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Drinking Water Needs and Infrastructure
Subcommittee on Environment and Hazardous Materials
Mr. Howard Neukrug
INTRODUCTION
Good
morning Mr. Chairman. I am Howard Neukrug, Director of the Office of Watersheds for
the Philadelphia Water Department in Pennsylvania.
The Philadelphia Water Department is a municipal water, wastewater and
storm water utility serving over two million people in the Philadelphia
metropolitan area. I serve as the
Chair of the American Water Works Association (AWWA) Water Utility Council and
am here today on behalf of AWWA. AWWA
appreciates the opportunity to present its views on drinking water needs and
infrastructure. Founded
in 1881, AWWA is the world's largest and oldest scientific and educational
association representing drinking water supply professionals.
The association's 57,000 members are comprised of administrators, utility
operators, professional engineers, contractors, manufacturers, scientists,
professors and health professionals. The
association's membership includes over 4,3000 utilities that provide over 80
percent of the nation's drinking water. AWWA
and its members are dedicated to providing safe, reliable drinking water to the
American people. AWWA
utility members are regulated under the Safe Drinking Water Act (SDWA) and other
statutes. AWWA believes few
environmental activities are more important to the health of this country than
assuring the protection of water supply sources, and the treatment, distribution
and consumption of a safe, healthful and adequate supply of drinking water. AWWA
is also a member of the Water Infrastructure Network (WIN)
- a broad-based coalition of drinking water, wastewater, municipal and
state government, engineering and environmental groups, dedicated to preserving
and protecting the hard-won public health, environmental and economic gains that
America's water and wastewater infrastructure provides. AWWA
and its members commend you for holding this hearing concerning the
infrastructure needs of the Nation's public water systems.
AWWA looks forward to working with the subcommittee in its efforts to
address the growing infrastructure costs facing public water systems and
consumers. FEDERAL
MANDATES AND THE CONTEXT FOR WATER AND WASTEWATER FUNDING ISSUES Both
drinking water and wastewater utilities face enormously expensive federal
mandates that set the context for all other funding issues.
Although, the jurisdiction of this Subcommittee does not include
wastewater, the funding issues of drinking water and wastewater utilities are
inextricably intertwined. The
drinking water community faces a complex array of expensive new federal
requirements and new standards, including standards for arsenic, radon,
disinfection byproducts, enhanced surface water treatment, and others.
Wastewater utilities also face enormously expensive federal mandates,
such as those relating to Combined Sewer Overflows (CSO) and Sanitary Sewer
Overflows (SSO). For both water and
wastewater utilities, these needs significantly skew financing for other
investments, including the replacement of aging pipes, appurtenances, and other
infrastructure. Local ratepayers
are often seriously challenged to pay for these mandates, and little, if any,
room is left in the ratepayer's budget for other vital spending.
In many cases, it appears that mandatory spending for clean water
mandates has "driven out" the ability to raise rates for drinking water
services. We
believe that significant federal assistance, including grants, is necessary and
justified to help meet the cost of these very expensive federal mandates on
water and wastewater utilities, and to meet these costs of repair and
replacement of aging pipes, appurtenances, and other infrastructure that have
been, in many cases, deferred because federal mandates have consumed the
ratepayer's budget. We
would point out that, in the case of CSO and SSO mandates, federal support for
the cost of those requirements is not only justified in the community receiving
federal support, it also lowers costs for drinking water utilities downstream in
the form of improved water quality. This
is especially true in critical source water protection areas. THE
DRINKING WATER INFRASTRUCTURE NEED The importance of safe
drinking water to public health and the nation's economic welfare is
undisputed. However, as we enter
the 21st Century, water utilities face significant economic
challenges. For the first time, in
many of these utilities a significant amount of buried infrastructure - the
underground pipes that make safe water available at the turn of a tap - is at
or very near the end of its expected life span. The pipes laid down at different times in our history have
different life expectancies, and thousands of miles of pipes that were buried
over a 100 or more years ago will need to be replaced in the next 30 years.
Most utilities have not faced the need to replace huge amounts of this
infrastructure because it was too young. Today
a new age has arrived. We stand at
the dawn of the replacement era. Recognizing
that we are at the doorstep of a new era in the economics of water supply, the
replacement era, AWWA has undertaken an analysis of 20 utilities throughout the
nation to understand the nature and scope of the emerging infrastructure
challenge. The project involved
correlating the estimated life of pipes with actual operations experience in the
sample of 20 utilities. Projecting
future investment needs for pipe replacement in those utilities yields a
forecast of the annual replacement needs for a particular utility, based on the
age of the pipes and how long they are expected to last in that utility.
By modeling the demographic pattern of installation and knowing the life
expectancy of the pipes, we can estimate the timing and magnitude of that
obligation. This analysis
graphically portrays the nature of the challenge ahead of us.
In the AWWA statement submitted to the Subcommittee for the hearing on
Drinking Water and Infrastructure, March 28, 2001, we summarized the highlights
of the analysis and subsequently provided a copy of our report entitled, Dawn
of the Replacement Era: Reinvesting in Drinking Water Infrastructure, to all
members of the Subcommittee. Extrapolating
from our analysis of 20 utilities, we project that expenditures on the order of
$250 billion over 30 years might be required nationwide for the replacement of
worn out drinking water pipes and associated structures (valves, fittings, etc).
This figure does not include wastewater infrastructure or the cost of new
drinking water standards. Moreover,
the requirement hits different utilities at different times and many utilities
will need to accelerate their investment. Some
will see rapidly escalating infrastructure expenditure needs in the next 10-20
years. Others will find their
investment decisions subject to a variety of factors that cause replacement to
occur sooner or at greater expense, such as urban redevelopment, modernization,
coordination with other city construction, increasing pipe size, and other
factors. Overall,
the findings confirm that replacement needs are large and on the way.
There will be a growing conflict between the need to replace worn-out
infrastructure and the need to invest in compliance with new regulatory
standards under the Safe Drinking Water Act.
In addition, as pointed out earlier, the concurrent demands for
investment in wastewater infrastructure and compliance with new Clean Water Act
regulations, including huge needs for meeting combined sewer overflow (CSO) and
storm water requirements, will compete for revenue on the same household bill. Ultimately,
the rate-paying public will have to finance the replacement of the nation's
drinking water infrastructure either through rates or taxes.
AWWA expects local funds to cover the great majority of the nation's
water infrastructure needs, and remains committed to the principle of full cost
recovery through rates. However, many utilities may face needs that are large and
unevenly distributed over time. They
must manage a difficult transition between today's level of investment and the
higher level of investment that is required over the long term.
Facing an inexorable rise in infrastructure replacement needs driven by
demographic forces that were at work as much as a 100 years ago, compounded by
the negative effects of changing demographics on per-capita costs in center
cities, many utilities face a significant challenge in keeping water affordable
for all the people they serve. Affordability,
poverty and infrastructure abandonment seem to go hand-in-hand.
In Philadelphia, where 40 percent of the population lives in poverty, a
rise in water bills will remain a significant socio-economic issue well into the
foreseeable future. In the March 27, 2001, issue of the Philadelphia Inquirer,
it was reported that almost one-third of the 28,000 residential blocks in
Philadelphia have abandoned homes. We
estimate that there are three or more abandoned houses on each of 4,600
residential blocks in our city. At
ten city blocks per mile, these
inner-city neighborhoods contain a total of 460 miles each of water and sewerage
pipes. At a replacement cost of $1
million per mile for water pipe and $1.5 million per mile for sewer pipe, these
4,600 blocks represents over $1 billion in pipe infrastructure replacement costs
-- the burden of which is falling on fewer and fewer households and, typically,
poorer and poorer families. An
analysis of U.S. Census data shows that for over the hundred years from 1850 to
1950, the population of Philadelphia grew from 100.000 to 2 million people.
But from 1950 to the end of the century, Philadelphia lost 25 percent of
its population, dropping to 1,500,000 people. In the forthcoming AWWA report,
the average per-capita value of water main assets in place today across the
sample of 20 utilities is estimated to be three times the amount that was
present in 1930. In Philadelphia,
however, that ratio is almost eight times the value in 1930 due to population
declines since about 1950. Demographic change, then, places financial strain on
all public water systems and has a direct impact on affordability of the
investment required. While
various studies and analysis have arrived at differing figures for the magnitude
of the drinking water infrastructure replacement need, AWWA does not believe
that differences in the figures should be the major issue. All of the conclusions, regardless of the methodologies and
assumptions used, point to a very large infrastructure funding need over the
next twenty to thirty years. To meet this challenge, AWWA has called for a new
partnership for investing in drinking water infrastructure in which utilities,
states, and the federal government all have important roles. PUBLIC
WATER SYSTEM SECURITY NEEDS The
events of September 11, 2001, have added a new dimension to the protection of
drinking water and drinking water infrastructure needs.
In addition to protecting drinking water from contamination, America's
homeland security requires a secure water supply.
Public health, fire protection, and sanitation depend on it.
The role of public water systems for first responders is a critical, and
is often overlooked in discussions concerning homeland security funding
priorities. The al Qaeda terrorist
network and others are known to have conducted research on public water systems
in the United States. If the intent
is to create terror in our society, water systems are targets of opportunity for
terrorists, not only to contaminate the water supply, but also to deny first
responders water for fire protection in a coordinated terrorist attack. Drinking
water suppliers have a long history of security preparedness prior to September
11, 2001. However, the post-September 11 world has added a new understanding of
security and has added an unprecedented financial burden on public water systems
for immediate steps needed to protect the people of the United States.
AWWA research has estimated the cost of immediate capital improvements to
ensure security of access to critical public water system assets through
barriers, detection devices and cyber security systems to be approximately $1.6
billion. This cost will provide
initial security improvements for about 53,000 water systems serving more than
264 million people. It does not
include future capital costs of upgrades to address vulnerabilities identified
in vulnerability assessments such as hardening pumping stations, chemical
storage buildings, transmission mains, add redundant infrastructure or relocate
facilities and pipelines. These new security concerns added to the cost of replacing
aging drinking water infrastructure and the capital cost of compliance with
federally mandated regulations, drives the need to greatly increase the level of
federal investment in drinking water infrastructure now. THE
DRINKING WATER STATE REVOLVING FUND In
our report entitled Dawn of the Replacement Era: Reinvesting in Drinking
Water Infrastructure, AWWA
recommended changing and expanding the existing Drinking Water State Revolving
Fund (DWSRF) to significantly increase federal funding for projects to repair,
replace, or rehabilitate drinking water infrastructure to include the aging
distribution pipes. Subsequent to
September 11, AWWA has further recommended that drinking water capital security
upgrades should specifically be identified in the SDWA as eligible projects. In
many ways, the DWSRF program has been very successful.
Loans are reaching communities of all sizes and income levels, average
costs of capital are well below market rates, many states have been highly
creative in leveraging their original federal capitalization grants, and funds
are generally in demand among local borrowers.
Yet, clearly, these programs can be improved to address a range of
remaining problems that impede enhanced equity, efficiency, and effectiveness.
AWWA
believes that the DWSRF could serve as a model for funding drinking water
infrastructure with the following changes: ·
Significantly increased federal funding. ·
Clear eligibility of projects to repair, replace, or rehabilitate
drinking water infrastructure. ·
Clear eligibility for capital security upgrades. ·
Universal eligibility of all water systems, both public and investor
owned, regardless of size. ·
Ability to make grants or loans in any combination and to use other
financing tools to leverage public and private capital. ·
Reasonable terms and conditions such as demonstration of system viability
and ability to repay a loan. ·
Streamlined procedures for those accessing the funds. AWWA
urges the Subcommittee to introduce a bill as quickly as possible to amend the
SDWA to address drinking water infrastructure needs in the DWSRF so that a bill
can be enacted before the end of this Congress. In the remainder of this
statement, we will summarize suggested improvements to the DWSRF to address the
growing drinking water infrastructure and security needs. DWSRF
AUTHORIZATIONS AWWA
recommends that the DWSRF authorization should be significantly increased to
provide at least half of the $57 billion ($28.5 billion) recommended by WIN over
the next five years drinking water. We believe that this authorization would
mark a significant step by Congress towards assisting in the enormous challenge
public water systems and their customers face in meeting federal mandates and at
the same time replacing aging distribution pipes in the coming years.
As illustrated in AWWA's report entitled Dawn of the Replacement Era:
Reinvesting in Drinking Water Infrastructure, the "demographics"
of pipe replacement is real, it is big, and the bill is coming due soon.
This challenge is exacerbated by population shifts and growth patterns
over the years, economic conditions and the changed demographics of urban
populations. We
must note that the recommended authorization level is a very small fraction of
the $250 billion in infrastructure replacement needs over the next thirty years
identified by AWWA. AWWA does not
expect that federal funds will be available for 100 percent of the increase in
infrastructure needs facing the nation's water utilities.
AWWA remains committed to the principle that utility operations should be
fully supported by rates. In the
long run, the objectives must be to manage the costs of replacing pipes and
treatment plants and ensure financial sustainability through local rate
structures. However, many utilities
are going to face a period of adjustment in adapting to the new reality of the
replacement era described in the AWWA report.
Many utilities and their customers will need additional assistance in
working through extraordinary replacement needs in the next 20 years in the form
of principal forgiveness or other direct financial assistance measures. The
difference between drinking water utilities' current expenditures for
infrastructure replacement and the needed level of expenditure is estimated by
WIN to be about $11 billion per year over the next 20 years.
If the federal government were to provide half the cost of this gap, the
federal share of total utility spending would still amount to under 12 percent
of total utility spending for twenty years. For comparison, the federal share of
investment in roads, bridges, and airports is 80 percent. It
is clear that, even with federal assistance, the burden of paying for public
water system improvements will remain overwhelmingly with utilities and their
rate-paying customers. In
recognition of this, we believe that, if the needs of older cities with large
economically disadvantaged populations are to be met, an increase in the
authorization is warranted. We look forward to working with the Subcommittee to
ensure that authorization levels will be adequate to address the needs of older
cities with economically disadvantaged populations and meet the security needs
of public water systems. ELIGIBLE
PROJECTS Aging
Infrastructure. It
is important to note that support of drinking water infrastructure is not the
primary purpose of the Environmental Protection Agency (EPA) programs. The eligibility requirements of the DWSRF created by the SDWA
Amendments of 1996 address the compliance needs of public water systems.
The very large and growing need to replace aging drinking water
infrastructure is a challenge that is not specifically addressed by the DWSRF as
currently structured and funded. AWWA
recommends that the DWSRF eligibility of projects for the replacement and
rehabilitation of aging distribution system pipes and appurtenances be made
explicit in the statute. This, we
believe should be the major purpose of the increased DWSRF authorizations. EPA has interpreted the current provisions of the SDWA to
authorize the use of DWSRF funding for the replacement and rehabilitation of
aging distribution pipes as furthering the health protection objectives of the
SDWA as authorized in Section 1452 of the Act.
While this interpretation of the SDWA is welcome, it is not universally
accepted. That statute should make
Congress's intent clear that repair and replacement of aging infrastructure is
an important priority and not rely on an EPA or State interpretation that is
subject to change. Security
Upgrades. Since
September 11, 2001, AWWA has been advocating for federal assistance for public
water systems to help pay for security upgrades to protect public water systems
from terrorist attack. Since that
time events have validated this concern, and water utilities are undertaking
comprehensive vulnerability assessments and emergency planning to protect both
water quality (for health protection) and water supply (for fire suppression and
sanitation). Of note are documents
found in the possession of al Queda terrorists in Afghanistan that could be used
to help plan an attack on a drinking water utility.
Security concerns thus represent a large, immediate, and unprecedented
cost for public water systems concerns. EPA
has interpreted the current provisions of the SDWA to authorize the use of DWSRF
funding for capital security upgrades as furthering the health protection
objectives of the SDWA as authorized in Section 1452 of the SDWA.
While this interpretation of the SDWA is welcome, it rests on
interpretation and is subject to change. Moreover,
it does not state Congress's intent that capital projects to address security
concerns should be priority projects for DWSRF funding.
AWWA strongly recommends that bill make explicit the DWSRF eligibility of
capital projects to address security LARGE
PUBLIC WATER SYSTEMS AWWA
does not believe that the DWSRF adequately addresses the infrastructure
challenges presented by large urban public water systems and particularly those
with declining and economically disadvantaged populations.
During the short history of the DWSRF, large public water systems have
not been receiving a fair share of SRF loans.
According to EPA, states have made approximately seventy-five percent of
all SRF loans to small communities. In
per capita terms, assistance to very small communities has averaged over $400,
while loans to large communities (with over 100,000 people) have averaged a
little over $50 per capita. Current
law mandates that fifteen percent of a state capitalization grant shall be
reserved for small systems serving populations under 10,000 to the extent that
such funds can be obligated for eligible projects.
AWWA supported that set-aside in 1996, to ensure that small systems could
participate in the loan program. We
did not anticipate that large systems would be left out of the program,
relatively speaking, and there is no corresponding set-aside for large public
water systems serving populations over 100,000.
As noted, the bulk of DWSRF funding is going to small systems.
AWWA is not convinced that an overall increased authorization for the DWSRF alone will provide states the ability to provide more assistance to large public water systems than was possible previously as some believe. To assure that systems of all sizes can participate in the SRF program, AWWA believes that a corresponding set-aside of fifteen percent of a state capitalization grant should be reserved for public water systems serving a population of 100,000 or more, assuming there are eligible project applications. This will ensure that large public water systems with major infrastructure replacement needs and disadvantaged consumers can participate in the DWSRF program in all States. DWSRF
LOAN REQUIRMENTS AND RESRICTIONS AWWA
has recommended streamlining many of the requirements and procedures for
obtaining loans from the DWRSF. We believe careful attention is required to
strike an appropriate balance between Congress's desire to encourage certain
behaviors at utilities, and the need to keep the DWSRF as unencumbered as
possible by unproductive red tape. Congress
or EPA should exempt certain types of projects or projects below a certain size
threshold from DWSRF red tape requirements that don't make sense.
Similarly, capital investments to improve the security of the Nation's
drinking water should be exempt from red tape to the maximum extent possible.
We urge the Congress to resist adding requirements for DWSRF loans that
can lead to an inappropriate federal micro-management of drinking water rate
structures, assessment management, utility ownership and management options or
local planning decisions. If a
public water system is otherwise financially sound, can repay the loan, and can
comply with applicable drinking water regulations, the addition of irrelevant
requirements creates a burden to obtaining a loan. Congress also needs to provide incentives for States to reform their existing programs to make them more effective. For example, some states have not allowed larger systems to access the existing state revolving fund, or have excluded investor owned systems. Some states encumber their revolving funds with nonproductive red tape, charge high loan origination and other fees, or charge loan rates that are equivalent to market rates. Some states preclude the use of alternate procurement methods that minimize infrastructure procurement costs. For example, the "design/build" process for infrastructure procurement has been documented to save 20-40% of construction costs for new treatment plants in some cases. Public procurement laws in many states, while not explicitly banning design/build, mandate a process that prevents its use where local authorities have determined it would be advantageous. The result is that, in many states, revolving loan funds have not proved to be useful or attractive even to drinking water utilities desperately in need of capital. To improve the efficiency, effectiveness and flexibility of the DWSRF, Congress should authorize the use of DWSRF funds to purchase or refinance outstanding debt obligations of a drinking water system; guarantee, or purchase of insurance for, and obligation of a drinking water system; secure the payment or directly repay principal or interest on general obligation bonds issued by the State if proceeds of the bonds will be deposited in the DWSRF; and deposit into a capital reserve for a debt instrument of a drinking water system. Since drinking water infrastructure projects have a design-life much longer than twenty years, AWWA recommends that the DWSRF loan repayment period by extended to thirty years for all utilities. This is an accepted loan repayment period in the financial market. These measures will greatly reduce the cost of financing drinking water infrastructure and allow communities increased flexibility. CONCLUSION How we address our emerging
drinking water infrastructure needs is a critical question facing the Nation and
this Congress. America needs a new partnership for reinvesting in drinking water
infrastructure. There are important
roles at all levels of government. AWWA
does not expect that federal funds will be available for 100 percent of the
infrastructure needs facing the nation's water utilities.
However, AWWA does believe that due to concurrent needs for investment in
water and wastewater infrastructure, security projects, replacement of treatment
plants, new drinking water standards, and demographics, many utilities will be
very hard pressed to meet their capital needs without some form of federal
assistance. Over the next twenty
years, it is clear that SDWA and CWA compliance requirements and infrastructure
needs will compete for limited capital resources.
Customers are likely to be very hard pressed in many areas of the
country. Compliance and
infrastructure needs under the SDWA and CWA can no longer be approached as
separate issues. Solutions need to
be developed in the context of the total drinking water and wastewater
compliance and infrastructure needs. In
our testimony we have made recommendations that we believe will improve the
DWSRF to address the increasing drinking water infrastructure financing needs.
We believe that increasing the DWSRF authorization to at least $28.5 billion
over the next five years is critical. AWWA
urges the Subcommittee to introduce a bill as quickly as possible to amend the
SDWA to address drinking water infrastructure needs in the DWSRF so that a bill
can be enacted before the end of this Congress.
AWWA pledges to work with Congress to develop a responsible and fair
solution to Nation's drinking water infrastructure challenge.
We thank you for your consideration
of our views. ____________________________________ This
concludes the AWWA statement on drinking water needs and infrastructure.
I would be pleased to answer any questions or provide additional material
for the committee.
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