In California, the water business is as big as businesses get. The movement of water from Northern California through the San Joaquin Delta to Southern California powers a multibillion-dollar industry that accounts for thousands of jobs statewide.
Over the years, water providers, regulators, politicians, environmentalists and water users in the north and the south have waged wars over how water should be moved, how much of it should be moved and, perhaps most importantly, who’s paying and how much it costs.
Providing enough potable water is one of the biggest challenges we face in our state and country, and across the world, where countries like China and India are growing rapidly in population size. This commoditization of water worldwide has more recently pushed water-related businesses and sectors into their very own asset class.
In California, our water is – compared with the rest of America – an extremely precious commodity, and our water future boils down to solving one multibillion-dollar problem: finding a way to fix a water infrastructure that is titanic and rapidly deteriorating.
There’s certainly no simple answer, but companies and organizations from a diverse array of sectors across the state are working to be a part of the lucrative solution. Skeptics have said that investing in water carries significant risk because of the factors that shape the market. Some factors include politics, statewide and national regulatory processes, and even the weather – which are all unpredictable and ever-changing.
But, for those who understand what it takes to move water in California, and what kinds of companies and organizations are involved along the way, investing in water infrastructure means investing in a commodity that’s literally as vital as the air we breathe.
In Southern California, the majority of the water we use to drink and irrigate our crops comes from the flowing rivers of Northern California through the Sacramento-San Joaquin River Delta, the largest estuary in the Western United States.
Before this water flows into the delta from the north, several different statewide and national regulatory bodies – including the California Resources Agency and the Interior Department – decide how much water can be diverted through the delta without harming local wildlife. The state and federal water contractors, which can be either private companies or public entities, are responsible for moving water through the delta and down toward Southern California.
This explanation represents a simplified version of how water is moved in California, while illuminating the kinds of businesses and entities that are involved along the way.
The contractors sell their water to the wholesalers, which are located in service areas across the state. The Metropolitan Water District of Southern California is the largest of these wholesalers, encompassing most of the region in its service area.
From here, the water can be sold once again to water retailers, such as the Los Angeles Department of Water and Power. The retailers are the entities that usually sell water directly to local residential, commercial and agricultural users.
All of the entities involved in moving California water, from the contractors and the wholesalers to the retailers and all of the companies and organizations who rely on them for their own well-being, are closely interrelated financially. And they, above all, are dependent upon the availability of water from the delta.
That’s why the issue of water investment is currently so compelling – with our statewide water infrastructure deteriorating rapidly and California’s water future becoming more uncertain, the only thing we know for a fact is that the companies and agencies involved have no choice but to march onward in search of a real, comprehensive solution.
For those looking to invest in one or more of the various levels of this process, there are several questions to consider with a financial professional: First, whether it would make sense to invest in new water technology. Developing innovative technology will be absolutely vital for any major infrastructure solution. However, as with any new technology sector, it’s difficult to know what kinds of returns the future holds. Second, whether it would make sense to invest in broader water sector investments which include stocks from across the industry. There are also opportunities to invest in specific water projects, though that approach requires a great deal of hands-on management.
Ultimately, it’s difficult to know what the future holds for California’s water or what solution we will find for our state’s critical water issues. But one thing is certain: There won’t be any lack of activity in this massive, multifaceted business anytime soon.
Larry Palmer is a managing director with the Private Wealth Management Division of Morgan Stanley Smith Barney in Los Angeles.
