Uncertainty and Risk in Securing Adequate Water Supplies ... … · The water industry will continue to experience strong and predictable –if not ... Adequate Water Supplies: Challenges

Uncertainty and Risk in Securing Adequate Water Supplies: Challenges and Opportunities

Wednesday, March 28, 2012

TechKNOWLEDGEy Strategic Group, 2004

Four Key Trends in Water

Steve Maxwell

ELI WebinarMarch 28, 2012

Food

Survival

Luxury Life

Recreation

Energy

Transportation


1 - Water as a “Factor of Production”

3

� Water will increasingly be viewed as

a true “factor of production” – much

like energy, labor or capital – in

economic, business, policy and

individual decision making

� As water becomes more expensive, it

will increasingly drive economic,

and individual, decisions

� Availability of abundant clean water will drive the

location of industry in the future

�Will cities like Cleveland and Buffalo again be our centers of

manufacturing and population growth in the future?


2 - A More Holistic View of Water

4

� We only directly utilize some 50 to

300 gallons per day of water

� But we consume far more water

contained in the products and

services that we consume, and the

various activities we engage in

� We must also begin to consider our

totalwater footprint – the virtual

water that we consume as well

� In the UK, 40 gallons/person/day

vs. virtual use of 1220 gallons


3 - Managing “One Water”

5

� The silo thinking of the past has kept

water use and water reuse interests

segregated

� We must encourage comprehensive

thinking, planning, and management of

our waters – on the transformational

scale now necessaryClean Water Wastewater

Storm WaterRain Water

Groundwater Recycled Water


4 - Rising Water Prices

6

� The average family pays less than $20/mo. for

water – far less than monthly electricity, cable TV,

internet, or phone service bills

� Yet there is strong political resistance to 10% and

20% rate increases – probably less than what

many spend monthly on bottled water!

� Recent surveys indicate about a 3-5% increase in

water and sewer rates on average

� Cost per 1000 gals. in the US – $0.80 to $5.50

� High variability in water prices across the

country, and around the world – Denmark pays

almost 3 cents per gallon, while the U.S. pays

about 4/10 of a cent per gallon

� Unfortunately, the U.S. and Canada ranks near

the bottom in terms of efficient water usage

CountryAverage Water

PricePer Capita

Domestic Use

(Cents/Gallon)(Gallons per Head

per Day)

Denmark 2.96 30.0

France 1.34 61.1

Germany 1.04 39.7

Australia 0.82 159.2

U.K. 0.69 36.6

Canada 0.64 204.7

Czech Rep. 0.53 56.1

Turkey 0.53 62.6

Japan 0.48 98.2

Portugal 0.47 81.1

Spain 0.46 90.0

United States 0.43 162.1

Poland 0.39 39.2

Italy 0.31 127.1

South Korea 0.19 145.3

Mexico 0.19 52.6

Russia 0.16 96.8

China 0.11 25.0

India 0.05 36.6


Water Economics “101”

7

Time

Demand

For Water

Available

Water

- Available Water is Fixed- Population and Per Capita Demand is Growing

- Demand today is largely price-inelastic- Prices must rise, and the natureof demand will change

The price that we pay for water is often not reflective of the actual, life-cycle cost

of sustainably supplying that water; or the true value of that water to the end user.


Whither the Future?

8

� We must promote a broader and

deeper public understanding of

water issues

� In terms of water issues, we must

think globally, but act locally

� We must develop smarter laws

and policies

� The water industry will continue to

experience strong and predictable – if not

spectacular – growth

� Water prices will continue to inexorably rise

- sharply in many areas

� More efficient pricing and allocation

systems will emerge, by necessity

� A key future challenge will be managing and

pricing water as an economic commodity,

while simultaneously

insuring that it

is available to all

Sharlene Leurig,Senior ManagerInsurance ProgramCeres

Uncertainty and Risk in Securing Adequate Water Supplies: Challenges and Opportunities

March 28, 2012

Moving the Markets to Drive Sustainable Water Management

• Lack of full-cost pricing for services• Lack of funding for long-term maintenance,

expansion, improvements and transformation • No accounting for the value of natural

infrastructure and ecosystem services• Managing water through centralized systems

imposing high marginal costs on utilities • High debt burden prevents systems from

continued practice of deferring real costs to future generation of ratepayer

Why is sustainability a financial imperative?

• Average household pays $1 / day for ¾ ton of drinking water

• In most places, the amount we pay for stormwater/wastewater is not based on the burden we place on the system

• Underpricing forces systems to manage reactively; as a result, ratepayers can end up paying more for water services in the long run

• Low marginal cost encourages high consumptive behavior, which in turn demands more high-cost supplies

• Utilities that want to raise rates face resistance because many utilities don’t market their services to communicate value

No matter what the financing plan, underpricing is a barrier

• Pricing that:• Allows utilities to recover costs and honor debt• Encourages user efficiencies & conservation• Decouples revenue from volume

• Maximizing cost efficiencies through new investment:• Distributed systems • Systems that meet more than just our water needs• Input efficiencies (energy, chemicals, water loss)

• Due diligence addressing water risks will be increasingly important for debt financing and acquisitions

How does this translate to financial management and transactions?

• Improve disclosure of risks and robust planning• Decouple revenues from volume• Engage FASB (Financial Accounting Standards Board)

around putting natural capital assets onto utility balance sheets, demand management capitalization.

• Educate PUCs and city councils on full cost pricing and conservation rate structures.

• Benchmark water utilities. Consider third-party accreditation to ensure credibility and accountability.

Three Issues Provide a Path Forward to Meet the Water Supply Needs of the Nation

1. Getting the Prices Right › Full-cost or full-value pricing/subsidies› Conservation pricing› Taking care of low-income citizens or

customers› Receding federal role

› Urban-rural› Water trusts› Third-party and environmental

impacts

› No such thing as wastewater, just water that is wasted

› Water reuse, recycling, reclamation› Related to pricing issue

2. Water Marketing/Trading

3. Will Technology Save Us?

G. Tracy Mehan, III

©ZAG/S&W 2012 An International Joint Venture Law Firm

Risk Associated with the Physical and Legal Availability of Water

George William Sherk, D.Sc., J.D.

March 28, 2012

©ZAG/S&W 2012

Introduction

• National water policy (myth):

› State Primacy

› Federal deference to state water law

› Coldiron, “Nonreserved Water Rights -

United States Compliance with State Law,”

88 Interior Decisions 1055 (11 September

1981):

• Deference to state water law in 37 federal

statutes (e.g., the Mining Law of 1866; the

Desert Land Act of 1877)

ZAG/S&W, An International Joint Venture Law Firm

©ZAG/S&W 2012

Introduction

• National water policy (actual): States have primacy over that quantity of water that is not required for federal purposes.


©ZAG/S&W 2012

Federal Purposes

• The Commerce Clause, article I, section 8, clause 3 of the Constitution:

Congress is authorized “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes[.]”

› The Federal Power Act

› The Lake Gaston Litigation


©ZAG/S&W 2012

Federal Purposes

• The Treaty Clause, article 2, section 2, clause 2 of the Constitution:

The President “shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur[.]”

› The Migratory Bird Treaty Act

› The proposed Exelon nuclear power plant in Victoria, Texas


©ZAG/S&W 2012

Federal Purposes

• Authorizing legislation:

› Rivers and Harbors Acts

› Flood Control Acts

› The Atlanta situation:

• The Rivers and Harbors Acts of 1945

and 1946

• The Flood Control Act of 1962

› Multiple Corps of Engineers projects


©ZAG/S&W 2012

Federal Purposes

• Multiple federal statutes may limit the

availability of water:

› Environmental (e.g., the Clean Water

Act)

› Resource management (e.g., the

Coastal Zone Management Act)

› Species protection (e.g., the

Endangered Species Act)


©ZAG/S&W 2012

Federal Authority

• Article 1, section 10, clause 3 of the

Constitution:

No state shall, without the consent of

Congress...enter into any agreement or

compact with another state[.]

› Interstate water compacts

› Muys, Jerome C., George William Sherk and

Marilyn C. O’Leary, Model Interstate Water

Compact. Albuquerque: University of New

Mexico Press (2009)


©ZAG/S&W 2012

Federal Authority

• Article 3, section 2 of the Constitution:

In all cases…in which a State shall be a Party,

the Supreme Court shall have original

jurisdiction.

› The Equitable Apportionment Decisions

› Sherk, George William, Dividing the Waters:

The Resolution of Interstate Water Conflicts in

the United States. London: Kluwer Law

International (2000)


©ZAG/S&W 2012

Federal Authority

• The Supremacy Clause, article 4,

paragraph 2 of the Constitution:

This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof;

and all Treaties made, or which shall be made,

under the Authority of the United States, shall be

the supreme Law of the Land; and the Judges in

every State shall be bound thereby, any Thing in

the Constitution or Laws of any state to the

Contrary notwithstanding.


©ZAG/S&W 2012

Federal Authority

• As Justice Douglas noted in Oklahoma ex

rel Phillips v. Guy F. Atkinson Co., 313

U.S. 508 (1941):

“Whenever the constitutional powers of the federal

government and those of the state come into

conflict, the latter must yield.” Florida v. Mellon ...

[T]he suggestion that this project interferes with

the state’s own program for water development

and conservation is likewise of no avail. That

program must bow before the “superior power” of

Congress.


©ZAG/S&W 2012

Federal Authority

• Arizona v. California, 373 U.S. 546

(1963):

While the States were generally free to exercise

some jurisdiction over these waters before the

[Boulder Canyon Project] Act was passed, this

right was subject to the Federal Government’s

right to regulate and develop the river. Where the

Government, as here, has exercised this power

and undertaken a comprehensive project for the

improvement of a great river and for the orderly

and beneficial distribution of water, there is no

room for inconsistent state laws.


©ZAG/S&W 2012

Conclusions

• Water that is physically available may not be

legally available.

• The legal availability of water may change

over time as climatic conditions change.

• There is uncertainty regarding both the

physical and the legal availability of water in

the future.

• This uncertainty must be considered in the

financing of water supply and wastewater

treatment projects.


©ZAG/S&W 2012

Questions?

Sharlene Leurig

Senior Manager, Insurance Program, CERES

[email protected]

R. Steven Maxwell

Principal, TSG

[email protected]

G. Tracy Mehan, III

Principal, The Cadmus Group, Inc.

[email protected]

George William Sherk

Of Counsel, ZAG/S&W

[email protected]

James R. Wrathall

Counsel, ZAG/S&W

[email protected]

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Uncertainty and Risk in Securing Adequate Water Supplies ... … · The water industry will continue to experience strong and predictable –if not ... Adequate Water Supplies: Challenges