Investing in America’s Aging Water Infrastructure

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Market Trends

Editor’s Note: We hope you’re taking this Memorial Day to relax, reflect or do something that you love… or maybe all three.

Here at Energy & Resources Digest, we are fortunate to do what we love every day: research and write about trends and opportunities in energy, commodities and infrastructure, and help build the wealth of our readers…

It’s something we often take for granted.

In the spirit of the holiday, we’re feeling especially grateful for the opportunities and resources at our disposal.

Water is also something we take for granted. With the convenience of a water infrastructure system, we must be mindful of the responsibility involved in maintaining it.

Today’s article from Energy and Infrastructure Strategist David Fessler takes a look at the water problem (read: opportunity) in this country we call home.

We hope you find value in the superb research Dave has put together… and see the opportunity in this pressing issue, as we do.

– Patrick Little, Managing Editor

What do water and electricity have in common? We take both of them for granted.

We expect to walk up to a switch and turn on a light. We also expect to go to a sink and turn on the water.

When we can’t do either, panic sets in. All we can focus on is when the electricity or water will come back.

Just as our power grids are subject to blackouts, our water and sewer mains can fail with equally catastrophic consequences. According to the American Society of Civil Engineers, there are more than 240,000 water main breaks every year in the U.S.

Those breaks waste more than 2 trillion gallons of treated drinking water. The American Water Works Association (AWWA) estimates we will need to spend $1 trillion over the next 25 years to replace and maintain our water infrastructure.

We’re talking about more than 2 million miles of water distribution lines. From 2001 to 2006, utilities added roughly 225,000 miles of new lines, but only about 56,000 miles of aging lines were replaced.

Unlike cars or cellphones, which we regularly replace with newer and better models, water mains are buried in the ground and forgotten about. In some major metropolitan areas, large cast-iron water mains are more than 100 years old.

That’s just about the end of their useful life. When one of them fails, all hell can break loose, as this photo, courtesy of Fox45 Baltimore, illustrates…

Image source: Fox45 Baltimore

In addition to the lost water, large sinkholes are common. Cars and even buses unknowingly drive into them, as this photo from CBS8 San Diego shows…

Image source: CBS8 San Diego

Unlike deteriorating roads and bridges that we can see, old, rusting water pipes are out of sight… and therefore out of mind.

Unfortunately, replacing these old water and sewer mains is not in the budget for most municipal water companies. As you can see from the chart below, water utility operation and maintenance expenses have risen steadily since 1956.

Meanwhile, capital expenditures peaked in 2008 and have been declining ever since. It’s clear that the need for water supply and waste treatment systems has been outpacing the investment required for their upkeep.

The AWWA lists the replacement and renewal of both water and wastewater infrastructure as the most important issue facing the U.S. water industry.

Utilities laid cast-iron pipes in the late 1800s. Those have a useful life span of 120 years.

Pipes laid from 1920 through World War II have a useful life span of 100 years. Finally, pipes laid during the post-World War II economic expansion have a life expectancy of about 75 years.

The bottom line is that over the next two decades, we need to replace a significant amount of our underground water supply network…

And that has a $1 trillion price tag.

America’s aging water infrastructure is a perfect candidate for Trump’s infrastructure spending plan. The problem is, all of the money Trump wants to spend could be spent on our water problems alone.

So how are we going to pay for the fixes and replacements? Part of the problem is that current water use fees combined with local taxes are enough to cover only operating and maintenance costs.

The capital needed to cover renewal and replacement costs is lacking from current rate structures. It turns out that a little more than 33% of water utilities earn enough revenue to cover all of their costs.

Most Americans pay just $3.75 or less per 1,000 gallons of water. In 2014, the average U.S. residential user spent $530 on water, compared with $2,468 on gasoline.

By just about any measure, what Americans are paying for water isn’t nearly enough for utility companies to balance their budgets. That means costs are bound to increase.

But it won’t be just consumers who foot the bill. In fact, I see municipal bonds playing a key role in all of this.

Municipal bonds have been successfully used in the past to finance other major infrastructure projects.

The beauty of most municipal bonds is that they’re exempt from federal, state (if it’s your own) and even local (again, if you live there) income taxes.

With more interest rate hikes on the horizon, municipal bonds could once again become a favorable investment…

More importantly, they could be the best way to fund the repairs that our water infrastructure desperately needs.

Good investing,