Archive

Economic Bubbles


 

So everyone is doing their Top 10 questions for 2016 (although with David Letterman off the air, perhaps less so), I figured why not?  So it the vein of looking forward to 2016, let’s ponder these issues that could affect utilities and local governments:

  1. How wild, or weird will the Presidential election get? And part b, what will that do to America’s status in the world?  Thinking it won’t help us.  Probably won’t help local governments either.
  2. Will the economic recovery keep chugging along? Last time we had an election the economy tanked.  Thinking a major change in direction might create economic uncertainty.  Uncertainty (or panic) would trickle down.  Status quo, probably keeps things moving along.  .
  3. What will the “big” issue be in the election cycle and who will it trickle down to local governments and utilities? In 2008 it was the lack of health care for millions of Americans and the need for a solution. Right after the election we got the Great Recession so most people forgot about the health care crisis until the Affordable are Act was signed into law.  And then ISIS arose from a broken Iraq and Arab summer.  None helped local governments.
  4. What are we going to hear about the 20 richest Americans having more assets than the bottom 150 million residents? 20 vs 150,000,000.  And while we are at it, the top 0.1% have more assets than the bottom 90%, the biggest disparity since the 1920s.  While we will decide that that while hard work should be rewarded, the disparity is in part helped by tax laws, tax shelters, lobbying of politicians, etc. as Warren Buffett points out, indicate a discussion about tax laws will be heard.  Part b – if we do adjust the tax laws, how will we measure how much this helps the bottom 99.9%?
  5. What will be the new technology that changes the way we live? Computers will get faster and smaller.  Phones are getting larger.  Great, but what is the next “Facebook”?  By the way the insurance folks are wondering how the self driving car will affect the insurance industry.  So reportedly is Warren Buffett.  Watch Mr. Buffett’s moves.
  6. Along a similar vein, will the insurance industry start rethinking their current risk policies to look at longer term as opposed to annual risk? If so what does that mean for areas where sea levels are rising?  The North Carolina coast, where sea level rise acceleration is not permitted as a discussion item could get tricky.
  7. Will unemployment (now 5%) continue to fall with associated increases in wages? Will that help our constituents/customers?  Will people use more water as a result?
  8. Where is the next drought? Or flood?  And will the extremes keep on coming?  Already we have record flooding in the Mississippi River in December – not March/April?  Expect February to be a cold, snowy month. IT is upper 80s here.  Snowing in the Colorado Rockies.
  9. Will we continue to break down the silos between water “types” for a more holistic view of water resources? We have heard a bunch on potable reuse systems.  More to come there, especially with sensors and regulations.  But in the same vein, will we develop a better understanding of the link between ecosystems and good water supplies, and encourage lawmakers to protect the wild areas that will keep drinking water cleaner?
  10. Will we get water, sewer, storm water, etc. customers to better understand the true value of water, and therefore get their elected official on board with funding infrastructure neglect? And will that come as a result of better education, a better economy, breaking down those silos, drought (or floods), more extreme event, more breaks or something else?

Happy New Year everyone.  Best to all my friends and followers in 2016!


The true risk to the community of pipe damage is underestimated and the potential for economic disruption increases.  The question is how do we lead our customers to investing in their/our future?  That is the question as the next 20 years play out. Making useful assumptions about increases in demands, prices, inflation rates etc. are key to useful projections and long-term sustainability. Building too much or too little capacity for example can have disastrous consequences (to the ratepayers on the former, to the local economy for the latter).

Getting funding relies on economic strength, a problem of you are in a depressed area (Detroit) or a boom that could crash at any time (North Dakota).  P3 opportunities are available for cash strapped communities but they come with a cost.  Risk must be allocated fairly – the private community will not take on too much risk without increasing costs significantly. Loss of control is one of those risk conversion issues.  Extensive planning and feasibility analyses should be expected – far more scrutiny than most utilities are used to.  The economic strength of the community is important to private investors.

In a prior blog we talked about the boom towns of North Dakota.  Things were booming in 2013 but the downturn in oil prices may get ugly.  The need for more fracking wells may have decreased (at least temporarily) and the decrease in the oil and gas costs has cut into local revenues, so is this is the time to keep planning for the boom?  South Florida did this in the early 2000s – and well, that real estate boom put quite a dent in the economy and population estimates for 2020 and 2030.  The balloon popped and so did the economy.  South Florida had the resiliency to bounce back because of weather and proximity to South America.  We have seen the result to an industrial economy – where a community relies on industry, well industry can be fickle.  Ask Detroit.  Or Cleveland.  Or any number of other Rust Belt cities.  Now they have infrastructure, but much of it is underused.
So while the Plains states plan for the boom, the boom has settled in some places. Already the oil and gas industry has shed 100,000 jobs (many high salary).  Texas, Kansas, North Dakota and Oklahoma are facing financial challenges in 2015 due to funding losses.  Alaska is dipping into reserves.  But that doesn’t mean the results of the 2010-2014 boom are not continuing, or at least portions of them.  Frack water continues to be discharged to local wastewater systems, but the revenues to pay for the needed upgrades is lacking.  Effluent limits for nitrogen and TOC for some rivers have decreased as a result of constant increased loading to the streams (more flow increases total loads, so if flows remain the same, the concentrations must decrease to maintain total loading).  The costs to reduce ammonia, for example from 10 mg/l to 2 or 3 mg/L can be $1-2/1000 gallon – over 50% or more of the current cost for treatment.

So is it a surprise that some communities fight the boom times?  Booms create disruption and uncertainly, and a need for technology (and costs).  Maybe stability does matter, as it can contain costs and treatment requirements.  However the boom can help communities in financial distress.  Detroit and Flint would love a boom – both have the infrastructure in place to support it as opposed to rural communities in the Plains.  But that’s is a key – they already HAVE the infrastructure in place.  The Plains, well, do not.

There is a lot of older, underutilized infrastructure out there.  Detroit, Flint, Cleveland, Akron, Toledo and Philadelphia are among the older industrial cities that have stable populations – people that live there most of their lives, have a trained and educated workforce, and normally have lots of water and infrastructure, and lots of potential employees, all of which are underutilized and at risk due to economic losses. But the booms rarely go to older cities. How that is?  Is this a leadership issue?  Convenience?  Quick profits?  And how long will the boom last?  Is it a matter of lack of understanding or regulations that creates the boom?  A combination of factors?  A better PR program?

Remember we all play defense.  Industry does not.  Industry plays offense all the time.  The private sector mode is play offense.  Get the message out.  Frame the message.  Win the game.  Is winning the game at any cost the right answer?  For boomers it is.  What about the rest of us?


Interesting that while we all love low gas prices and the low cost of energy is fueling an expansion of our economy, including the first gains in middle income salaries since 2008, the states reliant on oil and gas may be facing real problems financially.  A year ago I read an article that noted the reluctance of North Dakota residents and politicians to invest in roads and other infrastructure despite the influx of oil money.  Keep taxes low was the mantra.  SO they did.  A recent Governing magazine article notes that a dollar drop in oil means $7.5 million decrease in revenues for the State of New Mexico.  Since oil has lost about $30 a barrel in the past year – that is $200 million loss.  Louisiana sees a $12 million cost/dollar drop so they have $171 billion less to work with.  Alaska, perhaps the most oil dependent budget (90 percent) has a $3.4 billion shortfall, but $14.7 billion in revenues.  Texas, North Dakota, Oklahoma and Kansas are other states facing losses.  Fast growing states like North Dakota and Wyoming now have hard decisions to make.  Growth in Texas, Oklahoma, Louisiana and Arkansas may be cut by 2/3 of prior estimates as a result.  A double hit on anticipated revenues.

The comparison is interesting financial straights experienced by the “property value” states like Florida, Nevada and Arizona before and after the economic collapse in 2008.  Florida politicians couldn’t wait to cut taxes and slow spending during boom years, then got caught badly after the 2008 recession when property values dropped in half and state sales tax revenues (tourism) dropped steeply.  They ran out of reserves and refused to raise taxes (after cutting them), so cut things like education and health care to balance the budget.  Not sure how either helped low and middle class Floridians get back on track since Florida has primarily create low wage jobs since that time, not high paying jobs.  We are paying the price still.  I am guessing Nevada and Arizona are similar.

We clearly have not learned the lessons of the many mill towns in the south or the rust belt cities of the Midwest that encountered difficulties when those economies collapsed. Everyone refused to believe the good times would end.  Now Detroit is half of its former self and Akron has the same population as it did on 1910.

The moral of the story is that booms great, but short term.  Diversity in the economy is a key.  Florida will continue to be subject to economic downturns more severe than other states when it relies primarily on tourism and retirees to fuel the economy.  Detroit relied on automobiles, Akron rubber and chemicals, Cleveland steel, etc.  Some day the Silicon Valley will suffer when the next generation of technology occurs that makes the current works obsolete.  It is what happens when you are a “one economy” town.  It is also what happens when you believe the booms are “normal” and fail to financially plan by putting money aside during the boom to soften the subsequent period.

An argument could be made that if the federal government had not enacted tax cuts in 2000 when the budget was finally balanced and surpluses were presumed to loom ahead, we could have banked that money (or bought down our debts), and the amount of borrowing would have been less in 2008.  Buying down debt when times are good is good business.  So is putting money in reserve.  The question is why the politicians do not understand it.  We can run government like a business financially, but takes leadership to do it.  It takes leadership to explain why reserves are good and tax cuts are a future problem.  It takes leadership to make hard decisions like raising taxes, spending more on infrastructure, requiring people to move out of flood plains, not rebuilding in vulnerable areas, and curtaining water use policies when they damage society.  Leadership is making decisions that help the needs of the many, versus the needs of the few.  Oh wait, I see the issue now.  We need Spock to lead us…

 


ASCE came out with more bad news about infrastructure.  60 Minutes did a piece about deterioration of bridges. The magazine American City and County has published a couple articles about the risks of aging infrastructure.  Asset management is practiced by few governments, and even fewer small ones.  The public doesn’t want to foot the bill and lobbyists want taxes cut further.  Where does it end?

The infrastructure crisis is a political and business leadership crisis.  Or vacuum.  The economy of America and much of the developed world was built on advanced (for their time) infrastructure systems constructed by governments with a vision to the future.  Some of this infrastructure was repurposed (federal interstate system for example), but much of it has addressed critical issues that hampered our development.  For example, the lack of water severely inhibits many third world nations.  Even when they have water, it is unsafe to drink or use.  In America, at the turn of the 20th century 1:100,000 people DIED each summer from typhoid.  Just typhoid, not all the other waterborne disease options.  Many more were sick.  And the population was much smaller.  Talk about reduced productivity.  Now we have advanced water systems, disinfection practices that protect people and pipes, and few event get sick from contaminated water.  Those that do, become headlines.  You don’t want to be a headline.  Productivity is up.  But we expect good water and can’t see the pipes.

Sewer is an even better example.  People just don’t want to know.  Flush and it’s gone.  But the equipment, treatment and materials may be even more complex than the water system.  But few people get sick from sewage because of the systems we have built.  Now think about third world examples.  Or conditions you have seen in documentaries, the news or movies.  Being in sewage is not a great place to be.  Even the manhole thriving cockroaches agree..

Stormwater is probably the laggard here, in part because changes in development patterns have overwhelmed the old systems.  Miami Beach experienced this when redevelopment replaced small houses on permeable lots with large housed with mostly impermeable property.  Oops.  Meanwhile road and bridges have received a lot of funding – with much to do (see bridge that collapsed on I-75 in Cincinnati a few weeks back).  Most states fund transportation at a magnitude more than water and sewer.

What is the problem?  Local officials do not convey an understanding of these complex system to the public very well.  In part this may be because understanding the maintenance needs is difficult and highly variable.  And many do not fully comprehend the assets they have, their condition, life expectancy or technological needs.  No one knows when things will fails, so maintenance or replacement of some equipment or pipeline is always the thing cut in the budget, with no real understanding of the consequences.

The public does not see the asset, assumes it will have a long life, so is unconcerned until they are affected.  Then it is personal.  The public does not understood the impact or value that these assets have to society – they tend to be personal focused, not societal.  That is a leadership issue.  That leadership starts with vision and communication from those that understand the issue to the elected officials that need to advocate for their infrastructure.  Elected officials need to take ownership of infrastructure.  It is like your house – you need to upgrade and protect it constantly.  You do not let that roof leak keep leaking!  Elected officials that do not invest in infrastructure, are letting the roof leak.  Making is someone else’s problem for political expediency is not leadership.

Despite the infrastructure crisis, the good news is that construction of piping is increasing – both new and replacement.  Every so many months, the magazine Utility Contractor will note current trends and pipe seems to be going up.  That’s good but there is a long way to go.  Better news – the construction of buildings is increasing.  That could lead to more revenues.  In Florida, all of a sudden finding experienced construction workers is a problem.  Things are definitely better economically, but are we taking advantage to improve the local infrastructure, or is you economy simply an infrastructure disruption away from another fault?


Once upon a time, people worked until they died.  But the longer people lived, the more infirmities impacted older people, and the concept of stopping work came into play.  So these folks labored all their lives, put some money away in a safe place, like a bank, where someone else would watch over an manage their money until they needed it.  Then one day, they found out that the banks have gambled and lost on real estate, and their money was gone.  There was no government to bail anyone out.  So the people had to try to go back to work, became beggars and destitute or died.  The government thought this was unfair to those older folks who had worked so hard, but through absolutely no fault of their own, had lost everything.  So the government decided that it would “tax” people a portion of their income, and put it into a retirement system.  People could retire at 65, and of course they were only expected to live another r3 or 4 years.  There were 16 people laying in for every person taking out.  And the government told the banks that they could not gamble with people’s hard earned savings, passed legislation and created an insurance pool to backstop losses by criminal or unethical activity.  All was good and the people were happy.

As time went on some things changed.  For one, people lived more than 3 or 4 years.  The population retirees increased, and the ratio dropped to 1:10 and then to 1:6 ration of retirees:workers, but the “tax” did not go up, but investments were made that increased the pool.  It was called good management.  The government also encouraged people to save money by deferring taxes, which they did, and the banks used it to make money.  All good as long as the investors gambled well.  They gambled so well, they were able to talk the government into undoing the anti-gambling rules from the past, so their pool to invest was twice as much.  And the markets grew and the portfolios grew and the people were happy.

And then it came to pass that the banks again gambled on real estates, and created complicated investment tools to hide the risk, but the risk was exposed and half the money was gone overnight.  And the retired were wondering about jobs again.  But there were no jobs.  And the employed now had fewer jobs.  So less people paid into the system.  And the people were sad.  And mad because they thought they were being protected from the gambling of the past.  They did not understand.

And the government could supply no answers because they had changed the rules and they knew the people would be unhappy, so the government felt there was no choice, so they borrowed money, and bailed out the banks.  And some people were happy.  And some people were concerned about all that debt.  And some people wondered why it was that history could repeat itself and put society at risk.  And some people asked why people who did bad things were not punished.

And none of these questions has been answered.  Good thing that these fairy tales don’t depict anything real right?


Public water and sewer systems have the responsibility to protect the health, safety and welfare of the public they serve, just as engineers do.  This is includes not just complying with regulatory mandates (they are minimum standards), but enacting such precautions as are needed to address things not included in the regs.  Unfortunately we continue to pay too much attention on regulatory compliance and evaluate the condition of the system using unaccounted for water losses or leaks fixed in the system as a measure of condition.  That may be an incorrect assumption.  The problem is that unless we understand how the system operates, including how it deteriorates with time, the data from the past may well be at odds with the reality of the future.  For example, that leak in your roof can be a simple irritation for a long time if you ignore it.  But ignoring it creates considerable potential for damage, including roof failure if too much of the structure underneath is damaged.  With a water system, pipes will provide good service for many years will minimal indication of deterioration.  Then things will happen, but there is little data to indicate a pattern.  But like your roof leak, the damage has been done and the leaks are an indication of the potential for failure.  Bacteria, color, pressure problems and flow volumes are all indicators of potential problems, but long-term tracking is needed to determine develop statistical tools that can help with identifying end of life events.  Basic tools like graphs will not help here.

Construction to repair and replace local water, sewer and stormwater infrastructure is expected to reach $3.2 and $4.8 billion respectively for water and sanitary sewer. The federal SRF programs are only $1.7 Billion in SRF loans, 24% below 2012 and well below the levels identified by the federal government to sustain infrastructure condition.  The only reason for the decrease seems to be a demand by Congress to reduce budgets, especially EPA’s budget where this money resides.  But the 2008 recession and its lingering effects to date have deferred a significant amount of infrastructure investments, and the forecast does not rectify the past deficits, and likely does not address the current needs either.  Few water and sewer systems are flush with funds to update infrastructure and borrowing has become a difficult sell for many public officials.  Lake Worth, FL just had a $60 million bond issue for infrastructure redevelopment defeated by voters two weeks ago.  The officials know they need this infrastructure, but the public is unconvinced because few serious problems have occurred.  We have to get the public past this view so we can improve reliability and public safety.  Those are the arguments we need to demonstrate.  The question is how.

 


The first month of the fall semester has slammed me, which accounts for a little less blog activity on my part.  But as fall rolls in many local governments are dealing with final budgets, new projects and dealing with taxes and fees.  Students are back to school and industries are looking to the end of the year and 2015.  How fast time flies.  Our students that graduated last spring all have jobs and half of our seniors that will graduate in December do as well.  With engineers or contractors.

The good news is that the economy continues to tick up, construction and construction jobs are back to 2005 levels (which if you recall was a lot), and the stock markets are making money for somebody because they are up as well.  Alan Greenspan can complain that housing maybe lagging, but that is more a lack of people having funds or being able to move.  Meanwhile construction of projects that were deferred might be addressed?  Time will tell but it raises an interesting question –  can we plan on growth forever?  We assume a continuous growth rate (like 1 or 2% per year), but is that reasonable since it means more people come to an area each year than they did the year before?  Works for bacteria, maybe not so much for people.  Ask Detroit.  Or Cleveland.  And does this type of growth create unintended consequences for us?  I think this is a  good question for a future blog and of course a question that economists and politicians do not want to answer.  It would be highly disruptive to our plans.   So since it is election season again, we all need to be prepared for the inundation of campaign sales pitches that try to convince us to vote for someone, or more likely to vote against someone.  That’s probably not the way it was intended to go, but it’s what politics has degenerated to in so many places.  Ideology and adherence to it under any circumstances often prevents us from looking objectively at issues and reaching real solutions, some of which may have winners and losers, but may be necessary to improve long-range forecasts.  Listen to the political patter and decide where the plan is.

For example, ignoring the evidence that the climate is changing, places constituents in perilous positions…..in the future.  Not now and few climate impacts need drastic immediate action.  But longer term, storm sewer will be inadequate, there will be less water stored in glaciers, less rainfall in places (like the southwestern US), more frequent flooding in coastal areas, etc.  The problem may be 50 years from now, but wholesale infrastructure programs take that long.  It took the US 50 years to build the interstate system.  Nearly 40 years to dig canals in south Florida, 20 year to acquire property for a reservoir in North Carolina, etc.  Things take time and meanwhile if we need to alter current practice, such as elevating roadways and building to avoid flooding, the time to start is now, not in 50 years when solving that problem is overwhelming.  Find those water sources now, so development and competitors can be controlled.  Finding water that may take 20 years to secure and construct is an unmanageable issue the year before you need it.  You need a plan.  Where do you hear that planning?

What about that failing infrastructure?  We tend to ignore it until it fails.  But if it fails, that can be catastrophic.  Engineers and operations personnel know deterioration occurs, and know that it will take time to plan, design and refurbish of replace infrastructure.  But projects continue to get deferred for lack of funds.  Aggressively planning repair and replacement may actually save money in the long-run, but our planning tends only to be short-term.  So how do we change that?  Perhaps the state agencies that require local planning to be submitted and approved will push for better evaluation of infrastructure.  GASB 34 clearly did not go far enough.  Too many communities do not track their work and even fewer document the conditions when they make repairs.  Too little data is collected on what fails, when and why.  WE can collect huge amounts of data with work orders that track work.  Perhaps a regulatory frontier.  Or maybe, just maybe, some enlightened managers will decide tracking information is actually fairly easy.  The question is the platform.  Stay tuned… we are working on that…


In this blog we are going to talk about trends in the power industry and how they may affect utilities.  One of the ongoing themes of this blog is that to be leaders in the field, we need to be cognizant of what others are doing and how those actions might affect utility operations.  Power is a big cost for utilities – often 10-15% of the total operations costs where a lot of pumping is involved. In most communities, the utility system is among the largest consumers of power, which is why many utilities have load control agreements in place – power companies can off-load power demands by having the utilities go to onsite generators.  Our community’s building account for 70% or more of local energy use.

The need for power is expanding, albeit at a lower rate that population growth in many communities.  This is because new building construction measures tend to insulate better and install more energy efficient equipment.  Power companies often will subsidize these improvements to reduce the need for more expensive plant expansions.  Where expansions are needed, purchase/transfer agreements or renewables are often a convenient answer.

But long-term we are seeing that the power industry is changing in other ways too.  Already we see a migration away from coal for power generation.  This was occurring before the new regulations were in place for carbon dioxide.  Certain utility companies like NextEra, the largest wind and solar power generator in the US, and the parent of Florida Power and Light, have reduced greenhouse gas emissions from their plants by converting to other sources like combined heat and power (CHP), and increasing efficiency.  The typical oil or coal power plant is 30-35% efficient, while the newer gas turbine systems are up to 45% efficient.  That makes a big difference in costs as well as emissions when gas emissions are half the coal and oil emissions.  NextEra is well placed for carbon trading, a concept some fight, but the US had been emission trading since the early 1990s, so carbon trading markets are already in place.  The only thing needed is the regulations to put them into play.  Buy that NextEra stock now and hope for carbon trading!

But NextEra is not the only likely winner under this carbon trading scenario.  ExxonMobile is big into gas, Exelon is big in the nuclear power industry, Siemens and General Electric, which make wind and gas turbines, are also likely to see growth.  All have poised themselves years ago as the impact of carbon dioxide becomes more apparent.  Most of the industry executives acknowledge climate issues and recognize that people will expect the industry to do its part (the Koch brothers aside).  Many power generators like ConEd and FPL are making changes as well, in advance of the regulatory requirements to do so.  They see it as good business.  They also see it as a means to make more power at a given facility (by increasing efficiency) while reducing water use.  Water use can be a limiting factor, so we will discuss that in a couple days…

 

 


In a prior blog we talked about the difference between urban and rural counties and the impact of the differences between incomes and how that would affect utilities.  Keep in mind that the 40 largest urban counties in the US contain nearly half the US population as do the 50 largest utilities.  So in a recent article in Governing, the focus was on the few counties where income was higher than average.  In fact, in looking at counties, within the top 20 in per capita income are 10 counties in North and South Dakota.  Interesting until you review why.  All are in areas where fracking is ongoing and corporate farming is prevelant.  It is no surprise that the fracking boom has created wealth in rural areas that have limited populations, limited regulations and state and local officials who are desperate to reduce unemployment and stimulate laggard economies.  We noted before that rural counties are often desperate for jobs, so they often ignore what could possibly go wrong when jobs and development are the only priorities for a community.  Governing used the example of Wells County, ND where the per capita income has doubled since 1997 and is 75% above the national average.  Yet the local governments are looking at which roads they will allow to go back to gravel.  How is this possible? 

The issue is not relegated to just Wells, ND.  Despite the fact that many rural communities in areas with intensive farming or fracking have grown 10-15% since 2007, local officials are finding it difficult to raise taxes to pay for infrastructure.  Roads are the most obvious and pressing issue because of the impact from fracking traffic.  As new wells are constructed, the frackers build new dirt roads and use the existing roadways.  Some believe the need to fix many of the roads is temporary so why bother, but it neglects the need to infrastructure improvements in general.  The same argument could be used for water and sewer infrastructure as well, but these wealthy rural communities do not want to increase governmental spending to improve any infrastructure, so the opportunity to address the community needs is being lost.  

What is more interesting is that the states where these rural counties exist, including the Dakotas, along with Montana, Wyoming, New Mexico, and most of the southeastern states are among the states that rely most heavily on federal funding.  So when incomes increase, the dependency remains.  These are the same states that tax residents the least, spend the least on education, have the poorest health care (and the fewest people signed up for the Affordable Care Act and few have state exchanges) and have the most people in poverty.  The dichotomy between reality and the political perception is interesting in these states, which leads one to wonder if the residents of these states like their situation and keep electing representatives that reflect this desire, or they have fallen victim to political interests that cause them to vote consistently against their better interests, or for the interests of a limited few that deny them access to the education, infrastructure, medical care and other benefits their urban and wealthier neighbors enjoy. 

That is a tough question but the bigger question is how to infrastructure agencies like utilities attempt to overcome either of these perceptions?  Neglecting infrastructure, education, medical and the like does not promote local economies, does not create jobs and more likely causes the migration of the best and brightest young people out of the community in search of better prospects, which further imperils their rural situation.  Keep in mind that most cities are relatively permanent, but fracking, like mining, oil and timber before them, have been booms and busts.  The situation if far more dire after the boomtown than it was before.  After all, what could possibly go wrong when 50,000 miners, or frackers, descend upon a community of 1,500 people?  They will consume all the resources, then leave.  Locally those well paying jobs are imported due to the lack of skills and education, and then they leave with the bust.  This has played out many times in the past.  It is not sustainable.  We need to learn from the past – when the boom hits, make the investments you need in infrastructure, education, medicine, etc. so that the future is better after the bust. 


We have talked about reserves, the need for them, reasons why they are neglected and how to establish appropriate numbers (an area where more research is needed).  Reserves are an issue when the economy tanks.  We all recall the problem in 2008, but this is where utilities need to look beyond just their system to see what might be coming.  2008 was a problem that we should have seen coming, or at least planned for, but did not.  But it means that we need to look at the national and local economic picture and understand a little about events beyond our reach that can affect us.  Utilities and governments generally do not do this well. 

In 2005-2007, it was very clear we had a property bubble going on.  There was discussion on the news, financial channels, Wall Street Journal and even columns by economist like Paul Krugman.  A few of us may have taken advantage of the bubble through prudent real estate sales, but many did not.  Likewise, few utilities or governments planned for its inevitable fall.  After the crunch hit, those who owed the least amount of money, had savings and had stable incomes fared better than those who did not.  Same for governments.  Unfortunately most Americans and most governments fell into the “did not” category. 

So let’s look at a couple issues.  First, we knew there was a bubble and should know that all bubbles pop.  We had the tech stock bubble in the late 1990s.  People on Wall Street knew that the investments had turned to real estate and bankers where busy loaning money out with no interest for two years, no money down, adjustable rate mortgages and the like.  If you owned a computer you were inundated with Countryside and various other folks trying to loan you money.  Or buy your house and pay you an annuity if you were older. 

The reason that these “opportunities” were so prevalent was to help speculators who expected to own the property for short periods of time, or help those who might not have the means to buy time to get the means to support the payments.  All the subsequent financial instruments discussed in books like “Too Big to Fail” come from tools used by bankers to disperse the risk associated with speculators and the risky.  It made money for bankers and investment houses (remember they are private businesses beholden to their private stockholders). 

Like all bubbles, we get caught up in the money being made by speculators (and yes if you invest in the stock market you are speculating).  We try to grab onto the rising instruments to get ahead, but we forget that especially with real estate, the growth overall rate across the nation could only grow at the rate of population growth.  It is basic supply and demand. 

For governments, revenues rise, especially during real estate bubbles.  Some bubbles last for years, which creates a distorted view of the future.  In south Florida, there was a lot of buzz concerning water supply projections and arguments between regulatory staff and utilities over water supplies that were projected 20 years in the future, based on demand projections from 2000-2005.  When the dust settled in 22011, most of those issued disappeared because virtually all projections were substantially revised downward.  And most revenue growth projections were likewise revised downward and capacity needs delayed.  Planning 20 years out is historically inaccurate because the global economy can impact local growth.

Of course these new projections are incorrect as well.  Because the test period was 2005-2010 or 2000- 2010, the growth is stunted.  So they are likely underestimating demand and revenues.  Uncertainty with time means that the accuracy of projection decreases with time.  As a result, simply relying on past projection methods increases risk that of significant deviations.

I do an exercise n class where I give students three sets of projections.  10 years apart, for 50 years.  I tell them nothing else.  The examples are The State of Nevada, Cleveland, and Collier County, FL.  All are in the past (Cleveland is 1910-1950) There is absolutely no easy method that can project the growth in either Collier County or the State of Nevada, or that Cleveland’s population will drop in half. We could do the same with Detroit and never project that decrease either.  But when you tell them where the population are and what year, the wheels start to turn.  They realize that economics is a major issue.  While Nevada and Collier grew from 1960-2000, the rate of change is likely to be very different in 2010 to 2020 due to the 2008 recession. 

Tracking economic activity is a utility responsibility.  We need to know what is really happening, and understand bubbles.  We need to recognize that when property values and housing number increase fast, it will be short term.  Plan for savings and reserves.  Figure out what your recovery period might be.  We need to understand our economic base.  For example try this out and see what your conclusion is.  Florida’s economy is based on three major industries: agriculture, tourism and housing.  What could possibly go wrong with that model?  Well if we have an economic problem nationally, 2 of 3 take major hits because people outside the state do not travel to Florida and retirements get put off.  The economy gets hit hard and recovery is slow.  We have experienced that exact phenomenon from 2009 to date.  And many of those jobs are low wage positions which means the people who struggle most get hit hardest.  Storm events can impact the state.  Bit hits to all three, and agriculture is also a low wage industry.  It is a precarious economic model that sets itself up for potential fluctuations.  We need to plan for this.  It is our responsibility, utility staff and decision-makers to plan and prepare for the next big event.  

%d bloggers like this: