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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
TechKNOWLEDGEy Strategic Group, 2004
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?
TechKNOWLEDGEy Strategic Group, 2004
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
TechKNOWLEDGEy Strategic Group, 2004
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
TechKNOWLEDGEy Strategic Group, 2004
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
TechKNOWLEDGEy Strategic Group, 2004
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.
TechKNOWLEDGEy Strategic Group, 2004
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)
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Introduction
• National water policy (actual): States have primacy over that quantity of water that is not required for federal purposes.
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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
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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
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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
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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)
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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)
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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)
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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.
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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.
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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.
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©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.
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©ZAG/S&W 2012
Questions?
Sharlene Leurig
Senior Manager, Insurance Program, CERES
R. Steven Maxwell
Principal, TSG
G. Tracy Mehan, III
Principal, The Cadmus Group, Inc.
George William Sherk
Of Counsel, ZAG/S&W
James R. Wrathall
Counsel, ZAG/S&W