Episode Transcript
[00:00:00] Five balloons. That was the entire product line of a Minnesota company. In 1966, five engineers pulled together over $14,000 and set out to manufacture high altitude research balloons.
[00:00:15] Well, the balloons didn't sell, canoes didn't sell.
[00:00:20] By 1968, four of the five founders were gone and the company was nearly bankrupt.
[00:00:26] The last man standing bought a paper mill.
[00:00:30] Well, paper mill became the engine for five decades, acquisition for things that included things like power tools, enclosures, ammunition and then at one point water.
[00:00:45] This included pumps and filters and pool equipment and over time everything but the water business got sold off.
[00:00:54] Today, the company those five men started, named for their number five of them and the air they never conquered with the balloons, is a four billion dollar water Pure play.
[00:01:08] The company is Pentair.
[00:01:17] This is the future of water. Which talk about all the ways which peer people, companies and utilities are addressing the challenges and opportunities in water. I'm Reece Tizzle and this is episode 146 and I think it's going to be a good one.
[00:01:33] I have some reservations, partly because I'm flying solo this week and I'll be honest with you about why.
[00:01:40] One, it's habit and I'm on the road and for any aspiring podcaster out there, 90% of the game is just doing it one episode at a time and just don't stop. That's how we've gotten to 146.
[00:01:56] The downside of this is I usually have other people with me who are knowledgeable and understanding of what's happening in the water sector.
[00:02:04] But to explain why that is, well two, I'm in the middle of cleaning out my parents house right now. So after 55 years of a family in place, one place that is here I am emptying out a 250-year-old creaky house, determining what stays, what goes and I guess what we hope the next generation will deal with.
[00:02:28] So what does this have to do with water? Well this past week I've been thinking about it, wondering what am I going to talk about on this podcast while I'm on the road and no one else around me and I'm doing all this work? Well it made me think of the Colorado river. One, there's been news out of the Basin states for one, so I wanted to talk about that. And then it also makes me think about actually what I'm doing now. Decisions that were convenient at the time.
[00:02:54] You know, every generation in the case of The Colorado since 1922 has been finding a reason to kick the can down the road. Well that's supposed to change this year and hopefully you'll take away from this. But that no matter how bad it might feel right now, there has never been a better time to be in the water sector. The crisis is real, but quite honestly, so is the opportunity. So let's get into it. So this is just going to be basically an extended version of what caught my eye this past week that I do, you know, every episode.
[00:03:31] So let's jump into the Colorado River.
[00:03:35] The federal government, it seems to be moving towards a final decision on the river operations. So what does this mean? A binding record of decision must be in place by October 1st.
[00:03:47] The governor of Colorado has declared a statewide drought emergency.
[00:03:53] Did that in June.
[00:03:55] And then Arizona legislators are discussing the Colorado River Protection Fund, specifically funded by fees on data centers.
[00:04:06] Not sure I'm such a big fan of that. But in any case, I know we've been talking about the Colorado river crisis, and that's exactly what it is for what seems like forever. I mean, to put it in context, I was talking about it during my western geology class field trip in the summer of 1992.
[00:04:25] So the rings were there then on the river, and the rings are there now, but they're just bigger. So here's what should be different. I think the clock is it finally running out at the federal level, or at least among the basin states.
[00:04:40] And you know, as they say, the frog may have finally been boiled. We may. That might be it. So it'll be interesting to see what happens. So let's just. I'm going to walk through this. I'm going to talk a little quickly about the problem. I'm going to talk about a couple of dates, and then I'm going to talk about what I see are opportunities. So let's talk some quick facts, like why is this important? It does feel like, you know, deja vu, but it does seem to be worse this year in some respects. So Lake Powell is at 23% capacity. So that's 37ft above the threshold where Glen Canyon Dam stops generating power. Mind you, they're 36 to 37 million people reliant on the river, not just for water supplies and agriculture and such, but also for power.
[00:05:31] So this is not a buffer that was planned. This is what we would call a cliff edge that we are barreling towards in Utah. The town of Emory is hauling water by truck this week. So towns are running dry now.
[00:05:49] This isn't later or what is expected. It's happening now.
[00:05:53] And then. This is kind of the real rub this year, and that is the 2025, 26 snow season produced the lowest snowpack on record.
[00:06:02] And this water year has been the warmest on record in Colorado, which is driving early snow melt for what snow there has been. I think I already mentioned those podcasts that I was supposed to be out there to go skiing this past winter and there was no snow, so we didn't even go.
[00:06:20] So what does this mean? This means low river flows. This means dry soils.
[00:06:25] And then, you know, the really uncomfortable part that comes out of this as well is elevated wildfire risk. And that's a problem as well when there's low moisture.
[00:06:36] So as they say, as Brad and Udall has said, we have too many straws in the glass.
[00:06:42] That's the reality of it. The river was 20% smaller than it was last century.
[00:06:48] The states are legally entitled to use about 15 million acre feet a year when the average flows are about 12 and a half million. So that 2.6 million acre feet gap is, I think Dean put it in context. That's the annual water supply for about 13 million people. It doesn't exist, but it's legally promised.
[00:07:11] And you know, it's not a drought problem, quite honestly. It's basically a math problem or even more so, it's an US problem because of governance or lack thereof.
[00:07:23] So, you know, that's kind of the problem.
[00:07:25] Then let's talk a little bit about the timeline. Let's kind of go through what everybody should be looking for as we go forward towards the end of the year. And that is a couple deadlines. So October 1, 2026. So that's the deadline for the final environmental impact statement and record of a decision they've been targeted for this summer. I think there were about 18,000 comments that were provided in the draft EIS.
[00:07:52] And I think the Interior Department has realized that they can't delay accident anymore.
[00:07:58] So mind you, the states have already failed to agree twice and they're saying there is no third decision. Well, the upside is that the lower basin states don't seem to be standing still. It seems like they've come to an agreement. That is Arizona, California and Nevada have committed to conserving about 3.2 million acre feet through 2028.
[00:08:23] California is reducing usage by about 13%. So this is a stop gap. It's not a solution. But. But it proves that if things get too hot, so to speak, states can agree on meaningful cuts when the pressure is sufficient. So October 1st, that's really where I started with this. Keep an eye on what that means for the river, what the cuts are going to be, that's the long term plan. Another one is the end of 2026. And this is really important because the 2007 interim guidelines, 20 years old, the 2019 drought contingency plans and the water sharing agreements with Mexico all expire at the same time. So that's two decades of Colorado river governance unwinding in what could be a single moment. So whatever the federal record of decision establishes, that's going to become the operating reality by default.
[00:09:19] And then I think the other thing out there is what's happening within Washington and Congress. We've talked about other agencies and funding, including things like IIJA, but also there's $4 billion in inflation reduction act drought relief funding that could be subject to rescission in Congress. We'll see what happens with that. Agricultural water users, they face the sharpest exposure because they account for about 80% of Colorado river water consumption.
[00:09:48] So mandatory cuts are increasingly likely in any post 2026 framework. So we'll see what happens there. But also that's talking ag. But I think we also need to keep in mind that municipal utilities, well they have political capital, but they're also easily targeted in their water use because you can put a finger on them, it's harder to do that in ag. But they're not insulated from this as well.
[00:10:13] I mean you have to keep in mind places like Arizona, Nevada, these are super high growth states as far as housing development, pop growth in the US So they are exposed somewhat, they're not fully insulated.
[00:10:30] And then you know, tribal nations which hold senior water rights but often unquantified and so they face risk as well.
[00:10:40] So it'll be interesting to see what happens if Congress actually fully enters a room and does something. And quite honestly, I'm not sure in any case if Congress has demonstrated its ability to pull things together. So those are the facts, that's the timeline dates or at least key ones to look out for. So what does this mean for Bluefield and what are we thinking when we read all of this? Well, I guess my takeaways from this are that governance failures of this magnitude, and that's really what it is, they're not just creating problems. I look at it as they're creating markets and markets of opportunity. So the same policymakers who've missed two consecutive deadlines and kicked the problem down the road for 20 plus years have almost accidentally created the strongest market conditions the water sector has ever seen.
[00:11:37] When you mandate cuts from a system that 40 million people and multibillion dollar agricultural and technology economies depend on, you're not going to shrink that economy. You're basically going to force efficiency. You're going to accelerate things like reuse. You're going to create urgency around alternative supplies that no amount of industry advocacy could ever manufacture. So that's a glass half full perspective if I've ever had one. And I'm a firm believer because when the bottom line is hit for agriculture or industry, really probably first and foremost, they're the first to move ag. You know, the challenge with ag is they continue to get bailouts and such from the federal government.
[00:12:22] So any moves that they make will be slower. It's a very mature market. But when you start looking at what will semiconductor fabs or manufacturing or data centers in some cases, what will they do in these markets that are water stressed? If they see an opportunity that they can make money in, they're going to implement efficiency measures that are worth it because it's basically insurance and it gives them market access. And that's just the cost of doing business.
[00:12:54] So that's one aspect of it I would say. Secondly, you know, when it comes to infrastructure, I would talk about the reuse market. It's undersupplied. Right. And that means. What do I mean by that? Well, Bluefield is forecasted about $47 billion in municipal water reuse investment between 2025 and 2035. So over the next 10 years, we're looking at a significant build out. I think we're still at the early stages, quite honestly, and the company's moving now. They're kind of defining the market. It's not an easy market because a lot this, I'm just talking municipal, not even talking industrial reuse at this point. So.
[00:13:35] But a lot of this is happening out west of, you know, I think California represents, when we look at all the projects, we have about 700, 750 reuse, municipal reuse projects we're tracking in the U.S.
[00:13:48] i think 10% of them or more are in California.
[00:13:52] But we're looking at almost 400 of them are in the Western U.S. right.
[00:13:57] And these projects are focused specifically on things like drought, resilience.
[00:14:03] Meaning is there going to be enough, what you can call it drought or you could call it, there's just not enough water in the Colorado river and elsewhere. So the infrastructure is being built out. So now the question is, who builds it, who pays for it? And it'll be interesting to see what happens. Speaking of paying for it, on the industrial Side or private side if you will.
[00:14:27] Congress is starting to think about this. This has been in play since at least 2013. But now the Advancing Water Reuse act, it's been proposed to establish an investment tax credit targeting things like data centers, manufacturers and large industrial users. This is super interesting. I liken this to what happened in the solar industry.
[00:14:53] Not the solar industry all you want. I don't think most people do. But it has been the fastest growing segment of the power sector over the last decade. Right. How has this happened? Well, it's happened because of investment tax credits and it's not giving away money. If people are paying taxes, they're able to benefit from this. If you're not making money, then you can't benefit from it. Let's start with that. It's simple math, but what this is is a way to incentivize these private facilities. Industrial manufacturers start use that if they see an opportunity to invest in water reuse systems, processed water reuse systems where they can help pay for infrastructure and the investments to drive efficiency, they're going to do it. Give them incentives to do so.
[00:15:45] It provides jobs, it sells product, it sells technology.
[00:15:50] So it's a balance sheet argument that the water sector has not had and it has worked for the solar sector.
[00:15:58] I think this is a great opportunity and I think this should be pushed forward. People will benefit, people will complain. But hey, who doesn't complain then lastly, this is the strongest demand signal the technology sector has seen. So technology, whether it be for treatment, filtration, but also Digital. Right. The U.S. and Canada Digital water market is on track to double to $29 billion by 2036. That's over the next 10 years. Pretty significant. The market is waking up what seems to be in real time. This includes everything ultimately from municipal digital tech. That's something that's happening. But also digital irrigation technologies for the ag sector that's growing at almost 13% annually and will continue to grow. This is things like smart irrigation, having more efficient pumps. The same states cutting senior water rights and hauling water by trucks are the ones that are going to drive the investment.
[00:16:59] You know, if you haven't read Cadillac Desert, it's worthwhile. It is, you know, the Western U.S. california, most productive agricultural region in the world. One of them at the very least. There's not enough water to go around. So being more efficient when it comes to water water management will be partly enabled by digital tech. So you know, urgency moves the capital and the capital is moving. So we'll see what happens there. So Those are my three quick takeaways from what's happening in the Colorado River. So policy failing on governance is driving opportunity.
[00:17:35] There will be and there is more investment in things like reuse and advanced water treatment infrastructure and technology. These are things that we talk a lot about at Bluefield. So it keeps coming back to, you know, basically the tools exist, there is capital available.
[00:17:57] Could be public private partnerships. These models could be ultimately investment tax credits would be really interested in that. You know, it's the regulatory frameworks need to be built and there is some action, at least at the state level.
[00:18:13] So the architecture is there.
[00:18:16] The unfortunate part is we have to rebuild this house while living in it. So this has been my take for the week. So keep an eye on the deadlines and also keep an eye on what we're talking about at Bluefield. There'll be more coming out on this as things roll out over time.
[00:18:36] So that's my take for the week. That's my solo podcast, and thanks for listening. So, as always, if you have any questions, this episode or any other episode or just what we have going on in Bluefield research, you can reach out to us@water expertsluefieldresearch.com can always just go to our website. One thing I would suggest to sign up for our Waterline newsletter. It comes out every Wednesday.
[00:19:00] We provide, you know, the analysts pick out three articles we share with our readers. They should be available to everybody. I think we purposefully don't choose articles of interest that are behind paywalls. It may happen every now and then, but I think we purposely try to avoid that. And then it also gives you an idea of what's happening at Bluefield. Not only the research, we're putting out the podcast as well. So I recommend that you just go to bluefieldresearch.com, go to the top nav of the page, and there should be a register button that you can go there. It takes 15 seconds, I bet.
[00:19:36] So that's that. So I want to thank Mike Gaylor, as always. I want to thank Kelly Talbot, Steph Aldyke, Ryan Sullivan, all the Bluefield analysts that always contribute to this podcast. We couldn't have gotten a 146 without them.
[00:19:50] And as I always say, there's no better time to be in the water business and for all the wrong reasons, but it is what it is.
[00:20:00] So until we talk again, be well, be safe, and take care.
[00:20:11] Sam.
