Getting Smarter About Water Use

Oct 8, 2014 2:30 PM ET

Fresh thinking, fresh water.

Like a giant bathtub, U.S. water supplies in many parts of the country are being sucked down the drain.

By now you've probably heard of the problem: We are running out of water. If there is any place that needs a giant divining rod it's the arid West and Southwest where a prolonged drought, climate change and growing populations, combined with intensive water demand for agriculture and hydraulic fracturing energy development, has created a profound public challenge.

But the solution won’t come through any new magic wand. It’s going to come from new thinking. And it involves a wonky, but vitally important part of our lives we rarely think about: Water-pricing models used by local water utilities, the backbone of drinking water supplies across the country.

Ceres is in the center of solving this watery equation.

Much like the U.S. electric power sector, U.S. water utilities have long operated on the assumption of ever-increasing water demand and limitless water supplies, which meant they could sell more water, which meant they would have more revenues to pay their bills. That assumption worked in the 20th century when water was cheap and plentiful, and the federal government was willing to bankroll expensive water supply projects such as mammoth pipelines and reservoirs and for water-scarce urban centers like Los Angeles and Las Vegas.

But times have changed. Water supplies in many parts of the country are dropping like the rings on an emptying bathtub. And developing new water sources is becoming far more costly, the result of federal funds drying up and the water itself needing to be piped longer distances.

The Southern Nevada Water Authority, for example, is trying to build a 263-mile-long pipeline, costing as much $15 billion, to move northeastern Nevada groundwater to Las Vegas. And just last week, the San Antonio Water System approved a controversial $3.4 billion contract to pipe water 140 miles from the Carrizo Aquifer.

For the past few years, Ceres has been highlighting the financial risks of going further afield for water, beginning with its seminal 2010 report, The Ripple Effect: Water Risk in the Municipal Bond Market. The report, done in collaboration with Water Asset Management, is designed to help bond-rating agencies, utilities and investors understand the long-term financial risks of trying to manage water shortages by building new water supply projects.

But Ceres also recognizes that utilities need better tools to avoid these costly projects while meeting future water demand.

Many utilities are raising water rates and enacting water conservation programs to limit to water demand. These approaches are sensible in many ways, but they have an unintended consequence: decreased water use reduces the revenues that water utilities need to pay their bills. Consider the case of Colorado Springs where residents were seething last year over double-whammy water restrictions and higher water bills, much of it to pay for a new $1 billion pipeline.

Clearly, water conservation is a far less costly approach to managing limited water availability than expensive new water-supply projects. But water utilities, which traditionally balance their budgets based on how much water they sell, must then shoulder the burden of too little revenue.

Ceres is working with utilities to solve this financing conundrum. Through the CFO Connect project, Ceres is working directly with water utilities in Colorado, Utah and Texas to develop new pricing models that will allow them to achieve a dual goal of revenue stability and water conservation that will reduce long-term water costs for consumers.

The effort is being supported by two key partners, the Alliance for Water Efficiency and the University of North Carolina’s Environmental Finance Center, both of which have developed new tools, available for free, to help water systems manage droughts and other water-scarcity situations when water use – and resulting revenues – are dramatically reduced.

In addition to water conservation, there are several other approaches that can protect utilities from revenue swings even under the most aggressive conservation pricing strategies. These include temporary drought surcharges to offset lost revenues during times of extraordinary shortages. Utilities can also put money aside for a rainy (or dry) day in the form of reserves. They can also explore hedging weather risk through weather risk insurance contracts like those used in the electric power and agricultural sectors.

A key consideration in pursuing these strategies is getting the local business community to understand that in the big picture, water conservation is about long-term cost savings. While water bills may not go down when aggressive conservation programs are enacted, the huge expense of financing mega new water supply projects is avoided.

The bottom line: water conservation creates challenges for utilities and customers in the short term, but the overall benefits in creating reliable and affordable long-term water supplies for future generations is immense. Whether it’s Phoenix, or Las Vegas or Denver, we need to get smarter about how we use and pay for precious water.