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Congressional Testimony
October 31, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4192 words
COMMITTEE:
SENATE ENVIRONMENT AND PUBLIC WORKS
SUBCOMMITTEE: FISHERIES, WILDLIFE AND WATER
HEADLINE: WATER PURIFICATION PROGRAMS
BILL-NO:
H.R. 2207 Retrieve Bill Tracking Report
Retrieve Full Text of Bill
TESTIMONY-BY:
PETER L. COOK, ON BEHALF OF J. JAMES BARR
BODY:
TESTIMONY 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 INNOVATIVE FINANCING TECHNIQUES FOR
WATER INFRASTRUCTURE IMPROVEMENTS
OCTOBER 18, 2001
PRESENTED BY PETER L. COOK ON BEHALF OF J. JAMES BARR NATIONAL
ASSOCIATION OF WATER COMPANIES
Good Morning Mr. Chairman and Members of
the Subcommittee, I am here to testify for J. James Barr, President and C.E.O.
of the American Water Works Company.
American is the largest regulated
water utility business in the United States. The Company's utility subsidiaries
and affiliates serve approximately 10 million people in 23 states. We can trace
our roots back to 1886, though some of our subsidiaries have roots going back
even further. Today, the Company remains committed to continued growth and is
involved in a number of industry consolidation and privatization initiatives
including water and wastewater system acquisition, contract operation and
public/private partnerships. Mr. Barr is also Chairman of the Board of the
National Association of Water Companies (NAWC). NAWC is a non-profit trade
association the exclusively represents private and investor-owned drinking water
utilities. I am offering this testimony on behalf of NAWC's membership-the 200
members in 41 States-which provide safe reliable drinking water to more than 20
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.
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, including rate schedules.
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 these hearings on improving the utilization of
available water and wastewater infrastructure funding. This is an important part
of the larger
water infrastructure financing issue. We also
commend you for tackling this important larger question.
Due to our
concern about this issue and our commitment to finding sound solutions, earlier
this year NAWC joined with other organizations to form the H2O Coalition[1].
This coalition was formed solely to work on the coming infrastructure
replacement challenge facing the water and wastewater 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 only limited, targeted
federal government involvement.
GENERAL COMMENTS
In the last
year 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
must address today.
We have several problems with this argument, some of
which I will discuss in greater detail today, and others that have already been
the subject of this Subcommittee's previous hearings.
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 recently estimated the
drinking water needs about 2/3rds lower.
Second, the advertised "gap" of
one-half a trillion dollars is a worst-case scenario. Setting aside the fact
that the "need" upon which the "gap" is based is probably overstated (as
discussed above), the financial "gap" the federal government is being asked to
fill assumes that utilities do nothing on their own to fill it. This 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 .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 massive grants for the
water industry, it should consider that the cost of providing this needed
service is not a burden on most households.
Fourth, 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 these systems having 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; highways and airports are good
examples. To think of
water infrastructure as integrated on a
national level is simply inaccurate. It is in fact many thousands of separate
infrastructure 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 limited areas in which federal activity is appropriate. Clearly,
federal water quality regulations as promulgated under the Safe Drinking Water
Act are a necessary and appropriate federal government activity. Some will argue
that the broad
water infrastructure issue constitutes an
unfunded federal mandate that the federal government has a responsibility to
address. This is not the case. There is no federal mandate regarding
water infrastructure as we are talking about it today. There
clearly are mandates represented in the Safe Drinking Water Act and Clean Water
Act regarding health and environmental standards, but those are different issues
and not the topic being discussed today.
THE ROLE OF THE PRIVATE SECTOR
The private sector has long played a vital role in our nation's
water infrastructure and stands ready to do much more. The
privately owned drinking water utility business traces its roots back to before
the very existence of our nation. However, outright private ownership is but
one-model localities can pursue as a means of addressing their infrastructure
challenges. Another large and growing option is contract operations, wherein the
municipality retains ownership of the asset, in this case a water utility and
its infrastructure, but the management and operations of the facility are
contracted out to a private company. History has shown that the private sector
can and does provide water customers efficiency and sustainability through
market-based solutions. Privately owned utilities have been on the cutting edge
of technical innovation and research. Particular needs in particular communities
can be met by the private sector through a range of public-private partnership
models. All of this can and is done while maintaining accountability to the
public and complying with all federal and state regulatory requirements. The
National Association of Water Companies recently published a report on the role
of the private sector in the drinking water industry. That report studied the
various forms that private sector involvement in the water business can take,
from out-right ownership of an asset to various short and long term contracts.
The report found that when such creative solutions are pursued by a
municipality, operating costs can be reduced by 10 to 40%. It is obvious that
with such cost savings, the need to look to the federal government for
assistance is greatly reduced if not eliminated. It is also worth noting that in
those cases where the acquired company was not in compliance with EPA
regulations, the utility was quickly brought into compliance. Other studies
confirm this potential. Standard and Poors recently reported that the water
companies rated by them - which is virtually all of the larger privately owned
utilities - spend on average about 40% of their annual capital outlays on
modernizing and expanding their infrastructure. My company alone has invested
$
6 billion since the early 1970s, or roughly
$
2,000 per customer. If more utilities around the country were
doing this, there might not be any reason for us to be here today. Privately
owned utilities can also bring many creative solutions to infrastructure
problems, often in partnership with States in municipalities. In Indiana, the
Indiana Department of Environmental Management requested the Indiana-American
Water Company, one of my Company's subsidiaries, to take over the troubled
Prairieton Utility and made $
500,000 in State Revolving Loan
funds available to them. This creative solution was good for all involved: the
customers are receiving safe, more reliable water at rates they can afford, the
state of Indiana has addressed a potential health and environmental problem, and
Indiana-American has increased its business. Indiana- American has a similar
story to tell in Gary, Indiana, where about 1,000 people have been receiving
service from potentially contaminated wells. Working with the State,
Indiana-American Water company will extend service to those customers, solving
problems all around. There are also instances where private water companies have
been working with localities to extend service to needy areas. Another American
subsidiary, the West Virginia- American Water Company worked with the Boone
County Service District to extend vastly improved water service to approximately
30 communities. Similarly, in Fayette County West Virginia, West
Virginia-American worked with the county to extend water service to
approximately 1200 families that had never before had public water supply
through the installation of over 63 miles of new distribution facilities. The
industry has seen great growth in the last few years in the field of contract
management. Unlike out-right asset ownership, under a management contract
arrangement, the municipality retains ownership of the asset but contracts with
a private provider for services. These services can be very limited and specific
such as billing. However, the major growth has been in long-term (as long as 20
years) full service contracts where the private firm is responsible for all
aspects of running the utility. These contract arrangements can take many forms
but what they have in common is great savings to localities. A few years ago,
United Water contracted with the city of Atlanta to manage their water system,
saving the citizens of Atlanta $
400 million or 45% over the
life of the contract. There are literally dozens of examples of such savings
from contracts signed across the country resulting in savings to U.S. citizens
of hundreds of millions of dollars: Milwaukee, WI, 30% savings; Seattle WA, 40%
savings; Tampa FL, 21%
CHALLENGES FACING THE INDUSTRY
It is
clear that the private sector can do much to help the nation's utilities contend
with their infrastructure issues either through direct ownership and operation
or in partnerships with municipal utilities. If the full power of the private
sector is unleashed to help this coming infrastructure challenge, we all will be
winners: - Americans will continue to enjoy clean and safe water for generations
to come at reasonable and reliable rates;
- Congress and the federal
government will have performed their role successfully, without the need for
huge, budget-breaking grants; and
- Both public and private water
utilities will be successful in meeting the various challenges facing the
industry, including infrastructure replacement. However, to fully unleash the
power of the private sector there a few issues which should be dealt with,
though not all are under Congressional jurisdiction. Public Perception Probably
the number one hurdle facing the expansion of the private and investor-owned
water industry is the public's attitude regarding private ownership and/or
management of a resource as vital and basic as water. This is largely the
private water utility's problem to contend with, and we do so by performing
responsibly and professionally, and educating the public on our industry. We
raise awareness of our industry by educating the public and key decision-makers.
When people learn of our long history, our generally exemplary health and
environmental records, and our leadership within the industry working with EPA
and Congress, their concerns about the private sector fade. As an example of
this, many private water utilities led the way in consumer relations by
publishing consumer confidence reports long before Congress mandated them. Then
when Congress mandated the reports for the entire industry, we worked with EPA
to share our knowledge and experience on the matter so all utilities could
better contend with what was for some of them a new challenge, but for us was
business as usual.
Private Activity Bonds
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. 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 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 few dollars coming from the ratepayer and/or taxpayer;
(7) Does not require the average taxpayer to pay for services he/she
does not directly enjoy; and
(8) 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. I know some of you, including
you Mr. Chairman, also sit on the Finance Committee and I encourage you to
consider this change in the tax code as soon as possible. This proposal also has
far ranging support. Legislation in the House, H.R. 2207, 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. Water Industry Litigation A disturbing trend
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. This trend involves coordinated
litigation aimed squarely at America's water industry, and the drinking water
quality regulatory system under which it has operated for many years. Massive
civil lawsuits involving hundreds of plaintiffs have been organized and
commenced against water suppliers in several states for allegedly supplying
contaminated water even when these utilities have been in full compliance with
State and Federal drinking water quality standards. These suits have targeted
both privately-owned and municipal water systems. To address this problem the
entire drinking water industry has come together to support legislation to deter
unfounded lawsuits. We are not interested in protecting water suppliers who are
not meeting State and EPA health standards; we are however interested in
offering some protection to those suppliers who are meeting all standards yet
getting sued anyway. Therefore, we, along with five other associations
representing public, private and rural utilities support legislation that would
make compliance with federal drinking water standards a defense in lawsuits
involving contaminants covered by such standards. If Congress does not pass such
legislation the repercussions could be extremely costly to our industry and the
public. This at a time when there are other pressing needs, including
infrastructure replacement, compliance with new standards for contaminants such
as arsenic, and heightened security measures due to increased threats of
terrorist attacks. Even if utilities prevail in the vast majority of the
lawsuits, the legal defense costs will be substantial. These costs will
eventually have to be borne by the customers of the water utilities, increasing
their costs without providing any commensurate benefits, and increasing the
chance water will become unaffordable, the last thing we need in this era of
infrastructure replacement. In addition, if juries in 50 States decide that
EPA's standards aren't safe enough, juries will become the de facto standard
setters, thus undermining both EPA's standard setting process and Congress's
oversight of that process. Finally, the public's confidence in their own
drinking water supply could be unnecessarily and perhaps irrevocably harmed.
Procurement Practices
The water and wastewater industries could
see pronounced savings if creative procurement practices, common in the private
sector for years, were more widely available and utilized by municipalities. It
has been estimated that communities could realize savings of as much as 40%, and
significantly speed up the process by using these creative procurement practices
as compared to more traditional procurement approaches. There are, however, some
roadblocks to these practices which Congress and EPA can assist in eliminating.
The traditional procurement practices separated the various phases of a project
into distinct steps, to be managed and handled separately. Some of those steps
were bid out to contractors and some were not. A fairly typical model saw a
three-step process (1) planning, (2) design, and (3) construction, with
management and operations considered separately and typically performed by
municipal employees. However, it has been shown that significant costs can be
realized by combining two or more steps of the process and bidding them out.
Examples of these compressed procedures include design- build,
design-build-operate, and design-build-finance-operate (yet all are often called
integrated project delivery methods). By having the designer, constructor,
and/or operator working together, perhaps for the same contractor, an efficient
dynamic is created resulting in savings. For example: 1. Time (and therefore
money) is saved because many steps are compressed;
2. Innovation is
encouraged by requiring performance-based standards and allowing the designer to
be the builder;
3. Confusion and problems are reduced throughout the
process, even in operations, because fewer parties are involved, perhaps as few
as one; and
4. Liability and responsibility is clear, thus reducing any
possible litigation costs and complexities in the case of non- performance. Many
communities have benefited from these creative practices. They include Seattle,
WA; Wilmington, DE; Jersey City, NJ; Newport, RI; Franklin, OH; Charlotte, NC;
and Cranston, RI. However others are either barred or stymied from pursuing
theses alternatives due to lack of knowledge, local and State restrictions
and/or outright bans. To address this problem this Committee can instruct EPA to
assist in educating communities about these alternatives, and to consider
incentives to localities to use these creative procurement practices.
State Revolving Loan Funds
Congress can also help with some of
the problems private systems, including small systems are facing in a number of
States. Many States have declared privately owned drinking water systems to be
ineligible for drinking water
State Revolving Fund (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. Right now, 14
States are ignoring Congress, and denying their citizens equal access to the
DW-SRF. Another disturbing fact is that many states (other than the 14 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. 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
something is wrong. Some have argued that privately owned companies, even those
serving the public, should not receive federal assistance -not even loans.
Congress 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 these states to comply with Congressional intent. We
believe the best way to encourage States to implement the DW-SRF as Congress
intended is to reduce the DW-SRF allocation of those States disallowing private
utility access by the amount of "need" attributed to private utilities and to
reallocate those funds to States that are in compliance. Unfortunately, EPA has
refused to modify its SRF allocation process, so that Congressional action may
be necessary. CONCLUSION Mr. Chairman, we appreciate the leadership role that
you and this Subcommittee have taken to address drinking
water
infrastructure problems, and we also appreciate the concern that you
have expressed regarding the need for cost-effective solutions. 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: October 31, 2001