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Drinking Water Needs and Infrastructure
Subcommittee on Environment and Hazardous Materials
Mr. Terry L. Gloriod
Summary
of NAWC Testimony
Good Morning Mr. Chairman and Members of the
Subcommittee, my name is Terry Gloriod and I am the President of the
Illinois-American Water Company. Illinois
American serves nearly a million people in 124 communities in Illinois. I am
also the Chairman of the National Association of Water Companies' Government
Relations Committee. 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 member
companies in 39 States-which provide safe reliable drinking water to more than
20 million Americans everyday. 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, which include setting rates.
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 this hearing on
drinking water infrastructure financing.
Due to our concern about this issue and our commitment to finding sound
solutions, last year NAWC joined with other organizations to form the H2O
Coalition[1].
This coalition was formed solely to work on the infrastructure
replacement challenge facing the water 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
limited, targeted federal government involvement. GENERAL COMMENTS
In
the last two years 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 and the federal government alone must address today. We have several problems with this argument. 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 has estimated the drinking water needs at $250 billion. Second,
the advertised "gap" of one-half trillion dollars is also a worst-case
scenario. It assumes that utilities
do nothing on their own to fill it, which of course 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 0.8%),
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 a massive infusion of cash for the water industry, it
should consider that the cost of providing this needed service is not a burden
on most households, and that in most cases users, not taxpayers, can and should
pay for infrastructure maintenance and improvements. Fourth,
options and solutions provided by partnerships with the private sector can and
should be explored to a greater degree by municipalities.
While such partnerships are not right for everyone, there is ample
evidence that such arrangements can be hugely beneficial for all involved.
Furthermore, they can be sized and formatted to meet specific needs,
addressing only those areas municipalities need or wish to be addressed.
The most obvious benefit to the customer is cost savings, which range up
to 40%. At least part of the water
infrastructure replacement challenge we are facing can and should be addressed
not by the government, but instead by the private sector. Fifth,
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 those systems experiencing
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. To think of water
infrastructure as integrated on a national level is simply inaccurate.
It is in fact many thousands of separate infrastructures 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 areas in which federal activity is necessary and appropriate.
Clearly, federal water quality regulations as promulgated under the Safe
Drinking Water Act are a proper and necessary federal government activity.
Research funding is also a role for the federal government. There are emerging technologies that if proven effective,
could reduce the price tag of infrastructure replacement for all water
utilities. Without such field
research to prove the viability of innovation,
utilities may be unwilling to "gamble" capital on new techniques. Recommendations
The
Drinking Water State Revolving Loan Fund (DW-SRF) is a successful government
program and it should remain the conduit for government assistance to utilities.
Projects have been prioritized for funding based largely on public
health-related criteria and funding has been provided predominantly in the form
of low interest loans. We believe
that with relatively minor reforms, the SRF process will remain the best
mechanism for assisting water systems in financing capital improvements related
to regulatory compliance and infrastructure replacement. Some
organizations have called on Congress to establish new financing authorities to
take the place of the SRFs as a means to address the infrastructure financing
challenge. NAWC does not support such proposals.
Though there are some improvements that Congress can make to the DW-SRF
such as including incentives to move utilities toward self-sustainability, the
DW-SRF has proven its ability to help meet our infrastructure financing
challenges in an efficient and sustainable manner. REFORMS
TO THE DW-SRF Within the DW-SRF Congress should support
creative non-governmental solutions to the infrastructure financing challenge by
explicitly tying DW-SRF assistance to utility consideration of:
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.
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. Congress should avoid some past mistakes of
government assistance programs by requiring utilities receiving DW-SRF
assistance to have in place, or have a plan to achieve within a reasonable
period of time:
These provisions require managers to take an
enterprise approach to utility management and move all systems toward
self-sustainability. These
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:
Some
will argue that these provisions represent a too heavy-handed government
approach to legislating, and are thus a step backward.
We disagree. While the
DW-SRF is administered through the States and includes some state matching
money, the vast majority of the DW-SRF corpus is made up of federal money coming
from the American taxpayer. Therefore,
the federal government has a responsibility to American taxpayers to be sure
their money is distributed and used in an efficient and accountable manner. To
address affordability issues, we encourage Congress to consider assistance
directed to individual ratepayers rather than just to utilities.
A federal water bill assistance program for low-income families would use
federal dollars very efficiently, because assistance would be targeted only to
the needy. We believe a water bill assistance program is an appropriate
form of long-term assistance, especially to larger utilities, where only some of
its customers are likely to be impoverished. There
is some precedence for such a program. The
Low Income Home Energy Assistance Program (LIHEAP) provides assistance
disadvantaged Americans in paying the heating bills. Such a disadvantaged customer assistance program could be
fashioned to work as part of the DW-SRF. A
new federal program and new federal funding need not be created. PRIVATE
UTILITY ACCESS to the DW-SRF
Though we support the DW-SRF as indicated
above, we are concerned that treatment of private utilities on the State level
has been uneven and often disappointing. This
is a problem that Congress should revisit. First, currently 13 States have declared
privately owned drinking water systems to be ineligible for 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. There
is a simple way Congress can encourage States to implement the DW-SRF as this
Committee intended when it authorized the DW-SRF. Congress should require states that include private company
needs in their needs survey to ensure that private companies are eligible for
SRF funding. This would be a fair
solution for all systems and their customers and would avoid rewarding those
state that have ignored Congressional intent. Another
disappointing reality of the DW-SRF is that many states (other than the 13
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 since the DW-SRF was created. 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 some states need to reassess their
programs. Some
have argued that privately owned companies, even those serving the public,
should not receive federal assistance-not even loans. Congress and this Committee 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 some states to comply with Congressional intent.
remove
Private Activity Bond cap
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. We
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 fewer
dollars coming from the ratepayer and/or taxpayer; (7)
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.
This proposal also has far ranging support.
Bi-partisan legislation in the House 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. limit Direct Federal Grants As
I've said, there have been calls to establish a new large federal grant
program like the old Construction Grants Program of 1970s and 1980s to address
our nation's looming infrastructure financing challenge. NAWC and our partners in the H2O Coalition oppose
this plan and urge Congress to work within the existing DW-SRF mechanisms,
including the current 30% limit on grants and grant-like assistance. Experience
teaches us that grants are a very inefficient method of providing assistance to
utilities. They send the wrong
economic and conservation signals to consumers, encourage-even reward-bad
management practices, choke-off innovation, discourage public-private
partnerships and other creative business models, send American dollars and
business overseas, and ultimately cost the public more than other more creative
solutions. In Congressional
testimony last year, the Congressional Budget Office said "if the federal
government issued blank checks for infrastructure, local drinking water and
wastewater systems would lose any incentive to keep capital costs down." CBO
also said "high federal cost shares in the original construction grants
program.raised capital costs by more than 30 percent."[3]
The following specific problems hobbled the old Construction Grants
Program and would likely plague any revival of such programs: ·
Procurement regulations discounted quality for the sake of lowest price.
Owners were forced to purchase and install equipment that fell short of
desirable standards for performance, reliability and overall costs of
operations. The objective was not
value, merely price. ·
The unpredictable nature of the annual appropriations process resulted in
an artificial rapid ramping up of business activity when grants were available,
followed by a rapid downturn in activity in lean appropriating years.
These surges and declines forced out of business many American companies
long in the construction and/or manufacturing business. ·
Sudden infusions of cash in the form of federal grants, rather than the
usual steady and predictable ramping observed in a "normal" economy and
market, forced customers to go offshore for materials and services, harming the
U.S. industry. ·
The EPA construction grants program did not adequately require recipients
to establish a capital replacement account to ensure that funds existed to
replace the plant when it exceeds its life cycle (which could be contributing to
the current funding problem). ·
Grant recipients had little "ownership" of their projects resulting
in overbuilt systems and wasted tax dollars. ·
Due to the federal procurement regulations accompanying grants,
innovation nearly came to a halt in the U.S.
Much of the innovation the industry has seen over the last 20 years has
come from offshore. This phenomenon
is directly attributable to the construction grant program. NAWC
acknowledges that in some cases grants are the only viable option or at least
the option that makes the most sense. For
example grants, or forgiveness of loans, may be appropriate for systems in
economically disadvantaged communities. NAWC also supports targeted assistance for individuals based
on economic need. However, we
oppose subsides for entire systems that benefit customers who can afford higher
rates in addition to the needy who cannot. CONCLUSION Mr.
Chairman, we appreciate the leadership role that you and this Subcommittee have
taken to address drinking water infrastructure problems.
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. [1] The H2O Coalition is made up of the National Association of Water Companies, the Water and Wastewater Equipment Manufacturers Association, and the National Council on Public-Private Partnerships. [2] NAWC agrees with the long-standing policy of the American Water Works Association that "Water utilities should receive sufficient revenues from water service, user charges, and capital charges, such as water development charges, to enable them to finance all operating, and maintenance expenses and all capital costs (i.e. debt service payments)." [3] Congressional Budget Office Testimony before the House Committee on Transportation and Infrastructure, Subcommittee on Water Resources and Environment, March 28, 2001
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