SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3802 words

COMMITTEE: HOUSE TRANSPORTATION

SUBCOMMITTEE: WATER RESOURCES AND ENVIRONMENT

HEADLINE: WATER QUALITY FINANCING

TESTIMONY-BY: BENJAMIN H. GRUMBLES, DEPUTY ASSISTANT ADMINISTRATOR FOR WATER

BODY:
STATEMENT OF BENJAMIN H. GRUMBLES DEPUTY ASSISTANT ADMINISTRATOR FOR WATER U.S. ENVIRONMENTAL PROTECTION AGENCY

BEFORE THE SUBCOMMITTEE ON WATER RESOURCES AND ENVIRONMENT

OF THE COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

U.S. HOUSE OF REPRESENTATIVES

March 13, 2002

Good morning, Mr. Chairman and Members of the Subcommittee. I am Ben Grumbles, Deputy Assistant Administrator for Water at the U.S. Environmental Protection Agency (EPA). First, let me convey Tracy Mehan's regrets for being unable to be here today to speak with this Subcommittee. Second, I appreciate this opportunity to provide the Administration's views on some of the key issues involved in legislation to meet the challenge of equipping the Nation's wastewater facilities to protect our public health and water quality in the 21st century.

Through a strong and evolving local, State, federal and private partnership, the United States has made great progress over the past three decades in reducing water pollution and assuring the safety of surface water uses. The Clean Water Act (CWA) has served us well and provides the solid foundation we need to make sure that all Americans will continue to enjoy clean rivers, lakes, and coastal waters. In particular, our cooperative investment in wastewater treatment and pollution prevention has paid dramatic dividends for water quality and public health. The economic and social benefits of improved water quality are readily evident from urban waterfronts to recreational water bodies to wild rivers all across America. CLEAN WATER STATE REVOLVING LOAN FUND

The financial demands that communities face in providing clean water to all Americans are substantial, and the Administration is committed to helping find ways to meet those demands. The federal government has provided over $80 billion in wastewater assistance since passage of the Clean Water Act, which has dramatically increased the number of Americans enjoying better water quality. The primary mechanism that EPA uses to help local communities finance water infrastructure projects is the State Revolving Fund (SRF), established in the 1987 CWA amendments. The SRF was designed to provide a national financial resource for clean water that would be managed by States and provide a funding resource "in perpetuity." These important goals are being achieved. Other federal, State, and private sector funding sources are also available for community water infrastructure investments.

As I provided the Committee with an update on the financial and operational status of the Clean Water SRF in a statement on the budget last month, I will not repeat that update today, other than to note the Administration's continuing commitment to capitalize the Clean Water SRF to revolve at a $2 billion average annual level.

THE CHALLENGE AHEAD

With the important investments made by and achievements of all levels of government and the private sector, together we have substantially improved quality of the water in every State -- even while our population sharply increased and the output of our economy more than doubled.

But the task America's intergovernmental, public-private partnership has undertaken -- to protect public health and the environment by maintaining and improving water quality -- is a continuing one. As our economy and population grow, partnership members must increase their efforts to provide clean water every day. We must also periodically take a good look at the challenges ahead, and reassess the adequacy of the tools we have to meet those emerging challenges.

EPA's most recent Clean Water Needs Survey, for 1996, identified $139.5 billion in documented needs eligible for SRF assistance in the coming decades. More recent estimates associated with correcting sanitary sewer overflows may increase the estimated total Clean Water needs, and the Agency expects to release a new Clean Water Needs Survey in August 2002. Over the past year or so, several stakeholder groups have issued reports estimating water infrastructure needs that are substantially higher, based on different methodologies and definitions.

With that in mind, the Agency is actively working to improve information about long-term infrastructure needs, assess different analytical approaches to estimating those needs, and estimate the gap between needs and spending. Last summer, EPA presented its analysis -- known as the Gap Analysis -- to a diverse panel of industry experts. Overall, the reviewers commended the report as a reasonable effort to quantify the gap. We have made revisions to the analysis based on peer review input and we expect to release the Gap Analysis shortly.

In considering these studies and analyses, it is important to keep in mind a few points of context. First, there is no single "correct" number to describe the gap. Any gap study must be built using methodologies and definitions of need, which in turn rest on assumptions about present conditions nationwide, and desirable or appropriate policies to follow in the future. That raises the second point that while these gap numbers may be helpful to provide a broad sense of the challenge ahead, they cannot themselves be a clear guide to policy, because they do not take into consideration how the various roles of federal, State and local governments should be balanced. Third, under any study, funding gaps are not inevitable. They occur only if capital and operations and maintenance (O&M) spending remains unchanged from present levels over the time covered by the study. What a proper analysis may suggest is that a funding gap will result if the challenge posed by an aging infrastructure network -- a significant portion of which is beginning to reach the end of its useful life -- is ignored.

I believe most partnership members would agree that the nation, through our partnership, needs to put more resources into wastewater infrastructure in the future than we have been doing; and, that we need to reduce costs by ensuring more efficient and productive use of such resources, through locally-tailored, fiscally sustainable management and technical approaches. We need a strategy to build fiscal sustainability that addresses both the fiscal demand side (how to define and manage infrastructure needs) and the fiscal supply side (how to pay for those managed needs).

While much of the projected gap is the product of deferred maintenance, inadequate capital replacement, and a generally aging infrastructure, it is in part a consequence of future trends we can anticipate today. For instance, continuing population growth means that even increasing capacity at current levels of wastewater treatment will not be enough to prevent water quality degradation, and that development pressures on unprotected drinking water sources will increase. The same tools we need to make the fiscal demand side of the gap more manageable -- like reducing the flow of wastewater and stormwater requiring treatment through conservation and nonstructural alternatives -- will help us to deal with the water quality impacts of a growing population.

To meet these future challenges to clean water, the Administration believes that the touchstone of our strategy should be building fiscal sustainability. In particular, several basic principles should guide our pursuit of clean water through fiscal sustainability:

1.Utilizing the private sector and existing programs: Fostering greater private sector involvement and encouraging integrated use of all local, State, and federal sources for infrastructure financing.

2.Promoting sustainable systems: Ensuring the technical, financial, and managerial capacity of wastewater systems, and creating incentives for service providers to avoid future gaps by adopting best management practices to improve efficiency and economies of scale, and reducing the average cost of service for providers.

3.Encouraging cost-based and affordable rates: Encouraging rate structures that cover costs and more fully reflect the cost of service, while fostering affordable wastewater service for low- income families.

4.Promoting technology innovation: Creating incentives to support research, development, and the use of innovative technologies for improved services at lower life-cycle costs.

5.Promoting smart water use: Encouraging States and service providers to adopt holistic strategies to manage water on a sustainable basis, including a greater emphasis on options for reuse and conservation, efficient nonstructural approaches, and coordination with state, regional, and local planning.

6.Promoting watershed-based decision-making: Encouraging States and local communities to look at water quality problems on a watershed scale and to direct funding to the highest priority projects needed to protect public health and the environment.

This is an important and serious challenge. We would not be in this room today if we did not recognize that. That's good news in itself; and there's more, as we can see the tools, the means to realize these principles in practice, taking shape all across the country. Many States and local governments across the country have been changing the way they do business. As a result, they've successfully managed many of these infrastructure needs, using creative, individualized approaches that are cost-effective, environmentally protective, and socially equitable -- efficient, clean, and fair.

The CWSRF has proven itself to be an effective means to help local governments address their needs. Now the task is to refine it to facilitate and encourage the use of these State and local innovations in every community in America. It is important that communities have and use all the necessary tools to close the gap before it widens, so the tools can work together consistently and effectively in a fiscally sustainable way. THE WATER QUALITY FINANCING ACT OF 2002

For the past thirty years, meeting the infrastructure challenge has been a shared fiscal responsibility between federal, State and local government. The Administration shares the Committee's goal of improving the Nation's water quality and has submitted a budget that will continue progress towards achieving that goal by targeting non-point source pollution, the largest remaining problem. However, the President clearly defined his priorities in the State of the Union as defense and homeland security. If the bill as introduced calls for increased spending levels similar to those contained in S. 1961, the "Water Investment Act of 2002", then the funding levels would not be consistent with the President's priorities, and the Administration would not support such funding levels.

There is a whole range of creative ways to help wastewater utilities meet their needs. Just as there is no single "correct" number to describe the gap, there is no automatic formula to define how local, State, and federal roles and responsibilities should be balanced. Building fiscal sustainability requires work on the fiscal demand side - reducing costs through better management, technological innovation, and more efficient service delivery and nonstructural alternatives -- as much as on the fiscal supply side -- putting in more resources into infrastructure through the national partnership.

At this initial stage of the Committee's consideration of this bill, I will give the Administration's response to some of the bill's key approaches and major components.

These comments reflect our review of the draft bill that was available to us at the time we prepared this statement. On these, as well as other provisions that this testimony does not specifically address, we look forward to working with you and stakeholders during the Committee's deliberations in the weeks ahead.

Project Eligibilities: The bill clarifies that a broad range of projects that would improve water quality under Clean Water Act programs can be supported using the SRF. These are useful clarifications. EPA especially appreciates that all of these provisions are framed to make clear that the primary benefit of eligible projects must be to improve or maintain water quality. This is important because it ensures that SRF resources go to projects whose objective is to advance Clean Water Act goals.

Priority List Funding: The bill amends the Clean Water Act to place a greater emphasis on setting priorities for funding eligible project applications based on the State's water quality monitoring, reporting, analysis, and program management. This is helpful to spur a close alignment between the investment of SRF resources, and the State's programmatic perspective on water quality needs grounded in its own water quality data.

As with any new approach, there are some questions about how aspects of this prioritization process would operate in practice. We want to work with you and stakeholders to examine these points, including by sharing and learning from our experiences with the priority list processes States have developed for the Drinking Water SRF.

Additional Subsidization: The bill creates a major new provision for additional subsidization of loans, including forgiveness of principal. First, it adds to the Clean Water SRF affordability provisions similar to those enacted in the Safe Drinking Water Act in 1996, enabling States to provide such additional subsidization in municipalities that meet affordability criteria established by the States. It also includes in the Clean Water SRF the extended loan terms available to municipalities that meet such criteria, as is provided under the Drinking Water SRF.

Second, it authorizes States to provide this additional subsidization to treatment works which do not meet the State's affordability criteria, so long as the assistance agreement with the recipient ensures that the additional subsidy will be directed to individual residential ratepayers who would otherwise experience a significant hardship from the increase in rates to support the financing.

Third, it provides additional subsidization for alternative processes, materials, and techniques, including pollutant trading, that would provide cost savings or increased environmental benefit in preventing water pollution. Under current law, local communities bear the full risk of testing new approaches, which has proven to be a powerful disincentive to such creativity that could benefit towns and cities all across the nation.

The Administration welcomes the Committee's interest, reflected in this provision, in finding ways to encourage the adoption of well-managed trading approaches as a potentially cost-effective means to improve and maintain water quality. Additional issues that need to be addressed in successful water quality trading involve considerations of accountability, monitoring, and public involvement. EPA will continue to encourage collaboration and coordination with States and their communities to help facilitate water quality trading.

The revolving loan funds will always face the challenge of striking a balance between important values -- of offering additional support for low-income residents, small communities, and state programs on the one hand, and preserving the corpus of the fund so it can assist communities far into the future on the other. EPA appreciates the Committee's use of a 30 percent cap on additional subsidization similar to that adopted for the Drinking Water SRF, and would like to collaborate with the Committee to ensure that any provisions for additional subsidization in the bill continue to strike this important balance.

Loan Conditions: The bill creates new provisions requiring several things of loan applicants as a condition of project approval. Taken together, these loan conditions are among the key provisions in the bill, and the Administration supports the objectives behind them as according with basic principles that should guide our infrastructure revitalization efforts. At the same time, we want to make sure that the conditions operate in ways that are workable for loan applicants and States alike, and that the SRFs can continue to function to provide the needed kinds of assistance.

In so doing, we would also like to take this opportunity to state the Administration's support for having communities look at alternative institutional arrangements as they consider how to meet their individual clean water challenges in the decades ahead. Often, wastewater utilities must compete for limited resources with other high-priority functions such as schools, police, or transportation in local government budgets. Where this is the case, local elected officials must allocate resources in relation to other priorities which are, objectively, more physically visible in the public eye than are wastewater systems. Wastewater utility managers may then be unable to provide resources on the basis of what they may identify as the most cost- effective ways to achieve clean water. To have the adequacy of needed wastewater investments hinge on the outcome of this budget competition is unfair to both wastewater utility managers and local elected officials alike, especially when there are more workable alternatives available. Public-private partnerships, and publicly-owned wastewater utilities which are constituted as special districts or multi-jurisdictional, regional partnerships, can be authorized to determine resource needs based on the most cost-effective means to achieve and maintain clean water, and can obtain rates to generate revenues accordingly, as approved by a politically-accountable supervisory body. Such utilities may also be less constrained in setting positive examples for efficient operation.

The bill requires loan applicants to conduct studies and analyses of several kinds of project, management, and financing alternatives. This should help communities to clarify the true, long-term costs and realistic management and financing alternatives available to address water quality needs. It also requires that loan recipients have the dedicated revenue sources to pay for and the capacity to ensure adequate operation and maintenance of treatment works and services.

We agree that it is both desirable and appropriate, through loan conditions, to have local governments undertake, and States supervise, management and planning changes to ensure fiscally- sustainable solutions. All of the studies indicate that the potential gap in wastewater infrastructure comes largely from replacement of aging pipes and O&M costs -- both, historically, a responsibility primarily of local government (although pipe replacement is eligible under both SRFs). Promoting a comprehensive examination of all cost-effective tools and options, on both the fiscal demand and supply sides, is key to building fiscal sustainability. The Administration believes that the potential gaps will become more manageable if these conditions can be designed and implemented effectively.

The challenge here is twofold. First, the bill should contain loan conditions that are effective to encourage States and communities to look at water quality problems on a watershed scale, and to adopt comprehensive strategies that integrate water management into whatever planning for sustainable communities they may be doing. And, it should create incentives for service providers to adopt best management practices to improve efficiency and economies of scale, reduce the cost of service, and avoid future gaps, while encouraging rate structures that cover costs. The bill is helpful in some of these functions.

In particular, asset management is vital to the principle of building fiscally sustainable systems. The key to asset management is to take a strategic approach, based on a systemwide assessment and identification of how to achieve overall service requirements (including water quality) through an integrated program of least-cost, efficient, long-term management of infrastructure needs. The second part of the challenge is to recognize and address the reality that these new conditions are going to increase substantially the level of effort required to obtain an SRF loan. We must make sure that these conditions are framed in a workable way; that we provide a transition to the new conditions that equips applicants to address them in a timely way; that those who need special help in meeting the conditions can get it; and that small loans can continue to be provided without a level of analysis that's disproportionate to the investment sought. Here as elsewhere, we look forward to working with the Committee to pursue these shared objectives in a practical manner.

SRF Fund Transfer Authority: In addition, the bill would make permanent the States' authority to transfer funds between the Clean Water and Drinking Water SRFs. This is an important enhancement of State flexibility to address their highest priority needs, and we welcome the Committee's proposal to turn what began in 1996 as a short-term experiment into a well- established tool to promote cost-effective investment.

Promoting technology innovation: This strategy to renew our wastewater infrastructure for the 21st century puts a high premium on optimizing the efficient use of our current capital assets and the new investments we must make. That will require the use of innovative technologies for improved services at lower life-cycle costs, which in turn means supporting research and development on these innovative technologies and practices.

Substantial reductions in life cycle costs are possible through the use of innovations such as: (1) new construction and repair practices; (2) remote monitoring and real-time control of wastewater systems; and (3) advanced sensors for contaminants and structural integrity. Research and development, in coordination with demonstration efforts, is needed to assure that these and other advancements are available to community decision-makers. We want to work with the Committee on ways to promote this objective.

CONCLUSION

In summary, notwithstanding our continuing concern, if the funding authorization levels proposed in the bill as introduced are unsupportable, we appreciate the Committee's initiative in taking up this important issue, and particularly in its efforts to build fiscal sustainability in wastewater infrastructure. We look forward to continuing our constructive participation in your efforts to refine this legislation. We and other interested federal agencies will review the bill when it is introduced and may have additional comments.

Thank you for the opportunity to present the Administration's views on this bill. That concludes my prepared remarks, and I would be happy to answer any questions.



LOAD-DATE: March 21, 2002