Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:06] Speaker B: This is Future Water, where we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. Today we're going to talk about Texas climate and what a mess it is and what these events could mean for sustainable water management strategies and solutions going forward, not only in Texas, but also the rest of the US and maybe elsewhere. But before we bring in Aaron Bonnie Casey, let's talk about what's happening in the news.
Three deals in one week. Autodesk acquired Innovise for $1 billion. Quikrete acquired Forterra, the ductile iron pipe company, for $2.74 billion. New Mountain Capital, the private equity firm, acquired Aegion for $963 million. Those are three huge deals in water. What's unique about those? Well, they're mostly focused on water, which is what you really don't see a lot of. But rather than getting into a lot of detail here, I thought I'd share with you that Keith Hayes and I, my partner in crime at Bluefield Research, he and I discussed on the Future of Water, an emergency podcast that we recorded the other day about what all of this means and what the bigger trends are. So I suggest everybody be on the lookout for that podcast when it drops, which will be soon. And then separately the beginning of last week, actually, we thought there was just going to be one deal. Mario Marchand I discussed trenchless water and the Aegean deal with New Mountain Capital and sort of what the trenchless market landscape looks like and why Aegion plays such an important role that so that's news item number one. Looking at number two today, at the time of this recording, which is March 3rd, the American Society of Civil Engineers is slated to release its Infrastructure report for the US and what does that mean for Bluefield and water? Well, Bluefield is happy to have worked with the American Society of Civil Engineers ASCE in collecting, analyzing and presenting water, wastewater and stormwater data. Our team addressed a number of different questions that the organization had pulled together data to showcase what we think is happening and what the impacts and also what the future may look like for the water segment as a whole. So that'll be really interesting. I know that it gets millions of reads, but also let's hope that some of these segments get better than a D or D + ranking this time around. So usually they're pretty hard on infrastructure as a whole, but maybe, hey, that's what the story is. So be on the lookout for that news item number three. So a couple weeks ago I failed to I Believe I failed to bring up the Florida cybersecurity event in Oldsmar, Florida, where a small municipal utility reported levels of lye being added to the drinking water system were changed remotely, basically by hackers, which posed a real significant problem to residents and users and stakeholders of that system. This is something that has been of growing concern on a number of different fronts. And now water seems to be the next segment or area that has been impacted. I mean, cybersecurity is something that is becoming ever more real in our daily lives, including water. And really it seems like the at least our take is that these hacks come in different forms. You know, I'd say three or four different forms. One, ransomware, where we've seen in places like City of Baltimore where a hacker locks down the municipal operating systems and computers. And so they're basically asking for money before they will unlock the system. It's just like a money making scheme. The other is, you know, customer account hacks where we see, you know, hacks go in and try to grab customer data, credit card numbers, personal data, and they can use that for other purposes. So that's been ongoing, happens department stores, happens at cities, happens in hospital, happens all over the place. Then there are asset hacks and I think Bluefield, we've talked a bit about it in previous podcasts. In fact, Eric Bindler and I talked about cybersecurity. I think it was late summertime where we talked about what's happening in cybersecurity in relation to some events happening in Israel where assets were hacked, where you start seeing pumps and valves being affected by hackers, where they pose real, I'd say physical risk potentially, if not health risk to end users and stakeholders. But now this old Smar Florida hack is a bigger concern where someone has actually gotten into the system and they could hack the actual drinking water quality and impact it negatively. So this is a real concern and it exposes not just digital digital solutions, who has access, you know, what is the security around them, but also just the basic assets themselves. And lastly, I would say, how are we going to pay for all of this? Because I think my upcoming guest Aaron Bonnie Casey and I talk about 75 to 80% of US municipal water utilities, water specifically, they're small, they're serving under 3,300 people. They don't have the financial personnel or technology resources to stay on top of this. So trying to figure out what that means going forward and what the risks are to infrastructure owners and operators will be going forward is definitely significant. So three news items Some big deals, new reports, infrastructure report card and then lastly cybersecurity. But also before we jump into the conversation, I want to give a shout out to the Water Values podcast and my friend Dave McGimpsey. This week he released episode can you believe it 187 with the rambles Brian Arndt, who discusses innovation in the wastewater space and details the importance of microscopy and wastewater treatment plant operations. So if you are listening to this and you haven't subscribed to the Water Values podcast, you should do both. So take advantage of the opportunity. He interviews guests in a blue field. In the future of water, we really kept it in house. Talk amongst ourselves what we are seeing in the world of water.
So that being said, more importantly, let's get to Aaron Bonnie Casey.
All right, so over the last two weeks Texas has been in the news for all the wrong reasons, I suppose more than I think 14 million people have been impacted by a freeze out that was I guess catalyzed by a failure in the energy and power sectors. And the result has been for water has really been water main breaks, boil water advisories, flooded homes. So rather than hear me talk about it and a monologue, let's bring in Aaron Bonnie Casey and sort of address some of the questions about Texas, the water landscape in the state, but also the US as a whole and also climate. So Aaron, how's it going?
[00:07:24] Speaker A: Good, thanks for having me on. I think this should be an interesting discussion. You know, these types of dramatic disaster events kind of highlight some of the underlying issues that we're seeing with these systems.
[00:07:33] Speaker B: So yeah, I know this one sort of obviously was unforeseen. I think, you know, now it's getting a week to 10 days old and I guess the problem is not fully solved. Meaning that there people are still under boil water advisories in certain cities and it's not just Texas. Right. I think even places like Jackson, Mississippi are having all kinds of problems as well. So let's step back a little bit and let's just talk about, you know, the fact that right now Texas seems to be a mess. But in the broader context of climate events, Aaron, is, is this unique or what makes Texas unique when it comes to this situation?
[00:08:13] Speaker A: Yeah, I think so. First of all, for Texas, it's kind of the scale of the state. Right. It's the second largest state in the country. And so when you talk about, you know, what's happening in Texas, you're talking about millions of people impacted.
I think the other big aspect that makes Texas unique is the fact that it has its own power grid. So potentially, when you get power failures in Texas, especially in the storm, they're really widespread. If it had been in other parts of the country, potentially the power outages wouldn't have been as widespread.
But that being said, you know, I think there are a lot of things about Texas that are actually reflective of the United States as a whole. So if we talk about the scale of the state, you know, it has 4,600 water systems. That's about 10% of the US market. Texas has lot of small systems. And when you're talking about overall numbers, it's a huge number of systems. I think there's somewhere around 3,500 systems that serve 3,000 people or less.
So those small systems don't have a lot of extra capacity for dealing with disasters. There's a lot of them in Texas because it's such a big state. But when you're looking at kind of the percentage or the structure of the water sector, it's pretty similar to the rest of the United States. The country in general has a lot of small systems, and those small systems maybe have one or two operators.
They're very cash strapped, and they're not prepared to deal with major disruptive events. We saw in the onset of the pandemic last spring, and we see it in these types of kind of physical disasters as well, dealing with power outages and broken pipes and things like that. Another way that Texas is a little bit unique is it sets up its systems through municipal utility district structures. Those are small entities that are responsible for water and sewer services in an area, and they're often owned by property developers. So when a new development goes in, you set up an mud, the owner of that system is the property developer, not necessarily a utility expert. And as a result, those muds operate as efficiently, on average, as some of the larger public utilities.
[00:10:29] Speaker B: Yeah, I mean, that raises a good point, because this is a question we've been sort of trying to figure out is, you know, when it comes to the water landscape. Yeah, it differs in that it's just a big state with a lot of systems. I mean, it's not all that different from California. Right. Or Florida or New York. Big states, a lot of systems. Because quite honestly, the US Has a significant amount of systems. And I agree with you. I mean, I think when you have a lot of systems, let's say, you know, is that 75 to 80% of the US by just count of those, I think 50,000 total systems, I know 75 to 80% of them are small or very small, serving less than 3,300 people. I think that's sort of the number we go by and the EPA uses as a metric.
So, yeah, they probably have a couple people operating the systems. They probably don't have a lot of financial resources. They're sort of running on their ongoing operating budget, which is basically, you know, the revenues from water bills. So when everything's going along swimmingly, it works when it all hits the fan like it did in this case then. And absolutely, they're kind of thrown back on their heels, maybe at best, in some cases worse. So we've got sort of the landscape, and that is Texas. And I would happily talk more about the power grid, which I think is interesting, but that's all over the news and sort of the failures of that. But let's talk about extreme weather events. I mean, they're not new. While this is a cold snap, and a cold snap in the south is different than a cold snap, as you and I know, in the North. Right. It goes down to zero here. It is what it is. Everybody sort of deals with it in the south. It's a whole nother matter. But they're also being confronted or having to confront other types of events. So how would we rank this or how would we compare this to others?
[00:12:36] Speaker A: Yeah, I think, you know, to that point, one of the reasons that Texas got hit so hard by this cold snap and the south in general is that they're very. Their infrastructure is not prepared for the cold weather. Right. So I think that's important to note that we're talking about extreme weather in Texas wouldn't be considered extreme weather in Boston, but the systems are just set up to kind of handle different things.
You know, extreme weather events, they take multiple forms and all of them really impact water utility functioning. When we think about water related natural disasters, I think the first one that people might think about is drought. And so, you know, look no further than cape town's Day Zero in 2018 when the city had to start rationing groundwater because they had, you know, a few weeks worth of water supplies left and they were basically praying for rain.
Closer to home, the California drought a few years ago, that was a major flashpoint for the water community to start talking about emergency and alternative water supplies.
I would say the other disaster that people think about water is obviously flooding, but there are other disasters that affect water utility operations. So the wildfires in California exposed a lot of communities such as Vallejo, that had to shut down water and wastewater facilities because of brownouts related to the wildfires.
We're seeing increasingly that these kind of extreme weather events of all sorts. So wildfires, flooding, droughts, freezing winter storms, hurricanes are becoming more common. So the US sustained 255 weather and climate disasters exceeding a billion dollars in damages since 1980. And if you look at that data set, look no further back than 2011. The state of Texas experienced blackouts because of freezing temperatures. So it wasn't that long ago they were facing the same issue. Those blackouts led to broader infrastructure shutdowns. You know, Texas also had Hurricane Harvey hit a few years ago, which flooded Houston with over 51 inches of rainfall over just a couple of days.
And that was the third time in as many years that the city experienced a 500 year flood. So I think at this point, you know, it's just highlighting the fact that utilities have to be prepared for these extreme weather events. They're just becoming more common and there's more of an infrastructure asset base that is susceptible to disruptions by those types of events.
[00:15:05] Speaker B: Yeah, I mean, I think what's, I don't know if it's surprising about this one, but I think some of the things you talked about, like Vallejo, California and the wildfires and the shutdown of their wastewater treatment facilities, this Texas one, right, when the power system goes out, then there's a cascading effect or impact on other infrastructure. Right. So it all starts shutting down. In the case that water froze in the energy pipes, you know, providing gas, and then the power plants aren't don't have the fuel. In a case in Texas, the nuclear plant, I think it was a backup cooling system, if I remember correctly, that ended up freezing. So it really wasn't the system, it was the backup. But for safety reasons, it had to shut down. And then at the same time, when it gets cold in a place like Texas, and I'm from South Carolina, this is what we used to do. When you look at the weather and it says you're getting to 30 degrees, first thing everybody does is they open their faucets or taps and start running water so their pipes don't freeze in the house.
So then the impact of that is the water utility has all this massive demand. There's basically they're overdrawing the customers from the system and then there's water supply issues and then it all leads to essentially system failure. So, yeah, it's kind of crazy how it's happened, but it seems like you said it's happening more and more and, and that's kind of. Well, maybe this is a question for you. We can't just overhaul the system. I think that your point about the 2011 event in Texas, there was, I think that's when winterization recommendations, they came out of that event and that was sort of across the state, like, hey, voluntarily, we're asking you to volunteer to winterize your systems and infrastructure. Well, that didn't happen. But what does that mean for water though? I mean, is there a solution to all of this? I mean, because there are a lot of stakeholders.
[00:17:13] Speaker A: Yeah. I mean, so from the utility perspective, I think, you know, they're going to have to figure out ways to be able to operate during disasters. So that's going to mean pretty extensive investments in infrastructure improvements, potentially digital solutions that allow for remote monitoring and on site power generation capability.
A lot of the boil water advisories that we've been talking about are a result of water main breaks from freezing pipes, pipe cracks, then the water inside is no longer guaranteed to be safe for drinking. So boil water advisory is issued to fix that and to insulate the pipes against freezing weather. You're going to have to bury them all deeper. And if you imagine the scale of burying all of them thousands of miles of water pipes in the Texas deeper, it's just a huge undertaking and it's going to require a lot of money in a sector that's already kind of cash strapped and just doing the bare minimum to keep the infrastructure functioning.
I think from if you look from kind of the customer side, if utilities don't do that and they're not able to guarantee continuity of services during natural disasters, they're going to start losing high volume industrial and commercial customers.
Because those customers are going to say, well, if we can't rely on the utility, we're going to have to start sourcing our own water and wastewater services on site.
And we have seen companies that have the means to do that and have started doing that, they are driven by the bottom line. And this just kind of disruption in service is a huge financial hit for them. It's a huge operating risk.
And so they're looking to secure alternative sources of water and treatment solutions as well as on site power gen.
And so we're seeing a proliferation of efficient on site water management like water reuse power management applications like solar energy, battery backup. Those things are already being realized and it's likely to quicken in the aftermath of blackouts, wildfires, hurricanes, droughts, natural disaster situations. We at Bluefield have been looking at corporate sustainability initiatives across over 100 companies that indicate that going green also includes having an efficient water strategy. It's good for business, it's good for reducing operational risk and it's good for brand identification. If utilities start losing those high volume commercial and industrial customers, it's going to be a big problem for them because their operating budgets rely on a volume based rate structure.
And the revenues from those large volume users provide a good chunk of the money that they need to keep the system functioning in the first place.
[00:20:09] Speaker B: There's a ton to unpack there. And I do, you know, I do have a question about reuse, but before we jump into that, I mean one thing that comes to mind that I've been thinking about over the past couple days is.
You're exactly right. I mean, we know we could ask Mario Marchand, who's on our team, about how many miles of pipe there are in the ground in Texas water and wastewater. But in the case of water, we're not going to go in and just dig up every pipe and winterize it and, you know, put them deeper into the ground so they're protected from cold snaps. I'm wondering though, like different devastation, but I was thinking like Hurricane Andrew in Florida and that was. Now I'm aging myself. Was that in 1989? So, 89, yeah, I think that seems right. So 1989, I think, where, you know, southern Florida got completely trashed and it really, I think it was a big driver behind new building codes, like, you know, houses, new build. Right then that's really what it's about. So I think in a lot of cases that's where the gains can be made. It's incremental, it's slow, but at least it's a starting point. So. Or during rehabilitation, right, when you have to go in and tear up the pipes or replace a pipe. Well, go a little bit deeper, you know, do something. See, is there anything that can be done then? But yeah, so. And I think the other discussion, which we haven't gotten there yet, but the insurance industry, I mean, what are, you know, because these homes, you know, if they are not receiving heat and they're not, you know, and then. Or if they're receiving water and it's all frozen in their house, are they all on the hook for this or is this force majeure? I mean, there's this whole problem that it's just bad and so I don't know if you have any thoughts on that.
[00:22:04] Speaker A: Yeah, you know, I mean, I think, you know, we've been talking so far kind of about the impact on utilities and what that means for continuing operations. But then if you look on the consumer side, like if the residents in Texas, this double whammy where they were get, they were out of power and heat and then also they were under boil water advisories and you're just sitting there like, how am I supposed to boil water with no electricity?
We talk about our systems not being prepared for these kind of ripple on effects of critical infrastructure failure. Neither are people how I don't think people are able to operate. You know, the heat's out, electricity's out and the water's out. You know, how do you solve those three things at once? So you have to start thinking about how do you isolate these events if the power goes out, how do you protect the water system, vice versa.
[00:22:51] Speaker B: I mean, and it's already been 17 and a half minutes since we started talking and we haven't even mentioned Covid. Right. Are people going into like convention centers or warming centers just to get warm? I mean, that's a whole nother matter, but we'll move on from that. So one of the things you did bring up though is there's the corporate sustainability. And part of that is kind of it makes me think of like Tesla and Reuse, but also like municipalities. I mean they can be more efficient in their own, in securing their own water supplies. But.
And I think even you started when people think of climate change, freezing temperatures is, is not it? Right. I'd say it's probably pretty far down on the list of the four or five things that we really look at. But drought is a big issue and in water it makes perfect sense. It sort of plays right into sort of the water supply issue. And I know you've been looking at reuse just sort of stepping back a little bit further. I mean, what is happening in Reuse? What's happening in that market as a whole?
[00:24:02] Speaker A: Yeah, the market, you know, well, when we talk about Texas, Texas is one of the largest markets for reuse in the world. Nevertheless, in the United States, because of the climate in the state and the growing water demand, they're really focused on securing new supplies for the future to meet that demand. And reuse has emerged as a major water management strategy for the future. And I think overall the reuse market has really matured over the past few years. And what that looks like is that we see a number of large scale projects going forward, especially in California and Texas. Reuse projects used to be really focused on using reclaimed water for irrigation, both, you know, agricultural applications, but also More urban applications like irrigating golf courses and parks. But now reuse projects are really focused on expanding potable reuse and reclaimed water for industrial applications. Those are more untapped opportunities. And in some cases, potable applications are kind of simpler to implement, despite the fact that they've experienced public pushback and that they do require higher levels of treatment. But they can utilize the existing distribution network. And so we see utilities, you know, if you can get the reclaimed water to the appropriate standard, you save yourself a lot of money in having to install new distribution networks. Industrial applications are kind of similar because you can get a high volume of water demand at one site, whether that be a power plant or other manufacturing facilities. Usually they're using reclaimed water for cooling.
And cooling water demands are really high. So you can install one pipe system and get a lot of reclaimed water out there. When we talked about the obstacles to reuse in the past, it was really public perception and convincing people that reclaimed water was going to be safe to use and that it was a good option going forward. And then also legislation and regulation about implementing those projects. And there's been a lot of progress in those areas. The public is definitely more comfortable with reuse because there are a number of existing projects that have done a good job of communicating with the public that have been operating safely for a number of years now. And regulations have changed, primarily at the state level, although there has been some federal support for change as well to allow for reuse. And successful implementation of previous projects have provided this blueprint for additional projects going forward.
I would say the biggest barrier to reuse for utilities, which is kind of touching on something I mentioned before, is just the funding. How are utilities going to pay for this? Because it does kind of go above and beyond just maintaining existing assets.
So we're tracking, you know, the Clean Water State Revolving funds, which provides funding for reuse projects. Also the WIFIA program at the federal level is increasingly funding reuse projects as well. So there are opportunities for utilities to tap into that kind of government backed financing to get these projects off the ground.
[00:27:08] Speaker B: Yeah, I think what's interesting also about reuse, I mean, related, also climate related, is, I mean, it hasn't been raining the winter season or rainy season in the west, particularly in California. Northern California has not been a banner year.
In fact, I think as someone mentioned I read somewhere, I mean, we're heading into, I think March might be the fourth quarter, as they would say, in the, in the rainy season. And so if they're way under rainfall levels and Snowpack I think has been okay.
I think it may. There were a couple big strong first, you know, do we see states like California, but also Nevada, Arizona obviously the Colorado river basin as a whole putting more focus on reuse. I mean like I said, it has matured. We started looking at this and I mean not all that long after the founding of Bluefield, like 2014. We really started looking at it at a project by project level, figuring out where the projects were happening but also what types, you know, from potable, whether it be indirect or direct, but also irrigation and ag off take. So no, I think it's really interesting.
It'll be interesting to see what happens. I think, you know, the main point of this discussion is really climate. Right. So it's not just the freeze outs, it's not just the hurricanes, but there's also the drought. And so not to lose sight of that.
[00:28:41] Speaker A: Yeah. And you know, it's the same utilities that we're talking about. Right. It's all of these things. Touch Texas for example. So the utilities are trying to figure out how to operate during power outages, how to protect from freezing temperatures and how to protect from drought all at the same time. So it's definitely kind of a dynamic emerging problem for them.
[00:29:01] Speaker B: Yeah, I mean don't you remember it was 2014, we were looking at reuse and Texas was part of it. The driver was both Texas and California. They were both in major droughts. Right. I mean I think and at the time drought was all in Texas was also a big concern for the energy sector, particularly as hydraulic fracturing was picking up and you know, did they have enough water supply? And there was a bigger discussion about reuse and transport of water.
You're right. Bringing it back all to Texas.
It will be interesting to see how this one plays out though the Texas blackout because it's. Yeah, I think it's worse than anybody ever realized and I think it's going to be a long time before we get a full understanding of it. And I don't even know if you said it but like Hurricane Harvey, the fallout from that, the financial fallout was like $125 billion.
So God only knows what this is going to be. Well, look, I don't want to take too much more of your time, so anything you're working on in particular worth.
[00:30:09] Speaker A: Calling out, we have coming out in the next two weeks. I would say OPEX report on US Utilities and we're really excited about that. It's pretty dynamic forecasting exercise we've been doing and so I'm excited to have conversations with clients about that market.
[00:30:28] Speaker B: Yeah, that'll be actually related to Texas. That was a question I have for you on some research you've been working on related to Texas. The small systems, you know, with so many of them, what are their budgets and their operating budgets look like relative to the larger ones and how to address that? Because the small system landscape, like you said, it's not just Texas, it's the entire US and there are strategies and solutions that are targeting those. We had a long discussion among our team yesterday about there are some successful strategies and also they could benefit, I think as we mentioned, from digital cloud solutions where you don't have to have as many people on site to sort of manage the data or manage certain assets. It can be done somewhat remotely, but that's a topic for another day maybe so. All right, Aaron, thanks a million for jumping on. Appreciate it and we'll catch up soon.
[00:31:30] Speaker A: Thanks.
[00:31:31] Speaker B: Alright guys, so before we sign off, give us a rating and subscribe to the Future of Water. You can do it on Apple podcasts, you can do it on Spotify and all those other podcast platforms. Send us a Note to water expertsluefieldresearch.com with any topics or ideas you would like us to discuss would be really helpful. We don't want to just talk to ourselves. Also tell a friend about the Future of water. Reach out to a friend. It's always a good time to do that. We're still think somewhat isolated in quarantine. Soon enough we'll see him in person at events and this podcast and these water industry insights have been brought to you by Bluefield Research. To learn more about us, go to bluefieldresearch.com all right, take care.
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