Charting the Industry’s Future
As vice president of the Washington Research Group for the Charles Schwab & Co., Debra Coy is familiar with long-term trends, as well as the manufacturers, within the water and wastewater industry.
WWD recently asked Coy to offer her take on a variety of topics involving our ever-changing industry.
WWD: What are some long-term trends that may drive investments into the water and wastewater industry?
Debra Coy: Some key long-term trends that I expect to drive investment in the sector are: a renewed focus on upgrading deteriorating water and wastewater infrastructure; the need for expanded water supplies in high-population growth areas, especially in the arid west; and the effort to correct the problem of sewer overflows.
We have too little water in the drought-starved west and too much water in many flood areas in the east—both problems are drawing the public’s attention to the need for water infrastructure investment.
On the water supply side of the market, I think that drought plans finally taking hold in the Colorado River basin states will drive demand for desalination and water reuse/water reclamation projects, as well as water conservation technologies such as drip irrigation. On the water infrastructure investment side, I expect to see rising demand for pipe rehabilitation and new sewer pipe and tunnel projects, as well as expansions of sewer treatment capacity, as main solutions to the sewer overflow problem. The Environmental Protection Agency’s new report on sewer overflows estimates that it will cost $140 billion over the next 20 years to address this issue—that’s a big market for everyone from system design engineers to pipe makers, sewer construction contractors, pump manufacturers and treatment technology firms.
WWD: Which specific technologies do you see becoming more profitable from an investment standpoint?
Coy: It certainly appears that membrane-based filtration in general has a bright future, given its range of existing and future potential applications in industrial and biotech-related fluid processing, as well as in water and wastewater treatment. Desalination, water reuse and reclamation, microbial treatment, and home water treatment are all shifting toward use of membranes. There are still relatively few companies that hold the bulk of the intellectual property in membrane manufacturing and systems design, and this is likely to be hard to duplicate, even by deep pocketed firms that are beginning to enter the filtration industry, such as GE.
Some of the smaller filtration companies, such as Ionics, haven’t been very profitable in recent years, as they have expanded beyond technology sales into the development of large projects. Other filtration companies such as Pall Corp., have also seen some volatility on the bottom line as a result of shifting market conditions and a fairly high internal cost structure. It appears that while membrane technology continues to make great scientific strides, there is still room for increased operating efficiency throughout the industry. Again, if the smaller specialized companies effectively can’t go it alone, they are likely to be acquired by larger companies—as GE acquired Osmonics.
Other technologies that appear to have a strong demand outlook are ultraviolet disinfection, as water treatment operators are decreasing their use of chlorine, and trenchless pipe replacement and expansion, as communities face billions of dollars in investment in sewer system upgrades.
WWD: What type of impact may desalination and desalination-related technologies have on the future of the industry?
Coy:Already, desalination of brackish groundwater is taking hold throughout the west and southwest, because the technology is less expensive to run for lower salt removal processes, and the permitting issues are typically less complex.
Of course, as the cost of membrane-based desalination has come down, these projects are within reach for a broader range of customers throughout the world, beyond the traditional market of oil-rich middle eastern countries and tourist-rich Caribbean islands.
I expect that we will also see further technological developments beyond the reverse osmosis membrane and distillation systems currently available, and such technology developments could have application in other areas of water treatment.
WWD: What impact does the fluctuation of water and sewer rates across the nation have on the industry? Do you feel there will be a time when the water and sewer rates will be regulated?
Coy:This is the real million-dollar question—or really, multi-billion-dollar question—for the water industry. I think that customer acceptance of rate increases will be critical to the future health of the water industry both here and abroad. Consumers must eventually learn that though water falls from the sky, getting it to your tap isn’t free. Water utilities are starting to understand that they need to market the value of their service. This is something that bottled water providers—who can sell a $6 bottle of water in a restaurant that hands out tap water for free—understood a long time ago.
Water and sewer rates remain the lowest-priced utility services in the U.S., and there is tremendous opportunity for industry growth if we finally see a period of above-inflation levels of rate increases over the coming decade. I do believe that this initiative will come from local politicians learning to “market” the case for increased water investment to the public, rather than through any regulatory system. Investor-owned water utilities do have regulated rates, of course, and they have successfully invested in modernizing their systems and gaining higher rates to pay for that.
However, this system isn’t likely to be applied to municipal utilities, at least not in my lifetime. I think rate increases will have to be put in place voluntarily, city by city. Finally, we are beginning to see that happen, but there is still a long ways to go.