ANALYST CORNER

COLLABORATION WITH INVESTOR-OWNED WATER UTILITIES ESSENTIAL IN ADDRESSING CALIFORNIA’S WATER SUPPLY CHALLENGES By Ms. Heike Doerr

As California faces a growing water crisis — extreme droughts, depleted groundwater basins, aging infrastructure, water quality concerns, and water supply constraints — efforts to solve these issues will involve collaboration from legislators, state agencies, wholesale water suppliers and numerous other stakeholders. Though often omitted from the discussion, investor-owned and large-privately-held water utilities have shown proactive leadership in encouraging conservation, addressing water quality concerns, and replacing aging infrastructure.

Four of the nation’s largest investor-owned water utilities (IOUs) — American Water Works Inc., American States Water Co., California Water Services Group, and SJW Group — are among these water utilities that distribute drinking water to approximately 16% of the state’s population. The remainder of the population gets its water from municipal utilities, managed by local elected officials. As state agencies focus on supply diversification and smaller water systems encounter water shortages and water contamination issues, these IOUs, which possess the financial health and technical expertise to assist neighboring utilities, will increasingly be relied on to provide solutions. The California Public Utilities Commission (CPUC) has regulatory jurisdiction over IOUs, ensuring they deliver clean, safe and reliable water to their customers at “reasonable rates.” Oversight by the CPUC does offer an additional element of risk and uncertainty. Confidence in a functional regulatory compact, which would ensure that utilities earn a fair return on their investment, will be instrumental, in particular as it relates to larger water supply projects. The CPUC has been proactive in providing a policy framework that encourages the IOUs to address water supply issues, dating back to the Water Action Plan that the Commission rolled out in 2005 and updated in 2016. The Plan instructed the IOUs to establish reliable water supplies, encourage customer conservation, implement more sustainable management of groundwater resources, and improve water quality. The CPUC has not been seen as hampering innovative solutions. The environmental and permitting challenges faced by other water operators remains the largest hurdle for potential projects. Since 2005, companies regulated by the CPUC have meaningfully accelerated their capital

spending programs, focusing largely on distribution main replacement to minimize water leaks and conserve treated water. To-date, IOU involvement in reuse and desalination projects has been on the smaller scale. San Jose Water, a subsidiary of SJW Group, is a part of the South Bay Water Recycling Program, administered by the City of San Jose. California Water has delivered 1.9 billion gallons of recycled water in California in 2019. The company’s reverse osmosis plant in Torrance treats groundwater that was affected by seawater intrusion. American Water’s California subsidiary has the largest, and most visible desalination project of the group. One of just ten proposed Sea Water Reverse Osmosis plants in California, Cal-Am’s Monterey project includes the construction of a 6.4 million gallon per day desalination plant. The project has been hamstrung by local politics, environmental pushback and legal battles, and it remains unclear if the plant will ultimately be built. S&P Global Market Intelligence anticipates water agencies and local elected officials will progressively turn to IOUs to assist in projects including water recycling, stormwater capture, and desalination of brackish and ocean water. The aforementioned water utilities will continue to have ample access to capital to finance innovative water projects and will play a more prominent role in developing new sources of water supply in California.

About the Author

Ms. Heike Doerr is a Principal Analyst at Regulatory Research Associates a group within S&P Global Market Intelligence. Heike oversees the department's water utility franchise, which monitors regulatory, legislative, and financial developments for the water utility sector.