SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4675 words

COMMITTEE: HOUSE ENERGY AND COMMERCE

HEADLINE: DRINKING WATER INFRASTRUCTURE

TESTIMONY-BY: MR. HOWARD NEUKRUG, OFFICE OF WATERSHEDS

AFFILIATION: AMERICAN WATER WORKS ASSOCIATION

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. Howard Neukrug Office of Watersheds 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 storm water utility serving over two million people in the Philadelphia metropolitan area. I serve as the 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 4,3000 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 commend you for holding this hearing concerning the infrastructure needs of the Nation's public water systems. AWWA looks forward to working with the subcommittee in its efforts to address the growing infrastructure costs facing public water systems and consumers.

FEDERAL MANDATES AND THE CONTEXT FOR WATER AND WASTEWATER FUNDING ISSUES

Both drinking water and wastewater utilities face enormously expensive federal mandates that set the context for all other funding issues. Although, the jurisdiction of this Subcommittee does not include wastewater, the funding issues of drinking water and wastewater utilities are inextricably intertwined. The drinking water community faces a complex array of expensive new federal requirements and new standards, including standards for arsenic, radon, disinfection byproducts, enhanced surface water treatment, and others. Wastewater utilities also face enormously expensive federal mandates, such as those relating to Combined Sewer Overflows (CSO) and Sanitary Sewer Overflows (SSO). For both water and wastewater utilities, these needs significantly skew financing for other investments, including the replacement of aging pipes, appurtenances, and other infrastructure. Local ratepayers are often seriously challenged to pay for these mandates, and little, if any, room is left in the ratepayer's budget for other vital spending. In many cases, it appears that mandatory spending for clean water mandates has "driven out" the ability to raise rates for drinking water services.

We believe that significant federal assistance, including grants, is necessary and justified to help meet the cost of these very expensive federal mandates on water and wastewater utilities, and to meet these costs of repair and replacement of aging pipes, appurtenances, and other infrastructure that have been, in many cases, deferred because federal mandates have consumed the ratepayer's budget.

We would point out that, in the case of CSO and SSO mandates, federal support for the cost of those requirements is not only justified in the community receiving federal support, it also lowers costs for drinking water utilities downstream in the form of improved water quality. This is especially true in critical source water protection areas.

THE DRINKING WATER INFRASTRUCTURE NEED

The importance of safe drinking water to public health and the nation's economic welfare is undisputed. However, as we enter the 21st Century, water utilities face significant economic challenges. For the first time, in many of these utilities a significant amount of buried infrastructure - the underground pipes that make safe water available at the turn of a tap - is at or very near the end of its expected life span. The pipes laid down at different times in our history have different life expectancies, and thousands of miles of pipes that were buried over a 100 or more years ago will need to be replaced in the next 30 years. Most utilities have not faced the need to replace huge amounts of this infrastructure because it was too young. Today a new age has arrived. We stand at the dawn of the replacement era.

Recognizing that we are at the doorstep of a new era in the economics of water supply, the replacement era, 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. In the AWWA statement submitted to the Subcommittee for the hearing on Drinking Water and Infrastructure, March 28, 2001, we summarized the highlights of the analysis and subsequently provided a copy of our report entitled, Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, to all members of the Subcommittee.

Extrapolating from our analysis of 20 utilities, we project that expenditures on the order of $250 billion over 30 years might be required nationwide for the replacement of worn out drinking water pipes and associated structures (valves, fittings, etc). This figure does not include wastewater infrastructure or the cost of new drinking water standards. Moreover, the requirement hits different utilities at different times and many utilities will need to accelerate their investment. Some will see rapidly escalating infrastructure expenditure needs in the next 10-20 years. Others will find their investment decisions subject to a variety of factors that cause replacement to occur sooner or at greater expense, such as urban redevelopment, modernization, coordination with other city construction, increasing pipe size, and other factors.

Overall, the findings confirm that replacement needs are large and on the way. There will be a growing conflict between the need to replace worn-out infrastructure and the need to invest in compliance with new regulatory standards under the Safe Drinking Water Act. In addition, as pointed out earlier, the concurrent demands for investment in wastewater infrastructure and compliance with new Clean Water Act regulations, including huge needs for meeting combined sewer overflow (CSO) and storm water requirements, will compete for revenue on the same household bill.

Ultimately, the rate-paying public will have to finance the replacement of the nation's drinking water infrastructure either through rates or taxes. AWWA expects local funds to cover the great majority of the nation's water infrastructure needs, and remains committed to the principle of full cost recovery through rates. However, many utilities may face needs that are large and unevenly distributed over time. They must manage a difficult transition between today's level of investment and the higher level of investment that is required over the long term. Facing an inexorable rise in infrastructure replacement needs driven by demographic forces that were at work as much as a 100 years ago, compounded by the negative effects of changing demographics on per-capita costs in center cities, many utilities face a significant challenge in keeping water affordable for all the people they serve.

Affordability, poverty and infrastructure abandonment seem to go hand-in-hand. In Philadelphia, where 40 percent of the population lives in poverty, a rise in water bills will remain a significant socio-economic issue well into the foreseeable future. In the March 27, 2001, issue of the Philadelphia Inquirer, it was reported that almost one-third of the 28,000 residential blocks in Philadelphia have abandoned homes. We estimate that there are three or more abandoned houses on each of 4,600 residential blocks in our city. At ten city blocks per mile, these inner-city neighborhoods contain a total of 460 miles each of water and sewerage pipes. At a replacement cost of $1 million per mile for water pipe and $1.5 million per mile for sewer pipe, these 4,600 blocks represents over $1 billion in pipe infrastructure replacement costs -- the burden of which is falling on fewer and fewer households and, typically, poorer and poorer families. An analysis of U.S. Census data shows that for over the hundred years from 1850 to 1950, the population of Philadelphia 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 people. In the forthcoming AWWA report, the average per-capita value of water main assets in place today across the 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 value 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.

While various studies and analysis have arrived at differing figures for the magnitude of the drinking water infrastructure replacement need, AWWA does not believe that differences in the figures should be the major issue. All of the conclusions, regardless of the methodologies and assumptions used, point to a very large infrastructure funding need over the next twenty to thirty years. To meet this challenge, AWWA has called for a new partnership for investing in drinking water infrastructure in which utilities, states, and the federal government all have important roles.

PUBLIC WATER SYSTEM SECURITY NEEDS

The events of September 11, 2001, have added a new dimension to the protection of drinking water and drinking water infrastructure needs. In addition to protecting drinking water from contamination, America's homeland security requires a secure water supply. Public health, fire protection, and sanitation depend on it. The role of public water systems for first responders is a critical, and is often overlooked in discussions concerning homeland security funding priorities. The al Qaeda terrorist network and others are known to have conducted research on public water systems in the United States. If the intent is to create terror in our society, water systems are targets of opportunity for terrorists, not only to contaminate the water supply, but also to deny first responders water for fire protection in a coordinated terrorist attack.

Drinking water suppliers have a long history of security preparedness prior to September 11, 2001. However, the post- September 11 world has added a new understanding of security and has added an unprecedented financial burden on public water systems for immediate steps needed to protect the people of the United States. AWWA research has estimated the cost of immediate capital improvements to ensure security of access to critical public water system assets through barriers, detection devices and cyber security systems to be approximately $1.6 billion. This cost will provide initial security improvements for about 53,000 water systems serving more than 264 million people. It does not include future capital costs of upgrades to address vulnerabilities identified in vulnerability assessments such as hardening pumping stations, chemical storage buildings, transmission mains, add redundant infrastructure or relocate facilities and pipelines. These new security concerns added to the cost of replacing aging drinking water infrastructure and the capital cost of compliance with federally mandated regulations, drives the need to greatly increase the level of federal investment in drinking water infrastructure now.

THE DRINKING WATER STATE REVOLVING FUND

In our report entitled Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, AWWA recommended changing and expanding the existing Drinking Water State Revolving Fund (DWSRF) to significantly increase federal funding for projects to repair, replace, or rehabilitate drinking water infrastructure to include the aging distribution pipes. Subsequent to September 11, AWWA has further recommended that drinking water capital security upgrades should specifically be identified in the SDWA as eligible projects.

In many ways, the DWSRF program has been very successful. Loans are reaching communities of all sizes and income levels, average costs of capital are well below market rates, many states have been highly creative in leveraging their original federal capitalization grants, and funds are generally in demand among local borrowers. Yet, clearly, these programs can be improved to address a range of remaining problems that impede enhanced equity, efficiency, and effectiveness.

AWWA believes that the DWSRF could serve as a model for funding drinking water infrastructure with the following changes:

- Significantly increased federal funding.

- Clear eligibility of projects to repair, replace, or rehabilitate drinking water infrastructure.

- Clear eligibility for capital security upgrades.

- Universal eligibility of all water systems, both public and investor owned, regardless of size.

- Ability to make grants or loans in any combination and to use other financing tools to leverage public and private capital.

- Reasonable terms and conditions such as demonstration of system viability and ability to repay a loan.

- Streamlined procedures for those accessing the funds.

AWWA urges the Subcommittee to introduce a bill as quickly as possible to amend the SDWA to address drinking water infrastructure needs in the DWSRF so that a bill can be enacted before the end of this Congress. In the remainder of this statement, we will summarize suggested improvements to the DWSRF to address the growing drinking water infrastructure and security needs.

DWSRF AUTHORIZATIONS

AWWA recommends that the DWSRF authorization should be significantly increased to provide at least half of the $57 billion ( $28.5 billion) recommended by WIN over the next five years drinking water. We believe that this authorization would mark a significant step by Congress towards assisting in the enormous challenge public water systems and their customers face in meeting federal mandates and at the same time replacing aging distribution pipes in the coming years. As illustrated in AWWA's report entitled Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, the "demographics" of pipe replacement is real, it is big, and the bill is coming due soon. This challenge is exacerbated by population shifts and growth patterns over the years, economic conditions and the changed demographics of urban populations.

We must note that the recommended authorization level is a very small fraction of the $250 billion in infrastructure replacement needs over the next thirty years identified by AWWA. 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. AWWA remains committed to the principle that utility operations should be fully supported by rates. In the long run, the objectives must be to manage the costs of replacing pipes and treatment plants and ensure financial sustainability through local rate structures. However, many utilities are going to face a period of adjustment in adapting to the new reality of the replacement era described in the AWWA report. Many utilities and their customers will need additional assistance in working through extraordinary replacement needs in the next 20 years in the form of principal forgiveness or other direct financial assistance measures.

The difference between drinking water utilities' current expenditures for infrastructure replacement and the needed level of expenditure is estimated by WIN to be about $11 billion per year over the next 20 years. If the federal government were to provide half the cost of this gap, the federal share of total utility spending would still amount to under 12 percent of total utility spending for twenty years. For comparison, the federal share of investment in roads, bridges, and airports is 80 percent.

It is clear that, even with federal assistance, the burden of paying for public water system improvements will remain overwhelmingly with utilities and their rate-paying customers. In recognition of this, we believe that, if the needs of older cities with large economically disadvantaged populations are to be met, an increase in the authorization is warranted. We look forward to working with the Subcommittee to ensure that authorization levels will be adequate to address the needs of older cities with economically disadvantaged populations and meet the security needs of public water systems.

ELIGIBLE PROJECTS

Aging Infrastructure.

It is important to note that support of drinking water infrastructure is not the primary purpose of the Environmental Protection Agency (EPA) programs. The eligibility requirements of the DWSRF created by the SDWA Amendments of 1996 address the compliance needs of public water systems. The very large and growing need to replace aging drinking water infrastructure is a challenge that is not specifically addressed by the DWSRF as currently structured and funded.

AWWA recommends that the DWSRF eligibility of projects for the replacement and rehabilitation of aging distribution system pipes and appurtenances be made explicit in the statute. This, we believe should be the major purpose of the increased DWSRF authorizations. EPA has interpreted the current provisions of the SDWA to authorize the use of DWSRF funding for the replacement and rehabilitation of aging distribution pipes as furthering the health protection objectives of the SDWA as authorized in Section 1452 of the Act. While this interpretation of the SDWA is welcome, it is not universally accepted. That statute should make Congress's intent clear that repair and replacement of aging infrastructure is an important priority and not rely on an EPA or State interpretation that is subject to change.

Security Upgrades.

Since September 11, 2001, AWWA has been advocating for federal assistance for public water systems to help pay for security upgrades to protect public water systems from terrorist attack. Since that time events have validated this concern, and water utilities are undertaking comprehensive vulnerability assessments and emergency planning to protect both water quality (for health protection) and water supply (for fire suppression and sanitation). Of note are documents found in the possession of al Queda terrorists in Afghanistan that could be used to help plan an attack on a drinking water utility. Security concerns thus represent a large, immediate, and unprecedented cost for public water systems concerns.

EPA has interpreted the current provisions of the SDWA to authorize the use of DWSRF funding for capital security upgrades as furthering the health protection objectives of the SDWA as authorized in Section 1452 of the SDWA. While this interpretation of the SDWA is welcome, it rests on interpretation and is subject to change. Moreover, it does not state Congress's intent that capital projects to address security concerns should be priority projects for DWSRF funding. AWWA strongly recommends that bill make explicit the DWSRF eligibility of capital projects to address security

LARGE PUBLIC WATER SYSTEMS

AWWA does not believe that the DWSRF adequately addresses the infrastructure challenges presented by large urban public water systems and particularly those with declining and economically disadvantaged populations. During the short history of the DWSRF, large public water systems have not been receiving a fair share of SRF loans. According to EPA, states have made approximately seventy-five percent of all SRF loans to small communities. In per capita terms, assistance to very small communities has averaged over $400, while loans to large communities (with over 100,000 people) have averaged a little over $50 per capita.

Current law mandates that fifteen percent of a state capitalization grant shall be reserved for small systems serving populations under 10,000 to the extent that such funds can be obligated for eligible projects. AWWA supported that set-aside in 1996, to ensure that small systems could participate in the loan program. We did not anticipate that large systems would be left out of the program, relatively speaking, and there is no corresponding set-aside for large public water systems serving populations over 100,000. As noted, the bulk of DWSRF funding is going to small systems.

AWWA is not convinced that an overall increased authorization for the DWSRF alone will provide states the ability to provide more assistance to large public water systems than was possible previously as some believe. To assure that systems of all sizes can participate in the SRF program, AWWA believes that a corresponding set-aside of fifteen percent of a state capitalization grant should be reserved for public water systems serving a population of 100,000 or more, assuming there are eligible project applications. This will ensure that large public water systems with major infrastructure replacement needs and disadvantaged consumers can participate in the DWSRF program in all States.

DWSRF LOAN REQUIRMENTS AND RESRICTIONS

AWWA has recommended streamlining many of the requirements and procedures for obtaining loans from the DWRSF. We believe careful attention is required to strike an appropriate balance between Congress's desire to encourage certain behaviors at utilities, and the need to keep the DWSRF as unencumbered as possible by unproductive red tape. Congress or EPA should exempt certain types of projects or projects below a certain size threshold from DWSRF red tape requirements that don't make sense. Similarly, capital investments to improve the security of the Nation's drinking water should be exempt from red tape to the maximum extent possible. We urge the Congress to resist adding requirements for DWSRF loans that can lead to an inappropriate federal micro-management of drinking water rate structures, assessment management, utility ownership and management options or local planning decisions. If a public water system is otherwise financially sound, can repay the loan, and can comply with applicable drinking water regulations, the addition of irrelevant requirements creates a burden to obtaining a loan.

Congress also needs to provide incentives for States to reform their existing programs to make them more effective. For example, some states have not allowed larger systems to access the existing state revolving fund, or have excluded investor owned systems. Some states encumber their revolving funds with nonproductive red tape, charge high loan origination and other fees, or charge loan rates that are equivalent to market rates. Some states preclude the use of alternate procurement methods that minimize infrastructure procurement costs. For example, the "design/build" process for infrastructure procurement has been documented to save 20-40% of construction costs for new treatment plants in some cases. Public procurement laws in many states, while not explicitly banning design/build, mandate a process that prevents its use where local authorities have determined it would be advantageous. The result is that, in many states, revolving loan funds have not proved to be useful or attractive even to drinking water utilities desperately in need of capital.

To improve the efficiency, effectiveness and flexibility of the DWSRF, Congress should authorize the use of DWSRF funds to purchase or refinance outstanding debt obligations of a drinking water system; guarantee, or purchase of insurance for, and obligation of a drinking water system; secure the payment or directly repay principal or interest on general obligation bonds issued by the State if proceeds of the bonds will be deposited in the DWSRF; and deposit into a capital reserve for a debt instrument of a drinking water system. Since drinking water infrastructure projects have a design-life much longer than twenty years, AWWA recommends that the DWSRF loan repayment period by extended to thirty years for all utilities. This is an accepted loan repayment period in the financial market. These measures will greatly reduce the cost of financing drinking water infrastructure and allow communities increased flexibility.

CONCLUSION

How we address our emerging drinking water infrastructure needs is a critical question facing the Nation and this Congress. America needs a new partnership for reinvesting in drinking water infrastructure. There are important roles at all levels of government.

AWWA does not expect that federal funds will be available for 100 percent of the infrastructure needs facing the nation's water utilities. However, AWWA does believe that due to concurrent needs for investment in water and wastewater infrastructure, security projects, 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 SDWA and 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.

In our testimony we have made recommendations that we believe will improve the DWSRF to address the increasing drinking water infrastructure financing needs. We believe that increasing the DWSRF authorization to at least $28.5 billion over the next five years is critical. AWWA urges the Subcommittee to introduce a bill as quickly as possible to amend the SDWA to address drinking water infrastructure needs in the DWSRF so that a bill can be enacted before the end of this Congress. AWWA pledges to work with Congress to develop a responsible and fair solution to Nation's drinking water infrastructure challenge. 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: April 29, 2002