Economy Weighs Heavy on Municipal Water Market
The economic downturn has had a huge impact on municipal water and wastewater utilities across the country.
The economic downturn has had a huge impact on municipal water and wastewater utilities across the country. Utilities are struggling with a combination of reduced funding, aging infrastructure and increased federal regulation. While the national economy has begun to improve, it could be a year or more before city budgets feel the positive impact of that upturn. And in some areas of the country, it could take much longer.
In a series of interviews, new members of the WaterWorld Editorial Advisory Board were asked to share their thoughts on the current state and near-term outlook for the municipal water and wastewater industry in the United States. They were asked their views on a variety of issues, including the economy, regulations, the graying workforce, new technologies and utility management, among other things.
As a group, they see the municipal utility market slowly recovering over a period of years from the current economic downturn. The hardest hit areas of the country, like California, Arizona, Nevada and Florida, might take several years to recover to pre-recession levels, while other areas could return to near-normal levels by 2012.
Brent Fewell, Vice President, Environmental Compliance, at United Water, said the economic downturn has been doubly hard on cities because of aging infrastructure and a growing number of regulations on both the clean water and drinking water sides of the market.
"United Water operates over 300 systems and we see communities really struggling to keep up their water systems," Fewell said. "Not only do you have towns trying to make payroll for police, teachers and sanitation, but they are trying to keep up with the costs of complying with all these new requirements."
There are reasons for optimism, however. Engineering firms serving the water market expect to see modest growth in 2011, said Andrew Richardson, P.E., Chief Executive Officer at Greeley and Hansen. He noted that the US municipal water market has grown every year but one in the past 18, and that one year was 2009.
Growth in construction activity of 5 percent could be possible in 2011. Bright spots include low interest rates and downward pressure on construction costs. For cities with access to capital, now is a good time to move projects forward, Richardson said.
"2011 is probably another wait-and-see bridging year, just maintaining if you can. I think that will be happening with a lot of municipalities," he said. However, "There will be a lot of pent up need and there are probably opportunities for municipalities to move projects forward and get the best bang for their buck."
Of course, access to capital is a challenge for many cash-strapped cities. Bond ratings have been slashed for many. Sales tax revenues are down and the drop in real estate values will translate to a corresponding drop in ad-valorem tax revenue. Also, water consumption has declined in many cities as industries have closed or cut back production.
"In the last three years we've had a significant drop in new construction, so correspondingly we've seen a drop in revenue because those new customers are not coming on line," said Fred Angel, Customer Operations Administrator at Chesterfield County Department of Utilities. "Plus, as the economy has tightened up on people, I think they have conserved. That's good and that's bad. That's good because they're saving money, but it's bad because it does lower our projected revenue."
Utilities in the best shape are those operating under separate enterprise funds, and those that have done the best job of effectively raising rates to pay for the full cost of service.
"I think one of challenges we see in front of us is getting people to really understand the value of water, and how we go about communicating that. In this economic environment it becomes even more challenging, but even more important," said Christine Owen, Water Quality Assurance Officer at Tampa Bay Water.
The pace of new regulations has not slowed with the economy. To make matters worse, the US Environmental Protection Agency has a stated goal to increase enforcement of water quality regulations, particularly Clean Water Act regulations dealing with wet weather issues. The TMDL program remains a high priority for EPA. The Chesapeake Bay "pollution diet" proposed by EPA will serve as a model for the rest of the country and will likely move west to the Mississippi basin in the not-to-distant future.
For the drinking water side of the market, the groundwater rule, requirements for enhanced surface water treatment and disinfection byproducts will all be drivers.
Recent discussions have focused on carcinogenic VOCs, NDMA and other nitrosamines, plus concerns about the need for even tighter regulation on disinfection byproducts, said Dr. Zaid K. Chowdhury, Vice President, Technology and Applied Research Leader in the Municipal Business Unit at Malcolm Pirnie.
EPA's newly announced strategy to study groups of contaminants rather than addressing each individually could result in sets of regulations being developed, which could include VOCs and nitrosamines, he said.
"I think there will be a drive to come up with regulation for NDMA," Chowdhury said. "The implication of that could be pretty significant on the technology side. That would require a lot more utilities to move away from chloramination, which means they would have to embrace other technologies to remove more of the organics from the water."
Treatment technologies continue to evolve, with new systems coming onto the market to address regulatory challenges. The ability to treat more water in less space is also a strong driver.
"Membranes have not been adopted as widely as expected, but their use continues to grow. I know of a few plants that opted for membranes from the reliability perspective and also from the site restraint perspective," Chowdhury said.
The challenge for new treatment technologies is the cost of acquiring the equipment in a down economy, coupled with the cost of obtaining the required approvals from state regulatory bodies, Christine Owen said.
"Sometimes it can be a hard sell, especially in this economic environment, to spend that money on piloting," she said. "I've run across a number of smaller utilities that don't have the economic wherewithal or technical capabilities" required for piloting projects.
On the management side of the equation, forward-thinking utilities are utilizing new automated systems to streamline operations, manage assets, maintain customer service, ensure continuity of operations, and address issues surrounding the graying workforce, said Thomas DeLaura, PE, Vice President of Westin Engineering and contributing author of "Information Technology in Water and Wastewater Utilities."
Referencing a recent AWWA market survey, "Managing my utility as a business is still the biggest challenge. Second is the state of the infrastructure," DeLaura said. "Next is regulatory - doing what is required by law."
Given the industry's graying workforce, automation can also help with the transfer of knowledge.
"Not everything someone knows is worth keeping, but (the importance comes in) identifying the right knowledge, protecting and preserving it, and figuring out a way to share that with the people coming in, so they can come up to speed quickly," DeLaura said.
To manage the utility as a business, and drive continuous improvement, management and staff need information to track performance against targets that align with the utility's strategic goals, while matching available budgets.
"Whatever the economic environment, utilities need better information and improved management practices to make effective decisions to manage the total cost of ownership," DeLaura said.
In the end, the water market will recover. The recession will end and budgets will eventually return to "normal" levels -- although the "new normal" might be at levels lower than bubble days before the bust.
The key now for the industry -- and the country -- is to continue making the investments that need to be made. What is troubling for some is the amount of capital that is not being put to work because of concerns about the economy.
"Right now you have all this money sitting on the sidelines," Richardson said. "Wall Street, private equity groups, venture capitalists have money and are searching for returns. Our industry is trying to figure out how you get access to that capital and the folks with the capital are trying to figure out what's a reasonable return on investment."
In the end, "Demand is great, based on infrastructure that needs to be repaired and replaced, and regulations will continue to be promulgated. On the wastewater side, we will see the Chesapeake Bay model propagating west. Utilities will have to find the funds to meet those needs, somehow, whether through private activity bonds, raising rates or the bond market," Richardson said.