“It helps to have someone like Carpe Diem West there, reminding them to think big."

Q. Your recent report The Ripple Effect: Water Risk in the Municipal Bond Market, on the vulnerability of some cities’ municipal bonds to water scarcity and climate change caused quite a stir in the municipal water world. What is Ceres’ ultimate goal in producing that report?

SL: Ultimately, our goal is to see that America builds the most sustainable infrastructure it can build. The truth is that for decades we have been underinvesting in our infrastructure, and we are long overdue for investment needed to serve our public health and our economy.

We also recognize that the investors who are so critical in providing capital for these needs don’t understand the pressures our infrastructure is under from environmental constraints - for example, regulatory pressure to meet heightened water quality standards, which can require very expensive treatment. Or they might not understand that in some areas we have completely allocated the available water resources, so that supplies are going to be much more variable and uncertain in the future. There’s a traditional perception in the investment community that because water systems are essential services, they are risk-free investments. In reality, they’re not.

So our goal is to orient investors and rating agencies to this new reality - to help them see that there’s a difference between cities that are managing these risks and those that are not, so they can reward cities that are doing a good job of creating sustainable systems.

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"If you are going to use bonding as a tool to help enable investment in a watershed across multiple jurisdictions and entities, you need to have a 'partnership of purpose' among those jurisdictions and entities.”

Q. As you know, Ceres recently released a report on the vulnerability of some cities’ municipal bonds to water scarcity and climate change. What did AWWA find helpful in that report?

DLF: Many of our members in the municipal water community found the Ceres report to be unnecessarily alarmist in tone. The concern of our members was centered on two central claims by Ceres that they felt to be inaccurate. First is the notion that the investment community, and in particular the bond rating agencies, do not currently account for risks from water supply and capacity. In fact, all three major bond rating agencies do look at the vulnerability to supply and capacity, and their ratings of municipal bonds take this factor into account. Second, while the Ceres report focused on the potential vulnerability of some water supplies, it failed to acknowledge that each of the utilities it cited have response plans and supply strategies in place for dealing with those vulnerabilities. That’s a big omission, and I think it leaves an inaccurate impression of the responsibility that utilities take in addressing supply risk.

But behind the alarmist message, I think there’s a core message in the Ceres’ report that’s helpful. Water utilities have duties to both their ratepayers and their bondholders, and the report brings to light that in many regards these duties to these two groups are similar, as are the risks these two groups assume. Both groups depend on whether the utility has certain policies and practices in place. These would include long-term strategies and short term response plans to deal with uncertainties in supply and capacity, best management practices, sound financial policies, adequately established rates, knowledgeable management teams, informed and responsible governing bodies, and policies and plans for maintaining their infrastructure, including sources of supply such as watersheds.

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