[00:00:00] Speaker A: We've seen this shift in the balance of capital investments versus day to day operating expenses like labor, energy and maintenance and others. 50 years ago these were just about even. But while the level of annual capital investments during this time has only doubled, operating costs have more than quadrupled.
[00:00:24] Speaker B: I am Reese Tisdall and this is Future Water which we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 83 and I know it's going to be a good one because today I'm joined by Liffield senior analyst Charlie Seuss. Chicago based Charlie has dug into water rates across some of the largest utilities in the US. He was looking to uncover some broader trends year on year but also cause us for volatility at the local level. So we're going to bring Charlie in, hopefully shed some light on what's happening when it comes to water rates and water bills for the households across the US. And not going to lie the report which you just put out, us municipal Water and Sewer annual utility rate index 2023.
It's always one of the most popular downloads on our website.
And as a listener to this podcast, I'll tell you why. It's free for registrants on Bluefield's website. So if you just go to WW bluefieldresearch.com you can register. I think you go to the top of the page and you'll get access to the analysis on US. Water rates considered a holiday season gift from Bluefield research.
But before we bring Charlie into the conversation, I'm going to take a little bit of a new approach at the advice and guidance of my thoughtful colleagues. They missed the old format, which I talked a little bit, a couple of news items and what we were thinking of Bluefield. So let's give the people what they so. But I'm not going to give you three, I'm just going to give you one. Let's go around, maybe we'll build up to three. But a news item to talk about today is France based SAR Is. It signed an agreement to acquire Natural Systems Utilities, provider of turnkey water treatment reuse solutions in the US. Natural systems utilities, if you haven't heard of them, they report over 270 distributed systems around the US. Mainly focused on wastewater treatment and direct water reuse solutions. Notable projects I think include I think there's one in Battery Park in New York, another in Brooklyn, but also in my mind because I'm in Boston, they do have a system at Gillette stadium where the New England Patriots play, just south of Boston. So they've been around a while. Actually, XPV is a private equity firm that was a big investor over the better part of a decade, so if not longer. So it's interesting to see XPV make an exit. But also Natural Systems Utilities hooking its wagon to SAR who's actually been interesting to watch for a number of different reasons. Typically, SAR has been lumped together with Violi and Suez because of its traditional business model water services, utility concessions and it's French.
But in 2022, SARS revenues were about €1.9 billion, mainly through its concessions. But what's interesting to us is its growing industrial footprint that's built out through M and A in recent years and in some cases it's been at the benefit of the Suez Violia merger. But really, why do we care? At Bluefield. Really? Like I said, it's a focus on industrial, distributed and mobile treatment reuse. Lots of big water terms there. But it's really interesting.
They're actually building out or building from the platform they acquired a couple of years ago, which is Nywee's, Dutch company that they acquired. And that's really sort of what all these new deals are being rolled up into natural systems, utilities, part of it. Another interesting piece is that it's expected to expand SAR's relatively new US footprint. I think it was last year, it purchased a company, Aquachem, water purification company Aquachem in the US. So it's growing in the US. And obviously because of its water treatment technology, they do have applications outside of the US. And for know, Sara acquired Violia's mobile treatment business in Europe. I think that was last year as well. And that was part of the Violia Suez merger. It was a divestment of at least one of the assets sold off. And then we've also been following SARS global repositioning over the past couple of Know, some pushing and pulling different ways. It's dialed back in some markets like Colombia where it had some utility concessions that it sold off to FCC, the Spanish engineering company. At the same time, it has also expanded its digital position in places like the Middle East, Saudi Arabia in particular.
So it's sort of reshaping its footprint or its mix of activities as a whole. And when it comes to sort of distributed water, according to our analysts, this is really where the market's heading. To say this is a disruption might be a little strong, but it's definitely an area of change across the market, whether it be at the corporate level, whether it be industry and in some cases for natural systems utilities like hospital campuses, university campuses. There is definitely opportunity out there and in some cases we've seen policymakers at the city municipal levels encouraging distributed. Reuse san Francisco is the most notable one we've talked about for, I believe, on this podcast and also in our research. So the biggest challenge is going to be scaling it. And then lastly, it'll be interesting to see what happens with SAR. It's industrial water services at the end of 2022 made up 16% of the company revenues and by middle of this year, in the first half, it had already climbed up to 21%.
And that was done through organic and M and A growth during the first half of the year. So it's interesting to see how that plays out. So that's my news item of the week, or for this podcast I'll bring out as we go forward, I'll start doing some more. But before we bring in Charlie, one last thing. This is my ask. If you're using a podcast platform like Apple Podcasts, please give us a review. It's as easy as clicking on the appropriate star or just writing a quick comment such as, hey, the future water is great. That go a long way to getting the word out there, helping our SEO, and just letting everybody else know that podcast is worth listening to. So if you're hearing this, I'm going to give you a heartfelt thanks in advance.
And with that, let's get on to Charlie.
All right, so I'm joined here by Charlie Seuss just before Thanksgiving. Charlie, how are things going?
[00:07:14] Speaker A: Good. Yeah, looking forward to seeing some FAM this week.
[00:07:17] Speaker B: Are you sticking in the Chicago area?
What's your plan?
[00:07:21] Speaker A: Yeah, just a short drive away, so looking forward to it.
[00:07:25] Speaker B: Nice. Yeah, it looks like there's a storm sweeping across the East Coast just in time for holiday travel, so I'm glad I'm missing that. I'll be in New Hampshire this time of year, so that'll be so. All right. Well, as I mentioned in the intro, you've been doing a deep dive into some water rates. And so we do this every year, look at the same utilities, which provides us basically a benchmark of where things are heading or not heading, and also to identify some underlying drivers. So let's talk big picture. So what have you done? What are some of the takeaways or at least high level points that you uncovered in the analysis of US. Water rates?
[00:08:11] Speaker A: Yeah, so for about eight years now, we've engaged in this comprehensive analysis of water and sewer rates for 50 of the largest US. Cities.
And our analysis looks at some of the drivers and associated impacts on residential water and sewer bills, given that ratepayers represent the primary funding source for municipal operating expenditures. So the utilities that we surveyed collectively provide about potable water and wastewater collection and treatment services to around 15% of the US. Population.
And so across 50 of these largest US. Metropolitan areas, what the data showed through our analysis is that monthly household water bills averaged about $51 and monthly sewer bills averaged 71, roughly dollars based on the national average for household consumption.
[00:09:12] Speaker B: Yeah. So we're looking at about $120 a month all in. It's not something, quite honestly, I think a lot of people think about. You really don't have a choice in many respects. You need water and you need the wastewater system or the sewer to put it all. So when we look at this year over year, the numbers that we're seeing at 50 and 71 or 120 in aggregate, is this on pace with historical numbers? What's the year over year trend we're seeing?
[00:09:42] Speaker A: Yeah, absolutely.
So at least over the past twelve years, combined household water and sewer bills for the typical US. Household have increased a total of 56% yearly. That the average comes out to about a 4.2% increase year over year. From 2022 to 2023, combined bills increased by 3.9%. So down a little bit from the 5.2% increase that we saw from 2021 to 2022 for a typical US. Household. Sewer costs typically comprise about 59% of the combined monthly bill, which reflects many of the higher costs associated with upgrading or maintaining sewer systems as well as treatment costs. So to put things in perspective, monthly water and sewer bills range from a low of about $19 in San Antonio to a high of $122 in Portland, Oregon, based on this national average consumption figure. Meanwhile, when we look at sewer bills, these range from a low of roughly $11 per month in Long Beach, California to a high of over $170 in Seattle, Washington. So one other thing I guess to point out when we're thinking about historical trends is we've seen this shift in the balance of capital investments versus day to day operating expenses like labor, energy and maintenance and others. 50 years ago, these were just about even.
But while the level of annual capital investments during this time has only doubled, operating costs have more than quadrupled. One of my colleagues, he explained this as kind of a self fulfilling prophecy, where the less you invest in replacing or rehabilitating and modernizing your infrastructure, the more expensive it is to operate. So utilities have an incentive to they really have to keep raising rates just to try to keep pace with their operating expenses and meet these capital investment needs.
[00:11:52] Speaker B: Yeah, I think that's a really good point. And this is an exhibit we put out or we provide to clients is sort of background of what's happening in the US. Municipal water sector. It is that shift towards Opex, it's pretty significant. Like you said, it was 50 50 share 50 years ago, not to confuse anybody with all those numbers, but now it's what, closer to 65, 35, I think. So the big difference, and there is that trend towards if you don't rehabilitate repair, like you were saying, then you're going to end up fixing a lot of pipes, putting on a lot of bandaids, whether it be pipes and systems, so on a whole, or maybe in aggregate, it seems fairly stable. Like you said, it's 4.2% over the better part of a decade.
Well, it doesn't sound crazy in today's world, given what's happening with inflation and everything else. So maybe it's kind of in line where it should be, but it's not changing dramatically from year to year, as far as you can tell. But there is some variation city to city, and that's really sort of where some of the real nuance comes into play. So how does it look when you start digging into the cities year over year?
[00:13:20] Speaker A: Yes. So I guess to take a step back. When you pay your water bill, you're not just paying for the water, you're paying for all the infrastructure required to extract that water from the environment. To treat it, pipe it and pump it all the way to your house. And then pipe it and pump it back out of your house in the form of wastewater. Treat it again and then return it to the environment. So all of that infrastructure requires constant maintenance and as these system age and populations grow and capacity needs grow, you also have eventual inevitable investments needs in capital upgrades. So given all that, a lot of the notable rate increases we've seen are largely reflection of rising costs and inflation affecting O M as well as capital investments for aging. Infrastructure and utilities have not been immune from a lot of these economic disruptions we've seen over the last few years.
Whether it's higher costs for labor, chemicals and materials or inflationary pressures. These are all some of the most cited reasons that we've come across that utilities are citing for rate increases. Other drivers include new programs targeting drought resiliency in California as well as certain debt services for capital programs in Detroit and Washington DC.
Other cities like Riverside, California were forced to implement or resume some of the new rate schedules after years of postponements, largely due to COVID or I should say COVID pandemic rate relief programs that began to expire in the last couple years. The only utilities that we saw that in this survey, I should say, that saw a decline in their combined water and sewer bills were Jacksonville, Florida, Long Beach, California and San Antonio while there were about four cities that saw increases over 10%.
[00:15:14] Speaker B: Yeah, I mean I think it's interesting to your point, as I said, in aggregate it's relatively stable but when you start looking down in the weeds you start really noticing sort of the ups and downs. Like you said, four cities saw increases of 10% while there were several others that had declines. And it does swing from year to year based on capital projects. Could be labor and chemicals. That was one of the big things. I think it was a chemical plant or facility fire a couple of years ago that really has an impact on operating costs or at least for the chemicals themselves for treatment. So things like that do happen and I don't necessarily think that's going to go away, but we're looking at 50 cities, whereas in 15% of the US population, when you look at the US as a whole, we're looking at 50,000 water utilities, another 15 20,000 wastewater systems. It's pretty fragmented and so there's not a lot of commonality between them all. And one of the reasons we do this is because we often have a number of people, particularly the media, coming to us looking for clear trends and drivers on water rates. But this isn't really the case. I mean, if there is a takeaway from the exercise, what would you say?
[00:16:34] Speaker A: Yeah, that's a good question. I think there are a couple takeaways on that note from doing this exercise. First, as you said, the US utility landscape is really fragmented, so the drivers and demands on utilities and the rates can really vary a lot just depending on the location, the system size, the age of assets, along with a handful of other factors. The second point I would make, I guess, is that water can be very political. There's often a disincentive to raise rates, at least among politicians. That being said, some cities are more inconsistent in their rate structures, so you see swings from zero to double digit increases from year to year. And yes, that is typically happening for all the right reasons, such as a big capital project, spike in operating costs because of the pandemic. But from the ratepayers perspective, these factors are not necessarily evident or even justified in their minds for such an essential service. So rates will continue to be a hot topic and looking forward to tracking trends in the future as well.
[00:17:47] Speaker B: Yeah, I think your last point is maybe the most important one is that I think everybody notices when their cable bill goes up 510, 15, 20% there's usually, including myself, there's a freak out like oh my God, it went up so high, even the internet. But the water bills, I think you do see less of that. And then there are a number of reasons. Some customers across us, they're not even billed monthly, right, or it's an average. And so they're not seeing these big swings, they're not even being closely monitored in their usage of water itself. So sort of out of sight, out of mind. I think there's also the expectation and then the other part of it is if there's a ceiling on water rates, one is you need water to live, right? So you can't just cut people off and that if you're in low income neighborhood or low income household, the city can't be doing such things. So there are programs to subsidize, but usually they're third party programs that come from other sources rather than the city or the utility itself.
There are a couple of innovative, if you want to call them innovative ways where water bills and rates have been based on income levels and such. But it's not very common when it comes to that. It's usually I've got a water bill and then you either have access to some other subsidy from some third party, so well, Charlie, this is really great. I know it's a lot of work that goes into know, because you have to go city by city and it's also just going through some of the little details that no one's really paying attention to except for you. But I appreciate you jumping on the podcast to share these insights. But before I let you go, why don't you give everybody a heads up what you're working on now and what to expect in the coming months, maybe before the end of the year.
[00:19:56] Speaker A: Yeah. Thanks, Reese. We've got some exciting new research on some of the updates to the Lead and Copper Rule coming out, as well as another report on PFAS, so stay tuned for that. There's definitely some interesting stuff coming up for the end of the year.
[00:20:14] Speaker B: Yeah, those are two areas of focus. I mean, the PFAS one is also really interesting. You've got the Circo ruling coming up, the MCL guidance is about to come into play, and you've got all these legal settlements that have been happening. So our forecast, which we updated relatively recently, I know that'll be a big part of this as well, sizing the PFAS market overall, at least in the US. To see what's happening. So that's really great. And then lastly, I know you just put out your analysis of investor and utility M A. You put out the quarterly, which is really interesting as well. There's a lot happening when it seems to be picking up a little bit from a slower middle to earlier part of the year. So this is great. Well, with that being said, Charlie, thanks a million for jumping on the podcast and somewhat short notice and right before Thanksgiving. So hope you have a great Thanksgiving and we will talk again soon.
[00:21:13] Speaker A: You too. Thanks, Reese.
[00:21:14] Speaker B: Take care.
[00:21:15] Speaker A: Bye.
[00:21:17] Speaker B: All right, that was great to have Charlie on. I think it's actually been a little while, so super useful to hear his insights. So before we sign off, if you're in Boston, Barcelona or anywhere we are, just let us know. We'd enjoy the opportunity for a meeting. Please subscribe and give us a review. That is future Water podcast. That would be super helpful. It's how we bump up in the ratings and then send us a note to water
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Lord.
