There are several business models for water distribution including investor owned, coops, regional associations, private-public partnerships and municipal. In the UK there are a small number of regulated regional investor owned water utilities like Thames Water, Northwest Water and Southern Water each of which serves millions of customers. But in many parts of the world water and waste water are a municipal responsibility. In France water and waste water are the responsibility of municipalities, but 75% of water and 50% of waste water services are contacted out to private sector companies like Veolia and Suez. In the Unites States there are about 54,000 community public water systems, which are either publicly owned, cooperatives or privately owned. But about 50,000 of these systems provide water in localities with less than 10,000 inhabitants.
Water and waste water funding gap
Only a portion of water infrastructure maintenance and operations costs are covered by rates in the United States, the rest comes from grants from several levels of government. Both the American Society of Civil Engineers (ASCE) has estimated that the water infrastructure funding gap is on the order of $20 billion per year. As a result most municipalities across North America under-invested in water infrastructure for years and many are now faced with the reality of aging infrastructure with increasing leakage and breakage, competition for more limited (quality and quantity) sources of water, and the increasingly costly impact of regulation from state and Federal regulators. Assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion, according to the American Water Works Association (AWWA). Capital investment needs for U.S. waste water and storm water systems are estimated to total $298 billion over the next 20 years according to the ASCE.
Municipal water systems are typically departments of the city government and are controlled by the mayor and the city council. And like public water companies around the world, it has been very difficult to persuade elected officials to raise water rates to cover the funding gap. From Margaret Catley-Carlson's perspective, the crossover between elected officials and water and water pricing is one of the universals around the world. She told a story of how even in the great drought of Spain two summers ago Spain was still charging less for water than any of the other European countries. She talked to people in Spain and they understood that paying more for water was part of the solution, but it was not possible to get elected officials to make the decision to increase water rates.
Utilities that have surmounted the funding gap
At the Canadian Water Network conference we heard about two examples of municipally water companies, both of which are unique in their own ways, but both have been able to get the needed funding to fill the gap in infrastructure spending. These companies which may be pointing the way to the future of water delivery.
The first, EPCOR Utilities based in Edmonton, Alberta, is run like a private corporation, but is wholly owned by a municipality for which it is a source of revenue, estimated at about $1.5 billion since it was formed.
The second, Greater Victoria Water Services, is structured like a municipal public water company, but because it is a regional water utility it has a board that has an arms length relationship to its constituency.
One important thing that both of them have in common is that they were both able to successfully structure solutions to problems facing their water utility as a result of a major crisis, a financial crisis in the case of EPCOR and a major water main break in the case of Greater Victoria Water Services.
Don Lowry, past President and CEO of EPCOR Utilities, is a strong believer that the only way to have a functioning water distribution system is that everyone must pay for water. In his view water is not an entitlement, it's a hard earned right. You have to be diligent and work 24x7 on continuously earning that right to have access to water and a sustained, continuous supply of water.
EPCOR was formed in a crisis. The city was faced with a significant financial crises during the Canada's National Energy Program. Facing massive layoffs and job losses, the water system had no choice. It had to carry its own weight, recover its own costs and start to be a growth engine for the city as opposed to a burden for the city. As a result EPCOR Utilities is 100% owned by the City of Edmonton, but it is operated completely as aa commercial enterprise. EPCOR has become the water and waste water provider for a large footprint of water and waste water utilities in Western Canada. They are also the largest private water supplier in the states of Arizona and New Mexico in the U.S.
The way that EPCOR is setup is that it is 100% owned by the City but has an independent board of directors under a universal shareholders' agreement that puts it on a standalone basis. It must finance its operation completely from earnings of the business or what it raises on the capital markets. It has a BBB+ credit rating. EPCOR pays its shareholder a dividend. Since 1998 the dividend was $67 million annually, today it is $144 million. The company has returned back to the shareholder over $1.5 billion in cash, taxes, fees and dividends and this is growing. EPCOR pays tax in every jurisdiction in which it does business and it competes in the capital markets. Most importantly EPCOR fully costs its water, there are no subsidies. They are able to compete and EPCOR's water utilities are thriving and growing..
The three key challenges EPCOR sees facing water today is the scarcity of it, the deterioration of the infrastructure and and most importantly the fragmented approach that we in North America take to its operation, regulation and financing.
The increasing scarcity of water is an absolute growing concern. In southern Alberta it has been fully allocated. There can be no further development unless there is trading of water rights or the diversion of water from one use to another. EPCOR is working to make better utilization of the water that they use. For example, they are capturing the water that we would have previously diverted back into the river after processing it through their waste water treatment plant and are piping 15 million liters per day to a Suncor refienry ro make petrochemical products. But in the long run the scarcity of water is going to lead to longer pipes, bigger pumps, more chemicals, more competition for water, higher costs and Don believes that the current service delivery model is not going to make it.
North American infrastructure is getting older. Most of the infrastructure that was put in Canada and most in the US was put in major chunks. A lot of it in the 60s and 70s and it is old and deteriorated and needs to be replaced. On top of that you need to layer the growth requirements and the replacement requirements. In Canada alone it is estimated to amount to about $80 billion for replacement and to plan for the growth of infrastructure, pumps, pipes, valves, plants, and meters necessary to deliver that essential service. In the US it's estimated to be over a trillion dollars. In Edmonton EPCOR has a major program underway to replace the cast iron pipe that was put in shortly after the Second World War, that has deteriorated dreadfully, causing leaks and water main breaks. As a result they are starting to see results, fewer leaks and less breakage. This is an example of a program EPCOR expects that that other municipalities are gong to have start to aggressively implement to replace ageing infrastructure. \
North America is backward in terms of how we approach the treatment, the delivery, and the recycling of water across Canada and US in terms of the shear number of companies. There are over 54 000 water companies in the US, ranging from the local water company in a town of 10 people up to millions of people in New York, However, 8% of those companies serve 81 % of the entire population. The other 92% serve 19% of the population. The story is not much different in Alberta. Of the over 530 water companies in Alberta, the top 10 water utilities serve 76 % of the population, the other 520 or so serve 24% of the population. Don's point is that with such a fragmented structure we can't get the economies of scale that we see in other industries in our society, such as airlines, telephony, wireless, natural gas, and electricity. The present fragmented state of the industry it brings its own stream of inefficiencies and concerns such as how do you adequately train people in very small water utilities and how do you fund all these water utilities. Even more critically how do you ensure that what happened in Walkerton and North Battleford (well publicized outbreaks of water borne disease outbreaks in small communities) don't get repeated.
According to Don, the Government of Alberta has taken a first step in this direction and has embarked on a conversation with the regions within the province to look at the watersheds and consider the creation of utilities similar to EPCOR that could achieve an economy of scale for all of the water needs for each region. This could be a first step toward shrinking the over 530 existing water companies down to perhaps 10 or 12 to begin to achieve some efficiencies of scale.
Water Services, Capital Region District, Greater Victoria, British Columbia
Jack Hull, General Manager of Water Services of the Capital Region District in Victoria, British Columbia, gave an overview of some of the successes Greater Victoria Water Services have had in implementing some of the measures that have been implemented by EPCOR.
First of all he said categorically that there is no infrastructure deficit in the Greater Victoria water supply system. It was eliminated over a 15 year period. Like a lot of municipalities the Greater Victoria Water started off in the early 90s with underinvestment. “If it breaks, we'll fix it, but we won't be proactive.” Greater Victoria Water put a strategic plan in place to address water supply, water quality, and infrastructure and pricing issues. They moved to a utility model for pricing, which is based on the asset base. Over the next 15 years with over $200 million in investment Greater Victoria Water eliminated its infrastructure deficit and addressed its water quality and quantity issues.
All the decision making was ultimately done by a group of politicians who recognized that if they didn't invest, there was going to be a major negative impact on the quality of life within the capital region.
Greater Victoria Water also runs the distribution systems that serves about 60 000 people in five neighbouring municipalities. Similarly to EPCOR's cast iron pipes problem in Edmonton, it was necessary to replace asbestos cement pipes. Greater Victoria Water recommended a 10 year program to address this issue, but the politicians came back and said no we want to do it in five years and they put the money behind it to do it in five years.
Greater Victoria Water has been able to successfully promote water conservation. A utility model obviously is able to generate revenue. According to Jack every cent of that revenue goes back into improving the infrastructure and eliminating the deficit. During the same period, particularly in the last 10 years, Greater Victoria experienced 14 % growth in population, but water demand dropped by 8% during that same period. In 2001 Greater Victoria Water had a ban on outdoor water use for 9 months of the year. Last year normal water use was down to that level without anything extraordinary in terms of water restrictions.
From Jack's perspective, given the right group of politicians and the right group of managers you can achieve much of what EPCOR has done without going to the fully corporatized model.
Jack said that he fully supports what EPCOR has done with small systems because that is where the real issue is. Small systems do not have the resources to deal with some of these issues and that is where an organization like EPCOR can provide significant assistance, which a regional government can't do because of the legislation that controls regional government.
With respect to governance the Greater Victoria Water board is one step away from the electorate because they are members of local councils who are appointed to the regional board. They are elected officials at the local level, but appointed to the regional board and appointed to the water commission so they are one step away from being directly elected to the board.
The other thing that contributed to this achievement was a crisis. On New Year's Eve in 1992 Victoria had a major water main break. A 36" water main burst and caused a lot of damage. So when Greater Victoria Water reviewed its budget that year they had lots of photos of all the damage caused by the water main break. The fact that it took 18 hours to shut the water off because the valves hadn't been serviced probably since 1915 when they were installed. There were photos of air release valves that couldn't be recognized as valves, because they were just clumps of rust. As a result when at the budget review Water Services asked for some money to do a study on infrastructure, Jack related that this was one of two times in the last 20 years when politicians asked him if he was sure he had enough money in his budget, didn't he need some more ?
The most important conclusion I take from this is that water needs to be fully costed from the water source to treatment and reinjection if we are going to have sustainable water systems that work. The second is that there are several ways to skin the cat but setting up a governance structure that allows the water utility to be run an arm's length from the elected politicians seems to be key. Thirdly, small water systems are facing a crisis, because it is going to be increasingly difficult and expensive for them to access the resources they need and it may be regional companies based on the EPCOR model that can resolve this problem. And the moral of the story is don't waste a good crisis.