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Low water mark

17 March 2016 By Antony Currie

The U.S. water industry could turn its Enron moment into action. The Securities and Exchange Commission fined California utility Westlands and its boss, Thomas Birmingham, last week after he compared the company’s drought-prompted accounting tricks to those of the disgraced energy firm. The incident highlights the $1 trillion-plus funding crisis facing the sector.

Westlands’ transgression was failing to inform prospective bondholders that it had transformed reserve-account cash into revenue in 2010. California’s largest agricultural water district must maintain revenue at a minimum of 125 percent of debt service costs. Anything less could trigger a technical default. And without its little bit of bookkeeping jiggery pokery, Westlands’ ratio would have been 0.63 percent. Birmingham flippantly described the move to his board as “a little Enron accounting.”

Shrinking top lines have been a problem for many American water operators caught by drought in the West and South West. The supply of H2O has fallen, and official restrictions on consumption have crimped that even further.

Drought isn’t the only culprit. Severe floods – both in water-scarce regions and elsewhere – can wash a lot of industrial and other waste into drinking water or increase the levels of toxic algae, as happened in Lake Erie. These can limit supplies and push up costs, depleting cash and making it harder to convince bond investors to stump up more resources.

Cutting expenses can be disastrous. Flint, Michigan switched in 2014 to a cheaper provider that put corrosive water through old pipes, creating a lead poisoning scandal. Replacing the nation’s aging 1.2 million miles of plumbing alone is likely to cost more than $1 trillion over the next two decades, according to the American Water Works Association.

Such incidents, though, may spark action. Flint’s fiasco unleashed broader concerns about lead in water and on Thursday Congress held its third hearing on the mess. Recycling water may become more prevalent – and can eventually pay for itself, according to water infrastructure firm Xylem. And there may be more private financing of projects, such as the controversial $3.3 billion 140 mile pipeline to bring more water to San Antonio.

It’s likely many consumers will end up paying more for clean water. But a dose of reality about this increasingly scarce resource is long overdue.


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