Founded in 1886, American Water Works, Inc. is the largest publicly traded water and wastewater utility in the U.S. Through 19 state subsidiaries and other market-based businesses, the company serves approximately 15 million people in more than 1,600 communities across more than 30 states, Manitoba and Ontario.

With headquarters in Voorhees, New Jersey, American Water has about 7,000 employees and annual revenues of $2.7 billion. In 2009, the company instituted a sustainability plan that addresses energy and water use both in its own operations and among communities and institutional customers. Heather King talks to CEO Jeff Sterba about the tie between energy and water, finding value in wastewater, and the irony of our $21 billion per year bottled water habit.

In May 2011, the Ontario Global Water Leadership Summit called attention to the looming water supply and quality crises. How is the mounting concern about sustainable water changing your business model?

We are focused on both capturing savings through greater operational efficiencies and on building new revenue opportunities in our water service. Much of our efficiency gains relate to energy. Electricity is our second largest cost after labor. It takes energy to treat and deliver water. We've committed to reducing our carbon footprint by 16 percent by 2017. That mandate is fostering innovation and helping us reduce energy in our operations.

As an example, we are testing a new technology that reduces energy use in wastewater treatment facilities by 30 to 50 percent. Much of our traditional revenue model is volumetric. We get paid based on the amount of water we sell. This works counter to water conservation. To support our planet's water needs and our own business model, it is important to decouple revenues and sales so we don't have disincentives associated with efficiency improvements.

We are already seeing a 1 – 1.5 percent per year decline in water use per customer. This is a shift the energy industry has also seen. But unlike the energy industry, there are not many new uses for water. We need to conserve, and our industrial and municipal customers need to conserve, our water resource. We've got formal decoupling mechanisms in two states -- California and New York – and we are working to bring on more regions.

In terms of tapping new markets and revenue, we see potential in new lines of business like wastewater management. Only 1 percent of water is used in human consumption. For many purposes -- irrigation, flushing, cooling -- wastewater is the better resource than potable (drinking) water. We want to better utilize wastewater so that it can meet the non-potable needs.

Can you provide some examples where wastewater has become a significant revenue source?

The economics of wastewater is about new revenue streams and monumental savings through water recycling. We just finished a project in Fillmore, California, which is now recycling a million gallons a day. We have a property in Arizona that is a complete closed system where we have "purple pipes" containing recycled water that runs and takes care of all the irrigation needs and cooling needs within the community. This property is now taking the model and using the experience and expertise to advise other communities and regions -- for a fee. We've got five buildings in Battery Park City, New York where we take all of the wastewater, we treat and recycle that wastewater, and it meets the cooling and flush needs of the buildings. So you have clean water for drinking and washing, but when you flush a toilet, you are not using up valuable potable water.

We work a lot with the food and beverage processing industry. Companies like Coca-Cola, PepsiCo and Walmart are having a lot of success with wastewater management and reuse. It optimizes their operations by saving on energy and water. We pioneered a 24-7 wastewater treatment operation. It's a control center outside of St. Louis that operates wastewater treatment facilities remotely to optimize their chemical loads, overall energy use and their wastewater production. It's an example of how important information technology is to sustainable water management.

Given water is currently inexpensive, how much economic sense does it make for companies to make water-efficiency investments?

You are right. Water is basically free. In the west, there are water rights. If you buy water rights, there is a cost. In the Midwest and East, there's just a cost for cleaning and delivering it, which is primarily an energy cost. So the business case for sustainable water now centers on energy savings.

Next page: Future drivers for water pricing

This won't be the case down the road. We will start to see a cost of water imposed. It might be imposed as was done in the gas industry, by creating a hierarchy of who gets cut first. Back to the '80s, industry was cut from natural gas first. This past winter, allocation was curtailed in Texas, New Mexico, Arizona and California because of extremely cold weather and lack of delivery capability. When we have water shortages, we will face rationing and allocation. Projections are that there could be 36 states that could face shortages of water within the next couple of years. If you don't use price to allocate resources appropriately, what do you use -- government fiat?

As the scarcity issues play out, water will have a cost. Rates are already going up 8 to 10 percent a year on average. So companies like PepsiCo are capturing energy savings from water efficiency planning now, and they will capture energy and water savings going forward. Plus they are managing an essential and irreplaceable raw good.

What is going to drive water pricing, then?

It won't come from Washington; water is very local.

My hope is that we can get full cost pricing at the local level. The private utilities may lead this charge because they see it as a way of better managing water resources. But, only 12-13 percent of the industry is private. The balance of it is municipal, cooperative agency organizations. Getting the whole industry to shift is more challenging. Full-cost pricing is an issue that has to be trumpeted. Otherwise we'll continue to misallocate our water resource.

The aging water delivery infrastructure is blamed for significant water loss and leakage. How big a challenge is this for American Water?

Globally, this is a huge problem. Some states in the U.S. have up to a 40 percent loss. That means you are losing 40 percent of treated water – so the costs of the processing, chemical treatments, energy and infrastructure for delivery are also included.

If we continue our infrastructure investment at the current rate, it will take 250 years to replace our aging system. That's scary. We have to look at ways to amp that up. American Water is investing $800 million to $1 billion a year in infrastructure, and increasing the turnover of the pipes and meters. Now, a basic fix is to coat the inside of the pipe with a real thin cement mix to provide structural integrity to the pipe and elongate its life by 20 years or more. We can do a better job at developing new techniques and technology to rehabilitate some of the infrastructure that we have in place.

How do we accelerate the investment in infrastructure and water sustainability?

Aside from full cost pricing, this is a good question. We have to educate people. Water is poorly understood and will be the next big environmental and energy issue for our society. We have great discrepancies in perceived value around water.

For instance, the bottled water industry is enormous and is primarily a convenience driven, rather than a need driven, purchase. As a country we spend $21 billion a year on bottled water. The total amount of water we spend operating and maintaining the water system is $29 billion. So we've spent almost as much buying bottled water, which is an amount of water that meets our needs for eight hours a year, as we do operating and maintaining the water infrastructure that serves our needs for the other 8,752 hours.

What is your vision for American Water and the water industry ten years from now?

I would hope that an integrated water resource management cycle has taken firm hold and that American Water is helping make that a reality. That means we are recognizing the full lifecycle of water, valuing water closer to full cost, and transforming wastewater into a valued reuse resource.

The United States has the opportunity to make water the enabler of growth. If it doesn't, water will be the limiter of growth.

_{Photo CC-licensed by Prabhu B. Doss.}