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Federal Document Clearing House
Congressional Testimony
March 28, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4774 words
COMMITTEE:
HOUSE ENERGY AND COMMERCE
HEADLINE:
TESTIMONY SAFE DRINKING WATER
TESTIMONY-BY: MR. HOWARD
NEUKRUG , DIRECTOR
AFFILIATION: OFFICE OF WATERSHEDS
/PHILIDELPHIA WATER DEPARTMENT
BODY: March 28, 2001
The House Committee On Energy and Commerce W.J. "Billy" Tauzin, Chairman
Subcommittee on Environment and Hazardous Materials Hearing Drinking Water Needs
and Infrastructure Mr. Howard Neukrug Director Office of Watersheds Philadelphia
Water Department On behalf of: American Water Works Association INTRODUCTION
Good morning Mr. Chairman. I am Howard Neukrug, Director of the Office of
Watersheds for the Philadelphia Water Department in Pennsylvania. The
Philadelphia Water Department is a municipal water, wastewater and stormwater
utility serving over two million people in the Philadelphia metropolitan area. I
serve as the Vice Chair of the American Water Works Association (AWWA) Water
Utility Council and am here today on behalf of AWWA. AWWA appreciates the
opportunity to present its views on drinking water needs and infrastructure.
Founded in 1881, AWWA is the world's largest and oldest scientific and
educational association representing drinking water supply professionals. The
association's 57,000 members are comprised of administrators, utility operators,
professional engineers, contractors, manufacturers, scientists, professors and
health professionals. The association's membership includes over 4,2000
utilities that provide over 80 percent of the nation's drinking water. AWWA and
its members are dedicated to providing safe, reliable drinking water to the
American people. AWWA utility members are regulated under the Safe Drinking
Water Act (SDWA) and other statutes. AWWA believes few environmental activities
are more important to the health of this country than assuring the protection of
water supply sources, and the treatment, distribution and consumption of a safe,
healthful and adequate supply of drinking water. AWWA is also a member of the
Water Infrastructure Network (WIN) - a broad-based coalition of
drinking water, wastewater, municipal and state government, engineering and
environmental groups, dedicated to preserving and protecting the hard-won public
health, environmental and economic gains that America's water and wastewater
infrastructure provides. AWWA and its members thank you for holding this hearing
concerning the infrastructure needs of the Nation's drinking water utilities.
AWWA looks forward to working with the subcommittee in its efforts to address
the growing infrastructure costs facing drinking water utilities and consumers.
The Drinking
Water Infrastructure Need Last fall WIN released
Clean & Safe Water for the 21st Century, which summarized infrastructure
needs and the funding shortfall facing drinking water and wastewater systems.
That report estimates that the total drinking water and waste
water
infrastructure needs over a twenty-year period approaches one trillion
dollars. According to report estimates, drinking water utilities across the
nation collectively need to spend about $24 billion per year for the next 20
years, for a total of $480 billion. The report identified an $11 billion annual
gap between current spending and overall need. A separate needs estimate was
released in February by the U.S. Environmental Protection Agency (EPA), based on
a survey of water systems. The survey results suggest water systems will need
$150 billion during the next twenty years. However, the EPA estimate is limited
to identifying eligible Safe Drinking Water Act compliance needs for the
Drinking Water
State Revolving Fund (DWSRF) and does not
include many needs, such as the replacement of treatment facilities and
distribution systems due to age. These needs are not eligible for funding from
the DWSRF yet they are the largest infrastructure expense facing the nation's
water suppliers. EPA also relied on five-year capital improvement plans (CIPs)
by utilities and included them in the 20-year period, leaving the remaining
out-years compliance needs undocumented. None-the-less, both estimates suggest
an emerging large cost for drinking
water infrastructure. Why
is the need emerging now? Water is by far the most capital intensive of all
utility services, mostly due to the cost of pipes -
water
infrastructure that is buried out of sight. Most of drinking water
pipes were originally installed and paid-for by previous generations. They were
laid down during the economic booms that characterized the last century s
periods of growth and expansion. Pipes last a long time (some more than a
century) before they cost very much in maintenance expense near the end of their
useful life, or ultimately need replacement. For the most part, then, the huge
capital expense of pipes is a cost that today s customers have never had to
bear. However, replacement of pipes installed from the late 1800s to the 1950s
is now hard upon us at the beginning of the 21st Century and replacement of
pipes installed in the latter half of the 20th Century will dominate the
remainder of the 21st Century. This is a significant change that ushers in a
completely new era in water utility financing. Recognizing that we are at the
doorstep of a new era in the economics of water supply, the replacement era, the
American Water Works Association (AWWA) has undertaken an analysis of 20
utilities throughout the nation to understand the nature and scope of the
emerging infrastructure challenge. The project involved correlating the
estimated life of pipes with actual operations experience in the sample of 20
utilities. Projecting future investment needs for pipe replacement in those
utilities yields a forecast of the annual replacement needs for a particular
utility, based on the age of the pipes and how long they are expected to last in
that utility. By modeling the demographic pattern of installation and knowing
the life expectancy of the pipes, we can estimate the timing and magnitude of
that obligation. This analysis graphically portrays the nature of the challenge
ahead of us. We will summarize the highlights of the analysis in this statement
and AWWA will provide the subcommittee with a copy of the report when it is
completed shortly. Pipe Replacement Value The original pattern of water main
installation from 1870 to 2000 in 20 utilities throughout the nation analyzed by
AWWA is a reflection of the overall pattern of population growth in large cities
across the country. There was an 1890s boom, a World War I boom, a roaring 20s
boom, and the massive post-World War II baby boom. The oldest cast iron pipes -
dating to the late1800s - have an average useful life of about 120 years. This
means that as a group these pipes will last anywhere from 90 to 150 years before
they need to be replaced, but on average they need to be replaced after they
have been in the ground about 120 years. Because manufacturing techniques and
materials changed, the roaring 20s vintage of cast iron pipes has an average
life of about 100 years. And because techniques and materials continued to
evolve, pipes laid down in the post World War II boom have an average life of 75
years, more or less. Using these average life estimates and counting the years
since the original installations, it s clear that water utilities will face
significant needs for pipe replacement in the next couple of decades. The
cumulative replacement cost value (the cost of replacement in constant year 2000
dollars) of water main assets has increased steadily over the last century in
our sample of 20 utilities. In aggregate across our sample of utilities, the
replacement value of water mains in today s dollars is about $2,400 per person.
This is more than three times what it was in 1930 in constant year 2000 dollar
terms. The difference is not due to inflation; rather, there is simply more than
three times as much of this infrastructure today as there was in 1930, in order
to support improved service standards and the changing nature of urban
development. In older cities the per capita replacement cost value of mains
today is as high as nine times the 1930 level (in constant year 2000 dollars)
due to loss of center city population. Reflecting the pattern of population
growth in large cities over the last 120 years, the AWWA analysis forecasts
investment needs that will rise steadily like a ramp, extending throughout the
21st Century. By 2030, the average utility in our sample of 20 will have to
spend about three and half times as much on pipe replacement as it spends today.
Many water systems all across America have seen this day coming and have already
begun to ramp-up their expenditures on pipe rehabilitation and replacement. But
it is clear that for most utilities this problem is just emerging and is
enormous in scope. Pipe Repair Costs As pipe assets age, they tend to break more
frequently. But it is not cost-effective to replace most pipes before, or even
after, the first break. Like the old family car, it is cost efficient for
utilities to endure some number of breaks before funding complete replacement of
their pipes. Considering the huge wave of aging pipe infrastructure created in
the last century, we can expect to see significant increases in break rates and
therefore repair costs over the coming decades. This will occur even when
utilities are making efficient levels of investment in replacement that may be
several times today s levels. In the utilities studied by AWWA, there will be a
three- fold increase in repair costs by the year 2030 despite a concurrent
increase of three and one- half times in annual investments to replace pipes.
Water Treatment Plant Costs. Replacement of water treatment assets presents a
different picture from that of the pipes, but greatly complicates infrastructure
funding for utilities. Major investments in water and wastewater treatment
plants were made in several waves following the growing understanding of public
health and sanitary engineering that evolved during the 20th Century. Of course,
the installation pattern of treatment assets also reflects major population
growth trends. But whereas pipes can be expanded incrementally to serve growth,
treatment must be built in larger blocks. Investments in treatment thus present
a more concentrated financing demand than investments in pipes. Treatment assets
are also much more short-lived than pipes. Concrete structures within a
treatment plant may be the longest lasting elements in the plant, and may be
good for 50 to 70 years. However, most of the treatment components themselves
typically need to be replaced after 25 to 40 years or less. Replacement of
treatment assets is therefore within the historical experience of today s
utility managers. Even so, many treatment plants built or overhauled to meet EPA
standards over the last 25 years are too young to have been through a
replacement cycle. Many are about due for their first replacement in the next
decade or so. The concurrent need to finance replacement of pipes and of
treatment plants greatly increases the challenge facing utilities. While
spending for the replacement of pipes rises like a ramp over the first part of
the 21st Century, spending for treatment plant replacement will occur at
intervals causing "humps" in capital needs on top of the infrastructure
replacement capital needs. This is graphically illustrated in the attached
"Relative Asset Replacement Projections" graph of the BHC Company water utility
in Bridgeport, Connecticut, from the forthcoming AWWA report. This pattern has
been found to be common in many water utilities and has been nicknamed "The
Nessie Curve" because of its resemblance to depictions of the Loch Ness Monster.
Demographic Changes. Water utilities are the last natural monopolies. The large
investment required in pipe networks makes it impossible to have more than a
single provider of water service within a given area. These large investments
are also a major source of financial vulnerability for water utilities due to
the very fixed nature of the assets and the very mobile nature of the customers.
When populations grow, the infrastructure is expanded, but when people move
away, the pipe assets and the liability for repair and replacement remain
behind, creating a financial burden on the remaining customers. This problem,
known as "stranded capacity" (essentially, capital facilities that are not
matched by rate revenue from current customers), is typical of the demographics
of older cities and adds considerably to the challenge of funding replacement in
these cities. In Philadelphia, over the one hundred years from 1850 to 1950, the
population grew from 100,000 to 2 million people. But from 1950 to the end of
the century, Philadelphia lost 25 percent of its population, dropping to
1,500,000. This situated was replicated again and again throughout the older
cities of the Northeast and Midwest. The effect is to increase the burden of
replacement funding on the remaining residents of the city. As previously
mentioned, the average per capita value of water main assets in place today
across our sample of 20 utilities is estimated to be three times the amount that
was present in 1930. In Philadelphia, however, that ratio is almost eight times
the average per capita value of water main assets in 1930 due to population
declines since about 1950. Demographic change, then, places financial strain on
all public water systems and has a direct impact on affordability of the
investment required. Affordability of Rates A central question for policy makers
and utilities, then, is whether the increased rate of infrastructure spending
that utilities now face over the next 30 years can be financed by the utilities
themselves at rates customers can afford. WIN estimates that total water and
wastewater infrastructure bills will have to double or triple in most
communities to meet these needs, if consumers are forced to bear the entire
infrastructure cost. The cost of compliance with storm water regulations alone
may dwarf domestic drinking water and wastewater expenditures. Therefore, the
impact on household affordability and rates of projected drinking
water
infrastructure expenditures must be viewed in the context of the total
water and wastewater utility infrastructure bill to be paid by the consumer. In
the sample of 20 utilities studied by AWWA, the analysis showed an aggregate
increase in needed utility expenditures above current spending levels of $3
billion by 2020 and $6 billion by 2030. This implies the need for collection of
an additional $1,575 per household for infrastructure repair and replacement
over 30 years. The estimated $1,575 per household is an average of the
individual results. The individual utilities in the survey present wide-ranging
needs for increased expenditure (from $550 per household over 30 years to $2,290
per household over 30 years) and "lumpy" patterns of increased expenditure needs
that are unique to each set of circumstances. The sample of 20 utilities
represents relatively large utilities that are on the "cutting-edge" of utility
management. The household expenditure increase will be much higher in small
systems that do not have a large rate-base over which to spread the costs.
Extrapolating from EPA s estimated 20-year capital need for small systems, the
AWWA analysis projects the total 30- year expenditure for infrastructure repair
and replacement in small systems might be in a range of $1,490 per household to
$6,200 per household. Moreover, there is no guarantee that the projected
expenditures per household can be spread evenly or taken on gradually over the
30-year period. There are "humps" for treatment plant replacement throughout the
period. Additionally, expenditure "humps" for compliance with a dozen or more
new regulations is not included in this analysis. Conclusion How we address our
emerging drinking
water infrastructure needs is a critical
question facing the Nation and this Congress. To help reduce the burden on
consumers, many water utilities have made great strides in efficiencies, with
some utilities achieving a 20 percent savings in operations and maintenance.
Water utilities will continue to reduce costs, seek cost-effective financing and
employ innovative management strategies. Regardless, there will be significantly
increased costs for needed infrastructure investment. AWWA does not expect that
federal funds will be available for 100 percent of the increase in
infrastructure needs facing the nation's water utilities. However, AWWA does
believe that due to concurrent needs for investment in water and wastewater
infrastructure, replacement of treatment plants, new drinking water standards,
and demographics, many utilities will be very hard pressed to meet their capital
needs without some form of federal assistance. Over the next twenty years, it is
clear that Safe Drinking Water Act (SDWA) and Clean Water Act (CWA) compliance
requirements and infrastructure needs will compete for limited capital
resources. Customers are likely to be very hard pressed in many areas of the
country. Compliance and infrastructure needs under the SDWA and CWA can no
longer be approached as separate issues. Solutions need to be developed in the
context of the total drinking water and wastewater compliance and infrastructure
needs. AWWA pledges to work with Congress to develop a responsible and fair
solution to the Nation s growing drinking
water infrastructure
challenge. As a start, AWWA will provide a copy of the forthcoming AWWA report
to members of the subcommittee to assist the subcommittee deliberations on this
issue. We thank you for your consideration of our views. This concludes the AWWA
statement on drinking water needs and infrastructure. I would be pleased to
answer any questions or provide additional material for the committee.
LOAD-DATE: March 30, 2001, Friday