The US water paradox: falling demand, less money for infrastructure
Declining demand for water across the western US has created funding problems for systems that rely on volume sales to repay infrastructure costs.
Spiralling demand for water, shrinking supplies and a warming climate has the job of water manager in the US a suitable feature for NBC reality show America's Toughest Jobs. The epicentre of course is the water-strapped Colorado River Basin, which spans seven states and is the source of water for 35 million people.
A federal study released last week outlined the enormity of the basin's water supply gap and the complexities of solving it, whether with fanciful and expensive new supply projects or less glitzy water demand management.
I have a strong bias toward the less glitzy, and our new report, Water Ripples: Expanding Water Risk for US Water Providers, explains why. It also explains why silver bullets, such as a 600-mile pipeline from the Missouri River, could have dire financial impacts, especially on local water users and investors who would bear the burden of such projects.
A Bureau of Reclamation study found that within 50 years, the Colorado Basin's annual water deficit is likely to reach 3.5m acre-feet (152,460 cubic feet). That's nearly 25% more than the river's forecasted annual flow, factoring in climate change, which is expected to diminish river flows.
The study lists dozens of options for supplementing basin supplies, including water desalination plants, towing an iceberg wrapped in plastic to California and various new pipelines.
There are numerous reasons why these big project solutions, many costing more than $1bn, are risky. The biggest problem is paying for them.
A problem with infrastructure and debt
Like the rest of the country, western water projects are typically financed by issuing bonds that cover a project's upfront costs. The subsequent debt – and interest costs – are then repaid to bond-holding investors using revenues the water utilities generate by selling the water.
This arrangement was relatively painless years ago when the federal government paid for the vast majority of water infrastructure projects. But those days are over; federal funds have largely dried up. That means water utilities are assuming far larger debt obligations to finance new pipelines, reservoirs and other infrastructure. And that means they need to sell more and more water – and at higher rates – to repay those debts.
And therein lies the rub. Water demand is falling in many parts of the country. Between the 1970s and the late 2000s, the amount of water used by American households fell everywhere, by tens of thousands of gallons each year in Louisville, Kentucky, to nearly 100,000 gallons a year per household in Las Vegas. The trend is due to wide-ranging factors, including smaller households, water-efficient indoor fixtures, conservation programs, and even the protracted economic slowdown that devastated housing markets, especially in the western US.
Whatever the cause, declining demand has surprised US water systems and created complex financial challenges.
Most water systems' revenues are highly dependent on volumetric water sales – sales that mostly represent outdoor water use. One of the biggest water hogs is lawn grass, which accounts for as much as 80% of summer water sales in the west. If those sales evaporate, systems have to find another way of replacing that revenue to make good on the debt obligations that built their systems.
To offset declining household demand, many water systems turned to connection fees paid for new houses that were added to the system. But when the housing market stalled, that lucrative revenue source plummeted – most precipitously in Las Vegas which saw its water connection fees from new housing starts fall to $3m in 2010 from a peak of $188m during the housing boom. As a result, the Southern Nevada Water Authority is now allowing customers to replant the lawns they once paid them to tear up, a short-term revenue fix that only contributes to the region's dire supply shortage.
A love affair with grass
Our love affair with grass was stoked by dirt-cheap water prices that were only financially feasible when the federal government footed the bill for big pipeline projects. Now that local communities are paying for these projects, the question is: how much do westerners really want to pay to keep their lawns green in August?
In the case of the Colorado River Basin, this dynamic also begs the question: how necessary are some of these hugely expensive new projects? And if they are built, will there be enough water sales and revenues to support the debt payments?
For those thinking such scenarios are implausible, take a look at the Las Vegas Valley water district, where nearly $2bn of bond debt was downgraded last year due to a double whammy of declining water sales and emergency supply expenses to finance a new water intake pipe from water-deprived Lake Mead.
Or Colorado Springs, whose water system was placed on a credit watch for a possible downgrade (lower bond ratings mean higher borrowing costs) in light of slow economic recovery and a nearly $1.5bn capital program to build its own big pipeline, which will pump water from a tributary of the Mississippi River.
An even worse scenario is playing out in drought-stricken Australia, where four of six new water desalination plants are not being used amid declining water demand, triggered in large part by the projects' big price tags, which forced higher water rates.
The country's first large-scale desalination plant in Florida is operating below capacity for similar reasons.
Australia and Florida are two cautionary tales of a fundamental truth often ignored in water management: people's demand depends on the price they pay for water. As prices increase, we can be assured that Americans will use less water.
Instead of committing ratepayers to water they may not want to pay for, water managers should be harvesting every drop of water they can get from demand management. Thanks to groups like the Alliance for Water Efficiency, water system managers have numerous tools at their disposal to curb supply pressures while maintaining revenue stability.
The water use chart above shows the astonishing opportunities for reducing household water demand. We're also seeing breakthroughs in limiting agricultural water demand, the basin's biggest overall water user by far, through creative water leasing arrangements like Colorado's super ditch that keeps some farmland fallow while providing affordable water to growing urban areas.
This sort of co-operative supply arrangement between the urban and rural is the future we need to be building – it may look different to the Hoover Dam, but it is the face of 21st-century water infrastructure.
The bottom line is that warming trends, price-sensitive demand and growing populations are creating unprecedented challenges to our western water resources. How water managers solve these challenges – and pay for them – should be less about pie-in-the-sky solutions and more about old-fashioned conservative thrift.
Sharlene Leurig is a water financing expert at US-based advocacy organisation, Ceres, and author of the Water Ripples: Expanding Water Risk for US Water Providers report