U.S. House of Representatives: Committee on Energy and Commerce, RepublicansPrepared Witness Testimony: Bella, Joseph

Subcommittee on Environment and Hazardous Materials
April 11, 2002
09:30 AM
2123 Rayburn House Office Building

Ms. Joseph Bella
Executive Director
Passaic Valley Water Commission
1717 K Street, NW
Suite 801
Washington, DC, 20036

The Water Infrastructure Network estimates that drinking water utilities across the nation collectively need to spend about $24 billion per year for the next 20 years on infrastructure, for a total of $480 billion. Drinking water systems currently spend $13 billion per year on infrastructure, leaving an $11 billion annual gap between current spending and overall need.

Compounding these financial burdens are the looming investments local drinking water agencies will be forced to make to help protect their facilities and consumers from potential terrorist attacks.

WIN estimates that household water bills must double or triple in most communities, on average, if utilities are forced to absorb the entire infrastructure bill.

Further compounding this burden is demographics. When populations grow, the infrastructure is expanded, but when people move away, the pipe and the liability for repair and replacement remain behind, creating a financial burden on the remaining customers.

Thirty-one states provided no assistance to metropolitan water agencies in fiscal year 2001.

What is needed to help close the drinking water infrastructure gap is an investment program that not only helps small systems achieve and ensure regulatory compliance, but one that 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 ($28.5 billion for drinking water).

We recommend the Drinking Water SRF include a 15-percent set-aside for metropolitan drinking water agencies, to make certain that states address their needs.

We urge the subcommittee to avoid authorizing the states or the EPA to develop new and cumbersome requirements for water systems applying for funds. This would reduce access to the program, potentially leaving many water systems with compounding needs and unresolved compliance problems.

AMWA urges the subcommittee to encourage, through SRF incentives, voluntary cooperative partnerships. In particular, financial incentives should be provided to those drinking water systems that agree to partner with small systems facing compliance problems.

The association urges the subcommittee to avoid endorsing public-private partnerships as other legislation has. Privatization can be a very contentious issue in communities. Whether a water agency consider a public-private partnership should remain at the discretion of local government, because local factors will dictate whether the partnership is in the interest of the consumers.

Good morning, Mr. Chairman. My name is Joseph Bella. I'm the Executive Director of the Passaic Valley Water Commission, headquarted in Clifton, New Jersey.

I'm testifying on behalf of the Association of Metropolitan Water Agencies, which is an organization of the nation's largest publicly owned water agencies. Together, AMWA members serve clean, safe drinking water to over 110 million Americans.

The Passaic Valley Water Commission was established in 1927 and serves drinking water to 750,000 people in Passaic, Bergen, Hudson, Essex and Morris Counties in northeast New Jersey. The commission also provides water on a wholesale basis to municipal water agencies and private companies, including the New Jersey-American Water Company and United Water-New Jersey.

AMWA is a founding member of the Water Infrastructure Network (WIN), which consists of 46 organizations representing publicly and privately owned water systems, urban and rural water systems, mayors, city council members, county officials, labor, environmentalists, consumers, engineers, manufacturers and builders.

Here is a list of WIN members. Committee members are probably familiar with many of them.

International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers

Operative Plasters' and Cement Masons' International Association of the United States and Canada (O&CMIA)

INFRASTRUCTURE FUNDING NEED AND GAP

The Water Infrastructure Network's (WIN) report Clean & Safe Water for the 21^st Century and its follow up, Water Infrastructure Now: Recommendations for Clean and Safe Water in the 21^st Century, estimate that drinking water utilities across the nation collectively need to spend about $24 billion per year for the next 20 years on infrastructure, for a total of $480 billion. WIN's analysis also concluded that drinking water systems currently spend $13 billion per year on infrastructure, leaving an $11 billion annual gap between current spending and overall need. There are similar figures for wastewater systems.

Other estimates show large long term needs as well. The American Water Works Association's Dawn of the Replacement Era estimates a $250 billion need over the next 30 years, based on a survey of 20 utilities. And EPA's drinking water needs survey indicates a $150.9 billion need for the next 20 years, although it only focuses on needs related to compliance with the Safe Drinking Water Act.

WIN's estimate was developed by expert economists who are familiar with the water industry, its resources and how it manages and builds infrastructure. We believe it is comprehensive and accurate. Nevertheless, all of the estimates demonstrate that investments for safe, clean water and fire protection will be massive.

According to a recent survey, just 32 metropolitan systems reported that they must spend $27 billion over the next five years on drinking water and wastewater infrastructure[1]. For instance, Cleveland, Ohio must spend up to $700 million over the next five years; Columbus, Ohio, $253 million; New Orleans, $1.2 billion; Kansas City, Mo., over $500 million; Denver, $363 million; Chicago, $600 million; Austin, $568 million; Phoenix, $1.28 billion; Omaha, Nebraska, $355 million. In Detroit, ongoing and new capital expenditures for drinking water projects are $1.4 billion over the next five years and $2.9 billion for wastewater projects.

At the Passaic Valley Water Commission, we anticipate spending $160 million over the next ten years on capital improvements.

Compounding these financial burdens are the looming investments local drinking water agencies will be forced to make to help protect their facilities and consumers from potential terrorist attacks. The Passaic Valley Water Commission anticipates spending as much as $2 million over the next two years.

Near-term security improvements at water systems include fencing around facilities and reservoirs, security doors and locks, intruder alert systems, better lighting, surveillance cameras to monitor entry ways and sensitive facilities, access control and barricades around key facilities. Some systems already have some or all of these measures in place, while others are in the process of installing them. The American Water Works Association estimates that these costs could total $1.6 billion for the 54,000 public drinking water systems in the U.S. The average cost per utility ranges from $8,000 for water systems serving only a few thousand people to $700,000 for systems serving more than 100,000 people. Those serving more than one million people expect to spend much more.

Capital projects may be needed to. Water systems are now in the process of assessing their vulnerabilities to terrorism. When these assessments are complete, water systems will know what they need to accomplish to become more safe and secure. Only then will we know accurately what capital construction projects are going to be needed.

PAST AND PRESENT FEDERAL FUNDING

The needs of small water systems are substantial, and the lack of infrastructure dollars available to them could have public health impacts. However, metropolitan water agencies -- those serving 100,000 or more people -- are facing monumental infrastructure replacement costs. AMWA urges the committee to consider mechanisms to address the needs of both small and large systems.

Historically, the federal government has invested billions of dollars in smaller drinking water systems. Over a 12 year period, the Rural Utility Service (RUS) and EPA have poured over $8 billion in loans and grants into small systems and $932 million into systems serving between 10,000 and 100,000 people. During this same time period, metropolitan water systems have received drinking water SRF loans amounting to only $547 million.

This difference of nearly $8.5 billion illustrates the need for state and federal policy makers to consider the problems of the nation's urban areas and the critical nature of these systems to the economic wellbeing of the country.

The water infrastructure in many American cities is 80 to 100 years old. Although some states make loans to large water systems to ensure the funds revolve, especially where small systems are not prepared to apply for assistance, most states do not help large systems. In fact, 31 states provided no assistance to metropolitan water agencies in fiscal year 2001. Yet the cities that are served by metropolitan water utilities are the economic engines of their states and the nation, and a significant federal investment in these large publicly owned agencies will translate into stronger water delivery systems, better fire protection and thousands of new jobs. Along with banking and finance, telecommunications, transportation and oil and gas production, water infrastructure is among the nation's most critical infrastructures. Uninterrupted water service is necessary to local, state and national economies; strong infrastructure provides fire protection; and safe drinking water protects our families and consumers from water-borne diseases and pollution from farm and urban runoff and other types of contamination.

WIN estimates that household water bills must double or triple in most communities, on average, if utilities are forced to absorb the entire infrastructure bill. This scenario is complicated by rate inelasticity. A household's water bill often covers drinking water supply, sewer and storm-water control. Raising rates to cover one, diminishes the ability to pay for the other two. Unfortunately, all three sectors are facing massive infrastructure challenges. The impact on American families is even harsher when you consider the other utility expenses, such as phone, gas and electricity.

Members of Congress who served at the local level know this debate all too well. In communities large and small across the nation, utility managers face rate inelasticity each time they propose a rate increase to cover infrastructure costs.

Further compounding this issue is demographics. Large investments are a major source of financial vulnerability for water utilities due to the very fixed nature of the pipes and plants and the very mobile nature of the customers. When populations grow, the infrastructure is expanded, but when people move away, the pipe and the liability for repair and replacement remain behind, creating a financial burden on the remaining customers. This is true in small towns facing economic hardship, as well as cities, where the more affluent leave the less affluent to cover the water infrastructure maintenance and replacement costs. This problem, known as "stranded capacity," adds considerably to the challenge of funding infrastructure replacement in our communities.

What is needed to help close the drinking water infrastructure gap 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 ($28.5 billion for drinking water). This amount is only half of the infrastructure funding gap for those years. This investment program should include a strong grants component to help systems that are disadvantaged, yet have the capacity to return to self-sustainability. We recommend it also include a 15-percent set-aside for metropolitan drinking water agencies, to make certain that states address their needs. Under this proposal, small systems would continue to get the help they need to comply with the Safe Drinking Water Act, and metropolitan water agencies could invest in replacing aging infrastructure. In states where there are few metropolitan systems or where the systems do not need assistance, the funds set aside could be used for small systems.

Legislation was recently introduced by leaders of the Senate Environment and Public Works Committee and the House Transportation and Infrastructure Committee to invest more funds in water infrastructure and to establish new procedures and requirements to apply for and receive SRF assistance.

Although the needs of drinking water agencies over the next five years are nearly $60 billion, the Senate bill, if enacted, would authorizes $15 billion over five years and fund hundreds of projects to ensure safe drinking water for many years to come.

These bills also attempt to address the areas of water rates, asset management plans, community planning and contracting. These practices embody those commonly used in metropolitan water agencies today. For instance, the Passaic Valley Water Commission has raised rates on average three percent per year. This allows us to keep up with inflation, invest roughly $3 million to $4 million in infrastructure placement annually and cover other expenditures. But had the commission not received SRF assistance, we would have had to raise rates an additional three percent to cover the $14 million in debt service that would have accompanied the private capital. What we are concerned about is that states and the EPA might be authorized or even directed to develop new and cumbersome requirements for water systems applying for funds, even though many city and county governments and some state agencies already address these issues adequately.

AMWA encourages the subcommittee to maintain these practices as ideals and provide the opportunity for utilities that have not yet adopted them to do so. The subcommittee should avoid a situation in which the states or EPA enter the domain of local government and attempt to reinvent the wheel. Instead, industry organizations have many years of experience in this area and could be relied upon to provide technical and educational service to those utilities that have not adopted the practices.

Let's not discard what responsible water agencies have already accomplished and create a layer of bureaucracy that could make applying for SRF assistance too cumbersome. This would reduce access to the program, potentially leaving many water systems with compounding needs and unresolved compliance problems.

The bills also emphasize the importance of creative approaches to managing a water utility by encouraging consolidation, partnerships, and adoption of nonstructural alternatives. Many water systems are already considering various approaches to regional water management and it is important that these types of arrangements be evaluated and supported. For instance, the Passaic Valley Water Commission has partnered with private water companies to buy and sell water to satisfy local supply demands, and we have absorbed water systems around us, improving water service to consumers. Under one partnership arrangement, the Passaic Valley Water Commission, the city of Newark and other communities partnered to form the North Jersey District Water Supply Commission, to share the costs of developing new sources of water. Other utilities are engaged in a variety of voluntary cooperative partnerships, ranging from providing less costly water supplies to cooperation in obtaining new supplies and developing needed infrastructure.

Rather than require consideration of alternative approaches as part of a loan application process, the SRF should provide financial incentives in the form of grants, loan forgiveness or lower interest rates for those drinking water systems that develop alternative arrangements that provide more effective and efficient management of local resources. In particular, financial incentives should be provided to those drinking water systems that agree to partner with small systems facing compliance problems.

Among the partnerships water systems would be required to consider under the Senate bill are public-private partnerships, a form of privatization. AMWA is not here today to oppose private-public partnerships, but whether a water agency considers a public-private partnership should remain at the discretion of local government, because local factors will dictate whether the partnership is in the interest of the consumers. Therefore, the association urges the subcommittee to avoid endorsing public-private partnerships. Privatization is a very contentious issue in most communities.

Privatization often sells itself as "faster, better, cheaper" than public operation. But what the water industry has learned in the last several years is that public water utilities can operate just as efficiently as private water companies, or more so. In New Orleans, the public employees participated in a competitive bid process against two international private contractors, and the public employees demonstrated they could operate the city's water systems even more efficiently than the private firms. At the Passaic Valley Water Commission, by analyzing our competitiveness and reengineering our operations, we have been able to save nearly $7 million per year and increase revenues by $3 million. Dozens of other public systems have produced similar results, upending the "faster, better, cheaper" myth.

Privatization experts have identified some of the issues that need further exploration. Among them are those surrounding accountability and the blurring of roles and responsibilities. For example, who is responsible for complying with environmental regulations, resolving service complaints and planning to meet future needs?[2] Who pays if the private partner fails? If the private partner takes on more liability than it can afford, who's responsible when something goes wrong?

Another issue that has recently emerged is a concern about the implications of international trade agreements on domestic privatization since four of the major companies involved in the U.S. water market are located in other countries. For example, once a municipality contracts with a foreign provider, can that municipality withdraw from the agreement? What impact could the General Agreement on Trade in Services (GATS) and the authority of the World Trade Organization (WTO) have on future contracts? Will GATS or WTO prevent publicly owned U.S. water systems from providing water or services to neighboring water agencies.

The Senate bill also proposes procurement provisions that were abandoned in the Clean Water Act when the Clean Water SRF program was adopted. The requirements were abandoned because they encumbered both state agencies and local government, overrode state and local procurement laws and created many disputes. The same would hold true today, and AMWA urges the subcommittee to avoid such provisions in its own legislation.

AMWA appreciates this opportunity to discuss the infrastructure needs of drinking water agencies, particularly those serving metropolitan areas. We look forward to working with the subcommittee on proposals to help large and small water agencies continue to provide safe and affordable drinking water.

[1] Waterworld, December 2001

[2] Dr. Janice Beecher, Beecher Policy Research, Public Works Financing, November 2000.

Drinking Water Needs and Infrastructure

INFRASTRUCTURE FUNDING NEED AND GAP

PAST AND PRESENT FEDERAL FUNDING