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Federal Document Clearing House
Congressional Testimony
October 31, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3748 words
COMMITTEE:
SENATE ENVIRONMENT AND PUBLIC WORKS
SUBCOMMITTEE: FISHERIES, WILDLIFE AND WATER
HEADLINE: WATER PURIFICATION PROGRAMS
TESTIMONY-BY: HAROLD J. GORMAN, BOARD MEMBER
AFFILIATION: ASSOCIATION OF METROPOLITAN WATER AGENCIES
BODY: Association of Metropolitan Water Agencies
Testimony Before The Subcommittee On Fisheries, Wildlife And Water
Committee On Environment And Public Works United States Senate
By Harold J. Gorman Board Member Association Of Metropolitan Water
Agencies And Executive Director Sewerage And Water Board Of New Orleans
October 18, 2001
Good morning, Chairman Graham, Sen. Crapo and
members of the subcommittee. On behalf of the nation's largest municipal, county
and regional drinking water agencies, serving at least half of all the United
States, thank you for hosting this important hearing. My name is Harold Gorman,
and I'm the executive director of the Sewerage and Water Board of New Orleans
and a board member of the Association of Metropolitan Water Agencies, or AMWA,
on whose behalf I am testifying today. AMWA is one of the 40 national
organizations representing water systems, local elected officials, labor,
environmental advocates, and engineering and construction companies that
comprise the
Water Infrastructure Network. I would like to take
a moment to thank Chairman Graham, Sen. Crapo, Sen. Jeffords and Sen. Smith, who
have been instrumental in helping to protect drinking water systems and their
customers from terrorist attacks. We especially appreciate your signing a letter
on October 11 to urge President Bush to provide the estimated
$
155 million needed to help drinking water agencies conduct
vulnerability assessments and develop emergency response plans as soon as
possible. This is the first step in protecting drinking water and the facilities
that produce and distribute it.
The drinking water industry also wishes
to thank the nine members of the committee and subcommittee who have advocated
$
5 billion in grants for water and wastewater systems as part
of the economic stimulus package. Based a brief survey, the water industry
estimates this amount and more could be absorbed in the economy next year alone
and create 200,000 jobs. Rather than for new facilities, the grants would be
used to expand existing projects, such as pipe replacement and plant
rehabilitation, and possibly even projects to help protect against or respond to
terrorist attacks. We hope this new, temporary measure will recognize that some
cities, such as New Orleans, would have a difficult time coming up with large
matches in order to qualify for the grants, depending on the size of the grants
offered.
We look forward to working with you to protect consumers and
get the economy moving again.
New Orleans is one of our country's older
cities, founded in 1718 as a French colony. It has a few other distinctions that
set it apart from other cities. It is almost totally surrounded by water; it's
protected by over 300 miles of levees and floodwalls and its midtown elevation
is six feet below sea level. Our only source of water is the muddy Mississippi
River. It is an abundant source but we face the greatest water purification
challenge of any city in the world. Our watershed consists of 32 states and
three Canadian provinces that are located between the Appalachians and Rocky
Mountains.
The current water system in New Orleans dates back to 1899
when a women's suffrage group successfully petitioned the state legislature to
create the Sewerage and Water Board of New Orleans. Today we provide water,
sewerage and, most importantly, drainage services to a half-million consumers,
plus the hundreds of thousands more who commute to the city for work and who
come to the city as tourists. We also operate our own electric power plant to
provide us the reliability needed to weather floods, rainstorms and hurricanes,
which constantly threaten the city.
The Sewerage and Water Board, like
many other water utilities throughout the nation, is structured as a
freestanding business. The Board operates three separate businesses - water,
sewer and drainage. There are no general government subsides and there is no
co-mingling of funds allowed among the three systems. Each system must pay its
own way. The Board charges user fees for water delivered and sewerage collected
through its metered system. Drainage is funded by dedicated millages. The City
Council of New Orleans determines the rate structure.
All operations,
maintenance and capital funding must be provided through our dedicated revenues.
Capital projects are funded by a combination of cash generated from earnings and
through revenue bonds, which are sold in the open market based upon our historic
and projected revenue stream. We have very conservative debt coverage ratios to
protect bondholders, and we are very prudent in managing our funds. All
financial reports follow the guidelines established by the Government Accounting
Standards Board (GASB). Our annual financial audit is submitted and approved by
the Louisiana State Legislature Auditor. Success in meeting our financial
responsibilities has been recognized by the Government Finance Officers
Association (GFOA), which has honored the Sewerage and Water Board with an award
for outstanding financial reporting for the past 15 years.
As we look
forward, we project massive programs of infrastructure replacement. The current
book value of our assets is just over $
1 billion, and the Board
has adopted a five-year capital improvement program worth $
1.2
billion, doubling our asset base. Almost half of this program is dedicated to
complying with a court ordered EPA sewer system consent decree, which the Board
entered in 1998. Our projected program cost will probably increase
substantially, going forward, as we obtain better survey and evaluation data.
And in spite of trends in outsourcing and privatization and new heights of
reengineering and efficiency, the savings generated will not resolve the
infrastructure funding crisis facing New Orleans and other American cities.
To meet the needs of our capital infrastructure program without federal
grants, the Board would have to raise drinking water rates over the next five
years by nearly 50 percent and sewer rates by 90 percent. This type of increase
threatens the economic stability of our consumers and the city. Just as the
members of this committee want to avoid raising taxes, the New Orleans City
Council hopes to avoid increasing water rates. Our typical residential customer
currently pays about $
30 per month for sewer and water
services, which is near the national average. The projected rate increases will
push those rates to almost $
50 per month, amounting to nearly
$
600 per year. That may not sound like a lot of money in some
communities, but in New Orleans it's a substantial sum. In fact, it's double the
average expenditure for water services, according to the Bureau of Labor
Statistics. New Orleans is one of the poorest cities in the nation. Our
customers' utility bills now exceed the EPA recommended ratio of utility
cost/household income. According to the 2000 Census, 28 percent of the city's
residents live below the national poverty level. This is second only to New York
City's Bronx Borough, with 30 percent of its residents below the national
poverty level. Rate increases of 50-90 percent will only push working families
in New Orleans into a deeper financial hole.
Other cities have similar
numbers. Miami-Dade: 21 percent of residents below the poverty level and facing
an infrastructure bill of $
5 billion. Los Angeles: 20 percent,
with more than $
2 billion needed for infrastructure.
Washington, D.C.: 19 percent in poverty, facing over $
1 billion
in wastewater and stormwater improvements; Detroit: 18 percent in poverty and
needing $
2.6 billion in the next five years for infrastructure
improvement.
The Drinking Water
State Revolving Fund
(SRF), established by the 1996 amendments to the Safe Drinking Water Act, was
not created to address infrastructure repair, replacement and refurbishment. It
is not an infrastructure rehabilitation and replacement fund. Instead it is a
fund predominantly focused on solving small system compliance problems. EPA,
through guidance, and the States, through project prioritization, have adhered
to the requirements of the statute by giving a higher priority to those systems
that have violated the Safe Drinking Water Act and communities threatened with
acute health threats. Much of the estimated annual $
11 billion
gap between current spending and overall need involves pipe replacement. In many
cases, such projects would not qualify for the SRF. When a 100-year-old water
pipe bursts in downtown New Orleans, there is no violation of the Safe Drinking
Water Act and usually no public health threat. It's just another pipe that needs
to be replaced. Unfortunately, there are thousands of miles of these old pipes
throughout our nation's cities.
The Safe Drinking Water Act requires
States to use a minimum of 15 percent of its SRF for small systems serving fewer
than 10,000 people, and States may reserve as much as 30 percent for
disadvantaged communities - again primarily directed at smaller systems. An
additional two percent of the funds allotted to the States may be used to
provide technical assistance to public water systems serving 10,000 people or
fewer. Add to that an additional 10 percent for a number of programs including
development and implementation of a capacity development strategy and operator
certification program. Both of these support small system sustainability.
Many States actively discourage large systems from participating in the
SRF program. Some State formulas that determine affordability deduct points from
systems with very large service populations. Other State formulas only consider
household income and the water bill, ignoring the higher cost of living in large
cities. Needless to say, the current funding level of the SRF program is in
itself a discouragement to participation. Most large city infrastructure needs
are many times larger than the entire State allocation.
What is needed
is an investment program that not only helps small systems achieve and ensure
regulatory compliance, but also recognizes the challenges facing large water
systems. AMWA and our WIN partners have asked Congress to authorize and
appropriate $
57 billion over a five year period for both
drinking water and wastewater infrastructure. This amount is only half of the
infrastructure funding gap for those years. The gap is the difference between
what drinking water and wastewater systems have historically spent from their
own budgets and the overall need. This investment program should include a
strong grants component, with matches ranging from 75 percent for the most hard-
pressed systems to 55 percent, to help systems that are disadvantaged, yet have
the capacity to return to self- sustainability. The only current alternative to
funding the $
1.2 billion needed by the Sewerage and Water Board
is to borrow on the open market. But even no-interest loans would require
unaffordable rate increases for 28 percent of the residents living below the
poverty level. This program should also include ample opportunity for large
systems to participate in innovative programs such as principal forgiveness
loans, credit guarantees and insurance, and refinancing of high-interest debt
obtained on the open market.
Another proposal to resolve the gap is
privatization, ranging from a full asset sale to contracting out a single
treatment facility. It is often seen as a panacea for resolving infrastructure
funding gaps. But consumers objected strongly to the concept of losing control
of their water resources. Indeed, a number of cities have sought to buy back
their utilities. Indianapolis, for instance, expects to complete its repurchase
sometime next year. The more recent trend has been to outsource various
services. At the New Orleans Water and Sewerage Board, we have outsourced almost
40 percent of our business.
Most of privately owned water systems in the
U.S. are very small utilities, such as neighborhood associations or mobile home
parks. But the U.S. privatization scene is dominated by a handful of
foreign-owned firms. The largest is the French multinational Vivendi, which owns
contract operator U.S. Filter, among many other businesses, including
entertainment. One of its rivals is another French multinational, Suez. Its
American subsidiary is United Water. And the nation's largest investor owned
drinking water provider is the American Water Works Company, which just entered
into an agreement to be purchased by the German utility conglomerate, RWE. The
international engineering and construction firm CH2M Hill owns a major provider
of contract services, OMI, or Operations Management International. Two British
firms are involved in privatization, too. The most active is Thames Water, a
British firm owned by RWE. The other is the Kelda Group, which operates in five
U.S. states. There are a few relatively small American companies that have
contract operations mainly on the West Coast.
Though there have been
some interesting events surrounding privatization, especially in New Orleans,
there does not appear to be either a strong or weak record of success related to
privatization. But one of the differences between public and private operation
is that State utility commission regulations provide for investor-owned
utilities to ensure a profitable rate- of-return. Municipal, county and regional
water systems, of course, are public services that do not seek to earn a profit.
Instead, revenues are reinvested into the utilities.
Whether a publicly
owned water system privatizes should always be a decision for those who are
accountable to the voters: local elected officials. The Sewerage and Water Board
offers a good example. We are now undergoing a managed competition process,
which could potentially outsource our entire water and sewerage system. The
managed competition, a variant of privatization, involves a potential 20-year
operations and maintenance procurement worth $
1 billion. Under
the competition, the Board's employees will bid alongside private firms to
operate the system.
If a city is considering privatization, this is
probably the most equitable approach. It offers public employees the opportunity
to show they can operate a utility just as efficiently as a private firm. In
cities large and small, managers and employees are very proud of their ability
to compete against their peers, public or private. To recognize their efforts,
the Association of Metropolitan Water Agencies inaugurated early this year an
award program honoring competitiveness achievement. Among the 44 winners this
year are the water agencies serving Tampa and Broward, Palm Beach and Orange
Counties in Florida; Kansas City, Missouri; Las Vegas; and Akron, Columbus and
Cincinnati. These cities have reengineered, reorganized, reduced staff and
installed state-of-the-art technology to save millions of dollars and still
satisfy customer expectations and EPA regulations. Another competitiveness tool
employed by water systems is asset management. Asset management techniques can
help water utilities in planning and budgeting for maintaining existing
infrastructure while meeting future needs for growth and regulatory
requirements, making decisions on rehabilitation or replacement, providing
justification for funds for capital renewal, and integrating information systems
such as geographic information systems (GIS), maintenance management systems,
and financial recording and reporting systems.
The achievements of the
New Orleans Sewerage and Water Board are no less. The Board has become more
competitive, leaner and more efficient by reducing staffing levels by 25 percent
in the past three years and adopting new technologies, such as slip lining of
pipes, global positioning satellite (GPS) surveying and GIS tracking to manage
maintenance and customer service calls, and Supervisory Control and Data
Acquisition, or SCADA, to remotely monitor and operate plants and pumps. And
reengineering the Board's field operations has improved productivity by 30
percent.
The most innovative ways to stretch local and federal dollars
would be to "incentivize" voluntary regional partnerships among water systems, a
concept that offers much promise for improving and enhancing water systems
across the country. We have fine water service providers throughout the nation,
and each one does its best to provide the highest levels of service to their
customers. But it is also true that there are a wide variety of capabilities
among the systems. Many water providers face constraints in many different
areas, including financial, technical, operational and managerial limits unique
to each provider. For example, financial constraints force some systems to
minimize expenditures for needed work. This can contribute to long-term declines
in service and even weaker public health protection. Non-compliant systems
increase the regulatory burden on federal and state agencies to ensure that
public health standards are met.
The inherent potential in voluntary
partnerships is why a few water utilities have begun to work cooperatively with
others in their areas to gain access to, or share with others, the capabilities
needed. A partnership could include physical infrastructure connection among
utilities of various sizes near each other. Or it could involve a financial,
managerial or technical support connection among utilities regardless of
distance from one another. Or it could involve a combination of both. For
example, the Contra Costa Water District, which serves 450,000 people in the
area around Concord, California, is working with four other local water entities
in a variety of partnerships, ranging from simply providing less costly water
supplies to cooperation in obtaining new supplies and developing needed
infrastructure. One partnership being developed will save more than
$
10,000,000 for local agencies involved. Another successful
partnership, involving three agencies, provided an alternative water supply at a
cost that will save the local agencies as much as $
13,000,000.
In a third instance 10 water and sanitation agencies came together to conduct a
water supply and infrastructure study that focused on the region, rather than
the boundaries of each agency, thereby providing a more beneficial plan for the
region as a whole.
We believe that an incentive-based program to
encourage voluntary partnerships among water utilities could benefit all parties
and, most important of all, could provide excellent benefit to the customers of
those systems. Everyone could benefit from partnerships between water systems
with substantial technical, managerial and financial resources, known as
capacity, and those without. The receiving entities would gain needed capacity
more efficiently and cost-effectively than if they had to obtain it on their
own, and the providing entity would recover all of its costs.
Partnership authorization should provide maximum flexibility, so that
local providers can find the best solution for their own unique needs. Potential
forms of partnerships include: operating agreements, engineering and
construction contracts, long-term contracts, consolidation, asset transfers, or
even formation of new entities, such as the Central Arkansas Regional Water
Authority, formed out of the water systems of Little Rock, North Little Rock and
other smaller systems. The key point is that Congress should encourage
partnerships and provide local agencies with maximum flexibility to establish
the structure of that partnership to meet local conditions, within the overall
goals of the Safe Drinking Water Act.
Congress can encourage these
partnerships by offering loans, grants, loan subsidies, refinancing and credit
guarantees with more favorable conditions to partnerships. Assistance with basic
conditions would still be available to systems that do not seek partnerships.
Only where systems do not seek to improve their compliance records or
managerial, technical and financial capacities could States or the EPA compel
them to enter partnership, where available.
Another possibility for
helping to stretch available dollars is research into more efficient and
effective means of infrastructure improvement and repair. With the American
Water Works Association, we recommend Congress consider identifying a very small
portion of
water infrastructure funds for such research,
matched by drinking water and wastewater systems on a one-to-one basis, and
managed by a consortium of water research organizations to fund development of a
comprehensive infrastructure research plan and to provide funding for critical
infrastructure research projects. It would be a worthy investment, as research
into infrastructure management will make for more efficient use of federal money
in the long term as well as better protection of public health.
In some
ways the challenge we face today is not much different than that faced by our
predecessors 100 years ago when these systems were first being built. We must
replace and upgrade the massive systems built by our predecessors but it must be
done without disrupting the normal social and business activities of our cities
and without causing financial disruption or ruin. Funding of the major urban
water systems in 1900 was accomplished almost exclusively with local dollars.
The replacement of these systems today cannot be funded exclusively with local
funds. In the 1900's most taxation was local in nature. There was no federal
income tax. Funding of
water infrastructure today must reflect
the tax structure in 2001, not the structure of 1901. The federal government
must join with the urban centers of this country and help upgrade our
water infrastructure. As the U.S. Conference of Mayors
President and New Orleans Mayor Marc Morial said earlier this year, testifying
before the Senate Subcommittee on Transportation, Infrastructure and Nuclear
Safety on behalf of the Mayors, "Local infrastructure needs are no longer simply
a local concern. These needs are of national significance, of national economic
importance and of substantial cost, exceeding local capital resources."
AMWA believes the recommendations outlined here will help resolve the
$
11 billion per year drinking
water
infrastructure gap and keep American infrastructure strong and secure.
We look forward to discussing them further with you.
LOAD-DATE: October 31, 2001