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The Future of Water Steve Maxwell U.S. Water Alliance Cincinnati, Ohio October 16, 2012 Food Survival Luxury Life Recreation Energy Transportation

Steve Maxwell The Future of Water

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Author of “The Future of Water” and a long-time strategic consultant and transactional advisor to the water industry, Maxwell will review current challenges and opportunities in the world water market, and will highlight four critical trends which will increasingly categorize the water business and water decision-making over the longer-term future.

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Page 1: Steve Maxwell The Future of Water

The Future of Water

Steve Maxwell

U.S. Water AllianceCincinnati, Ohio

October 16, 2012

Food

Survival

Luxury Life

Recreation

Energy

Transportation

Page 2: Steve Maxwell The Future of Water

The Future – What’s the Problem?2

- The Supply of Fresh Water on Earth is Essentially Fixed

- The Earth’s Population and Its Demand for Freshwater is Rapidly Growing

- Water Use Has Been Growing At More Than Twice the Rate of Population Increase Over the past Century

IT’S ABOUT THAT SIMPLE

Page 3: Steve Maxwell The Future of Water

The Future – Four Key Themes

1) Water will increasingly be viewed as

a true “factor of production”

2) Water consumption will increasingly

be viewed in a more holistic manner

3

3) Boundaries between different

types of waters will fade

4) The price of water will inexorably

rise – reflecting its true cost and

value (and reinforcing all three key

trends above)

Page 4: Steve Maxwell The Future of Water

Water as a “Factor of Production”4

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?

Page 5: Steve Maxwell The Future of Water

A More Holistic View of Water5

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 total water footprint – the

virtual water that we consume

as well

In the UK, 40

gallons/person/day vs. virtual

use of 1220 gallons

Page 6: Steve Maxwell The Future of Water

Managing “One Water”6

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

necessary

Clean Water Wastewater

Storm WaterRain Water WATER

Groundwater Recycled Water

Seawater “Wasted” Water

Page 7: Steve Maxwell The Future of Water

Rising Water Prices7

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 5% or 10% rate

increases – probably less than what many spend monthly on

bottled water!

Recent surveys indicate about a 5% annual 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. 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 30.0France 1.34 61.1Germany 1.04 39.7Australia 0.82 159.2U.K. 0.69 36.6Canada 0.64 204.7Czech Rep. 0.53 56.1Turkey 0.53 62.6Japan 0.48 98.2Portugal 0.47 81.1Spain 0.46 90.0U.S.A. 0.43 162.1Poland 0.39 39.2Italy 0.31 127.1South Korea 0.19 145.3Mexico 0.19 52.6Russia 0.16 96.8China 0.11 25.0India 0.05 36.6

Page 8: Steve Maxwell The Future of Water

The Price of Water8

Price of Water vs. Price ofOther Consumer Liquids

($U.S./gallon)

Product Average Price

TAP WATER $0.0043

Coca-Cola $3.00

Gasoline $4.00

Tide Liquid Detergent $8.50

Imported Beer $12.00

Evian Bottled Water $25.00

Starbucks Latte $22.00

Pepto-Bismol $65.00

Vicks 44D Cough Syrup $100.00

American Whisky $150.00

Visine Eye Drops $750.00

Revlon Nail Enamel $1000.00

Good French Wine $1000.00

Chanel No. 5 Perfume $45,000.00

Annual Spending in the U.S.

$2 billion a year on Viagra$13 billion a year on cosmetic surgery

$22 billion a year on mood-altering drugs

$45 BILLION A YEAR ON CLEANDRINKING WATER

$52 billion on pet care$90 billion a year on tobacco products

$93 billion a year on legalized gambling $160 billion a year on alcoholic beverages

$720 billion a year on military defense

Page 9: Steve Maxwell The Future of Water

9

Water Prices: Background

Demand for water has begun to outstrip new supply

sources in many parts of the country – and the world

Prices – both for “raw” and delivered water – have begun

to increase, and are likely to accelerate in the future

The population continues to concentrate in urban centers

Major migration trends are towards more arid regions

Industrial production and economic output continues to grow

Per capita consumption grows as standards of living improve

There are increasing concerns about protecting “environmental flows”

in the country’s rivers and streams, to protect wildlife and recreation

New and alternative water supplies are often available only at high costs

– desalination, long-distance transfers, new dams/reservoirs

Page 10: Steve Maxwell The Future of Water

10

Raw Water Markets

In efficient markets, price information reflects

the value of the commodity – competition and

price signals promote efficient trading and allocation

Water markets, however, are very inefficient and are

typically subject to highly imperfect information and

competition; data are recent and anecdotal at best

Water markets are also very local in nature – often only meaningful at the

regional level of an individual watershed or river basin; few real

functioning markets.

Individual water supplies are subject to great variability and uncertainty –

in terms of hydrology, legal status, chemical quality, dependence upon

infrastructure, and potentially, variable quantity over time

These market imperfections result in poor or non-existent price patterns

and signals; hence water is often not allocated very efficiently

Page 11: Steve Maxwell The Future of Water

11

Delivered Water Markets

Price data for delivered water are also spotty and difficult to obtain – and

are exceedingly difficult to compare on an apples-to-apples basis

Delivered water prices to the end consumer, however, are generally subject

to regulatory review and oversight, and hence maintain more consistency

Delivered prices have tended to show a consistent

increase, albeit at slightly lower annual rates –

and they rarely decline

Over the long-term , the price of delivered water in an

area must reflect the price and availability of raw water

However, over the shorter-term, various factors –

primarily various types of subsidies – may distort this

inevitable correlation

Page 12: Steve Maxwell The Future of Water

12

Raw Water Prices

Many regions in the West have seen recent and dramatic price increases –the Santa

Fe-Albuquerque corridor, Colorado’s Front Range, or eastern Washington. These are

some of the fastest growing urban areas and most arid regions in the country.

Collapse of the housing market caused short-term down trend in 2009 – 2011.

Middle Rio Grande Water Right Prices (dollars per acre foot)

From: Brown, “Surface Water Opportunities in New Mexico” November, 2008 NMWRRI

From 1990 through 2007, 16% annual growth

Colorado Water Right Prices, 1990 - 2006

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Pri

ce ($

/Acr

e-Fo

ot)

Washington Water Right Prices, 1994-2006

$0$200$400$600$800

$1,000$1,200$1,400$1,600

Pri

ce (

$/A

cre-

Fo

ot)

WestWater Research LLC, 2008

Page 13: Steve Maxwell The Future of Water

13

Delivered Water Prices

Delivered water prices show a similar trend – with steady and consistent growth albeit at a slightly lower rate, and certainly with less volatility than seen in raw water prices –

this is due to the more regulated nature of delivered water

Evidence provided by recent studies suggest that delivered prices in the U.S. – on average – have been increasing over the last decade of between 5% to 10% per year, and that

this annual growth rate is increasing over time

GWI estimates that average prices globally have recently grown at about 7%

However, growth rates are highly variable; this same study showed examples of annual increases as high as 90% per year, and listed a number of areas of the water where

water remains a truly free service of the government

As in the case of raw water prices, although conditions are highly variable, the underlying drivers and general trends are similar in all areas – and they portend a future of

more rapidly increasing delivered water prices

Page 14: Steve Maxwell The Future of Water

14

Delivered Water Prices

Data provided by the U.S. Bureau of Labor Statistics, also shows that the price of residential water (here

combined with sewerage) services have grown at a rate well above the general Consumer Price Index

Page 15: Steve Maxwell The Future of Water

15

Conclusions – Future Water Prices

As the planet’s population increases, as global industrial output continues to grow, and as standards of living around the world continue to creep upwards, water scarcity and

water stress will be experienced in more and more regions

The type of anecdotal price data shown here, from currently water-scarce regions, are likely to be reflective of what will eventually be experienced in other regions of the

world. We should learn from these lessons.

It seems clear that delivered water prices must – over the longer-term – eventually rise, to better reflect prevailing and self-evident trends in the availability and hence the

cost of raw water supplies

As water prices begin to more closely reflect a full-cost and

sustainable model, water management, water re-use and

conservation, and water allocation patterns will all improve

Page 16: Steve Maxwell The Future of Water

16

Water as a New Investment Class?

Time

ValueAppreciationRate

Commodities 1–2%

Precious Metals - ~7%

Equities ~6%

Real Estate ~9%

Water ~10-12%

The data and the evidence is clear and growing …. in its various forms, water will increasingly be thought of as a separate investment class

0

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1989199

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9200

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0200

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1200

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9

GOLD SPOT $/OZ CRB COMMODITIES INDEX S&P 500 INDEX S&P Developed REIT Index TR

1990 - 2010

Page 17: Steve Maxwell The Future of Water

Future Trends17

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 commercial 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

The key future challenge will be starting

to manage water as an economic

commodity,

while simultaneously

insuring that it

is available to all