In recent weeks, former vice president and presumptive Democratic presidential nominee Joe Biden has rolled out a variety of clean energy and infrastructure plans. Most recently, on July 14 he unveiled a four-year, $2 trillion plan to reinvigorate the U.S. economy by investing in infrastructure. This and other plans focused on the "clean energy economy" have been wide ranging.
As it relates to water utilities, Biden’s plans focus on investing in water infrastructure and addressing drinking water contaminants. Monitoring additional contaminants and making the necessary investments to keep below new drinking water standards can be a strain on municipal budgets. Increased regulation by the Environmental Protection Agency, or EPA, could drive further expansion of water utility capital spending programs. Municipal systems overwhelmed by increased water testing and treatment requirements may look to sell their water and wastewater systems, providing an acquisition opportunity for investor-owned utilities, or IOUs.
Defining the water utility sector
For those less familiar with this niche group, the U.S. water utility industry comprises a mix of very different entities within both the municipal and private/investor-owned sectors. The EPA estimates that municipal systems represent 84% of the 52,000 community water systems and 98% of the 16,000 wastewater systems, while IOUs and privately-held utilities represent the remaining 16% of the water and 2% of the wastewater market.
There are just nine publicly-traded U.S. water utilities, down from about 25 stocks traded 30 years ago. They range in market capitalization from American Water Works Co. Inc. at approximately $26 billion to Global Water Resources Inc. at approximately $242 million. There are also a handful of medium-sized water utilities owned by larger electric and gas utilities, private equity and international owners.
Addressing water contaminants
In the "Plan to Secure Environmental Justice and Equitable Economic Opportunity in a Clean Energy Future," Biden discusses improving drinking water quality, specifically highlighting lead and PFAS, or per- and polyfluoroalkyl substances.
Lead can enter drinking water when plumbing materials that contain lead corrode. In the case of Flint, Mich., the lead contamination stemmed from the city’s water supply. Lead can cause damage to the brain and kidneys, and is particularly dangerous to infants and young children, resulting in a loss of developmental skills.
PFAS are water- and stain-resistant synthetic compounds that are difficult to break down in the environment and in the human body and are commonly referred to as "forever chemicals." PFAS have been widely used to make carpets, clothing, fabrics for furniture, paper packaging for food and other materials that are resistant to water, grease or stains. It is estimated that up to 110 million American’s drinking water could be contaminated with PFAS contaminants, which cause certain types of cancer, and a host of other health issues. Cleaning up and protecting U.S. drinking water from PFAS contamination could cost tens of billions of dollars nationally.
Biden intends to accelerate the process to test for and address the presence of lead in drinking water. His plan would also designate PFAS as a hazardous substance, set limits for PFAS in the Safe Drinking Water Act, and accelerate research on PFAS. The EPA has in recent years been criticized for moving too slowly to regulate PFAS and expand the amount of chemicals it regulates.
Lack of regulation at the federal level has left state legislators with the difficult task of setting water contaminant levels and state regulators with the responsibility to encourage water utilities to treat drinking water for additional public health hazards. At last week’s annual National Association of Regulatory Utility Commissioners Summer Policy Summit, the Water Committee approved a resolution calling for federal guidance on PFAS chemicals.
Addressing aging infrastructure
The water sector is extremely capital intensive, given its extensive pipe and main infrastructure system, as well as treatment facilities, storage facilities, dams, wells, and pumps. The EPA's, most recent drinking water "Needs Survey," published in 2013, estimated that about $384 billion, in 2011 dollars, will be needed through 2030 to upgrade U.S. water systems, both public and private, to meet environmental standards. Widely cited estimates of the investment required to upgrade, replace, and expand water and wastewater infrastructure over the next 20 years ranges from $385 billion to $1.3 trillion.
Biden intends to double federal investment in clean drinking water and provide new funding for low-income areas that are struggling to replace distribution pipes and treatment facilities.
While municipal entities have been investing at sub-optimal rates, the investor-owned water utility industry has been increasing capital investment across the board. The IOUs already invest two to three times their depreciation on capital expenditures. In 2020, the group is expected to spend $3.4 billion on infrastructure investment.
Opportunity for water IOUs
Operationally, smaller systems lack the expertise to keep up with increasingly stringent water quality standards. The larger privately held and investor-owned water utilities have the technological expertise to test and treat drinking water as additional federal and/or state contaminant levels are adopted. Municipal systems will likely consider divesting assets when the expense of testing and treating is overly burdensome.
Financially, municipal systems have been challenged by limited government funding, competing financial needs for other municipal services, such as fire and rescue and the general unwillingness of elected officials to raise taxes. While an infusing of federal money will provide some support, funding will not be available to all the municipalities in need.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.