Water, Sewer, Pipeline, and Communications and Power Line Construction

SIC 1623

Companies in this industry

Industry report:

This industry covers general and special trade contractors primarily engaged in the construction of water and sewer mains, pipelines, and communications and power lines.

Industry Snapshot

According to the U.S. Census Bureau's 2008 County Patterns, there were 13,269 water and sewer system construction establishments employing 191,752 workers in 2008 who earned combined wages of $9.9 billion. In addition, 5,729 power and communication system construction companies employed 199,192 workers who earned annual wages totaling $10.9 billion. The industry reported an estimated 13,709 water and sewer system construction establishments valued at nearly $42 billion in 2010 with industry-wide employment of 257,323 construction workers.

In the late-2000s, more focus was placed on water, sewer, and utility lines construction commanding more than 27 percent of the market in 2010, compared to 23 percent in 2005. Underground utilities maintained their market presence with 15.2 percent, as did the sewer line construction sector with 10.6 percent of the market. Other areas of increased demand were water and sewer line construction, pipeline construction, and water main construction.

According to Census statistics, there were 13,701 water and sewer system construction establishments employing 192,512 workers in 2005. Additionally, 5,527 power and communication system construction companies employed 167,148 people.

The largest sector within the industry was the water, sewer, and utility lines sector, which had more than 23 percent of the market. Underground utilities had more than 15 percent of the market. There were almost 42,000 workers employed as underground utility contractors. Sewer line construction represented more than 11 percent of the overall market. Other significant sectors included oil and gas pipeline construction, telephone and communication construction, water main construction, and electric power line construction.

The three segments of the water, sewer, and utility lines construction industry share a common trait: project-based organizational structure. To facilitate project completion, various general contractors and subcontractors form transitory networks that sometimes last for several years. Nevertheless, the three segments of the industry are distinguished from each other by their key stakeholders, market segments, and projected growth rates.

The utility construction industry is exceptionally sensitive to fluctuations in tax legislation and the investment community and experienced a decline during the early 2000s, caused by a decline in overall spending in the United States during a time of economic downturn. The pipeline construction industry, however, benefited from declining spot market prices and increased consumer demand for natural gas. As a result, there was a dramatic increase in building for that sector. The water and sewer construction segments respond to legislative actions and government spending. Decreased federal outlays and financially strapped state and local governments slowed growth for this segment of the industry. Legislative mandates that foster modernization and replacement of older aqueduct systems were expected to create long-term growth, however.

Private Electrical Utility Construction.
This segment of the heavy construction industry includes the building of new power plants, transmission lines, pollution control facilities, conversion of existing power plants from oil/gas to coal, and modernization of existing power plants. Spending on utility construction slowed considerably after the passage of the 1986 Tax Reform Act. According to a U.S. Industry and Trade Commission report, the inflation-adjusted value of electrical utility construction dropped 47 percent during the 1980s. Other factors that contributed to the slowdown included excess capacity, changing regulatory policies, dissatisfaction in the investment community, and overseas nuclear-generation disasters.

By the early to mid-1990s, however, demand for electrical energy was increasing rapidly, which encouraged the industry to consider building more electrical generation facilities. The Energy Information Administration estimated that electricity would increase approximately 40 percent from 2005 to 2030, facilitating the need for new generation capacity. The largest growth is expected to come in the Southeast and the West. Coal-fired capacity, which is expensive to build but has low operating costs, should make up most of the capacity additions in those areas by 2030.

During 2001, California underwent a serious energy crisis that interrupted service and caused prices to soar. The event highlighted the stress on the country's power lines during high-usage conditions. The average number of megawatts transmitted through power lines during peak summer months increased 22 percent and was expected to increase another 14 percent by 2009. "The grid is literally heating up--when lines are heavily loaded, they get hot, expand, and sag," explained David Stipp in Fortune. "Wires drooping onto branches on sweltering days are a major cause of voltage sags and blackouts."

Despite the need for additional power lines in many heavily populated areas, public resistance to new lines is substantial and the enormous cost is prohibitive. The cost of expanding the transmission system to keep pace with increased use had an estimated price tag of at least $50 billion in the first years of the twenty-first century.

In the meantime, history repeated itself with a blackout in the northeastern United States and Canada in August 2003. A subsequent report released by the U.S. and Canadian governments stated, "the power industry has known for years that the chronic under-investment in the transmission network had compromised the reliability of the grid." The North American Electricity Reliability Council (NERC) was in limbo as it awaited a long overdue energy reform bill stalled in Congress for some three years, which slowed investment.

NERC's reliability assessment report released in late 2004 indicated demand was projected to climb an estimated 69,000 MW through 2009 with only 67,000 MW expected to come online. After that, the adequacy of the transmission grid remained to be seen. From 2004 through 2013, there were plans to extend the transmission grid more than 10,275 miles.

NERC's reliability assessment report released in late 2008 warned that grid modernization "generation additions are projected to significantly outpace new transmission development" over the next 10 years, especially when about 23,000 MW of the total 145,000 MW that will be required to accommodate new wind capacity, especially in Texas, the Midwest, the Mid-Atlantic, and the Western states by 2017.

Meanwhile, the American Recovery and Reinvestment Act of 2009 allotted $8 billion in loan guarantees for transmission and renewable energy projects, including additional funding directed at "smart grid" technologies. Additionally, the Department of Energy has invested another $19 million specifically for five projects surrounding the modernizing of our nation's grid. "These innovative projects will greatly enhance the reliability, efficiency, and resource diversity of the nation's electric grid," U.S. Energy Secretary Steven Chu noted in Transmission & Distribution World in November 2010, adding that "Developing smart grid technologies will give consumers choice and promote energy savings, increase energy efficiency, and foster the growth of renewable energy resources."

Oil and Natural Gas Pipeline Construction.
The oil/natural gas industry uses pipelines primarily to acquire and transport natural gas. Long-distance, high-pressure "trunk lines" are the most efficient and economical method of transporting gas from areas of production to areas of consumption. Due to seasonal fluctuations in gas demand, transmission companies and large distributors maintain storage facilities near final markets and production markets. At "city-gate" facilities (located as the pipelines near consumer markets), pressure in the pipeline is reduced and an odorant is added to the gas to make leaks more noticeable. Finally, end-use pipelines distribute gas to homes and businesses.

During the mid-1990s, new construction projects and system expansions were consolidated into the interstate pipeline grid. The construction of new long-line pipeline systems slowed as the industry moved toward projects such as mainline extensions and lateral facilities to reach specific customers.

Gas pipeline companies reported an industry gas-plant investment of more than $59.8 billion in 1995, up from $55.5 billion in 1992. Despite nearly stagnant operating revenues, natural gas and petroleum liquids pipeline companies increased their net incomes slightly in 1995 by improving their efficiency. Oil and gas pipelines were highly volatile during the late 1990s, as production levels and prices swung widely. During the early 2000s, as oil and gas prices rebounded, the pipeline industry was looking toward a brighter future. Natural gas drove 80 percent of pipeline activity in the United States.

The industry faced a number of challenges after hurricanes Katrina and Rita and their aftermath created havoc in the Gulf Coast region. Pipeline recovery operations were concentrated around southeast Louisiana.

New natural gas pipelines from Canada and the Gulf of Mexico began coming online in the late 1990s. The increased supply caused some dips in the price of natural gas, but these fluctuations were generally offset by increased demand for energy. In contrast to the utility construction segment of the industry, world pipeline construction was a rapidly expanding industry.

In the mid- to late 2000s pipeline construction experienced increased activity driven by shale deposits, especially in 2008 with nearly 4,000 miles added to the pipeline grid compared to just over 1,500 miles in 2007, or a total of 84 projects completed. While the pace slowed somewhat in 2009, a total of 2,988 miles of pipeline, or 43 natural gas projects were added to the national pipeline grid with an investment totaling $9.9 billion.

The most pronounced project in 2009 was the $2.2 billion 639 mile Rockies Express-East (REX-EAST) pipeline completed in November 2009, which extends 1,679 miles from Rio Blanco County, Colorado to Monroe County in Ohio. More importantly, the pipeline connects to more than 25 intrastate and interstate pipelines that carry natural gas from the Gulf of Mexico and the Mid-continent, which translated into increased price competition within the network of supply basins in the U.S.

Water and Sewer System Construction.
Water and sewer construction is heavily influenced by growth or decline in the construction industry, since new homes require a water supply and sewage treatment facilities. Developers and local utilities usually pay for water and sewer systems for new subdivisions. During the early and mid-1990s, the industry grew moderately, but some projects were postponed because of problems with financing by local governments. This was particularly true of sewer projects. The industry did benefit, however, from federal legislation. The Safe Drinking Water Act Amendments of 1996 required system upgrades, and the Water Resources Act of 1991 increased federal funding for water supply construction.

In 1998 Forbes magazine reported that there were almost 60,000 U.S. water companies owned by cities or private enterprises, and many cities were placing their water supply services up for bid. Some U.S. waterworks projects were being taken over by foreign companies.

In the early 2000s, many municipal water and sewer systems were faced with significant problems in maintaining and upgrading aging pipes. The Environmental Protection Agency (EPA) began pressuring municipalities to cut down on combined sewer overflows. These systems, used by some 770 cities, have combined sewer systems that use the same pipe to collect sanitary sewage, wastewater, and storm water. Other cities have replaced defective pipes to meet EPA guidelines. According to the EPA, to meet new environmental standards, cities will need to spend between $93 and $123.5 million per year.

Much like the oil/natural gas construction industry, the water and sewer construction industry faced major setbacks and reconstruction in the Gulf Coast after the hurricanes of 2005. Many communities in Louisiana and Mississippi were just starting to rebuild their water and sewer systems in mid- to late 2007.

According to census statistics, spending on water and sewer projects climbed 35 percent from 2001 through 2003. Even before the hurricanes, however, key challenges for municipal water and sewer systems were based on inadequate funding, as well as increasingly stringent water quality regulations. In mid-February 2004, various municipalities along with the American Public Works Association (APWA) were lobbying Congress for billions of dollars in additional funding that the Bush Administration planned to cut from the Federal budget. The proposed $370 million cut would directly affect the repair to the aging infrastructure.

Meanwhile, municipalities could face harsh penalties under the National Pollutant Discharge Elimination System storm water program, the EPA's rule brought about as a result of combined sewer overflows. Under this program, the EPA has the "authority to levy administration penalties of $10,000 per violation per day against owner/operators of the sewer system."

Overall spending was continued in 2005, with an accelerated pace going into 2006. Water projects were expected to outperform sewer projects. However, line construction projects were expected to outperform both the water and sewer construction. The APWA suggested that $140 billion would be required through the early 2020s to remedy the aging infrastructure of the sewer systems.

In the late 2000s, following the one time $6 billion in emergency funds under the American Recovery and Reinvestment Act (ARRA) of 2009 for the Clean Water and Drinking Water State Revolving Funds, President Obama was seeking a much larger increase for both funds for fiscal 2010, which would begin in October 2010. Under Obama's budget, $3.9 billion would be allotted for the State Revolving Fund, $689 million for the Clean Water State Revolving Fund, and $829 million for the Drinking Water State Revolving Fund. "The increased funding levels show this administration is serious about addressing the water and wastewater infrastructure crisis confronting our communities," noted Ken Kirk, executive director, National Association of Clean Water Agencies (NACWA) in Underground Construction magazine in April 2009.

In the mid-2000s, the leaders in the water, sewer, and utility line construction included large telecommunication companies such as Verizon Communications, Inc., of New York City, with 2006 sales of over $88 billion; AT&T Inc., of San Antonio, Texas, formed with SBC Communmication's purchase of AT&T Corp. in 2005, generated over $63 billion in 2006 sales; and Qwest Communications International Inc., which garnered $13.9 billion in sales in 2006. Washington Group International, Inc., previously known as Morrison Knudsen Corp., acquired Ratheon's engineering and construction unit in 2000 before entering bankruptcy protection in 2001, from which it emerged in 2002. By 2006, Washington Group garnered revenues of $3.3 billion, employing some 25,000 people; MasTec Inc., of Coral Gables, Florida, posted revenues $945 million; Perini Corp., of Framingham, Massachusetts, generated just over $3 billion in revenues; Integrated Electrical Services, Inc., of Houston, Texas posted sales of $950 million; and EMCOR Group, Inc., of Norwalk, Connecticut, posted revenues of $5 billion.

In the late 2000s, Verizon Communications, Inc. reported revenues of $97.3 billion in 2008 climbing to $106.5 billion in 2010 with 222,900 employees; AT&T Inc. generated more than $124 billion in both 2008 and 2010 with 282,729 employees; Qwest Communications International Inc. posted revenues of $13.4 billion in 2008 falling slightly to $12.3 billion in 2009 with 30,138 employees; Washington Group International, Inc. was acquired by URS Corporation based in San Francisco, California in November 2007 for $3.1 billion; MasTec Inc. reported revenues of $1.3 billion in 2008 climbing to $1.6 billion in 2009 with 8,600 employees; Tutor Perini Corporation (formerly Perini Corp.) of Sylmar, California reported revenues of $5.6 billion in 2008 falling slightly to $5.1 billion in 2009; Integrated Electrical Services, Inc. reported revenues of $818.3 million in 2008 before plummeting to $460.3 million in 2010; and EMCOR Group, Inc. reported revenues of $6.7 billion in 2008 falling to $5.5 billion in 2009.

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