A liquidity crisis that has nothing to do with credit is looming for many U.S. businesses. This one’s about an actual liquid, namely water.
Drought conditions cover almost half the country and are at their worst where the population is growing fastest—the Southeast and Southwest—raising concern among corporate users about the reliability of their supply and making access to water an increasingly important factor in many companies’ real estate math.
“We are slowly but surely seeing industry look at its water supply issues in a way that they may not have had to in the past,” said Clay Landry, managing director of WestWater Research, a Boise, Idaho, consulting firm.
It’s a serious problem. Earlier this month, the federal government reached an accord with the seven southwestern states that tap the Colorado River on how its water will be allocated if the now eight-year drought in the region continues and the river runs short. If current trends continue, the river, which powers the Hoover Dam turbines that generate electricity for most of Southern California, as well as providing water and power to Las Vegas, won’t supply enough to generate power by 2010, according to some estimates.
In the Southeast earlier this year, Georgia, Alabama and Florida fought a legal battle over water rights to several rivers. River water levels were so low in Alabama that some of the state’s many pulp and paper producers began considering alternatives. “We made it through the summer without having to shut down or limit production,” said Rick Oates, executive director of the Alabama Pulp and Paper Council, adding that next summer, however, might be a different story if the drought continues.
Nevertheless, most corporate consumers don’t have the issue on their front burner given other pressing problems such as energy costs, the credit crunch and the weakening economy—and the fact that they haven’t had to face the issue before.
“I think water issues will become extremely important going forward, but I don’t know whether it’s still two or three years away” before it is on the radar of corporate decision-makers, said Steve Laposa, head of global strategic real estate research at Pricewaterhouse-Coopers.
Industries that are already feeling the pinch include obvious water hogs such as power plants, pulp and paper mills, chemical processors, and farmers, ranchers and meat producers.
Food and beverage companies, in particular those in the booming bottled water business, have also become acutely aware that they must consider local water resources when deciding where to locate a new plant or expand an existing one.
For example, Coca-Cola, a major consumer of water worldwide, voluntarily adopted more efficient water use procedures and wastewater treatment standards at company and franchisee-owned facilities beginning in 2002, said Lisa Manley, the company’s director of environmental communication.
“We are definitely making a very significant investment, not only in water use efficiency but to ensure our wastewater is treated to a standard we believe is the right standard,” she said.
Concern about water resources has come up about a dozen times in the past year in discussions with corporate executives, almost all of them from the food or beverage companies considering new plant locations, said Eric Stavriotis, vice president of strategic consulting at the commercial real estate firm Jones Lang LaSalle.
Those executives are quick to dismiss potentially troublesome locations, since water shortages are the type of headache they want to avoid altogether, he said. That’s because they’re aware that already water-starved communities could put restraints on their consumption and hence impede production, while some cities are instituting tougher standards for the treatment of the wastewater that is a manufacturing by-product, raising the specter of ever higher wastewater treatment costs, Mr. Stavriotis said.
“Pre-treating is very expensive, sometimes in the millions of dollars annually,” said Mr. Stavriotis. That cost can be incurred in the form of investment in technology and the cost of running the treatment process or in payments to a community for the use of its own treatment plant.
“If one were siting a brewery today, [the owners] would want to know that there is going to be an extra 1 million or 2 million gallons a day you can be sure you can get from another source if the primary one isn’t available,” said Chris Woodcock, president of Woodcock & Associates, a water and sewer industry consulting firm.
A few power plants in Wyoming have contracted with local farmers to gain their water rights as backups in the event of shortages, even though these long-running facilities haven’t had problems before, said Mr. Landry. Still, some farmers are earning more off the sale of their water rights than for their crops, despite rising commodity prices.
But Mr. Woodcock said the cost of water, which has been rising at about twice the rate of inflation for residential users over the past few years, or about 7% annually, is still not an issue for most corporate decision-makers.
One industry in which the cost of water is a major factor, however, is residential real estate development. That’s because developers must describe how they’re going to pay for new water resources before getting new development plans approved in some communities in the Southwest, said Mr. Laposa of PricewaterhouseCoopers.
Although the buying and selling of water rights is not new to the perennially water-short Southwest, it is now occurring at a higher rate than ever before, to the extent that it has caught the eye of private equity investors who see an opportunity to turn water into gold. Among them is well-known opportunist T. Boone Pickens, whose Mesa Water has purchased 200,000 acres of Texas water rights. With approvals for future residential developments depending on their ability to provide their own water sources, Mr. Pickens will be positioned to supply them via pipelines. FW
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