AT 4:47 IN THE afternoon on Sunday,
February 12, more than 13,000 Californians were ordered to
leave their homes.
Some, at the direction of the Butte County Sheriffs
Office, headed north, past the town of Oroville. Others,
however, heeded the call of the Yuba County Office of Emergency
Services, whose bulletin screamed different directions: Take
only routes to the east, south, or west. DO NOT TRAVEL NORTH
Confusion and fear reigned. Highways turned into parking lots
and then closed. Emergency evacuation centers filled up.
This is not a drill, warned the initial alert. Repeat, this is not a
After weeks of rain and snowmelt, immense flooding had
severely strained the Oroville Dam. Authorities feared it could
burst within the hour.
A Look Inside the Californian Water Crisis
Suspended above Oroville and the Sacramento Valley, the
Oroville Dam blocks the Feather River as it emerges from the
snow-covered mountains of the Sierra Nevada. On a typical day
water freed from the dam flows in an orderly fashion through a
hydraulic power plant before making its way down through the
Central Valley and eventually to Los Angeles. But February 12
was no typical day.
The lake had been rising all week. By 3:00 that afternoon
water levels were dangerously high. The decision had been made
to use an emergency spillway to drain off the excess, like a
valve releasing heat from a pressure cooker. But cracks and
then a massive hole appeared in the spillway. Authorities were
forced to turn to the backup spillway, which had not been used
since the dam was constructed in 1968. That spillway began to
rapidly erode; water flowed over the top of it. Suddenly,
California was facing a disaster beyond the scope of most
That same day Orovilles mayor, Linda Dahlmeier, was
flying back from a business trip. Upon boarding her flight to
Sacramento, she decided to get some rest. When she landed and
turned on her cell phone, it exploded with urgent alerts, voice
mails, and e-mails. During the mayors short flight, an
emergency had been declared.
Dahlmeier immediately called Ted Craddock, chief of utility
operations for the California Department of Water Resources.
I asked him two questions, she recalls. How
could this have happened? Nobody could have predicted it,
Craddock replied. Then I asked him, How far down is
Forty feet, he said.
Dahlmeier has lived around water her entire life, and she
knew immediately what that meant: A tidal wave of water could
come crashing down on the communities below the dam.
Nobody would have lived, she says. Life as
we know it in California would have changed forever.
FLOODING IS ONLY one of many water concerns
in America. Although images of Hurricane Katrinas
aftermath still sear the countrys consciousness, droughts
and contamination are more persistent, if less immediately
damaging, than disasters on that scale. For every New Orleans
there are many Flints (lead contamination) and Californias
(until recently, persistent water shortages). The human toll is
immense and hardly limited to the U.S.: flooding, droughts, and
poor water quality affect countries worldwide.
A significant contributing factor is massive
underinvestment. The Environmental Protection Agency estimates
that the U.S. needs to spend a minimum of $655 billion on water
infrastructure over the next 20 years to continue supplying
Americans with healthy, safe water. California forecasts that it
needs more than $50 billion to reduce flooding risk within its borders. Governor Jerry Browns
ambitious WaterFix program a controversial project
formerly known as the Bay Delta Conservation Plan seeks
to address some of the states most pressing water
problems. It is estimated to cost about $17 billion.
The scale of global water needs is hard to fathom. The
Organization for Economic Cooperation and Development puts the
bill for improved water supply and sanitation at $6.7 trillion
by 2050. In remarks at the landmark 2015 United Nations Climate
Change Conference in Paris, OECD Secretary General Angel
Gurría explained that by 2050, nearly 4 billion
people will live in river basins under severe water stress, and
global nitrogen effluents from wastewater are projected to grow
by 180 percent. Over the same period, global demand for water
is expected to grow by 55 percent. The international community
is finally waking up to the gravity of the situation, and we
have set ourselves a number of ambitious objectives.
Gurría continued, But lets be clear: These
efforts will fall short unless we resolve the question of
access to finance for water
Governments alone will not be able to foot the bill. Private
investors realize that water has the potential to be a
multibillion-dollar market, but the peculiar nature of
water it is essential for life, considered a human
right, and the most valuable commodity on earth even though
its often given away makes privatization
particularly sensitive. Yet investors participation is
essential for a solution.
First, they must overcome waters unique problems.
For one, scale is a challenge. There are 53,000 regulated
community water systems in the U.S. Some are very large; most
are tiny. The diffuse nature of Americas control over
water makes it hard for investors to put money to work and for
smaller entities often those most in need of capital
to raise it.
Price is another problem. Bluntly put, water is not as
expensive as it should be. Ultimately, the solution is to
price it and have everyone pay the same price, or a reasonable
market price, for the cost of providing the water, says
David Richardson, a managing director at Impax Asset Management
Group, one of the few equity managers to offer a specific water
The price of water is going to rise because it has
to, agrees Tom Ferguson, vice president at Imagine H2O, a
San Franciscobased accelerator for water-focused
start-ups. The question is how fast and how
Perhaps more problematic than waters complexity and
price is the fact that people arent entirely comfortable
with billionaires and private equity firms owning what comes
out of their taps. Because of this, investors experiences
with water have been mixed. Legendary financier T. Boone
Pickens is among the best known of the investors who have
sought to get rich in water. During the late 1990s and early
2000s, the oil speculator began acquiring water rights in the
Texas panhandle, with plans to sell the water located on
443,000 acres below ground, in the Ogallala Aquifer to
the Dallas metro area. Pickenss proposal outraged many
environmentalists and communities, especially as it would have
taken resources away from drought-stricken areas. In 2011,
after more than a decade of negotiations, Pickens sold the
rights to a local supplier for $103 million, having failed to
strike a deal with Dallas or make as much money as hed
hoped. Other investors, such as private equity firm Carlyle
Group, have dabbled in water with only moderate success.
Despite such controversies, outside money is expected to
flow into this space like water over the Oroville Dam. The need
for it is too great and in California that need can be
traced, in part, back to these very same investors.
THE PEOPLE OF OROVILLE fled their
homes because of almonds.
Their town is a straight one-hour drive north of Sacramento,
Californias sleepy capital. The Feather River, passing
through the Oroville Dam, is a major tributary of the
Sacramento River, which shapes the Sacramento Valley. That
valley and the San Joaquin Valley farther south make up the
states Central Valley, which stretches 450 miles down the
backbone of California.
The Central Valley is one of the most fertile places on
earth. The vast majority of Americas fruits and
vegetables are grown in California; the state and its Central
Valley are responsible for 99 percent or more of the
countrys almonds, artichokes, dates, figs, grapes,
olives, peaches, pistachios, pomegranates, and walnuts. In
January and February, when farmers markets in New York City
offer only endless radishes and sad-looking root vegetables,
the stalls in California boast a bounty of fruit, including
avocados and Meyer lemons.
Such abundance requires immense amounts of water, and this
demand, dating back to the California gold rush, spawned arcane
rules governing the usage of the water pouring through, among
other places, Oroville. The states fundamental problem
isnt so much a lack of water but its uneven distribution:
Northern California has too much, while most of Central and
Southern California has too little.
To solve this problem, a complex infrastructure developed,
including the 21 dams and 700 miles of tunnels that make up the
California State Water Project (SWP). On top of this are
overwhelming numbers of water authorities and regulators.
Rights are often fought over in court. Infrastructure
construction is perpetual, and ambitious plans are always being
proposed and opposed.
Established in 1960, the still-incomplete State Water
Project was an engineering marvel of its time. The initiative
gathers water from where it is plentiful and redistributes it
to 28 agencies or enterprises farther south. Beneficiaries
include Los Angeles, San Diego, the San Francisco Bay Area, the
Santa Clara Valley, the Central Coast, and the San Joaquin
Valley. Key to the project is the Oroville Dam, which at 770
feet is the tallest in the U.S. (The more famous Hoover Dam is
45 feet shorter.)
While 70 percent of the projects water goes to urban
areas, a crucial 30 percent is allocated to farmers. Their
water is cheap. The second-largest SWP entitlement holder, Kern
County Water Agency, which primarily serves agriculture, pays
about $45 an acre-foot, while Los Angeles Metropolitan
Water District of Southern California pays $298 per acre-foot.
Farmers also tap rivers, inlets, and underground sources.
The complexity of Californias system of water rights
and access was starkly highlighted by the recent drought, from
2012 to 2016. Water was in such short supply that cities and
towns were asked to drastically cut back their usage. In April
2015, Governor Brown issued an executive order directing the
State Water Resources Control Board to cut urban water usage
statewide by 25 percent. Farmers werent entirely spared:
In February 2014 the Bureau of Reclamation, a federal agency
under the Department of the Interior that oversees water
resource management, announced that some farms in the Central
Valley would be getting none of the water they had requested
for that year; others would get up to 40 percent. The next year
was more of the same. With federal water
supplies down, farmers turned to their local rights, leading to
intense battles and lawsuits. At the same time, several of the
states valuable (and irreplaceable) aquifers were
A popular villain emerged from this scorched earth: the
almond farmer. The almond industry is hypersensitive to any
accusations that it exacerbated the California drought, but the
nuts are an undeniably thirsty, and popular, crop. Producing
one almond takes approximately one gallon of water. A grape
takes less than a third of a gallon.
Anywhere from 70 to 80 percent of Californias
water is used by agribusiness, says F. Rowe Michels, the
Southern Californiabased CEO of Alpheus Water
Research. One has to question whether agribusiness is
sustainable, because for the past 30 years the number of wells
that go into the aquifers to pull up water has been increasing
exponentially. Michels adds that the Colorado River,
Southern Californias other great source of water,
often does not get to Mexico anymore. And the big
reservoirs are drawing down. The past year of good moisture
will help some, but its really a little hiccup.
Almond farmers feel unfairly maligned by the backlash. Their
product, they argue, is highly nutritious and consumes little
water compared with, say, cattle. Yet it is striking how much
the California almond industry has grown over the past decade.
The state had 1.1 million acres of almonds in 2015, up from
700,000 in 2005, according to the U.S. Department of
Agriculture. At the height of the drought, farmers converted
vineyards to almond operations. The reason was simple: money.
In 2013 a pound of almonds fetched $3.21; in 2000 it was worth
97 cents. The value of the California almond crop in 2013 was
$6.4 billion, up from $666 million in 2000.
And who owns the almonds? Big investors. TIAA Investments,
part of the TIAA family of financial businesses, is among the
worlds top almond producers. TIAA and other investment
managers, including Hancock Agricultural Investment Group, have
been buying up farmland in California. In some cases Hancock
replaced existing crops with more lucrative, and thirstier,
pistachio and almond trees. (When asked for comment, a TIAA
spokesperson e-mailed the following to Institutional
Investor: TIAA is a long-term investor in farmland
committed to sustainable agricultural practices such as our
water management and conservation programs which are designed
to efficiently use natural resources to meet the demands of
local climates and geographies where we invest.)
For investors the allure of these lucrative crops is clear.
But for California where most experts believe droughts
are set to continue despite the recent reprieve the move
toward crops that are less, not more, sustainable in a
low-water environment merely adds to the states burdens.
And if profit-driven investors cannot be trusted to support the
delicate California ecosystem with their farming practices,
some wonder what will happen when they get their hands on the
VISITING OROVILLE almost a month to
the day after the forced evacuations, one sees a town facing a
major renovation project.
Engineers were able to increase the flow to the primary
spillway and draw down water levels, avoiding disaster.
Residents were allowed back within a few days. But the damage
to the water system and surrounding area was significant, and
repairs are estimated to cost in the hundreds of millions.
Roads and pathways near Lake Oroville and its dam were still
closed, with hundreds of workers beavering away to fix what
broke. Showing remarkable resilience and a Californian sense of
whimsy, many residents in the affected areas displayed signs in
their front yards featuring slogans such as Thanks for
not cracking under pressure and In concrete we
trust. Massive cement trucks trundled by, delivering
their loads to the construction area.
Locals had never felt they were in particular danger from
their dam. As one resident says, It was always just
there. Though some red flags were raised about a decade
ago concerning the state of Orovilles water system,
Californias largest state-operated dam was on
practically no ones list of critical infrastructure
projects. Instead, what concerned, and still concerns, the
people of Oroville is how little they get in return for sharing
their most valuable resource with the rest of the state,
including investors like TIAA and other owners of water-heavy
Mayor Dahlmeier likes to say that my tap water comes
from God; everyone else gets their water from us. She
lives in a painstakingly restored midcentury modern home in one
of Orovilles elevated neighborhoods. She wears cowboy
boots and denim. This is what rural America looks
like, she says. Below her house the Sacramento Valley
rolls out, a carpet of farms and water. A Meyer lemon tree
grows in her yard.
The mayor, who took office in January 2011, hopes to use the
dam crisis to draw attention to the pressures her community is
under. Undercapitalized and underresourced, Oroville lacks the
political clout for its voice to be heard at either the
national or the state level. Lacking much in the way of jobs or
prospects, town residents voted almost overwhelmingly for
Donald Trump, not necessarily because they agreed with his
policies like most of rural America, the local farming
industry relies heavily on migrant labor but because
they felt he at least gave voice to their dissatisfaction.
With a population of 19,000, Oroville only recently got its
first Starbucks. Jerry Brown waited nine days after the dam
crisis before visiting, for which he was severely criticized.
When the governor did show, some felt his public remarks
focused more on large, flashy infrastructure projects
like the LA-toSan Francisco bullet train and his own
WaterFix, which would build two new tunnels to channel water
from Northern to Southern California than on little
In particular, the town feels it got a rotten deal when the
dam was built. Oroville was promised that jobs and tourism
would come, but much of the promise was never fulfilled.
Although money is now coming in to fix the dam, Dahlmeier is
worried that her town will once again miss out on its share of
She is probably right.
CALIFORNIA IS ABOUT to embark on something
of a water spending frenzy. The problem, however, is that the
spending may overlook places like Oroville.
In November 2014 voters passed Proposition 1, which raised a
$7.5 billion bond for water investments in support of the California Water Action Plan, an initiative
to put the state on a path to sustainable water. The largest
chunk of that $7.5 billion, some $2.7 billion, is being
directed toward water storage projects. This is not your
typical grant program, says California Water Commission
board member Joseph Byrne. It is considered an investment
program. We are not just giving money for people to just
broadly do whatever they want. To be eligible for the
program, projects must have a public benefit. The largest
portion of the fund 50 percent or more will go to
projects that enhance the ecosystem, but other projects can
deal with recreation, flood control, emergency response, and
water quality. Projects must be for-profit and 50 percent
But private money rarely invests so heavily in water. ?Today
the private sector accounts for just 9 percent of U.S. water
and sewage infrastructure spending, according to consulting
firm McKinsey & Co. For the power sector that figure is 92
One possible solution is for local communities and utilities
to issue their own bonds to make up for the 50 percent of Water
Action Plans that must be externally funded. Yet these groups,
seeking to tap the commission for smaller projects, could be
challenged to raise outside capital. Because they do not
oversee large populations and often are responsible for poorer
rural areas like Oroville, they lack the potential revenue base
to raise money.
The Aspen Institute, which hosts an annual forum on water in
partnership with Duke University, identified funding for these
smaller utilities as a key problem in its 2016 report.
Small water utilities or agricultural businesses
dont often have the revenue base to recover full costs,
and so are unlikely to take financial risks, the report said. Additionally, the
transaction costs . . . are high, incentivizing investors to
focus on larger deals.
Trevor dOlier-Lees, senior director in the
infrastructure practice at S&P Global Ratings, contributed
to the Aspen Institute discussion. He says one option for these
smaller projects and utilities is bundling grouping a
number of similar projects together. The trouble with
water is a lot of typical projects might only cost $7 million,
$10 million, or even $40 million, and you really dont get
investors excited about that size of project. What bundling
does is it takes a series of projects into one financing and
suddenly investors say, Im interested in
that. DOlier-Lees says bundling has been used
to great effect for infrastructure-related projects in Canada
and the U.S., and is just now being explored by some
To some, the most effective means of funding water projects
is through big money: sovereign funds, state pension plans, and
private equity firms. One such investor that owns water is the
California Public Employees Retirement System. The $300
billion, Sacramento-based fund is the major owner of the
Willow Springs Water Bank. Located in Antelope Valley, part of
the Mojave Desert, the water storage facility helps keep
Southern California hydrated during dry periods and allows it
to store water during times of plenty. The water bank currently
offers local utilities as much as 500,000 acre-feet of water
storage in underground aquifers. Willow Springs long-term
plan includes 1,000 acres of percolation ponds, pump stations,
62 water wells, a 72- to 84-inch two-way pipeline, and 640
acres of solar panels. The water banks partners are among
the groups expected to apply for part of that $2.7 billion in
water storage bond money to help finance the next stage of development.
When it comes to private sector money, Californians might
want to be careful what they wish for.
One example makes this clear. Private equity firm Carlyle
Group acquired Park Water Co. in 2010. The family-owned utility
in Downey, California, provided water to southeast Los Angeles
County. It also owned two other utilities, Apple Valley Ranchos
Water Co. and Montana Water Co.; the first served Apple Valley,
California, and the latter provided water to Missoula, Montana.
Since Park Waters deal with Carlyle, both Missoula and
Apple Valley have sued under eminent domain in an attempt to
take back control of their water providers. Starting in 2011
the people of Apple Valley saw their rates increase repeatedly,
including a 2015 surcharge to make up for lower usage; they now
pay $300 to $400 per year more for water than customers of
local public water utilities.
The challenges are even greater in developing countries. A
2013 study by a group of nongovernmental organizations accused
Dutch institutional investors, including pension plans ABP and
PGGM funds that pride themselves on being progressive
and sustainable investors of participating in a global
land and water grab through investments in real
assets in countries such as Sierra Leone and Mozambique. For
countries with very little in the way of water infrastructure,
even the slightest change to land use can have devastating
effects on local communities.
RATHER THAN WAITING on old-line private equity firms
or other large institutional investors to ride to the rescue,
the people of California are looking 150 miles southwest of
Oroville. There, in the office buildings of San Francisco and
Silicon Valley, are the nonprofits and early-stage venture
funds that give the area its unique culture and
potentially give the state and world a solution to their water
As California baked in its recent drought, the Bay Area came
under increasing pressure to turn its attention away from
social networking and toward fundamental problems of water and
climate. Water and venture capital arent an entirely
natural fit, however. First, water suffers from a lack of
market pricing. Second, as with energy, anyone brave enough to
plunge into water investing faces a preexisting and complex
Imagine H2Os Tom Ferguson believes there is immense
potential at the nexus of new money and water. The firm was
founded in 2009 as a hub for water-related businesses. If
you are brave enough to be an entrepreneur, that is one
thing, Ferguson says. If you are brave enough to be
an entrepreneur in water, that is a whole other thing.
Water is largely overlooked by Silicon Valley, he asserts, but
lack of competition isnt necessarily a bad thing from an
investors perspective. In water, Ferguson says, you
can throw a cat and hit a billion-dollar market. Of the
80 start-ups Imagine H2O has invested in, the survival rate is
an impressive 85 percent. If you are looking to build a
sustainable business over the long term, there are oceans of
opportunity, Ferguson says, though he warns that many
water companies are not good candidates for venture capital,
lacking the type of rapid growth that this money demands.
Along with entities like Imagine H2O, the venture
philanthropy, not-for-profit, and impact investing communities
have started to take up the challenge of water. The Walton
Family Foundation and the David and Lucile Packard Foundation,
for example, have founded the Colorado River Collaborative, an
effort to address water scarcity in the Colorado River basin.
But water is crying out for its own charismatic billionaire
an Elon Musk or a Bill Gates to take up the
Dahlmeier, for her part, would like Silicon Valley to come
to Oroville. She points out that Oroville is only a short
20-minute helicopter ride from the San Francisco Bay Area, but
sometimes when it rains it is impossible to get a reliable
phone connection there. We are the thread that sews the
tapestry of America together, she says. If it were
not for rural America, urban America would not exist.
Dahlmeier sincerely believes that with the right investment
her town could yet become a sort of Facebook on the
Forebay, a hub of learning and technology set in the
foothills of the Sierra Nevada. This is where the future
is going to lie, the mayor says. In all of us. This
is how you are going to fix things.