8 minute read
The Growing Threat to America's Water Supply
This is an article reprint from The Penn Wealth Report dated 21 March 2021
Biosecurity Threats
The Growing Threat to America’s Water Supply
The recent attack on a treatment facility near Super Bowl location was similar to Iranian attacks on Israeli facilities.
When the global pandemic was unleashed on the world from a province in central China, seizing up global economies and killing 2.5 million people—thus far, it struck us how unprepared governments were for this biological event. It also struck us just how easy it would be for a nefarious actor with state-sponsored resources to inflict damage through more tactical strikes. America’s utility infrastructure came to mind.
Precisely seven years ago, in February of 2014, we reported on a California power grid attack which began with the 1 a.m. slicing of underground AT&T fiber-optic cables, and ended with the 2 a.m. assault rifle barrage on a bank of PG&E transformers. Seventeen transformers were knocked out, and in the morning law enforcement collected over 100 rounds of ammo. Simply a case of local vandals? Perhaps. But recall that the Twin Towers were first attacked in February of 1993, eight years before the 9/11 strike.
Breach of the Oldsmar water plant by hackers
Two days before the Super Bowl in Tampa, the local suburb of Oldsmar had a breach at its water treatment facility. This time, it wasn’t a physical attack like the one which occurred at the PG&E facility, but a cyberattack. For good or bad, the individual systems which collectively comprise America’s critical infrastructure are becoming increasingly controlled by computer systems. This means that adjustments to these systems may be made with ease, generally by one technician on a computer; it also means that these systems can be easily hacked.
Around the start of his shift on Friday the 5th of February, an employee at the city’s water treatment facility noticed his mouse cursor moving around on his computer screen. As the plant uses remote-access software, he wasn’t too concerned; he assumed it was his supervisor monitoring the systems. A few hours later, however, the moving cursor was back—this time it was making actual adjustments to the level of chemicals entering the water supply.
Sodium hydroxide is used in municipal water supplies, at a ratio of 100 parts per million (ppm) or so, to control acidity and help remove heavy metals from the water. This chemical is also known by a few other names, such as lye or caustic soda. In high concentrations, this corrosive chemical damages human tissue. The technician at the Oldsmar plant watched as the mysterious stranger behind the cursor’s movements began altering the water supply’s sodium hydroxide levels to 11,100 ppm—over 100 times the correct amount.
The chemical injections were quickly moved back to normal levels, and plant officials were fast to point out that testing safeguards would have detected the issue long before the water reached any taps, but the threat is alarming.
An identified target of terrorists
Including the smaller districts, there are over 100,000 municipal water treatment facilities in the United States, each one vulnerable to attack. From a physical standpoint, a majority of the pipes which transport water to customers are between 50 and 75 years old and in need of repair. On the digital side, the threat of global hacks into local systems will only rise.
The events of 9/11 served as a sobering wake-up call to Americans. The threats once seen as external, taking place in distant parts of the world, suddenly appeared uncomfortably close to home. “What if” scenarios began dancing around in our heads. With respect to one of the most basic of needs, our ability to access clean drinking water, we have every right to be concerned.
Eight years ago, Iranian hackers were able to infiltrate the control system of a damn near New York City. This past April, six Israeli water treatment facilities came under cyberattack, with increased levels of chlorine being added to residential water supplies. In July, a similar attack took place in Galilee. Israeli intelligence traced the hacks back to Iran.
Whether the Oldsmar incident emanated from a disgruntled employee or Iranian hackers on the other side of the globe, it is clear that our water supply is a designated target.
Safeguarding water distribution systems
There are a number of coordinated steps which must be taken to keep our water supply safe. While the much-anticipated infrastructure bill has yet to manifest in congress, we fully expect it to gain traction this year. A big part of any plan would certainly be the renovation and repair of America’s outdated utility systems. This would include computer system upgrades to help prevent unauthorized access, and deployment of advanced instrumentation to detect anomalies throughout the distribution network. We can also expect a major outlay of funds to replace thousands of miles of generations-old pipes.
On the personal responsibility level, think back to the surreal hoarding of everything from toilet paper to cleaning supplies to bacon and eggs during the early stages of the pandemic. Imagine how Americans would react if they were told that their drinking water may be contaminated. We could expect bottled water, water filtration systems (we prefer Zero Water Filters), and contaminant detection devices to suddenly become scarce.
If we have learned anything from the most recent public health threat it is this: preparation is paramount, and relying on government assistance in a crisis is a fool’s gambit. Armed with the knowledge that this threat is real, let us take the necessary precautions now. Maintain a number of effective water filters, jugs of spring water, and water test strips for ready use. As a catalyst for action, simply think back to the empty toilet paper shelves of last year.
Investing in Water
We mentioned that there are over 100,000 municipal water treatment facilities in the US, but the big industry players are trying to change that. And considering the cash-strapped condition of most small players— such as the Bruce T. Haddock Water Treatment Plant in Oldsmar, they are finding receptive ears.
The big dog in the space is $29 billion regulated water utility American Water Works (AWK $161). Founded in 1886, AWK is the largest investor-owned US water and wastewater utility, serving over 15 million customers in 16 states and assisting municipalities and military bases with their upkeep and maintenance needs.
Over the trailing twelve months, AWK generated $3.75 billion in revenue and $662 million in profits. The company has been purchasing smaller municipality-run districts at a rapid clip, generally with the approval of regulatory bodies due to their ability to streamline costs and improve service for residents.
While many utility companies are facing increasing scrutiny due to ESG and green energy concerns, the opposite is true for the water utilities. Government bodies don’t see them as an adversary, but as a group which will play a critical roll in creating a greener environment. This should equate to increased spending on new infrastructure projects such as new pipes and more efficient monitoring and control systems.
When we think of infrastructure work, the one sector that should come to mind is industrials. To bring America’s utility infrastructure into the 21st century, specialty industrial machinery companies and engineering/construction firms will be awarded billions of dollars in new contracts. Yet investors tend to ignore these industries.
Tetra Tech Inc (TTEK $26) is a mid-cap engineering firm specializing in full lifecycle support for water treatment projects. The $7 billion industrial has been ranked #1 in the water field by Engineering News for seventeen straight years. The firm’s expertise includes threat and vulnerability assessments for water treatment facilities.
Rockwell Automation (ROK $249), or its previous iterations such as Rockwell Collins, has been one of our longtime favorites. This storied industrial, maker of the B-1 Lancer and the Space Shuttle, is now a pure-play automation company operating in three segments: intelligent devices, software and control, and lifecycle services. All three apply to water infrastructure. This $29 billion industry leader has a P/E ratio of 22.
When you think IBM (IBM $120), you may not think utility systems, but the company is a global leader with respect to the IT services of critical organizations—to include countering their cybersecurity threats. It has been in the investor doghouse lately, but it provides a 5.45% dividend yield and appears quite undervalued.
We saved our favorite options for last. The risk of investing in a sector, industry, or theme can be greatly mitigated by buying a basket of relevant holdings through an ETF. Here, we have three excellent choices: the Invesco S&P Global Water ETF (CGW $48), the Invesco Global Water ETF (PIO $35), and the First Trust Water ETF (FIW $77).
All three are strong choices if one truly believes in this thematic play, but our top pick is the first: CGW. A nice mix of cap sizes (a plurality of mid caps) and a healthy ratio of utilities to industrials gives this fund the edge in our evaluation. Happy investing!
