Water Risk: A New Issue for Investors

By Jennifer Weeks

For decades investors saw utilities – local companies that delivered water and electric power -- as ultra-safe places to put their money. (Think of Water Works and Electric Company on the Monopoly board: you buy them, and then collect money every time someone lands on either one.)

But for many reasons, the utility business is more complicated today. Here’s one example: According to a new report from Ceres (a U.S. nonprofit that works with businesses to address sustainability challenges) and the UK-based accounting firm PriceWaterhouseCoopers (PwC), water scarcity is a hidden risk for many U.S. water and electric utilities – especially in water-stressed areas like Los Angeles, Phoenix, and Dallas.

As I wrote in my CQ Researcher report on “Water Shortages” (June 18, 2010), many experts think the U.S. is facing unprecedented shortages of clean water, which we need not just for drinking but also for farming, manufacturing and generating electric power. Meanwhile, drought and climate change are altering weather patterns, and water pipes and treatment plants are aging nationwide.

The Ceres/PwC report compared water-demand projections for eight utilities to their available supplies under different scenarios, including wet weather, drought, tighter water-use regulations and legal fights with other states or regions over water. It found that the utilities’ high bond ratings didn’t reflect their water risk scores. If these utilities have trouble delivering water to customers, their bonds could lose value. In extreme cases, the utilities might even default.

Ceres and PwC think utilities, investors and credit rating agencies should all be thinking about water risk. As we’ve learned from the subprime mortgage crisis, hidden risks in one sector of the economy can have far-reaching impacts. Water scarcity, the authors argue, is a hidden risk in municipal bond markets that could lead to a similar financial meltdown -- or in this case, drought may be a better metaphor.

Jennifer Weeks, Contributing Writer, CQ Researcher