Sewage backups, water leaks threaten municipal budgets

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Century-old water pipes backed up in a storm in Washington D.C.'s Bloomingdale section, sending water and sewage cascading into basements. When it happened twice more in nine days last summer, a torrent of complaints flowed.

"Citizens are rightly frustrated and upset about sewer backups," said George Hawkins, the District's Water and Sewer Authority general manager. "The challenge we face is that the engineering fix is monumental. It runs back into the issue that we have a significant bill we have to figure out how to fund."

While the sewage backups aren't as destructive as Hurricane Sandy, such breakdowns highlight leaky systems in cash-strapped U.S. cities that are boosting rates to fund long-delayed fixes. At least $1 trillion is needed for water infrastructure by 2035, tripling some home bills, according to an American Water Works Association study. That may benefit such companies as pump supplier Xylem and flow-controls maker Pentair.

State and local governments are weighing the costs of water-system upgrades against a need to repair crumbling bridges and roads as lower tax receipts curb spending. Rising water bills to replace municipal pipes, some pre-dating the Civil War and made of cast iron and wood, don't sit well with customers seeing more water system failures, Hawkins said in an interview.

"When you start putting pencil to paper, you see that rates should have been going up for the past 15 to 20 years, and now the costs are so big that rate-payers are going to scream," said David Parker, an analyst at Robert W. Baird & Co. in Tampa, Fla. "We're starting to see push-back" on bills.

The Environmental Protection Agency estimates 240,000 water-main breaks occur annually in the United States. Up to 75,000 yearly sewer overflows discharge up to 10 billion gallons of untreated wastewater.

Costs for sewer and water maintenance jumped 5.3 percent in the 12 months ending December, up from an increase of 3.3 percent in the same period in 2000, according to the Labor Department. The total cost of living last year rose 3 percent. Sewer and water costs jumped 6.6 percent in September from the same month a year earlier.

Municipal pipes lose as much as 40 percent of the water flowing through them, according to Sandia National Laboratories in Albuquerque, N.M. Utilities commonly lose one-fourth of their water, according to the London-based research group Bloomberg New Energy Finance. The worst drought in five decades in the U.S. added to strains on the water network, pushing food costs higher in areas such as the Midwest.

Gary Naumick, senior director of water engineering at Voorhees, N.J.-based American Water Works, the largest publicly traded U.S. water company, said the utility saw an "uptick" in pipe breakages in Missouri and Illinois as drought caused soils to shift, adding more stress to the system.

Many of the company's breakages were around St. Louis, its biggest system in the state, where the average July high was 99 degrees Fahrenheit (37 degrees Celsius), Naumick said. American Water Works on Oct. 11 began replacing 10 miles of pipes in the Pittsburgh area, some with water mains more than 100 years old.

Public utility commissions, which must approve any rate increases, more and more recognize the need to upgrade systems, according to Naumick.

"There's been progress in a number of states where they have progressive mechanisms in place" for capital-cost recovery, Naumick said. He singled out Pennsylvania as a state with such a mechanism.

Still, the squeeze on municipal finances may accelerate the sale of municipal water systems to publicly traded companies such as American Water Works and Aqua America of Bryn Mawr, Penn., said Michael Gaugler, a utilities analyst at Brean Capital in New York. Companies tend to raise rates a little each year, avoiding "rate shock" by spreading costs out over a bigger customer base, he said.

"What you see with municipal utilities is that the bill is ridiculously cheap until they have a major capital expense," Gaugler said by phone. "Even if they go out and borrow, the math still doesn't make sense at that point."

Authorities in Allentown, Penn., said the city would explore a long-term lease of its water treatment and distribution system and sewer collection to raise money to cover pension obligations.

The city notified seven of nine bidders on Aug. 31 they were qualified to bid. Those included Aqua America, American Water and United Water, a unit of Paris-based Suez Environnement, which serves 5.7 million people in the U.S.

Westmoreland County's board in Pennsylvania in October authorized a five-year, $141 million water and waste system plan, its largest capital improvement program ever.

United Water Chief Executive Officer Bertrand Camus said changes in local governing administrations and budgets often make it more difficult for public utilities to follow long-term plans for big capital investments such as water-system upgrades.

That creates a "major opportunity" for companies such as United Water, which can sign long-term contracts and commit to rates, he said in an interview. The ability to attract private equity financing for projects also gives companies an advantage over municipalities, Camus said.

City governments tend to give the most attention to the infrastructure in most urgent need of repair rather than giving greater priority to water or road projects, he said.

Before 2010, the District of Columbia Water and Sewer Authority allocated enough funds to replace one-third of 1 percent of its water and sewer infrastructure in a given year. That figure is now 1 percent. While the authority is able to plug more leaks and upgrade more of the system, a backlog of projects means it's having to catch up after years of neglect, Hawkins said.

Sandy's destruction after it made landfall Oct. 29 near Atlantic City, N.J., is swelling costs and highlighting inadequacies of some water systems. New York state released $22.8 million in funds so New York City can more quickly repair wastewater treatment facilities damaged during the storm.

Xylem shares since the storm hit have risen 7.3 percent as the company dispatched more than 200 de-watering or sump pumps to the New York area to help remove water from flooded streets, subways and tunnels. Pentair gained 9.5 percent in the same period.

Xylem is the leader in de-watering pumps, with $600 million or 16 percent of sales, critical to flood control and recovery efforts, analysts including Deane Dray of Citigroup said in a note last week. Pentair estimated an incremental $10 million of sump pump sales from Sandy, the analysts said.

Washington plans to replace the 9-foot diameter pipe in Bloomingdale with a bigger-capacity system at a cost of $600 million.

By 2025, the city "will have tunnels ready to capture stormwater in a big rain event," Hawkins wrote in his blog. "But nobody wants to be told to wait 13 years when their basements are flooding today."

— With assistance from Randall Hackley in London and Rachel Layne in Boston.