SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2133 words

COMMITTEE: SENATE ENVIRONMENT AND PUBLIC WORKS

HEADLINE: WATER INFRASTRUCTURE & CLEAN WATER PROGRAMS

TESTIMONY-BY: ANDREW M. CHAPMAN,, PRESIDENT

AFFILIATION: ELIZABETHTOWN WATER COMPANY

BODY:
TESTIMONY OF

ANDREW M. CHAPMAN, PRESIDENT ELIZABETHTOWN WATER COMPANY ON BEHALF OF THE NATIONAL ASSOCIATION OF WATER COMPANIES

BEFORE THE SUBCOMMITTEE ON FISHERIES, WILDLIFE AND WATER COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS UNITED STATES SENATE

ON S. 1961, THE WATER INVESTMENT ACT OF 2002

THURSDAY, FEBRUARY 28, 2002

Good afternoon, Mr. Chairman and Members of the Subcommittee, my name is Andrew Chapman. I am the President of Elizabethtown Water Company in New Jersey, and I am a Vice-President of the National Association of Water Companies.

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 members in 39 States-which provide safe reliable drinking water to more than 22 million Americans everyday. I'm pleased to report that NAWC has members in nearly every state represented on this Subcommittee; Florida, Idaho, Montana, Missouri, Nevada, Virginia, New York, Rhode Island, New Jersey, and Colorado. Mr. Chairman, NAWC commends you and this Subcommittee for taking on the important issue of water infrastructure financing, introducing S. 1961, the Water Investment Act of 2002, and holding these hearings today. The challenge of replacing and upgrading infrastructure is one of the greatest and most pressing facing our industry today. Congressional interest in this challenge, as demonstrated by the introduction of S. 1961 and the several hearings on the issue held over the last year, underlines this fact.

We are particularly encouraged that this legislative project is being undertaken in a bipartisan fashion, a practice that drinking water issues have enjoyed in this committee for some time, and one that we sincerely hope continues far into the future.

GENERAL COMMENTS

NAWC along with our colleagues in the H2O Coalition[1] support S. 1961 and urge this committee to consider and report the bill to the full Senate at the earliest possible date.

This bill embraces many of the principles the H2O Coalition has been advocating for more than a year now. It encourages utilities to use creative public-private partnerships, consolidation and other solutions in addressing their infrastructure challenges. The bill will also keep the industry on the path to self- sustainability through rational rate structures and sound asset management practices. The authors of the bill have wisely thought outside the box with an innovative program designed to assist disadvantaged consumers, instead of the entire utility in circumstances where only some of the utility's customers are disadvantaged. Finally, S. 1961 at last puts the customers of privately owned utilities on full and equal footing with those of municipal utilities by extending private utility eligibility to the Clean Water SRF (CW-SRF) and encouraging all States to extend private utility eligibility to both the CW-SRF and Drinking Water SRF (DW-SRF).

Conversely, S. 1961 wisely does not authorize a large grant program which some have been advocating. We are encouraged, Mr. Chairman, that you and your colleagues in drafting this bill saw the error in authorizing an old fashioned and outdated grant program that would do more harm than good for the entire water industry, waste taxpayers' money, and add to the federal budget deficit.

SPECIFIC COMMENTS

DW-SRF and CW-SRF Restructuring - First, S. 1961 signals Congressional support for creative non-governmental solutions to the infrastructure financing challenge by explicitly tying SRF assistance (both DW-SRF and CW-SRF) to:

1. 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.

2. 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.

Second, S. 1961 seeks to avoid some past mistakes of government assistance programs by requiring utilities receiving DW-SRF and CW-SRF assistance to have in place:

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

2. 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. The 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. 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 both the CW-SRF and DW-SRF are administered through the States and include some state matching money, the vast majority of the SRFs' corpora are made up of federal money coming from the American taxpayer. Therefore, the federal government has a responsibility to the American taxpayer to be sure their money is distributed and used in an efficient and accountable manner, as S. 1961 would do.

Subsidization for Disadvantaged Users - Section 203 introduces a new and innovative approach for targeting SRF monies to subsidize the water rates of economically disadvantaged customers, as opposed to giving assistance to utilities in a form that subsidizes everyone's water rates. The bill provides for favorable loan terms, including principal forgiveness, to directly assist disadvantaged customers. NAWC and the H2O Coalition have long championed this target use of DW-SRF assistance and we are greatly encouraged to see the sponsors of this bill moving the DW-SRF in this direction.

There may be many instances, particularly in larger utilities, where there are many disadvantaged customers who need assistance paying their bills, even though the vast majority of the customers of the particular utility have the means to pay the full cost of service. In such cases it makes no sense for the DW- SRF to subsidize the entire utility, when in fact only a percentage of customers need the assistance. This innovation will allow states to target assistance to where it is most needed, freeing up money for the worthiest projects.

Private Utility Access - As you can imagine, the NAWC, as the representative of the private water industry, is particular happy to see that all utilities are treated equally in S. 1961, regardless of ownership. First, the bill makes private utilities eligible for the first time for assistance from the CW-SRF. This is a long delayed and much needed innovation to that program that will place all systems on a level playing field.

Private utilities have had access to the DW-SRF since it was established in 1996. When Congress established the DW-SRF it correctly determined that benefits of the DW-SRF would flow to the customers of the utilities, not to the owners or shareholders. This is no less true for the customers of privately owned wastewater utilities.

Second, we are also greatly supportive of provisions in S. 1961 that will bring fairness to the State SRF allocation process. The bill's provisions require States that include private utilities in their needs survey (thus maximizing the State's total DW-SRF allocation) to also ensure that private utilities are actually eligible for such assistance. As incredible as it may sound, currently there are 13 States that include private utilities in their needs survey but exclude those same utilities from eligibility for loans because of state laws or practices. S. 1961 will end this practice in the DW-SRF and keep it from happening in the CW-SRF.

Authorizations - S. 1961 would authorize $35 Billion over the next five years for the two SRFs, with a combined $7 Billion in FY 2006, and an eye-popping $12 Billion in FY 2007. We question whether Congress will ever appropriate anything close to these levels, considering that such appropriations would increase EPA's budget about 2.5 times.

We are concerned that such large authorizations, with relatively little chance of similar appropriations, may send counterproductive signals to utility operators. Utilities may defer making the necessary investments and hard choices required today with the false hope of significant federal assistance coming their way in the future.

Section 205: Competition Requirements - While we embrace the concept of competition in procurement, we are concerned with the requirements in Section 205 that might force utilities to specify "brand name or equal" in their procurement documents. We have found from long experience that "equal" often means in practice inferior equipment. We believe the procurement process today under the Drinking Water SRF is highly competitive, encourages innovation, and need not be modified.

ADDITIONAL ISSUES FOR CONSIDERATION

Private Activity Bonds - As we have testified here before, one of the easiest and least expensive 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.

I 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 local governments 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 ($147 million over 10 years[2]), yet leverage huge sums of private capital.

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 enjoys far reaching support. In the House, bipartisan legislation has been introduced which would make these changes. Also, the U.S. Conference of Mayors, the Water Infrastructure Network (WIN), and the U.S. Environmental Protection Agency's Environmental Financial Advisory Board have endorsed the proposal.

Compliance with Drinking Water as a Defense in Lawsuits - We have reported many times to this Committee on a disturbing trend that has been observed recently in many parts of the country, which could directly affect the ability of all utilities (both publicly and privately owned) to face the infrastructure financing challenges.



LOAD-DATE: March 28, 2002