Now bring forth the invisible finger of the free market to tickle the belly of the drought for profits

 The "politicization" of the drought "could be the inflection point" that gets investors serious about water, says Simon Gottelier of Impax Asset Management in London, which specializes in environmental investing. Kathleen Pender, SF Chronicle, March 15, 2014
You betcha! -- blj
San Francisco Chronicle
California drought spawns investment opportunity
Kathleen Pender
The California drought has investors wondering if there's money to be made in the crisis.
"We have been getting calls from around the world about the drought in California," saysDavid Parker, a water utilities analyst withW.R. Baird.
They started after Gov. Jerry Brown declared a drought emergency in January following the driest year on record and President Obama visited Fresno a month, later promising $183 million in federal aid.
The "politicization" of the drought "could be the inflection point" that gets investors serious about water, says Simon Gottelier of Impax Asset Management in London, which specializes in environmental investing.
After seeing the impact the drought is having in its own backyard, the trustees of theTulare County Employees Retirement System asked its staff to investigate water investments.
"We have seen growers plowing over some of their orchards and cutting back on the amount of plantings they will make in the new season," David Kehler, the system's retirement administrator says. "There is an interest in whether or not we could find companies that would be a benefit to our citizens as well as provide a healthy investment return."
The pension fund is still in the due-diligence phase. "It's a broader area than we thought it might be," Kehler says.
Gottelier says there are three ways to invest in water: utilities; infrastructure companies that make pipes, pumps and other capital equipment; and treatment companies that make filters, chemicals and other products.
All benefit from global growth. Emerging markets must develop clean water for everything from manufacturing plants to washing machines, while industrialized countries need to replace aging infrastructure. Spending on water grows twice as fast as gross domestic product, Gottelier says.
A change in the hydrological cycle - which is producing more extreme droughts and floods - is also creating demand for companies that can pump, transport and conserve water.
But finding companies that will benefit directly from the California drought is not so easy.
Water utilities
Take the water utilities. They are promoting conservation and if they are successful, their revenue will suffer.
Under a process known as decoupling, most can make up for lost revenues with surcharges the next year. But "prima facie, a drought is not good for them," Gottelier says.
There are only nine investor-owned water utilities in the country. Three are based in California - San Jose Water, California Water Service and American States Water. American Water Works is based in Philadelphia but has operations in California.
The California Public Utilities Commission approves a water company's rates for a three-year period. These rates are designed to give the company a certain return on its capital investment.
Under decoupling, if revenues come in under target one year, "we get a surcharge the next year. If they go over target, we have to give back the extra money," says Tom Smegal, California Water's chief financial officer.
Decoupling "allowed us to promote conservation," he says. The company spends $10 million a year, or 2 percent of revenue, on programs such "Lawn Be Gone," which gives rebates to customers who replace grass with drought-tolerant landscaping. That's the carrot.
The stick: Individual customers pay a sharply higher rate if they use more than a certain amount based on the average consumption for their community.
The drought could help the utilities long-term if people realize that water "is not just falling from the skies," and value it more, says David Richardson, a managing director with Impax.
Parker recommends buying California Water because it has a three-year rate reset pending with the CPUC that could benefit shareholders.
He also likes American Water Works because it has friendlier regulators in Pennsylvania than in California, which accounts for a small portion of revenues.