SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3942 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

HEADLINE: DRINKING WATER INFRASTRUCTURE

TESTIMONY-BY: MR. TERRY L. GLORIOD, PRESIDENT

AFFILIATION: ILLINOIS-AMERICAN WATER COMPANY

BODY:
Testimony The Committee on Energy and Commerce W.J. "Billy" Tauzin, Chairman

Drinking Water Needs and Infrastructure

Subcommittee on Environment and Hazardous Materials

April 11, 2002

Mr. Terry L. Gloriod President Illinois-American Water Company

Summary of NAWC Testimony

The size of the infrastructure funding gap is highly disputed, with many different estimates having been made. Any 20-year needs estimate is at best imperfect.

The advertised "gap" of one-half trillion dollars is a worst- case scenario. It assumes that utilities do nothing on their own to fill it, which of course is a difficult assumption to justify.

Water services account for a relatively small share of the average household utility budget (less than 0.8%). The Drinking Water State Revolving Loan Fund (DW-SRF) is a successful government program and it should remain the conduit for government assistance to utilities.

Within the DW-SRF Congress should support creative non- governmental solutions to the infrastructure financing challenge by explicitly tying DW-SRF assistance to utility consideration of:

Consolidating ownership and/or management functions with other facilities. Forming public-private partnerships or other cooperative partnerships Congress should require utilities receiving DW-SRF assistance to have in place, or have plans for:

A rate structure that reflects the actual cost of service, taking into account capital replacement funds, and

A sound asset management plan conforming to generally accepted industry practices and including a schedule of investments to meet and sustain performance objectives. (These provisions described above require managers to take an enterprise approach to utility management and move all systems toward self- sustainability.)

To address affordability issues, we encourage Congress to consider assistance directed to individual ratepayers rather than just to utilities. The LIHEAP program is a model, but such assistance can be provided through the existing DW-SRF. A new program is not needed.

Congress should require states that include private company needs in their needs survey to ensure that private companies are eligible for SRF funding. One of the easiest and cheapest incentives Congress can provide to address the infrastructure issue in a sound and efficient manner is to remove the existing volume caps on Private Activity Bonds for water and wastewater infrastructure improvement. Grants are a very inefficient method of providing assistance to utilities. They send the wrong economic and conservation signals to consumers, encourage bad management practices, choke-off innovation, discourage public- private partnerships and other creative business models, send American dollars and business overseas, and ultimately cost the public more than other more creative solutions.

Good Morning Mr. Chairman and Members of the Subcommittee, my name is Terry Gloriod and I am the President of the Illinois- American Water Company. Illinois American serves nearly a million people in 124 communities in Illinois.

I am also the Chairman of the National Association of Water Companies' Government Relations Committee. NAWC is a non-profit trade association that exclusively represents private and investor-owned drinking water utilities. I am offering this testimony on behalf of NAWC's membership-the 200 member companies in 39 States-which provide safe reliable drinking water to more than 20 million Americans everyday.

Privately owned water companies, like all other public water systems, comply with all EPA regulations. However, privately owned utilities also comply with the orders of State Public Utility Commissions, which include setting rates. In addition, our companies pay taxes - not just income taxes, but state and local property taxes - thus contributing to the welfare of the country and their communities in more ways than one.

Mr. Chairman, NAWC commends you and this Subcommittee for conducting this hearing on drinking water infrastructure financing. Due to our concern about this issue and our commitment to finding sound solutions, last year NAWC joined with other organizations to form the H2O Coalition[1]. This coalition was formed solely to work on the infrastructure replacement challenge facing the water industry. It is a group of organizations committed to the long-term self-sustainability of our nation's water utilities and to addressing our nation's looming water infrastructure challenge through a combination of creative asset management, local responsibility and decision making, and limited, targeted federal government involvement.

GENERAL COMMENTS

In the last two years or so there has been a great deal of discussion regarding the water infrastructure financing gap. This "gap" is simply the difference between the estimated dollars needed to replace failing water infrastructure and the dollars currently being spent. There are many estimates of the total need, and some of those are as high as a staggering trillion dollars. The "gap" some have said is perhaps half a trillion dollars. It has been argued that this constitutes a crisis, which the federal government and the federal government alone must address today.

We have several problems with this argument. First, any 20-year needs estimate is at best imperfect. The detailed data on our nation's water and wastewater industry required to make reliable, long range estimates simply don't exist. The $1 trillion number is likely a worst case high-end estimate. Other estimates, made by credible sources, have put the number much lower. For example, the American Water Works Association has estimated the drinking water needs at $250 billion.

Second, the advertised "gap" of one-half trillion dollars is also a worst-case scenario. It assumes that utilities do nothing on their own to fill it, which of course is a difficult assumption to justify. There are many things utilities can, should, and are doing on their own to close the investment gap, including reducing costs through increased efficiencies, improved asset management practices, innovative rate structures, technological innovation, industry restructuring including consolidation, and various revenue enhancement strategies.

Third, the cost of water service in this country is very small in relation to the typical household income. Water and sewer services account for a relatively small share of the average household utility budget (less than 0.8%), particularly in comparison to electricity (2.4%) and telecommunications (2.1%). In many respects, water services are a bargain to average households. As such, one of our most precious resources remains very affordable for almost all of the nation's citizens. Therefore, before Congress considers a massive infusion of cash for the water industry, it should consider that the cost of providing this needed service is not a burden on most households, and that in most cases users, not taxpayers, can and should pay for infrastructure maintenance and improvements.

Fourth, options and solutions provided by partnerships with the private sector can and should be explored to a greater degree by municipalities. While such partnerships are not right for everyone, there is ample evidence that such arrangements can be hugely beneficial for all involved. Furthermore, they can be sized and formatted to meet specific needs, addressing only those areas municipalities need or wish to be addressed. The most obvious benefit to the customer is cost savings, which range up to 40%. At least part of the water infrastructure replacement challenge we are facing can and should be addressed not by the government, but instead by the private sector.

Fifth, consolidation where possible must be a focus for our industry. There are currently about 55,000 separate drinking water systems in the U.S., some serving millions, but most serving few. According to the EPA fully 85% of all water systems serve less than 3,300 people, and a mere 2% of systems serve more than 50,000. Where possible, consolidation of these many small systems could result in significant savings to the customers. Therefore, for those systems experiencing infrastructure replacement, financial and/or compliance problems, consolidation should be considered before any public monies are sought.

Finally, it is worth considering exactly what the appropriate federal government role is. Water infrastructure has traditionally been a local or regional function. Geography and different treatment needs dictate this. There is no national water "grid". The federal government, on the other hand, has stepped in where there is a national interest in a national infrastructure. To think of water infrastructure as integrated on a national level is simply inaccurate. It is in fact many thousands of separate infrastructures across the country, with vastly different histories and needs.

This is not to say that the federal government does not have a role at all. There are areas in which federal activity is necessary and appropriate. Clearly, federal water quality regulations as promulgated under the Safe Drinking Water Act are a proper and necessary federal government activity. Research funding is also a role for the federal government. There are emerging technologies that if proven effective, could reduce the price tag of infrastructure replacement for all water utilities. Without such field research to prove the viability of innovation, utilities may be unwilling to "gamble" capital on new techniques.

Recommendations

The Drinking Water State Revolving Loan Fund (DW-SRF) is a successful government program and it should remain the conduit for government assistance to utilities. Projects have been prioritized for funding based largely on public health-related criteria and funding has been provided predominantly in the form of low interest loans. We believe that with relatively minor reforms, the SRF process will remain the best mechanism for assisting water systems in financing capital improvements related to regulatory compliance and infrastructure replacement.

Some organizations have called on Congress to establish new financing authorities to take the place of the SRFs as a means to address the infrastructure financing challenge. NAWC does not support such proposals. Though there are some improvements that Congress can make to the DW-SRF such as including incentives to move utilities toward self-sustainability, the DW-SRF has proven its ability to help meet our infrastructure financing challenges in an efficient and sustainable manner.

REFORMS TO THE DW-SRF

Within the DW-SRF Congress should support creative non- governmental solutions to the infrastructure financing challenge by explicitly tying DW-SRF assistance to utility consideration of:

Consolidating ownership and/or management functions with other facilities.

There are over 50,000 community water systems in the United States many of which are very small. In many, but not all, cases the financial challenges facing these utilities can be addressed by achieving economies of scale through consolidation. By tying consideration of consolidation with SRF assistance, Congress will encourage localities to put aside parochial interests, expand their vision and do what is right for the customer.

Forming public-private partnerships or other cooperative partnerships

Municipalities large and small all over the country have realized great savings and success through partnerships with private firms. These partnerships take many forms, from contracting out small portions of a utility's operations, such as billing or meter reading, to multi-year all inclusive management contracts wherein a private firm runs and manages all aspects of a municipally owned utility, to the transfer of assets to a private company. Cost savings that localities have realized over the years from such arrangements range up to 40%, freeing up much needed capital for infrastructure replacement, without burdening either the customers or the American taxpayer.

Congress should avoid some past mistakes of government assistance programs by requiring utilities receiving DW-SRF assistance to have in place, or have a plan to achieve within a reasonable period of time:

A rate structure that reflects the actual cost of service, taking into account capital replacement funds[2], and

A sound asset management plan conforming to generally accepted industry practices and including a schedule of investments to meet and sustain performance objectives.

These provisions require managers to take an enterprise approach to utility management and move all systems toward self- sustainability. These provisions will force utilities to solve their infrastructure problems in ways that are the least onerous to the American taxpayer, yet are responsible, efficient and effective.

Absent these important safeguards we could relive many of the problems of past government subsidy programs wherein:

1.Small or inefficient utilities were artificially propped up, discouraging consolidation and regionalization;

2.Utilities became dependent on the government funds and needed regular infusions creating greater reliance on government money;

3.pan style="color:black">Because of the subsidy, the American people got a false impression of the true cost of water, discouraging conservation; and 4.The private sector was effectively barred from participation in the industry, thus denying utilities the benefits of the free marketplace and its associated innovations and economies.

Some will argue that these provisions represent a too heavy- handed government approach to legislating, and are thus a step backward. We disagree. While the DW-SRF is administered through the States and includes some state matching money, the vast majority of the DW-SRF corpus is made up of federal money coming from the American taxpayer. Therefore, the federal government has a responsibility to American taxpayers to be sure their money is distributed and used in an efficient and accountable manner.

To address affordability issues, we encourage Congress to consider assistance directed to individual ratepayers rather than just to utilities. A federal water bill assistance program for low-income families would use federal dollars very efficiently, because assistance would be targeted only to the needy. We believe a water bill assistance program is an appropriate form of long-term assistance, especially to larger utilities, where only some of its customers are likely to be impoverished.

There is some precedence for such a program. The Low Income Home Energy Assistance Program (LIHEAP) provides assistance disadvantaged Americans in paying the heating bills. Such a disadvantaged customer assistance program could be fashioned to work as part of the DW-SRF. A new federal program and new federal funding need not be created.

PRIVATE UTILITY ACCESS to the DW-SRF

Though we support the DW-SRF as indicated above, we are concerned that treatment of private utilities on the State level has been uneven and often disappointing. This is a problem that Congress should revisit.

First, currently 13 States have declared privately owned drinking water systems to be ineligible for DW-SRF assistance. This unfortunate consequence is a clear, and in many cases deliberate, violation of Congressional intent that SRF loans should benefit customers of all public water systems, regardless of ownership.

There is a simple way Congress can encourage States to implement the DW-SRF as this Committee intended when it authorized the DW- SRF. Congress should require states that include private company needs in their needs survey to ensure that private companies are eligible for SRF funding. This would be a fair solution for all systems and their customers and would avoid rewarding those state that have ignored Congressional intent.

Another disappointing reality of the DW-SRF is that many states (other than the 13 discussed above) are not making loans to private utilities even though such loans are lawful and allowed in those States. In fact, as of December 2000, in 20 States where private utilities are eligible for assistance no such assistance has been extended to private utilities since the DW-SRF was created. To be fair, some of these states have made few loans to any systems, and/or have few private utilities. Also, generally, privately owned utilities are well managed and maintained and thus are often not the most needy under the current criteria. However, when private utilities comprise about 30% of all community water systems nationwide and serve about 15% of Americans, but receive a mere 3.5% of all DW-SRF assistance, it is clear that some states need to reassess their programs.

Some have argued that privately owned companies, even those serving the public, should not receive federal assistance-not even loans. Congress and this Committee considered that argument in 1996, and concluded that regulation by state public utility commissions would assure that the interest savings from SRF loans would benefit customers-not company shareholders. In fact the National Association of Regulatory Utility Commissioners (NARUC) has joined us in criticizing the failure of some states to comply with Congressional intent.

Remove Private Activity Bond cap

One of the easiest and cheapest incentives Congress can provide to address the infrastructure issue in a sound and efficient manner is to remove the existing volume caps on Private Activity Bonds for water and wastewater infrastructure improvement. This simple change will make capital both easier to obtain and less expensive for partnerships between the public and private sector, thus making such partnerships much more economically attractive to all concerned.

We understand that this, being a tax issue, is outside of the jurisdiction of this committee. It is, however, one of the most important modifications Congress can make to give municipalities the tools they need to meet this coming infrastructure challenge.

Since 1986 Congress has limited, under arbitrary state volume caps, the use of tax-exempt financing by private entities working for the public good. The cap has the unfortunate effect of limiting the use of private sector approaches for providing vital services, such as water services. Preliminary modeling indicates that this minor alteration in the tax code would cost the federal government very little, yet leverage huge sums of private capital.

We believe this proposal is far superior to federal grants because it:

(1) Is far cheaper for the federal government;

(2) Increases capital available to address infrastructure;

(3) Does not require massive reliance on scarce federal funds;

(4) Doesn't subsidize utilities but instead gives them the tools to handle their problems themselves;

(5) Will not subject long term projects to the uncertainties of the annual appropriations process;

(6) Is a far more efficient use of resources which will result in fewer dollars coming from the ratepayer and/or taxpayer;

(7) Is far less likely to lead to over-built and wasteful projects often seen in projects heavily reliant on government grants.

This proposal has precedent. Congress has exempted other environmental facilities (certain waste disposal facilities) from the state volume caps because of a perceived public need. This proposal also has far ranging support. Bi-partisan legislation in the House has been introduced which would make these changes. Also, the U.S. Conference of Mayors, National Association of Counties, and the Water Infrastructure Network (WIN) have endorsed this proposal.

limit Direct Federal Grants

As I've said, there have been calls to establish a new large federal grant program like the old Construction Grants Program of 1970s and 1980s to address our nation's looming infrastructure financing challenge. NAWC and our partners in the H2O Coalition oppose this plan and urge Congress to work within the existing DW- SRF mechanisms, including the current 30% limit on grants and grant-like assistance.

Experience teaches us that grants are a very inefficient method of providing assistance to utilities. They send the wrong economic and conservation signals to consumers, encourage-even reward-bad management practices, choke-off innovation, discourage public-private partnerships and other creative business models, send American dollars and business overseas, and ultimately cost the public more than other more creative solutions. In Congressional testimony last year, the Congressional Budget Office said "if the federal government issued blank checks for infrastructure, local drinking water and wastewater systems would lose any incentive to keep capital costs down." CBO also said "high federal cost shares in the original construction grants program. . .raised capital costs by more than 30 percent." [3] The following specific problems hobbled the old Construction Grants Program and would likely plague any revival of such programs:

- Procurement regulations discounted quality for the sake of lowest price. Owners were forced to purchase and install equipment that fell short of desirable standards for performance, reliability and overall costs of operations. The objective was not value, merely price.

- The unpredictable nature of the annual appropriations process resulted in an artificial rapid ramping up of business activity when grants were available, followed by a rapid downturn in activity in lean appropriating years. These surges and declines forced out of business many American companies long in the construction and/or manufacturing business.

- Sudden infusions of cash in the form of federal grants, rather than the usual steady and predictable ramping observed in a "normal" economy and market, forced customers to go offshore for materials and services, harming the U.S. industry.

- The EPA construction grants program did not adequately require recipients to establish a capital replacement account to ensure that funds existed to replace the plant when it exceeds its life cycle (which could be contributing to the current funding problem).

- Grant recipients had little "ownership" of their projects resulting in overbuilt systems and wasted tax dollars.

- Due to the federal procurement regulations accompanying grants, innovation nearly came to a halt in the U.S. Much of the innovation the industry has seen over the last 20 years has come from offshore. This phenomenon is directly attributable to the construction grant program.

NAWC acknowledges that in some cases grants are the only viable option or at least the option that makes the most sense. For example grants, or forgiveness of loans, may be appropriate for systems in economically disadvantaged communities. NAWC also supports targeted assistance for individuals based on economic need. However, we oppose subsides for entire systems that benefit customers who can afford higher rates in addition to the needy who cannot.

CONCLUSION

Mr. Chairman, we appreciate the leadership role that you and this Subcommittee have taken to address drinking water infrastructure problems. These are long-term challenges, and we look forward to working with this Committee to achieve long-term solutions that will allow the drinking water industry to stand on its own two feet.

In conclusion, Mr. Chairman, thank you very much for the opportunity to present our views, and I would be happy to respond to any questions.



LOAD-DATE: April 30, 2002