HOUSTON — Public utilities must awaken ratepayers to the reality that, while energy sources are expanding, water is growing increasingly precious, experts told The Bond Buyer Symposium on Public Utility Finance.
"Water is only going to be cheap for a little while longer," warned Debra Saunders, vice president for municipal underwriting at Fidelity Capital Markets. "When the water bill starts to reach as high as the electric bill, people will start to notice."
Saunders pointed to the Los Angeles City Council's decision last year to hire a customer advocate to review rate increases as a sign that political traditions supporting cheap water are giving way to a new reality.
Los Angeles agreed to hire the ratepayer advocate after utility customers protested what they considered to be excessively high bills and a series of billing errors.
Recent decisions by the Los Angeles Department of Water and Power represent what one conferee called "the nexus of water and energy." While moving away from coal as an energy source to protect air quality, the nation's largest utility is raising rates and using more aggressive measures to conserve water.
Philip Leiber, chief financial officer of the Los Angeles Department of Water and Power, said the higher rates on both the water and power sides of the business are driven by regulatory changes.
The utility is replacing all of its power plants, including those cooled by ocean water, which is no longer allowed under federal rules. It is also shedding its 20% stake in the coal-fired Navajo Power Plant in Arizona.
On the water side, the department is seeking more local sources to reduce dependence on costly importation.
“The great challenge amidst all this change is to keep rates competitive,” Leiber said. “They’re certainly not as low as they have been historically but they remain competitive.”
With a five-year capital improvement program getting underway in 2014, LADWP expects to increase annual debt issuance from the current $1 billion per year to an average of $1.5 billion, Lieber said.
Investment in electric power is expected to grow 85% during that time, with a 105% increase in water projects, Lieber said.
“We’re going to be a very active issuer,” he said.
In Texas and other states where hydraulic fracturing of shale formations has released a trove of natural gas and oil, the newfound energy makes pumping of water from distant sources more affordable. Unfortunately, the "fracking" process also requires water.
Noe Hinojosa Jr., chief executive of the financial advisory firm Estrada Hinojosa & Co., described how the city of Brownsville, Texas, plans to use bonds to build a gas pipeline to a proposed merchant-owned power plant while also financing a water supply for the power plant.
The project combines Brownsville's ability to finance two pipelines with Tenaska Inc.'s expertise in building gas-fired power plants, Hinojosa said.
For municipal bond investors, water may be under-appreciated, if not undervalued, said Mary Francoeur, managing director for Assured Guaranty.
"Airport bonds might seem a lot sexier," Francoeur said. "But I can go the rest of my life without getting on an airplane while I can only go about a week without water."
Public utilities accounted for about a sixth of the bond issuance in 2012, Francoeur noted.
El Paso Water Utilities, which shares Los Angeles' scarce rainfall and reliance on distant sources, is in the sixth year of operating a desalination plant that cost $91 million to build.
Marcela Navarrete, chief financial officer for EPWU, estimates the desal plant and the water reuse practices have saved the West Texas city $967 million compared to alternatives for providing the same amount of water.
The savings are largely due to the fact that the utility does not have to pipe water from distant wells it has acquired for future use.
"Desalination and reuse are much more cost efficient than importation," Navarrete said. Removing brackish elements from underground supplies requires energy, but less than would be required to pump water from the wells miles away.
The desal plant received about $26 million in federal funds and was named for former U.S. Sen. Kay Bailey Hutchison, who shepherded the funding through the Senate. That kind of federal funding is increasingly rare, Navarrete noted.
El Paso issued about $46 million of bonds for the plant, received a $1 million loan from the Texas Water Development Board and used cash for the balance, Navarrete said. The bonds were issued with 25-year maturities, about five years longer than the city's typical bonds, she said.
For any public utility that needs financing, historically low interest rates clearly work in their favor, panelists said.
"These are interest rates from the 1960s, when I didn't even know what a municipal bond was," said Dan Kaplan, president of Kaplan Financial Consulting Inc.