<DOC>
[107 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
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S. Hrg. 107-569
WATER INFRASTRUCTURE FINANCING
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FISHERIES, WILDLIFE,
AND WATER
OF THE
COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
INNOVATIVE FINANCING TECHNIQUES FOR WATER
INFRASTRUCTURE IMPROVEMENTS
__________
OCTOBER 31, 2001
__________
Printed for the use of the Committee on Environment and Public Works
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COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
one hundred seventh congress
first session
JAMES M. JEFFORDS, Vermont, Chairman
BOB SMITH, New Hampshire, Ranking Minority Member
MAX BAUCUS, Montana JOHN W. WARNER, Virginia
HARRY REID, Nevada JAMES M. INHOFE, Oklahoma
BOB GRAHAM, Florida CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio
BARBARA BOXER, California MICHAEL D. CRAPO, Idaho
RON WYDEN, Oregon LINCOLN CHAFEE, Rhode Island
THOMAS R. CARPER, Delaware ARLEN SPECTER, Pennsylvania
HILLARY RODHAM CLINTON, New York BEN NIGHTHORSE CAMPBELL, Colorado
JON S. CORZINE, New Jersey
Ken Connolly, Majority Staff Director
Dave Conover, Minority Staff Director
------
Subcommittee on Fisheries, Wildlife, and Water
BOB GRAHAM, Florida, Chairman
MAX BAUCUS, Montana MICHAEL D. CRAPO, Idaho
HARRY REID, Nevada CHRISTOPHER S. BOND, Missouri
RON WYDEN, Oregon JOHN W. WARNER, Virginia
HILLARY RODHAM CLINTON, New York LINCOLN CHAFEE, Rhode Island
JON S. CORZINE, New Jersey BEN NIGHTHORSE CAMPBELL, Colorado
(ii)
C O N T E N T S
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Page
OCTOBER 31, 2001
OPENING STATEMENTS
Bond, Hon. Christopher S., U.S. Senator from the State of
Missouri....................................................... 3
Chafee, Hon. Lincoln, U.S. Senator from the State of Rhode Island 6
Corzine, Hon. Jon S., U.S. Senator from the State of New Jersey.. 14
Crapo, Hon. Michael D., U.S. Senator from the State of Idaho..... 2
Graham, Hon. Bob, U.S. Senator from the State of Florida......... 1
Jeffords, James M., U.S. Senator from the State of Vermont....... 15
WITNESSES
Cook, Peter L., executive director, National Association of Water
Companies, Washington, DC...................................... 26
Prepared statement........................................... 48
Responses to additional questions from:
Senator Graham........................................... 55
Senator Jeffords......................................... 54
Farrell, Rick, executive director, State of Wisconsin, Department
of Administration, on behalf of the Council of Infrastructure
Financing Authorities, Washington, DC.......................... 18
Prepared statement........................................... 46
Gorman, Harold J., executive director, New Orleans Sewerage and
Water Board, New Orleans, LA, on behalf of the Association of
Metropolitan Water Agencies.................................... 28
Prepared statement........................................... 57
Howard, Stephen E., senior vice president, Lehman Brothers, New
York, NY....................................................... 16
Prepared statement........................................... 43
Mehan, Tracy, Assistant Administrator, Environmental Protection
Agency, Washington, DC......................................... 7
Charts:
Chart 1, Savings Provided by SRF Loans................... 39
Chart 2, CWSRF Assistance Provided....................... 40
Chart 3, Drinking Water Needs (1999)..................... 41
Chart 4, Clean Water Needs (1996)........................ 42
Prepared statement........................................... 34
Pinault, Paul, executive director, Narrangansett Bay Commission,
Providence, RI, on behalf of the Association of Metropolitan
Sewerage Agencies.............................................. 30
Prepared statement........................................... 61
Responses to additional questions from:
Senator Graham........................................... 67
Senator Jeffords......................................... 66
ADDITIONAL MATERIAL
American Society of Civil Engineers.............................. 68
Clean Water Action, National Citizens' Environmental Organization 70
Public Citizen's Critical Mass Energy and Environment Program,
Washington, DC, Special Report, Water Privatization: A Broken
Promise........................................................ 70
WATER INFRASTRUCTURE FINANCING
----------
WEDNESDAY, OCTOBER 31, 2001
U.S. Senate,
Committee on Environment and Public Works,
Subcommittee on Fisheries, Wildlife and Water,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:38 a.m. in
room 406, Senate Dirksen Building, Hon. Bob Graham (chairman of
the subcommittee) presiding.
Present: Senators Graham, Corzine, Crapo, Bond, Chafee, and
Jeffords [ex officio].
OPENING STATEMENT OF HON. BOB GRAHAM, U.S. SENATOR FROM THE
STATE OF FLORIDA
Senator Graham. I will call the hearing of the Subcommittee
on Fisheries, Wildlife and Water of the Committee on
Environment and Public Works to order. I extend a good morning.
I understand that we have already had our instructions as to
how to evacuate this committee room if necessary. That is just
one of the several new aspects of our life here in the U.S.
Congress.
One of the other aspects is that our committee schedules
have been disrupted by recent events. This meeting that we are
holding today has been scheduled twice before but has had to be
delayed because of unexpected developments.
I want to extend my appreciation that the members of the
committee and particular to the witnesses who have been so
flexible and patient awaiting the time that we could hear your
very valuable comments.
Over the last 2 years there has been much discussion about
water and wastewater infrastructure and the need to modernize
our current system. This subcommittee has held three hearings,
largely under the leadership of Senator Crapo, focusing on the
need for infrastructure investment, the types of problems
facing local communities and the effectiveness of our Federal
aid programs.
There is no question that our infrastructure needs are
great. In each of the States represented here today we could
cite a long list of special needs. The Federal Government has a
role in water and wastewater infrastructure with its annual
capitalization of the Safe Drinking Water and the Clean Water
State Revolving funds.
It is likely that the Federal Government will continue to
provide assistance to States as they seek to maintain the
superior service that our water system provides to our
citizens. However, I also believe that there are still
questions to be answered as to exactly how and in what
situations the Federal Government may choose to provide that
assistance.
Today, the subcommittee will seek to answer some of the
questions by hearing recommendations and suggestions by our
witnesses on two main issues. First, we will discuss what the
Federal Government can do to facilitate some of the innovative
financing techniques that are either already in use by local
communities and water utilities or in use in other areas of
infrastructure such as transportation.
Second, we will discuss ways that the Federal Government
may encourage the use of new financing techniques that may
stretch Federal dollars applied to water and wastewater
infrastructure. I recognize that some of the most effective
approaches may relate to tax policy. As modifications to the
tax code are under the jurisdiction of the Finance Committee,
we will not be focusing on these items in detail today.
However, with several other members of the Environment and
Public Works Committee, I serve as a member of the Finance
Committee and we will be glad to share any ideas that take the
form of tax code changes with our fellow members of the Finance
Committee.
In closing, I want to assure everyone that this issue is a
priority of this subcommittee. We intend to hold one or two
additional hearings this fall if time permits, and to develop
legislation over the next several months.
I encourage anyone who has concerns or suggestions on these
issues to contact the subcommittee over the next few weeks. If
you have written testimony you would like to submit for the
record, the record will remain open for 1 week.
With our Ranking Member, Senator Crapo and Senator Bond and
the other members of this subcommittee, we are committed to
making significant progress on this issue and to do so early in
2002.
Thank you very much.
Senator Crapo.
OPENING STATEMENT OF HON. MICHAEL D. CRAPO,
U.S. SENATOR FROM THE STATE OF IDAHO
Senator Crapo. Thank you very much, Mr. Chairman. I
appreciate your rescheduling this twice-postponed hearing. I
guess three times really is the charm in this case. But the
issue is of such critical importance that I think everyone in
America appreciates your commitment to make sure that we
continue our focus on the issue.
I also appreciate our witnesses joining us here today to
examine the EPA financing support programs for infrastructure
projects. I have said a number of times that in my opinion the
issue of our clean water and particularly the infrastructure
needs that we face in it as a nation right now are one of the
highest, if not the highest, environmental issues that we face
in this country.
One of the most significant environmental issues that we
face and what this committee's work will generate will be one
of the most important improvements to our environment or
efforts to improve our environment that we can take here in
Congress. That is the importance I place on this issue.
This is the fourth in a series of hearings that this
subcommittee has held, as the Chairman has already indicated.
We have been looking at the myriad of issues surrounding the
water infrastructure needs of our country surrounding the water
infrastructure needs of our country to make sure that this
committee is prepared to do the important work that is
necessary to assure clean water in our Nation.
In our initial hearing we examined the magnitude of the
water and wastewater needs projected over the next 20 years.
Although the estimates varied considerably, all witnesses
acknowledged that the problem is extremely large.
While there is disagreement on the scope and who the
contributors to the problem are, it is evident that all sides
are looking to Congress for providing assistance in safe and
cost-effective water and wastewater programs for the public.
We have also looked at how those resources are being made
available by the Federal Government, focusing on the EPA. In
addition to financing State loan programs, the agency has
provided direct grants to communities, research on pollution
and contamination prevention and technology, operator training
and certification and technical assistance.
With our current budget restraints and so many competing
needs, we all recognize that there are going to be limits on
what Congress can do. Therefore, we need to be sure that we
maximize the available resources that we have.
A number of stakeholder reports have outlined a series of
recommendations, everything from improvements in administering
funds to new programs that encourage innovation to promoting
public-private partnerships to better asset management.
I look forward to hearing the success of those ideas in the
past and all of your recommendations for future steps that we
can take.
In addition, knowing what hindrances exist that prevent
innovative uses of resources will help this committee better
understand the limitations on utilities and administrators to
providing the best and most effective services possible.
I also want to take a moment to welcome Tracy Mehan here
today. Although we had a chance to visit with you earlier
during the confirmation process, this is the first opportunity
that I have had to work with you to focus more closely on your
observations and expertise on our water and wastewater
infrastructure issues.
With the magnitude of the challenge before us, it is
important that we begin a real dialog on how to best utilize
the resources available to the EPA, to the States and to the
communities.
With that, I want to thank you again, Mr. Chairman, for
holding the hearing and all of our witnesses for not only
appearing here today, but for the significant amount of effort
that you have put into this issue already.
Senator Graham. Thank you, Senator.
Senator Bond.
OPENING STATEMENT OF HON. CHRISTOPHER S. BOND,
U.S. SENATOR FROM THE STATE OF MISSOURI
Senator Bond. Thank you, Mr. Chairman, I am not sure
whether we feel more reassured that the leader in the
Intelligence Committee is chairing this committee, knowing how
we ought to be intelligent about the threats or whether we
ought to consider ourselves more of a target. One way or
another, we appreciate your having the hearing.
I am delighted to welcome my old friend, Tracy Mehan from
Missouri. He has an outstanding record. He has done a great
job. Tracy, don't blow it.
I asked to be able to make a statement because the water
infrastructure financing is something that is very important to
me and with another hat that I wear.
Yesterday I introduced a Concurrent Resolution with
Sherwood Boehlert in the House to commemorate the 30th
anniversary of the Clean Water Act, which will occur on October
18, 2002. I would hope that we could set as a goal to pass a
new water funding bill by the 30th anniversary next October.
There is no question but that we have tremendous,
increasing needs for additional resources for water spending,
improving the wastewater infrastructure, providing clean and
safe water for our families. We need to assess the
vulnerability of our drinking water systems, provide protection
from terrorists, all of this must be done and it isn't going to
be cheap.
Recent surveys from the EPA and outside groups say that we
need to spend at least $300 billion over 20 years to maintain
our water systems.
In another committee, I have in the past served as chairman
of the Appropriations Subcommittee for VA-HUD which includes
the funding for EPA. Every year that I chaired that committee
the administration came in with cuts to SRF. They had wonderful
boutique programs they wanted to fund instead of the State
revolving funds, which is the only way of getting the money out
to make it continue to evolve and eventually to buildup to meet
the needs. And we restored it.
This is the year the Administration, using the same OMB
from the past, came in with an idea to rob the SRF for combined
sewer overflow funding. Senator Mikulski, with my strong
support is going to restore it. We put a measly $1.35 billion
in for clean water and $850 million in for safe drinking water.
Mr. Chairman and members of the committee, we are not going
to get there unless we find some other creative ways of
financing or get the Administration and OMB, with the pushing
of EPA, to make a significantly higher recommendation and work
with our colleagues on the Budget Committee to get us the money
and the appropriations leaders to give us a bigger allocation
because we are fighting against veterans medical care, housing
needs for the poor, and there are a lot of other places that
compete for these dollars. We don't have the dollars.
We also know as we look down the road, the regulatory
requirements. We have got bills for expensive concentrated
animal feedlot operations, total maximum daily load, and
sanitary sewer overflow. Right now we are debating how we are
going to ratchet down the limit on arsenic in water, and what
we do for small communities.
These are all going to cost a heck of a lot of money, and
we don't have it. I would say just one community, maybe Tracy
has been there, Pickering, MO in Nodaway County in northwest
Missouri, don't blink because you will miss it if you go
through. In the 2000 census they lost 15 people. They are now
down to 156. It is on Highway 148 out of Maryville. It is an
old railroad town. The train doesn't stop there any more. They
pulled up the rails. There are two churches and one elementary
school. Most of the workers there are on a minimum wage. The
major business is a junkyard. The total city budget is $25,000
a year with no paid city workers.
They have no sewer system. The houses have a septic system
and the gray water from tubs and sinks goes into the ditch at
the road. The waste leeches out of the septic tanks into the
ditch. The storm water becomes dirty storm water. You know,
they can't afford $1 million for a sewer system. They want to
do the right thing. They want to meet the Clean Water Act
standard. They want to meet the EPA regulations. No one in
Pickering wants to drink arsenic in their water. But they just
don't have the means of funding it.
We need to look at communities like that. We have the
community of Lebanon in southwest Missouri with 10,000
residents. They face millions of dollars in sanitary sewer
overflow costs. Then we go to the large cities like St. Louis
where it's water system is aging.
Everybody in our State needs to clean up the wastewater and
have safe drinking water. There just is not enough money in the
budget now. I hope this committee under your leadership, Mr.
Chairman, can put us on the path of figuring out how we get the
resources that are vitally needed in what I think is one of the
most pressing environmental problems we have in our country
today.
I appreciate the time. I wanted to share this with you
because I believe it is of greatest concern.
[The prepared statement of Senator Bond follows:]
Statement of Hon. Christopher S. Bond, U.S. Senator from the
State of Missouri
Mr. Chairman, thank you for holding this hearing on improving the
utilization of available water and wastewater infrastructure funding.
The cost of providing clean and safe waters for our families is
overwhelming local communities large and small. Therefore, we must
explore all creative and flexible financing options to fund drinkable
and fishable waters.
Yesterday, I introduced a Concurrent Resolution with Sherry
Boehlert in the House to commemorate the 30th anniversary of the Clean
Water Act on October 18, 2002. 1 believe it would be a wonderful goal
for us to set to pass a new water funding bill by that 30th anniversary
next October.
We certainly have the need for an increased authorization for water
spending. Recent surveys from EPA and outside groups say we need to
spend at least $300 billion over 20 years to maintain our water
systems.
To traditional infrastructure maintenance and improvement we can
now add infrastructure protection. Assessing the vulnerability of our
drinking water systems and providing protection from terrorists will
not be cheap, but it must be done. These numbers are only for water
infrastructure. There are a host of additional regulatory requirements
coming down the pipe as well. We also have bills for expensive
Concentrated Animal Feedlot Operations, Total Maximum Daily Load, and
Sanitary Sewer Overflow proposals. We are currently debating placing
new burdens on localities for additional Arsenic controls. All of these
proposals are well intentioned, but they also have very high real
costs.
Let me put a Missouri face on the challenges communities face. You
all have communities like these in your States, but it's good to remind
ourselves of our local problems as we debate these arcane financial
methods.
The town of Pickering is in Nodaway County in northwest Missouri.
According to the 2000 census, they lost 15 people and are now down to
156 residents. If you drive up Highway 148 out of Maryville, you will
see Pickering on the left side of the road.
Pickering is an old railroad town, but the train doesn't stop there
anymore. It couldn't anyway, because they pulled up the rails and ties
years ago.
There are two churches and one elementary school in town. Pickering
residents are hard workers, but most make barely over minimum wage.
Pickering has exactly one business--a junkyard. Thus, almost all city
tax revenues are from property taxes. The total city budget is $25,000
per year. There is no police department, no fire department, no
library. There are no paid city workers.
The reason I bring this up is because Pickering has no sewer
system. Houses have septic systems. Gray water from tubs and sinks goes
into the ditch at the road. But many septic tanks don't have proper
drainage, and their waste leaches into the ditch. Storm water becomes
dirty storm water.
As the financial experts can imagine, a town with 150 residents and
an annual budget of $25,000 can't afford $1 million for a sewer system.
A town with no city employees is hard pressed to fill out reams of
paperwork for loan programs. A town that size can't afford matching
requirements. Tripling water rates still won't be enough to pay for the
water system they need.
Pickering wants to do the right thing. Pickering wants to meet
Clean Water Act standards. Pickering wants to meet EPA regulations. I'm
sure no one in Pickering wants to drink Arsenic in their water.
Pickering wants to provide clean and safe water for its residents.
Pickering is willing to pay more for clean water, but sometimes good
intentions and desire just aren't enough. We have to keep Pickering in
mind when we talk about how to finance water improvements. We also have
to remember mid-sized communities such as the 10,000 residents of
Lebanon in southwest Missouri. They face millions of dollars in
sanitary sewer overflow costs. We also can't forget the aging system
that more than a million residents in St. Louis depend upon for every
drink of water they take.
All of these Missouri families and all the families in your States
deserve clean and safe water, but they need our help. These people are
depending upon us for a new water spending authorization to meet their
needs.
I urge my colleagues to come together to help meet these water
needs. Mr. Chairman, thank you for hosting this hearing and I look
forward to further Committee action on paying for clean and safe water.
Senator Graham. Well, thank you, Senator. I appreciate your
long commitment, your experience and your passion for this
issue. We will try to work together to achieve your very lofty
goals and to do so within that timeframe of the 30th
anniversary of the Clean Water Act.
Senator Chafee, do you have an opening statement? I also
understand that you wish to introduce one of our witnesses.
OPENING STATEMENT OF HON. LINCOLN CHAFEE,
U.S. SENATOR FROM THE STATE OF RHODE ISLAND
Senator Chafee. Yes, thank you, Senator Graham. I agree
with my colleagues on the importance of this issue. Certainly
wastewater and water treatment and innovative financing is
important. Of all the priorities, as Senator Bond said, that
confront us, certainly that is one of the highest priorities.
I, myself, think it is an area that we can export to
developing countries once we get good at it ourselves, that are
wrestling under the same challenges we have.
Yes, I am pleased to introduce Paul Pinault, who is
executive director of the Narragansett Bay Commission, which is
faced with combined sewer overflow problems in Providence. We
have an aging sewer system--old brick sewers. When we have a
rain event, of course, you have a discharge of completely
untreated wastewater into our beautiful Narragansett Bay. It is
very, very expensive in terms of trying to remedy that, of
course.
Paul has worked for the Narragansett Bay Commission since
1982 and is the Commission's executive director since 1991. He
was recently appointed the American Metropolitan Sewerage
Agency's vice president.
Welcome, Paul. I'm glad you are here.
Senator Graham. Thank you, Senator Chafee.
Our first witness today will be Mr. Tracy Mehan. Mr. Mehan,
if you would please take a seat at the table? Mr. Mehan is the
Assistant Administrator for Water at the Environmental
Protection Agency. This will be his first, albeit twice
delayed, appearance before the subcommittee.
We welcome you. Congratulations on the responsibilities
which you have assumed. We look forward to hearing your
comments.
Mr. Mehan, for each of the witnesses, I'm going to ask if
you could limit your oral presentation to 5 minutes. If you
have further detail that you would like to submit, it will be
reported fully in the record. Then, at the conclusion of your
remarks, members of the committee will ask questions.
STATEMENT OF TRACY MEHAN, ASSISTANT ADMINISTRATOR,
ENVIRONMENTAL PROTECTION AGENCY, WASHINGTON, DC
Mr. Mehan. Certainly. Thank you, Mr. Chairman, members of
the subcommittee. I have submitted written comments at length
that go over this very well-trodden path, I know, long before
my arrival on the scene and deals with the very daunting
challenge of the infrastructure needs of this country in the
area of wastewater and drinking water.
Basically, I would like to share just a few thoughts
generally with you. If the committee has any interest, I would
be happy to address any security issues, although I understand
that is the subject of a hearing tomorrow, too.
Basically, Mr. Chairman, our success in improving drinking
water and surface water quality is the result of many programs
and a partnership by local, State and Federal Governments in
partnership also with the private sector. But our cooperative
investment in water infrastructure and pipes and treatment
plants and the like has, more than any other single effort,
paid dramatic dividends for water quality and public health
these last 30 years.
EPA has decided to undertake a broader review of needs and
spending for water and wastewater infrastructure, as I am sure
you know, including estimating whether there is a quantifiable
gap between future needs and current spending.
This analysis, which is known to everyone as the ``gap
analysis'' has actually gone out for independent peer review.
Those peer reviews have been completed by several external
experts. We are reviewing those now and we hope to finalize the
analysis and have it ready for public release later this year.
We think that will be a significant contribution to the
public dialog on this very pressing issue.
We recognize at EPA that effective decisionmaking
concerning water infrastructure financing can benefit from a
better understanding of the broader context of this effort. We
believe that key components in the broader context of water
infrastructure need to be more fully evaluated and include the
following, and these aren't going to be a surprise to those of
you, such as yourself, Mr. Chairman, who have been interested
in this issue.
Just the growth of our population, of course, steady growth
and shifts in population create substantial pressure on local
governments to provide expanding drinking water and sewer
services. That is a fairly obvious point.
The aging of the infrastructure, again, is something known
to everyone on this committee. Many sewerage and drinking water
pipes were installed between 50 and 100 years ago and these
pipes are nearing the end of their useful lives.
That current treatment may not be sufficient is another
point to be made. In 1998, States, tribes and interstate
commissions assessed water quality and 44 percent of the
Nation's estuaries and 35 percent of the rivers and streams
assessed areas to be impaired.
Wastewater treatment facilities and combined sewer
overflows were two of the leading causes of impairment.
Wastewater treatment efficiencies may be leveling off which,
when combined with population and economic growth, could have
the effect of reversing hard-won water quality.
A June 2000 EPA report, Progress in Water Quality, as it
was titled, estimates that by 2016 pollution levels could be
similar to levels observed in the mid-1970's if there is no
increase in treatment efficiency. Again, that is a worst case
scenario, but nonetheless a sobering prospect to be
contemplated.
We are facing, of course, the issue of declining research
and development. Innovation, research and development are
essential elements of promoting the use of more effective,
efficient and affordable technologies in water and wastewater
treatment.
A recent EPA report on private/public R&D expenditures,
associated with water pollution abatement showed that
expenditures decreased by half from the early 1970's to the
1990's.
Of course, we have increasing operation and maintenance
costs. As the size and complexity of water and sewer systems
increase and facilities get older, the cost of operations and
maintenance tend to increase, although there is maybe a silver
lining here.
As I had mentioned during my confirmation hearings, the
staff and myself are very taken with the possibilities of asset
management, a concept, for instance, that has been pushed in
countries such as Australia that are showing some 20 percent
reduction in cost if there is an effective asset management in
place over time. We are going to have a handbook put out on it.
We are planning four seminars and workshops. There are two
sides of that coin.
Finally, the whole issue of affordability. Senator Bond, of
course, mentioned the case of Nodaway County. Although water
has historically been underpriced, some systems may find it
difficult to replace or update aging water and sewer systems
and keep household user charges at affordable levels,
especially for low-income households and communities.
Clearly, if I have learned anything during the arsenic
discussions I have been privy to the last few months, this
issue of affordability is one we are probably going to need to
revisit over time, and sooner rather than later.
A number of stakeholders groups, of course, have called for
a significant increase in Federal investment in wastewater and
in drinking water infrastructure. Certainly there will be a
continuing role for the Federal Government in helping to meet
the challenge of extensive infrastructure investment need. But
it cannot be the only solution.
The solutions will have to be multifaceted with Federal,
State, local, public and private investment of time, energy,
money, research and perhaps most needed, innovative thinking
and bold actions.
We must encourage States and local governments to think
strategically as they plan for forthcoming rules and program
requirements, infrastructure repair and replacement and overall
protection of the water that sustains their communities.
We are working with Administrator Whitman to develop
principles for engaging in this dialog and some other thoughts
that we hope to roll out in the near future. One of these
principles that I had mentioned in my confirmation hearing and
which I just want to reaffirm is the centrality, if you will,
or the importance of maintaining the integrity of the State
revolving loan funds.
Referring to Senator Bond's comments, as a former State
official for 13 years, this builds on the best of good
efficiency as well as good federalism. It is a process that has
worked. The SRF loan study that we have done indicates that we
get four times the purchasing power versus grants. That is not
to say there is not a role for target grants or loan principal
forgiveness and other enhancements such as that.
But again, the SRF works. It has worked and we very much
believe that is a core value that needs to be maintained
throughout the debate and the dialog to come.
I would be happy to deal with any other questions you might
like on this or the security matter, Mr. Chairman.
Senator Graham. I would like to ask some questions about
the current authority of EPA to create incentives for
innovative financing without the requirement of change in law,
what actions would the EPA take to energize State and local
governments to use new forms of financing for their water and
sewer infrastructure?
Mr. Mehan. As you indicated, there are limitations and
whether we are dealing under the current regime or some
different statutory regime makes a big difference. We need to
be engaged in sort of a quality exercise, a continuous
improvement exercise with all the stakeholders.
One example that comes to mind that I think we can look for
flexibilities we have not had in the past in the SRF is the
Ohio's link deposit program where the State purchases a
certificate of deposit at a favorable rate from a bank and then
makes loans directly to the farmers. This allows the farmers to
deal with the local bank at the same time the bank assumes
responsibility for loan repayment and further protects the SRF
assets.
It gets into a whole area that we think is very cost
effective, which is best management practices for nonpoint
sources. It quite frankly can get much more bang for the buck
than an end-of-the-pipe control. Those sorts of things we need
to keep trolling for and engaging with stakeholders to
experiment with.
A key issue--it is not a financing issue, but it relates to
it on the drinking water side--is the whole issue of the
multiplicity of drinking water, community systems. I think we
have 3,000 gas utilities, 3,000 electric utilities and 54,000
community drinking water systems in this country.
Now, a lot of people like having a small system close by,
but it is at least an option to be considered as to whether
some consolidation of systems within proximity to each other
might better allow a single system to bear costs and amortize
those costs over time.
So, again, I don't know if there is any one silver bullet,
but I think we need to be in a robust engagement on these
topics and explore whatever efficiencies and innovations that
we can. I just had a conference yesterday sponsored by the
administrator's Office on Innovation in Government. It is as
much a process as it is discreet work products. I am certainly
pledged to do that.
There are certainly things we can do, I think, changing the
rules of the game under the SRF that would improve it, but
working within the current rules is a challenge and we will
continue to do what we can.
Senator Graham. A comment on one aspect of what you just
said in your reference to the fact that there will be a hearing
on security tomorrow.
There have been some suggestions that in terms of
infrastructure such as water, electricity, gas supplies, that
we might be moving into an era where we would begin to
emphasize smaller units of generation or distribution from a
physical standpoint, not speaking of an organizational
standpoint so that you would not put, for instance, a whole
city at risk because it was dependent on a single water
treatment plant.
I think that is an issue that we are going to have to
factor into all of our considerations, including the impact
that that might have on financing facilities in the future.
In the minute and 33 seconds that I have left for
questions, could we move beyond what the EPA can do within its
existing authority to what would be any of EPA's
recommendations, let us say your two or three first priorities
for changes in existing law that we had increase the efficiency
with which Federal funds were used for water and sewer
infrastructure.
Mr. Mehan. Well, again, focusing on the SRF, which is sort
of the core value, as I articulated, there are a number of
things. There is a lot of discussion between the clean water
and the drinking water SRFs. We think that authority ought to
be made permanent. I think that is an efficiency that would
give States flexibility to put the money where they need it and
consistent with their overall needs, again, utilizing the best
of efficiencies under a federalism context.
We also think that similar to the drinking SRF, the clean
water SRF ought to have authority to forgive a portion of loan
principal for disadvantaged communities. Again, this
affordability issue is crucial.
When you look at, again, the debate over arsenic, it is not
the larger systems, although they have concerns, but the real
crunch is with the smaller systems. While we like the revolving
loan concept of the SRF, we understand there are unique
circumstances involving extremely small and disadvantaged
communities where consistency has to yield to reality. We
understand that. We think that makes sense there.
We think also the idea of drinking water SRF loans for
disadvantaged communities that go to 30 years over the 20 years
would be a practical specific thing that could be considered
and would present some relief where it is needed.
We also think that wastewater treatment works that are
privately owned, but which treat municipal wastewater are
currently not eligible under the clean water SRF. We think they
should be eligible. We need to look at privatization. We need
to look at those other options, whether it is consolidation or
privatization, and those are not the tools in every case.
Sometimes they fit. Sometimes they don't, but we ought to at
least utilize that technique where it is appropriate.
Finally, we would suggest expanding eligibility, the clean
water SRF to include more water conservation activities which,
again, is not just good environmental, but it is good economic
practice and over time you can get two birds with one stone.
So, those would be just some ideas. I don't mean to say
that that is exhaustive. But again, focusing on a core area for
us, the SRF, those would be sort of concrete specific things we
would recommend.
Senator Graham. Thank you very much. On your last point
about relationship of conservation to financing of
infrastructure, I would note that Senator Harkin has indicated
that in the farm bill which is now being developed there will
be a substantial emphasis on conservation. I would think it
would be worthwhile for EPA to look at that proposal from the
perspective of how it might serve to assist with some of our
water-related issues, particularly the nonsource pollution
questions.
The order of questions will be Senator Crapo and then
Senator Chafee.
Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman, I
appreciated your reference just now to the conservation title
of the farm bill. I have a proposed conservation title that I
am working with Senator Harkin on and I agree with you that
those are going to be very critical elements that we deal with
in that context as we work on the infrastructure needs of our
clean water needs in this country.
Mr. Mehan, the Environmental Financial Advisory Board has
indicated recently in a letter to Administrator Whitman that a
20 percent reduction in infrastructure costs is attainable by
applying a more cost-effective management strategy and
technique. The EFAB has gone on to recommend that the revisions
to State and municipal procurement practices for planning,
designing, building and operating water and wastewater
facilities could be used to achieve a significant portion of
these cost reductions.
Are you familiar with that letter?
Mr. Mehan. I am generally. I am planning a meeting with the
EFAB. I am very interested in their proposals. As to the 20
percent reduction, I think that gets back to the Australian
experience we talked about in terms of asset management. I am
very much looking forward to an engagement with that board. One
of my old colleagues and friends who I have total respect for,
Steve Moffut, who is director of the Missouri Department of
Natural Resources sits on that board and a few other folks that
I have very high regard for.
So, I think all those are very legitimate recommendations
that we need to consider very, very seriously.
Senator Crapo. If I understand you correctly, the EPA does
support the idea that design build or design built operating
procurement standards or procurement practices could reduce the
cost for environmental compliance.
Mr. Mehan. That is right. Administrator Whitman, Governor
Whitman, has, I know cited those kinds of examples often in her
own comments on this issue.
Senator Crapo. Did you see a role for the EPA under your
existing authorities or do we need to address this question
statutorily to allow the EPA to encourage States to consider
alternative procurement practices such as these we are talking
about?
Mr. Mehan. I don't have a firm view on it. I think they
should have that authority, whether they need laws or not. That
would be the only question I would want to explore. But
certainly as an end point or a State to be desired, I would
certainly agree with that and would agree that we need to do
whatever it takes to get that flexibility.
Senator Crapo. Thank you. Shifting to another issue now,
you had mentioned, I think both in your original comments as
well as in your response to Senator Graham's question, the
issue of grants or loan forgiveness versus the full operational
loan program.
In my evaluation of this, depending on what kind of
financing structure that we end up with, assuming that we still
have some form of a revolving loan system, well, I guess even
if we go to some of the other proposals or some other
approaches, the question still arises as to how we deal with
the small communities.
One of the other aspects of the farm bill that I have
introduced is a program called Project Search to help small
communities such as that described by Senator Bond to get
access to grant moneys. These are communities that have failed
to qualify, even for the other programs but have persistent
needs, mandates, and enforcement procedures without the
financial resources or economies of scale to deal with the
issues.
So, I have concluded that we do need to have some type of a
program to help those small communities that simply can't make
a go of it, even under a loan program.
I understand your testimony to indicate that you tend to
agree with that. Could you elaborate? Have you or the EPA
analyzed the extent of this problem and made any determinations
as to what nature or size of effort will need to be undertaken
with regard to these small communities?
Mr. Mehan. Not with the degree of specificity that I could
give you some programmatic thoughts. Again, when I talk about
the SRF I want to be clear, I deal in presumptions based on
principle and experience. The SRF loans, the revolving nature
of the SRF is where we start as a presumption.
We understand that this affordability issue is crucial. The
cumulative impacts of regulations and higher expectations in
terms of environmental performance takes its toll. Whether some
sort of targeted grant program through the SRF or whether it is
loan forgiveness or other things are certainly fair items or
items for discussion, for legitimate discussion and debate.
We know it is a problem. We need to define it more. We need
to give it some focus and walk through the very alternatives.
Again, our concern is we don't want to throw the baby out with
the bath water. We have a tremendous program here that has
worked, has a proven track record and we wouldn't want to do
violence to it in trying to deal with another legitimate
problem or concern.
Senator Crapo. I see my time has expired.
Senator Graham. Thank you, Senator.
We have been joined by our Chairman, Senator Jeffords, and
by Senator Corzine. The next questioner in order of appearance
is Senator Chafee.
Senator Chafee. Thank you, Senator Graham.
I would just like to follow up also on the smaller
communities. In Rhode Island we have a rural community of about
2,000 users that have their water affected by MTBE. Of course,
they are having trouble dealing with that, the same as Senator
Bond talked about, the difficult of getting into the
bureaucracy by a small community where I think they have three
employees or something in applying for the SRF and the like.
Is there any effort by the EPA to encourage these small
communities to merge with larger ones and profit from economy
of scale? Is there any initiative in that area?
Mr. Mehan. We very much believe it is a crucial direction.
In fact, I just met with the board of directors of ASDWA, the
Association of State Drinking Water Administrators. It is
funny, we were talking about variances and affordability and
exemptions and they pretty well thought those things were
pretty much at the margin. They said the single biggest thing
that could be done is consolidation. They saw that as the
biggest issue, although there are a lot of countervailing
arguments, local control and you know, sort of like the home
rule arguments you can get into.
So, we encourage that. We don't feel that it is our
position to be prescriptive or to be heavy-handed. We just
think it is a fact. You know, these 54,000 community water
systems are a fact and if somebody wants to look at options,
State and local governments want to look at options, that is an
option that ought to be considered.
Whether we go from 54,000 to 3,000 or 54,000 to 30,000, I
have no idea what the right mix is, but it is certainly
something we would consider. Quite frankly, the government, and
by that I mean both the legislative and executive branch, by
continuing to demand higher environmental performance on a
national basis, as we do in the Safe Drinking Water Act, sort
of sends an implicit message that you ought to be looking at
this option as you buildup these cumulative costs and
expectations.
We want to pursue that. We want to encourage the economic
research that would maybe elucidate that point better and again
we don't see ourselves absolutely mandating it or imposing it,
but it is certainly an option we want people to look at.
Senator Chafee. I am sure you are right that there is
always the inclination to keep control of your own area. As you
said, home rule, but I am sure if there were some incentives it
would help relinquish that control.
Mr. Mehan. Absolutely, Senator.
Senator Graham. Thank you, Senator.
Senator Corzine.
Senator Corzine. Thank you, Mr. Chairman. I appreciate your
holding this hearing.
OPENING STATEMENT OF HON. JON S. CORZINE, U.S. SENATOR FROM THE
STATE OF NEW JERSEY
Senator Corzine. Thank you. I would start out by saying
that the State of New Jersey and the folks within the State
government think this is one of the most effective programs. We
have had enormous success.
We have some of the same kinds of problems that I think
others do with small communities and there needs to be this
consolidation effort. I think we have 569 communities in New
Jersey, from very large ones to very small ones. It seems to me
that there must be some means for us to think about how we can
consolidate some of the same power of leverage that is
occurring in these revolving funds and still maintaining the
loan arrangements which, I think, brings discipline to the
process, or at least our people feel that it does.
I certainly encourage as much thought and would love to be
a party to some of that process where we may be able to bring
some regionalization, if you will, which doesn't deprive the
local communities of their ability to express themselves, but
have access at these funds.
Then I would put in a plug that in a world where we are
looking for stimulus to be laid down, this is certainly one of
those areas where a lot of projects are on the table and could
be in the ground very quickly. I certainly hope that we will
consider that.
I wonder if you feel like these SRF funds are being
utilized uniformly across the country. Are people in other
States, do they feel consistently positive about it drawing
down this? That is the first question I have. If they are not,
are there things that we ought to do to the program that would
make that happen?
I presume this flexibility issue is primary. Maybe some of
these questions were asked ahead of time. I would certainly
like to hear your comments on it. Maybe we need to give you
more flexibility on that.
Mr. Mehan. Senator, I did, in fact, go through four or five
examples of improvements or enhancements to the SRF that would
be useful.
Senator Corzine. I can check the record.
Mr. Mehan. Yes. But going back to your original point, what
is the universal feeling, again, I am speaking now as a former
State official. I worked in Missouri and Michigan and my
conversations with State officials throughout the country,
States such as New Jersey, I think uniformly they view the SRF
as a winner. It is the gun that won the West for the last 30
years, so to speak, in terms of water quality improvement.
It is also showing great strides on the drinking water side
in more recent years. So, that is where you start. As I
described, maybe before you came in the room, my presumption is
that is where we want to protect the integrity of the SRF
revolving loan concept.
Now, that is only a presumption. There are, obviously,
unique needs of the smaller, disadvantaged communities that
require us to maybe sharpen our pencils and scratch our heads a
bit and see what we can do, whether it is principal loan
forgiveness or whether it is some targeted disciplined grant
program, I couldn't rule any of those out.
Senator Corzine. Have any of the States used any
regionalization or consolidation efforts that are not unlike
the question that Senator Chafee was asking?
Mr. Mehan. I can't speak. I am not sure, for instance, what
States might be doing in areas through their public service
commissions and things like that. I can tell you that recent
conversations just as of last week in Baltimore with State
drinking water, they all view consolidation as the way to go,
even more useful in the long run than variances and exemptions,
although I think there is more we can do under the Safe
Drinking Water Act with exemptions if we look at this
affordability issue.
But I don't think they have really perfected the way how
you tee this up. There are countervailing arguments here in
terms of local control and people wanting to keep some control
of their destiny at the local level.
So, it is an education process. It is a persuasion process.
It is at least making clear to people that we do have an
extensive system there that may be some modicum of
streamlining.
Senator Corzine. Thank you.
Senator Graham. Thank you, Senator.
Senator Jeffords, our committee chair has joined us. He has
a statement and also questions.
OPENING STATEMENT OF HON. JAMES M. JEFFORDS,
U.S. SENATOR FROM THE STATE OF VERMONT
Senator Jeffords. Thank you very much, Mr. Chairman. I am
very pleased to be with you. Mr. Mehan, thank you for being
with us also. I want to echo the comments of many of our
colleagues by saying that the water and wastewater
infrastructure is a critical issue facing our communities, with
estimates of the potential gap between the need for
infrastructure replacement funding and available funding
ranging from $300 billion over the next 20 years to $1 trillion
over the same period.
It is clear that the Nation's water system will face many
changes and challenges in the coming decades. My State of
Vermont is one of the most rural areas in the country, an area
of small towns and cities surrounded by an open and working
landscape.
Vermonters wish to maintain this pattern. Most of our towns
have less than 5,000 people and lack the administrative and
budgetary capacity to undertake water and sewer infrastructure
projects on their own. Our cities are some of the oldest in the
country, as you know.
My question to you is relative to small systems. Can you
expand on your previous comments related to small systems? Do
you see any need to differentiate between rural and urban
systems and their unique needs?
Mr. Mehan. Well, urban or rural--if they are disadvantaged,
they are pushing the limits of affordability, or if the
technical requirements of the accumulated laws and regulations
are outstripping their capacity to sustain an adequate
program--they are going to need help. I think for the most part
we are talking about smaller rural communities.
We are looking at these issues from many perspectives. We
are watching to see where Congress is going with this. We are
looking at this affordability issue which, as I say, I think we
are going to be revisiting that over time because that plugs in
not just to the general policy questions on the wastewater
side, but also specific statutory exemptions that may or may
not be available under the Drinking Water law.
So, any and all things, whether it is some rejiggering of
the SRF, principal forgiveness, targeted grants, I could
research on low-cost or efficient technologies, say in the case
of arsenic. Whatever it is, we are open for business in that
area. Again, the arsenic thing has brought this to the fore,
certainly for me, but it has been an ongoing problem since I
have been working on drinking water issues since 1989.
So, yes, it would be a shame for us to disregard these
small communities which ends up then delegitimizing, in
political terms, if you will, what is a wonderful national
program under the Safe Drinking Water law and for that matter
the Clean Water Act.
Senator Jeffords. Thank you. Thank you, Mr. Chairman.
Senator Graham. Thank you, Mr. Chairman.
Mr. Mehan, we thank you very much for your testimony today
and your ideas. We look forward to a close partnership with you
and EPA as we proceed to develop the reauthorization bill for
the Clean Water Act.
Mr. Mehan. As do I, Senator. Thank you.
Senator Graham. Thank you very much.
If the second panel would please come forward. Mr. Stephen
E. Howard is the senior vice president of Lehman Brothers. Mr.
Rick Farrell is the executive director for the State of
Wisconsin, Department of Administration. He is presenting
testimony in his capacity as the executive director, Council of
Infrastructure Financing Authorities. These are the entities
that administer State revolving fund programs.
We are most appreciative that each of you could join us
today.
Mr. Howard, we look forward to your remarks.
STATEMENT OF STEPHEN E. HOWARD, SENIOR VICE PRESIDENT, LEHMAN
BROTHERS, NEW YORK, NY
Mr. Howard. My name is Steve Howard. I am a senior vice
president with Lehman Brothers in New York. I have spent the
last 20 years of my career at Lehman working with a variety of
local, State and regional governments and private companies
financing the development of infrastructure projects, including
environmental projects, water, solid waste and clean water as
well as drinking water, transportation facilities and other
public facilities such as jails and schools.
The primary function that we provide in the process is to
maximize and leverage to the maximum extent possible cash-flows
that are available to pay for these assets and bring capital
markets' discipline to the process of developing this
infrastructure.
Most of the projects that we finance involve partnerships
between the public sector and the private sector where the
private sector would come in and enter into short-, medium- or
long-term contracts to design, build and on the these assets.
I will not be addressing the issue of State revolving
funds. That is not an area of expertise for me personally. I
have colleagues in my office who can address that in future
hearings. I am here just to discuss the concept of financing
public-private partnerships, which I think is of interest to
the committee.
At one end of the spectrum you have structures that utilize
traditional governmental purpose bonds--primarily general
obligation bonds of local governments to finance these assets.
Under the current tax laws, generally speaking, local
governments can enter into short- and medium-term contracts
with private companies to design, build and run these
facilities.
At the other end of the spectrum you have private companies
such as water utilities under some form of State regulation
that finance water infrastructure projects in particular on
their own balance sheet, in some cases utilizing taxes and
bonds and in some cases utilizing their own equity or taxable
debt.
So, those are really the bookends of the options for
financing water infrastructure. In the middle between these
bookends are a variety of approaches that are employed to
finance infrastructure projects. In some cases the financing of
projects, particularly in the area of solid waste and
transportation, is significantly facilitated by the
availability of private activity bonds for those
infrastructures.
The key issue in this sort of middle category of financings
is that the tax provisions allowing for the use of private
activity bonds allows for a significant transfer of operating
and technology risks to the private sector, where the private
sector can come in and optimize labor and capital and really
enter into a long-term arrangement where it can manage the
asset over a long period of time, in the course of what was
referred to earlier.
We have more limitations in the water sector because of the
limited availability of private activity bond use for this
sector. So, we don't have the ability to leverage in the water
sector to the extent we do in solid waste and transportation.
As I mentioned earlier, we have the bookends on the right-
hand side. We would have the use of pure private financing, in
some cases taxable and in some cases equity with pre-tax
returns in the 15 to 20 percent range.
On the other end of the spectrum we have pure public
financing in the 5.5 to 6 percent range for tax exempt debt and
even lower with the use of State revolving funds and grants and
loans. It is the middle category that we are trying to
optimize, as I mentioned before.
What is that?
Senator Graham. That is the floor bell that we are hearing.
What I think we are hearing is----
Mr. Howard. I thought that was my buzzer. That is not my 5-
minute limit?
Senator Graham. That is the floor. It signals that there is
a quorum call, which is the essence of a time out for the
Senate.
We will allow you another minute.
Mr. Howard. OK. Let me just then wrap up very quickly.
In this middle category of financing options the true
benefit for the use of private activity bonds involving private
companies is primarily for small- and medium-sized communities
and in some cases for large communities as well.
These types of approaches are not, again, applicable in all
situations, but we have seen a tremendous preponderance of use
of short-term operating agreements between private companies
and local small- and medium-sized communities in the last 5 to
10 years.
In the area of infrastructure generally, as I mentioned, we
have the use of private activity bonds for solid waste,
airports and ports, but not for water and wastewater.
Specifically by that I mean we do not have the availability of
the use of these bonds without the use of what we call private
activity bond cap that, as most of you are probably familiar,
is a limitation on the use of taxes and financing by private
companies that have entered into long-term contracts or have
ownership of the assets.
Using solid waste as an example, in the mid-1980's it was
viewed to be a serious disposal crisis similar to what we are
faced with today in the water infrastructure with the huge
financing needs. What was done back then was to pull solid
waste facilities out from under the tax exempt bond cap for
private company involvement in the financing and development of
these assets.
As a consequence we saw in that sector very easily over the
next 10 years $20 billion of investment in state-of-the-art
assets to properly manage that particular waste stream. We feel
that the same approach, if it were applied to the water sector,
would significantly facilitate the development of this
wastewater infrastructure, particularly for small- and medium-
sized communities that can really benefit from entering into
partnerships with the private sector.
Senator Graham. Thank you, Mr. Howard.
We will hear from Mr. Farrell and then open for questions.
I would like to take my prerogative to say that Mr. Farrell has
had a long experience with the Congress, working closely with
our former colleague, Lawton Chiles, and then following him in
his administration as Governor of Florida.
I have very high regard for his dedication and intellect
and I am pleased that he is now serving the State of Wisconsin
and the Association of SRF agencies. I am pleased that he is
going to be sharing his insights with us today.
STATEMENT OF RICK FARRELL, EXECUTIVE DIRECTOR, STATE OF
WISCONSIN, DEPARTMENT OF ADMINISTRATION, ON BEHALF OF THE
COUNCIL OF INFRASTRUCTURE FINANCING AUTHORITIES, WASHINGTON, DC
Mr. Farrell. Thank you, Mr. Chairman. I haven't left my
Florida roots. The president of our association is in
Wisconsin. I am still here.
My name is Rick Farrell. I am here today in my capacity as
executive director of the Council of Infrastructure Financing
Authorities. CIFA is a national organization made up primarily
of State and local officials engaged in the development and
financing of water and wastewater pollution control projects
and the operation of State revolving funds for infrastructure
financing.
Our organization numbers among its members 44 States and
other municipal and private-sector participants in
environmental finance. An important part of CIFA's mission is
to foster innovation and encourage the exchange of information
concerning best practices in infrastructure financing among the
States, between the States, the national government and the
private sector.
The State revolving funds are arguably the most successful
environmental program ever. Their proven track record argues
strongly in favor of the SRFs as the primary mechanism for
delivery of environmental infrastructure construction
subsidies.
The Federal-State partnership and the successes it has
created would be undermined by the onset of separately
delivered programs or other alternative funding mechanisms.
Separate grant programs complicate the funding process at the
local level and can serve to delay project initiation as
communities hold out for the prospect of a grant.
Programmatically, it makes the most sense to provide all
infrastructure construction subsidies, be they in the form of
subsidized loans, grants or grant equivalents such as principal
forgiveness through the SRF structure which is already
established and has been successfully functioning in all the
States since 1989.
This saves overhead costs and reduces the confusion in
communities trying to access a multitude of programs. Using the
SRF to target subsidies, perhaps with grants as well as with
loans, extends valuable infrastructure dollars, a key goal.
Efficiency gains achieved by the SRF programs translate
into more and more efficient infrastructure construction than
can be achieved by comparable grant programs. The success story
of the SRF is clearly a model that should be built upon.
Indicative of the vitality of the SRF program to facilitate
financial innovation is the capacity it affords to leverage the
funds. Leveraging in the SRF context means that States have the
ability to use the Federal capital grants as well as their
matching share as collateral to borrow in the public bond
market for purposes of increasing the pool of available funds
for project lending. This option allows the States to use the
funds as security or a source of revenue for the payment of
principal and interest on bonds so long as the bond proceeds
are deposited back into the SRF.
The use of the assets of the SRF to generate new moneys
which can be used immediately to fund more projects underscores
the true financial strength of the SRF model. Leveraging the
SRF can dramatically increase the funds available for lending.
Close to $9 billion has been added to the loan pool by the 24
States that have leveraged their funds.
This compares with $18.3 billion in Federal capital grants
thus far. The successful leveraging occurring with the SRFs has
allowed us to address serious problems much more quickly than
anyone had anticipated by delivering substantially I could
amounts of affordable capital sooner to meet critical
infrastructure needs.
There are examples of leveraging that demonstrate a
multiple effect of project financing levels at two to four
times the original investment.
An example of the utility of flexibility is illustrated by
the fact that among all the States and territories operating
revolving funds, no two are structured precisely alike. Yet all
share the same water quality objectives. The SRFs are
successful because their underlying concept is based on program
management and service delivery at the State and local level
with broad accountability at the Federal level.
I believe a useful question for the subcommittee to examine
is why leveraging is not an option for more States and to
examine the underlying issues and concerns of the States in
this regard.
Taking in note the chairman's comments at the beginning of
the hearing that the jurisdiction doesn't extend to tax law, we
do want to point out that any comprehensive review of means
available to maximize water infrastructure funding should
include consideration of the arbitrage rebate rules as they
affect the leveraged SRF programs.
The States that operate leveraged SRF programs are
compelled by the arbitrage rules to either limit the rate at
which funds can be invested or rebate to the Treasury the net
earnings on those proceeds of the SRF funds that are considered
under these rules to be bond proceeds. This greatly reduces the
resources available to fulfill the fund's purpose of providing
below-market financial assistance to help communities meet
Federal standards for their water programs.
CIFA estimates that in the absence of these restrictions,
the affected States could earn an additional $100 to $200
million annually on their SRF capitalization funds which, when
leveraged, would permit an additional $200 to $400 million
annual investment in needed water projects.
Concluding, I want to point out that our position is that
any congressional initiatives targeting water and wastewater
infrastructure funding affecting current SRF operations or
expanding the mission of the SRFs should be developed with the
recognition that innovative methods of addressing water and
wastewater needs are more likely to originate at the State
rather than the Federal level. The States are closer to the
problems that need to be addressed and the States are capable
of tailoring their approach to best meet their unique needs.
The best hope for discovering and realizing innovative
financing approaches is to give the States wide latitude within
the constructs of appropriate accountability in designing and
implementing their locally-tailored solutions.
Thank you.
Senator Graham. Thank you, Mr. Farrell.
Mr. Howard, you talked about private activity bonds and the
role that they had played in other areas of infrastructure such
as transportation. Could you suggest how you think private
activity bonds might be part of the package of innovative
financing for water and sewer infrastructure?
Mr. Howard. In transportation, solid waste facilities and
port facilities there is a specific exemption for the use of
private activity bonds to finance those projects without having
to require the use of what is a fairly limited resources at the
State level and that is private activity tax exempt bond cap
allocation.
I am sure most of you are familiar with that. There are per
capita limits at the State level for the use of private
activity bonds. It so happens in the water sector privatized
water projects that use of private activity bonds are subject
to this rather limited resource at the State level. They have
to compete against other infrastructure asset categories.
Just to give you a sense, in 1999 there was a total private
activity bond cap availability nationwide of $15 billion and
only $1.5 billion was used for the exempt category that
qualifies for water facilities. But that is total across all
private use. So, water was even a subset of the $1.5 billion.
So, it is a tremendous limiting factor in the use of that
financing vehicle for water infrastructure.
Senator Graham. Recently, the Congress extended private
activity bonds for school construction and created a separate
educational category. It was only 10 cents per resident of the
State, so it is not a large program but it is the beginning of
what could be a larger program.
Would you suggest that we should have a separate private
activity bond category for water and sewer as we do now for
schools?
Mr. Howard. Well, I would suggest that it be added to the
current category under which solid waste, ports and
transportation facilities qualify. It is really a very simple
change to the code to just insert water facilities, privatized
water facilities.
The school category is a slightly different exemption. It
doesn't directly apply to the same approach that is used in
water, solid waste and port sectors.
Senator Graham. From your experience in other areas such as
transportation, are there any other ideas that you think this
committee should consider to use proven innovative financing
techniques that might be valuable for water and sewer?
Mr. Howard. Using transportation as one example, some of
you may be familiar with several programs that have been put
together. One of them that comes to mind is the TIFIA program
which was put together several years ago for the purpose of
providing subordinated Federal loans to buttress financing a
variety of unique projects to investment grade level so that
you could enter the capital markets.
That program has met with varying degrees of success. It is
a highly specialized program that is very tailored to given
projects around the country. I think with a broader use of that
type of financing technique, where we leverage off of
subordinated Federal loans in a capital structure for any given
project in the water sector, where the projects are more
typical than unique, I think would be a tremendous asset.
Senator Graham. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
Mr. Farrell, in your testimony you talked about the issue
of Federal oversight and the question that I have, if I
understand it right, you have a concern that excessive
oversight or one-size-fits-all Federal regulatory regimes can
be counterproductive in terms of cost effectiveness.
Could you expand on that a little bit and also indicate
what type of reforms we might consider here at the
congressional level?
Mr. Farrell. The interesting thing, the States organized
around the State revolving fund almost uniquely to each State.
Every State has set up their own structure. So, one-size-fits-
all is a problem right to begin with because States have
approached this where there are bond banks, there is financing
authority, some States do this within their environmental
departments. They regard the State revolving funds essentially
as a State program in which the Federal funds flow into that
and then it is supposed to revolve.
There had been some concerns by my organization during this
time that EPA was moving to set standards and requirements that
seemed to go beyond accountability. In the last couple of years
I think a lot of progress has been made in that regard. Our
member States feel that EPA is responding to the fact that
these programs are more mature and that the States are doing a
good job.
But there are some areas where we could see continued
progress, in areas like self-certification and others where we
would like to work with EPA to make sure that the appropriate
accountability is there but at the same time that the States
have the flexibility to, for instance like moving funds back
and forth between the programs, moving the administrative
funds, those types of issues that when you add them all up
gives the States a lot more flexibility than they currently
have.
But I do want to emphasize that we think the situation has
improved a great deal in the last 2 years from where it was 3
or 4 years ago.
Senator Crapo. So, in the context of whether there needs to
be any activity at the congressional level, I am hearing you
say that it can pretty much be solved and is being solved by
the EPA in terms of its management, with the exception of some
of the reforms we have already talked about to the fund itself.
Mr. Farrell. Right. We would not have any specific
legislative recommendations at this point, as long as we
continue to make the kind of progress that we think we are
making with EPA.
Senator Crapo. All right. Thank you.
Mr. Howard, I recognize, as has already been indicated,
that tax policy is not within the jurisdiction of this
committee, although we do have some who can have influence on
tax policy on other committees on which they sit.
We have frequently heard that infrastructure financing can
be improved by things such as Mr. Farrell mentioned, the
changes in the arbitrage rules. I believe you talked about the
adjustments to the tax exempt volume caps for private activity
bonds and so forth.
First of all, do you agree with Mr. Farrell on the
arbitrage issue and second, are there any things other than the
arbitrage and the caps issue that we should consider?
Mr. Howard. I do agree on the arbitrage issue. It is a
foregone opportunity for certain programs like the revolving
funds where we are basically putting several hundred million
dollars, we are pulling that away from the assets that are
generated at the local level.
Another area that doesn't necessarily involve legislative
change is the facilitation of the transfer of these assets from
the public sector to the private sector. That was codified to a
certain extent in Executive Order 12803. It really deals with
the handling of assets that were funded either in whole or in
part with grants, Federal grants, particularly relevant in the
wastewater sector where we had a tremendous amount of asset
investment in the 1960's and 1970's. It was funded in part by
Federal grants.
It is those assets, particularly with small- or medium-
sized communities, that are currently in need of updating
modernization, have not been properly maintained, that would be
in some cases better suited to shifting over to private
management in one form or another.
The problem is that if you enter into long-term contracts
or you shift the control of those assets under some sort of
long-term lease or sale to the private sector, you run amuck of
repayment obligations potentially under it has Federal grant
program.
There is a process that is set up by EPA and with OMB to
deal with this. But it has been somewhat cumbersome for
communities to sort of weed their way through. It has been very
time consuming. That is not to say it is impossible to get
through it. It can be a major hurdle.
Senator Crapo. Thank you. My time has expired, but before I
relinquish, I wanted to indicate to Mr. Howard that the first
time I ever testify before Congress that buzzer went off also.
Only you handled it better than I did because I just quit.
Mr. Howard. Thank you, Senator.
Senator Graham. Mr. Chafee and then Senator Corzine.
Senator Chafee. Thank you, Mr. Chairman.
Mr. Farrell, you said in your testimony, ``I believe a
useful question for the subcommittee to look at is why
leveraging is not an option for more States and to examine the
underlying issues and concerns of the States in this regard.''
I know you expanded on it a little bit in your statement,
but I guess what you are saying is what we could do on the
Federal level more and maybe just expand on that now.
Mr. Farrell. Yes, Senator. Keeping in mind that obviously
the decision to leverage is a State decision and the State
Legislature has to decide. In other words, there may be State
issues revolving here about how they view leveraging or about
how they view going to the bond market. I think that has to be
put out there first, that you wouldn't want to require the
States to go this way.
But the 24 States that do leverage have had very promising
results. More money has been put out into projects. I think the
issue that I was suggesting, and we would love to work with the
committee on this, is: What are the impediments for the States;
and whether there are some issues relating to EPA oversight in
a statute that may be preventing some States from
participating.
Senator Chafee. What comes to mind quickly as the
impediments?
Mr. Farrell. Well, a lot of it has to do with the
sophistication of the States and whether they need some
assistance in that regard. You will find leveraging is more
common to the larger States that are in the bond market more
regularly. So, there may be some need for some assistance in
that regard.
There was some feeling earlier on in this process that
there was a bias against leveraging on the part of EPA. I think
that is totally turned around but some States may feel that
this is not an area that they want to go in.
But we have not done--and it may be useful to do it--sort
of done a survey of the States to sort of raise that question
of what do they think the problems are that might move them
more to leveraging.
Senator Chafee. I am glad you volunteered to work with us
in the subcommittee and I look forward to doing that. Thank
you.
Senator Graham. Senator Corzine.
Senator Corzine. Thank you.
Mr. Howard, being an enterprising investment banker, you
have probably had people say no to these leveraging concepts. I
will ask you the same series of questions that Senator Chafee
had. Why are only 24 States taking advantage of this?
Are there bond cap limits or debt limits?
Mr. Howard. You are referring to the State revolving fund?
Senator Corzine. Yes.
Mr. Howard. Again, I am not an expert in that particular
area. I would, I think, echo what Mr. Farrell said, that
communities and States each have their own financing philosophy
and my experience working with a variety of different
communities across the State is that each community has a
different view on leverage.
Some communities are much more comfortable with issuing
bonds and some communities are much less comfortable. I think
the unique thing about the program is that it is a great match
of Federal local partnership in using this financing structure.
I don't think it is reasonable to expect that all 50 States
would take advantage of it given the different approaches that
each State takes to financing its infrastructure.
Senator Corzine. Could one of the blockers be the same
thing that we were talking about in another area, this great
dispersion of size? You said the size of States. But again,
smaller communities are not getting the same kind of exposure
and expertise to the leveraging concepts. Are there programs
again that we ought to get back to some kind of consolidating.
Mr. Howard. I would refer you back to my very limited
expertise in how State revolving fund programs work. I do have
some limited experience working with small communities that
just simply couldn't meet the requirements of the State
revolving fund program, so it just wasn't an option for them.
The requirements vary from State to State.
Senator Corzine. It sounds like we have a program that
works but needs to be adjusted pretty significantly with regard
to this particular area. It would be great if we could all sit
down and figure out ways that might be flexible enough to allow
others to take advantage of this, these smaller communities
that have these problems. It ought to be a serviceable issue.
Senator Graham. Thank you, Senator.
I just would like to ask a final question of Mr. Farrell
and Mr. Howard, if you would like to comment.
When the original idea of revolving funds for
infrastructure were developed, they were frequently developed
at the State level. Florida had a State-administered revolving
fund to assist local governments with water and sewer, even
before the Federal Clean Water Act was enacted.
At the time the feeling was that the principle financing
need of local governments was during the period of planning and
construction of the plant; that once the plant was in operation
and had a revenue stream that it could be financed on a
permanent basis through more conventional sources.
It seems to me that in recent years an increasing amount of
the revolving fund is being used for permanent financing. The
first witness, Mr. Mehan, suggested that the length of the loan
authorized be expanded to 30 years.
I guess maybe I am old fashioned in that I think the
principal challenge that most local governments have is getting
that financing during the period where the plant is not
producing any revenue.
What is your feeling about whether we should extend the
length of time that loans can be made and therefore make it
more likely that the loans will be used as a source of
permanent financing as opposed to focusing on what I thought
was the primary purpose which was the development and
construction period financing?
Mr. Farrell. Well, Mr. Chairman, I think you are correct in
the primary purpose. I think what you are seeing is that as
perhaps needs like smaller communities, disadvantaged
communities and so forth become apparent and there are some
questions as to whether the SRF is meeting those needs, then I
think the question becomes are there other strategies within
the context of the SRF that could meet those problems.
An extension of a 30-year loan might be amenable for a
smaller community that has a different set of needs, also for
things like principal forgiveness. In other words, keeping the
SRF model, but looking at sort of alterations of it to meet
particular things where perhaps it is not producing what you
need to produce. I think the primary goal is as you stated it.
Senator Graham. Mr. Howard.
Mr. Howard. I would just add that we have seen a shift in
capital markets financing toward 30-year financing away from 20
years for basic infrastructure projects. I would say that any
liberalization of the program to extend the term of the loans,
particularly for these types of assets, because they are 40-
and 50-year assets, they are not 20-year assets, I think makes
a lot of sense.
Senator Graham. Are there any other questions? Thank you
very much, Mr. Howard, Mr. Farrell. We appreciate your
contributions. As we move toward more specific legislative
proposals we would look forward to the opportunity to continue
to take advantage of your expertise. Thank you.
I'm glad, Mr. Farrell. I'm sorry for Wisconsin, but glad
for the Nation that you are fully focused on this.
Our third panel is Mr. Peter L. Cook who is the executive
director of the National Association of Water Companies, Mr.
Harold Gorman, the executive director of the New Orleans
Sewerage and Water Board and he is appearing on behalf of the
Association of Metropolitan Water Agencies, and Mr. Paul
Pinault, who was introduced earlier by Senator Chafee, who is
the executive director of the Narragansett Bay Commission. He
is speaking on behalf of the Association of Metropolitan
Sewerage Agencies.
Mr. Cook.
STATEMENT OF PETER L. COOK, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF WATER COMPANIES, WASHINGTON, DC
Mr. Cook. Thank you, Mr. Chairman. My name is Peter Cook
and I am the executive director of the National Association of
Water Companies. NAWC is a nonprofit trade association that
exclusively represents private- and investor-owned water
utilities in the United States. I am offering testimony on
behalf of the NAWC membership. There are 200 members in 41
States that provide safe, reliable drinking water to more than
20 million people in America every day.
Thank you very much for the opportunity to present NAWC's
views on innovative financing techniques that could be used to
address the infrastructure replacement challenge that the water
industry faces. These views are also shared by the
H<INF>2</INF>O Coalition.
A number of suggestions are described in detail in our
written testimony which we have submitted. However, before
summarizing our suggestions, I must explain the context within
which our suggestions are made.
We believe the only sound, long-term strategy for financing
the repair, replacement and upgrading of water infrastructure
is to have the utility customer pay for these capital needs in
their water bills. We believe water utilities like gas,
electric and telephone utilities should be self-sustaining by
charging their customers the full cost of services that they
are providing.
Since the Federal Government doesn't pay for gas, electric
or telephone infrastructure, why should it pay for water
infrastructure? The failure of the utilities to charge for full
cost of service will most likely lead to an open-ended direct
Federal subsidy of water services in this country with grave
consequences to the U.S. Treasury over the long term.
Now, where full cost of service rates are not affordable to
some customers, and this is very true in the small systems as
our previous panelists have said, we support a water bill
payment assistance program like the LIHEAP program for home
energy bills that has been used very successfully in this
country for many years.
Such a program would subsidize only those who have a true
financial need. Now, where we have entire communities that are
disadvantaged like many of the small water systems in this
country, forgiveness of principal and interest on SRF loans may
be appropriate in grants in some cases.
So, we definitely may need to have a separate program for
the small systems and I am talking primarily about the larger
systems with economies of scale when I say they need to be
charging full cost of service.
Those who are persuaded that government should assume a
major role in financing infrastructure have argued for a
massive grant program to utilities. We think this is about as
far from innovation as you can get. One need only review the
history of the wastewater construction grant program in the
1970's to see that grants breed dependence and subsidize
everybody's water rates, including those who can afford to pay
the full cost of service rates.
This is neither an efficient use of Federal resources nor
one that is likely to have an end. Revolving loans which do not
have these negative characteristics make a lot more sense to
us. We support their continued use to help utilities meet the
infrastructure challenge.
In addition to revolving loans, there are other financing
techniques that are available to utilities, all of which will
help utilities keep their rates as low as possible. The private
sector offers many innovative financing techniques, often
through partnerships with the municipal sector.
We recently published a report on the role of the private
sector in the drinking water industry and that report studies
various forms that the private sector involvement in the water
business can take from outright ownership of an asset to
various long- and short-term contracts.
The report found that when a municipality pursues
partnerships with the private sector operating costs can be
reduced by 10 to 40 percent. It is obvious that cost savings of
this magnitude can make a very big difference in rates.
Also this report showed that costs could be cut while
actually improving drinking water safety. Of the 41 percent of
the facilities that were out of compliance in the study before
privatization, 100 percent were in compliance after
privatization.
If the full power of the private sector is unleashed to
help this coming infrastructure challenge, we will all be
winners. However, to help unleash the power of the private
sector, there is an issue that should be dealt with, though
unfortunately it is not under the jurisdiction of this
committee.
That is to remove the existing volume caps on private
activity bonds for water and wastewater improvements. These
caps limit the use of tax-exempt financing by private entities
working for the public good. 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. This proposal has the support of the Conference of
Mayors, among others.
I understand that this being a tax issue is outside the
jurisdiction of this committee. It is, however, one of the most
important modifications Congress can make to give
municipalities the tools that they need to meet the coming
infrastructure challenge.
Preliminary modeling indicates that this minor alteration
in the tax code could cost the Federal Government very little,
yet leverage huge sums of private capital. This proposal has
precedent. Congress has exempted other environmental facilities
as we have heard before, certain solid waste facilities from
the State volume caps because of perceived public need.
I know some of you, including you, Mr. Chairman, also sit
on the Finance Committee. I encourage you to consider this
change in the tax code as soon as possible.
In conclusion, Mr. Chairman, thank you very much for the
opportunity to present our views. I would be happy to respond
to any questions at the appropriate time.
Senator Graham. Thank you very much, Mr. Cook.
Mr. Gorman.
STATEMENT OF HAROLD J. GORMAN, EXECUTIVE DIRECTOR, NEW ORLEANS
SEWERAGE AND WATER BOARD, NEW ORLEANS, LA, ON BEHALF OF THE
ASSOCIATION OF METROPOLITAN WATER AGENCIES
Mr. Gorman. Good morning, Chairman Graham, Senator Crapo
and members of the subcommittee. My name is Harold Gorman and I
am the executive director of the Sewerage and Water Board of
New Orleans and a Board member of the Association of
Metropolitan Water Agencies, which is one of 40 national
organizations that make up the water infrastructure network.
We would like to thank you for hosting this important
hearing and thank you for advocating $5 billion in grants for
water and wastewater systems as part of the Economic Stimulus
Package. We estimate that these funds could be absorbed in the
economy next year alone and create 200,000 jobs.
We would also like to thank the committee and subcommittee
leaders for calling on President Bush to include in the
administration's budget for emergency supplemental
appropriations, the estimated $155 million needed to help
drinking water agencies conduct vulnerability assessments and
develop emergency response plans as soon as possible.
The urgency and high degree of sophistication required the
security assessments and emergency response in this new
environment we all work in warrant Federal assistance.
I would also like to thank Senator Jeffords for introducing
legislation to authorize funding for research on security
matters. The foresight of Senator Jeffords will provide water
suppliers with cutting edge technology to better protect
consumers.
Dating back to 1899, the Sewerage and Water Board of New
Orleans provides water, sewerage and drainage service to a half
a million consumers. The board is structured as a freestanding
business. There are no generally government subsidies and no
commingling of funds among our drinking water, wastewater and
drainage system. Each system must pay its own way.
Unfortunately, to meet the needs of our $1.2 billion
capital infrastructure program without Federal grants the Board
will have to raise drinking water rates over the next 5 years
by nearly 50 percent and sewer rates by 90 percent.
But New Orleans is one of the poorest cities in the Nation
and our customer's utility bills already exceed the EPA
recommended ratio of utility cost to household income. Twenty-
eight percent of the city's residents live below the national
poverty level. This is second only to the Bronx.
High rate increases will only push working families in New
Orleans and many other cities into a deeper financial hole.
Currently, the primary Federal funding program is a drinking
water SRF. But it was not created to address infrastructure
repair, replacement and refurbishment. The intent was mainly to
provide a means to help small systems better comply with the
Safe Drinking Water Act and correct threats to public health.
Many large system projects do not qualify for the SRF
because when a 100-year-old water pipe burst in downtown New
Orleans, there is no violation of the Safe Drinking Water Act
and usually no public health threat. It is just another pipe
that needs to be replaced.
Unfortunately, there are thousands of miles of old pipes
throughout our Nation's cities. What is needed is an investment
program that not only helps small systems but also recognizes
the challenges facing large systems.
AMWA and our WIN partners have asked Congress to authorize
and appropriate $57 billion over a 5-year period for both
drinking water and wastewater infrastructure. This investment
program should include a strong grants component and ample
opportunity for large systems to participate in innovative
programs such as principal forgiveness, credit guarantees and
refinancing of high interest debt.
Another proposal to solve the gap is privatization, ranging
from asset sales to outsourcing. At the Sewerage and Water
Board we have outsourced almost 40 percent of our business. The
U.S. privatization scene is dominated by a handful of foreign-
owned firms, namely two French multinationals, Vivendi and
Suez, two British firms, Thames Water and the Kelda Group and
RWE, a German utility firm that expects to complete its
purchase of the American Waterworks Company next year.
The American players are OMI, a CH2M Hill company and a
handful of smaller firms. There does not appear to be either a
strong or a weak record of success related to privatization,
but one of the differences between public and private operation
is that investor-owner utilities are ensured the opportunity to
earn a profitable rate of return. Public water agencies instead
reinvest their revenues into their systems.
Whether a municipal system privatizes should always be a
decision for local-elected officials. The Sewerage and Water
Board is a good example. We are now undergoing a managed
competition process under which the Board's employees will bid
alongside private firms to operate the system.
Reengineering and increased efficiency of water systems has
also helped to stretch available dollars through reengineering,
reorganization, reducing staff and installing state-of-the-art
technology, public water systems have saved millions of dollars
and still satisfy customer expectations and EPA regulations.
But in spite of new heights of efficiency, the savings
generated will not resolve the infrastructure funding crisis
facing New Orleans and other American cities.
One of the most innovative ways to stretch local, State and
Federal dollars would be to encourage voluntary regional
partnerships among water systems. A partnership could include
physical infrastructure connections 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.
Another means of 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 small portion of water
infrastructure funds for such research. In some ways the
challenge we face today is not much different than faced by our
predecessors 100 years ago.
Funding of the major urban water systems in 1900 was
accomplished almost exclusively with local dollars. But funding
projects today must reflect the tax structure of 2001. The
Federal Government must join with the urban centers of this
country to help upgrade our water infrastructure. As the U.S.
Conference of Mayors president and New Orleans mayor, Marc
Morial said in testimony earlier this year, ``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.''
AMWR 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 these future ideas with you.
Thank you.
Senator Graham. Thank you very much, Mr. Gorman.
Mr. Pinault.
STATEMENT OF PAUL PINAULT, EXECUTIVE DIRECTOR, NARRANGANSETT
BAY COMMISSION, PROVIDENCE, RI, ON BEHALF OF THE ASSOCIATION OF
METROPOLITAN SEWERAGE AGENCIES
Mr. Pinault. Good morning Chairman Graham and Senator
Chafee. It is a pleasure to be here this morning to provide
comments to your subcommittee. As Senator Chafee noted, I am
also the vice president of AMSA. AMSA represents the interests
of more than 260 publicly-owned wastewater treatment facilities
across the country which provide service to the majority of the
United States sewered population.
At the outset, I would like to thank the members of this
subcommittee for their hard work in making water infrastructure
a national priority and for the continued commitment to meeting
the Nation's clean and safe water needs as we confront the
funding challenge together.
I would like to thank Senator Jeffords and the supporters
of the bill introduced yesterday that provides much needed
research and development funding for drinking water and
wastewater infrastructure security. I and AMSA sincerely hope
this measure passes swiftly with the full bipartisan support it
merits.
While infrastructure security demands require local
governments to stretch limited dollars even further, it becomes
increasingly clear that adequate financial resources to
communities like mine are the most essential elements to
maintaining our Nation's water and wastewater infrastructure.
Yet, since 1980, according to studies by both the U.S. EPA
and the private sector, Federal contributions for water and
wastewater infrastructure projects have declined by an
astounding 75 percent. Despite this funding drop, I assure you
that the wastewater utilities are being extremely innovative in
order to get the most out of the limited dollars available.
My commission has had a positive experience with the State
revolving fund, borrowing approximately $72 million to date.
This has enabled us to fund a significant portion of our sewer
system projects.
The commission's debt service as a percentage of total
operating budget is currently 22 percent this fiscal year. By
2006 it will be 54 percent as a result of $350 million in
planned capital projects over the next 5 years. It will cost
about $750 million to complete those projects.
It is daunting to think that the 54 cents of every dollar
the commission receives will go to debt service rather than
operations.
However, without the SRF the number would be much higher if
we had to borrow at full market rates.
Capital funding needs are driven by the dual forces of
aging infrastructure and increasingly stringent environmental
regulations, not operational costs.
The commission and its fellow AMSA members around the
country have a 6-year documented record of reducing operational
costs. However, no amount of operational streamlining or belt
tightening can offset the cost of replacing critical clean
water infrastructure.
Absent serious reform and increased funding to the SRF, the
commission will be forced to borrow at market rates. This will
make it extremely difficult to fund meaningful wastewater
infrastructure projects. The commission's ratepayers have been
paying their fair share of the cost of service provided, but it
is increasingly clear that they cannot sustain additional
substantial rate increases. Twenty-two percent of the
households in our district fall below the Federal poverty line.
In January of this year the commission raised rates 25
percent, primarily to pay for a portion of the first phase of
our combined sewer overflow project which we initiated this
summer. We will have to apply again within the next 6 months
for additional rate increases to meet growing debt capacity
needs.
For our demographic group, these increases represent
substantial financial hardship. Many communities simply cannot
afford to pay back SRF loans. These communities should be
afforded a full range of funding options including grants to
meet their infrastructure needs.
Simply put, the SRF Program is not and will not be adequate
to ensure continued compliance with our Nation's water quality
laws, regulations and goals. On a national level public
utilities are putting key innovations to work, such as pooled
borrowing and the restructuring of debt.
Environmental management systems and asset management are
becoming essential tools to ensure wastewater utility
competitiveness nationwide.
AMSA, in cooperation with EPA and the Water Environment
Federation is currently engaged in a joint project to develop a
comprehensive EMS guidance for wastewater utilities that will
provide a key tool to ensure a more integrated cost-effective
management approach for utilities in the near future.
At the same time AMSA is also collaborating with EPA on
developing a nationwide asset management program for wastewater
utilities which is scheduled to be implemented at the beginning
of next year.
Despite these key innovations, available funding options
have been narrowed to loans only. AMSA supports the
recommendations contained in the recent water infrastructure
WIN Now report calling for a next generation SRF. By creating
one centralized financing program States can eliminate
duplication, streamline government and save money.
AMSA and the 40 organizations in the WIN effort support the
inclusion of $5 billion in grants for ready to go
infrastructure projects in the Economic Stimulus Package. We
also support a 5-year, $57 billion funding plan to capitalize
State-administered grant and loan programs for water and
wastewater infrastructure.
While understanding the need to consider other potential
long-term options beyond the 5-year period.
Mr. Chairman, Senator Chafee, we look forward to working
with you to resolve these problems. We are available to answer
any of your questions.
Senator Graham. Thank you very much, Mr. Pinault.
Mr. Cook, in your written testimony you talked about the
gap between infrastructure needs and available funding and then
suggested that one of the ways to reduce that gap would be
through a series of actions such as innovative rate structure
and use of new technologies.
Could you give me what you think is the best example of a
community in America that has used those techniques and has
effectively reduced the gap between need and available
resources?
Mr. Cook. Yes, Mr. Chairman. The State of Connecticut
Public Utility Commission has a very active program to identify
marginal small water systems and to consolidate them with
larger water systems. Typically these are investor-owned
drinking water systems that are members of my association.
The Public Utility Commission has a legal authority to ask
a private water company under their jurisdiction to take over a
small system and to make the necessary investments to bring
that small system up to the standards that the EPA regulations
and State regulations require.
For its trouble, the Public Utility Commission will often
offer the private company that takes this burden on a slightly
higher rate of return on the money that they invest and
essentially also allow them to set up a uniform rate structure
so that the cost of providing this fully competent service in
the small system is covered on the backs of all of the
customers of the water utility, a much larger group of people
than just the small community. So, universal rates are a very
effective way of doing this.
Of course, there are precedents in the telephone business
where rural telephone service was provided through various add-
ons to everybody else's telephone bill. So, there are
precedents for this and that happens to be a very effective way
of solving these kinds of problems.
Senator Graham. What has been the effect in the State of
Connecticut of this program? How many of these smaller firms
have merged now with the larger ones?
Mr. Cook. I believe we are talking now about a dozen cases,
but we will be happy to provide for the record more specific
information from our member in Connecticut with the names and
the numbers for you.
Senator Graham. Very good. Thank you.
Mr. Gorman, in your written testimony you raise some
concerns about the manner in which individual States are
operating their State revolving fund. You mentioned a concern
that some States discourage large systems from participating
and that some State's formulas do not adequately take into
account the cost-of-living differentials.
Your comments are somewhat in contrast to several of our
previous witnesses who were urging greater flexibility at the
State level and less Federal direction as to how the State
revolving funds were operated. Are you advocating that there
should be some additional Federal constraints or parameters on
the States as they administer their SRF programs and if so,
what do you think those parameters should be?
Mr. Gorman. No, sir, we don't believe that we should ask
the States to follow some rigid Federal guideline. I think each
State knows its needs best. I think our concern is that the
SRFs tend to be a very small pool of money and rightly so, the
States are going to deal with the smaller systems who have the
greatest critical needs. That is our situation in Louisiana
where we have attempted in the past to use SRF funds, but our
requests have been so huge that it dwarfed the entire budget
available to the State.
Senator Graham. That last comment somewhat gets back to the
issue that I raised at the end of the last panel. That is that
the original concept of the State revolving fund, at least I
know this was the case when the State of Florida established
its fund, was to use it for the period of financing that was
most difficult for local governments and that was while the
plant was still under planning, design and construction. Once
the plan became operational and was generating income, it would
then be shifted to a permanent source of financing and those
initial funds during the preoperational period would be
returned to the State revolving fund and be available for other
communities.
As an increasing number of communities are now using the
State revolving fund for essentially permanent financing
instead of having the money roll over in maybe a 3- or 4-year
period, it is now 20 years and there are even suggestions that
it be longer than 20 years.
Has that been a factor in the fact that Louisiana has not
had funds to deal with the needs of the larger systems?
Mr. Gorman. I think that is the case. I think the needs of
the small towns are so enormous that what few funds are
available are being judiciously allocated to the small
communities in greatest need.
Senator Graham. Mr. Pinault, in your comments you
recommended the creation of long term sustainable and reliable
sources of Federal funding for clean and safe water. What would
be some of your ideas as to what the sources of that permanent
financing might be?
Mr. Pinault. Through the Water Infrastructure Network they
have discussed and evaluated a number of options but they do
not have a specific recommendation at this time. But we do know
that without Federal contributes the local governments cannot
do it alone. As I said, the WIN effort has recommended the $5
billion in support of that for the Economic Stimulus Package
and the $57 billion over 5 years.
Exactly where the source of funds will come from, they are
still discussing that with the 40 members in their group. They
will be glad to share their ideas and thoughts as soon as they
develop them.
Senator Graham. Thank you, we look forward to receiving
that further suggestion.
Senator Chafee.
Senator Chafee. I would just like to thank the chairman and
the panelists. It was compelling testimony. Mr. Gorman and Mr.
Pinault, you are on the front lines of trying to balance the
needs of your ratepayers. Thank you.
Senator Graham. Thank you very much, Senator. I also wish
to thank each of you for your contributions to the communities
that you serve as well as your contribution to our
understanding of these issues today. I hope that we can take
the opportunity to call on you over the next few months as we
begin to move these various suggestions into specific
legislation.
If there is no further business to come before the
subcommittee, I thank all of the witnesses who have educated us
today. The meeting is adjourned.
[Whereupon, at 11:25 a.m. the subcommittee was adjourned,
to reconvene at the call of the chair.]
[Additional statements submitted for the record follow:]
Statement of G. Tracy Mehan, Assistant Administrator for Water,
U.S. Environmental Protection Agency
INTRODUCTION
Good morning, Mr. Chairman and Members of the Subcommittee. I am
Tracy Mehan, Assistant Administrator for Water at the U.S.
Environmental Protection Agency. I welcome this opportunity to discuss
the Nation's investment in drinking water and wastewater treatment
facilities to protect human health and the environment.
As a Nation, we have made great progress over the past quarter
century in reducing water pollution and assuring the safety of drinking
water. The Clean Water Act and the Safe Drinking Water Act have served
us well and provide the solid foundation we need to make sure that all
Americans will continue to enjoy safe drinking water and clean river,
lakes, and coastal waters.
Our success in improving drinking water and surface water quality
is the result of many programs and projects by local, State and Federal
Governments in partnership with the private sector. But our cooperative
investment in water infrastructure--in pipes and treatment plants--has,
more than any other single effort, paid dramatic dividends for water
quality and public health.
I would like to take a moment to recognize the events of September
11. This hearing was originally scheduled for the thirteenth of
September and, as such, this testimony was developed prior to the
tragic events of September 11. Reviewing the testimony again after 1
month, I was struck by how much the world, even the somewhat
circumscribed world of the water industry, has changed. As you know,
EPA has established a Water Protection Task Force to accelerate work
that had been ongoing on critical infrastructure protection. For the
last month, my staff has been working diligently with other Federal
agencies, States, and water industry representatives to ensure that
measures are in place to protect our population from security threats
that could endanger our drinking water supplies or pollute our Nation's
waterways.
But this morning I want to move forward with our original testimony
and give you a brief overview of the progress we have made in improving
water quality and challenges we still face. I will summarize what EPA
knows about the need for future investment in clean water and drinking
water facilities.
Clean and Safe Water--Accomplishments and Challenges
Most Americans would agree that the quality of both surface waters
and drinking water has improved dramatically over the past quarter
century.
Thirty years ago, the Nation's waters were in crisis--the Potomac
River was too dirty for swimming, Lake Erie was dying, and the Cuyahoga
River had burst into flames. Many of the Nation's rivers and beaches
were little more than open sewers.
The 1972 Clean Water Act has dramatically increased the number of
waterways that are once again safe for fishing and swimming. The Act
launched an all-out assault on water pollution, including new controls
over industrial dischargers, support for State efforts to reduce
polluted runoff, and a major investment by the Federal Government to
help communities build sewage treatment plants.
The Federal Government has provided over $80 billion in wastewater
assistance since passage of the Clean Water Act, which has dramatically
increased the number of Americans enjoying better water quality. The
economic and social benefits of improved water quality are readily
evident all across the country. Some of the most dramatic improvements
are seen in urban areas such as Boston, Cleveland, St. Petersburg and
Baltimore, where the efforts to restore the health and vitality of our
waters has also led to economically vibrant, water-focused urban
environments.
The dramatic progress made in improving the quality of wastewater
treatment since the 1970's is a national success. In 1968, only 86
million people were served by secondary or advanced treatment
facilities. Today, of the 190 million people served by wastewater
treatment facilities, about 165 million people are served by secondary
or better treatment.
We have also made dramatic progress in improving the safety of our
Nation's drinking water. Disinfection of drinking water is one of the
major public health advances in the 20th century. In the early 1970's,
growing concern for the presence of contaminants in drinking water
around the country prompted Congress to pass the Safe Drinking Water
Act. Today, the more than 265 million Americans who rely on public
water systems enjoy one of the safest supplies of drinking water in the
world.
Under the Safe Drinking Water Act, EPA has established standards
for 90 drinking water contaminants. Public water systems have an
excellent compliance record--more than 90 percent of the population
served by community water systems receive water from systems with no
reported violations of health-based standards in place as of 1994. In
the past decade, the number of people served by public water systems
meeting Federal health standards in place as of 1994 has increased by
more than 23 million.
Despite past progress in reducing water pollution, almost 40
percent of the Nation's waters assessed by States still do not meet
water quality goals established by States under the Clean Water Act. On
a national scale, States report that the leading sources of pollution
include agriculture, municipal point sources, and urban runoff and
storm sewers. Other sources, ranging from factories to forestry
operations, cause water pollution problems on a site-specific basis.
Point-source pollution has been so greatly reduced that now non-point
sources (i.e., diffuse runoff) are the leading cause of water
pollution.
Clean Water and Drinking Water State Revolving Loan Funds
The primary mechanism that EPA uses to help local communities
finance water infrastructure projects is the State Revolving Fund (SRF)
established in the Clean Water Act and the Safe Drinking Water Act. The
SRFs were designed to provide a national financial resource for clean
and safe water that would be managed by States and would provide a
funding resource in ``perpetuity.'' These important goals are being
achieved. Other Federal, State, and private sector funding sources are
also available for community water infrastructure investments.
Under the SRF programs, EPA makes grants to States to capitalize
their SRFs. States provide a 20 percent match to the Federal
capitalization payment. Local governments get loans for up to 100
percent of the project costs at below market interest rates. After
completion of the project, the community repays the loan, and these
loan repayments are used to make new loans on a perpetual basis.
Because of the revolving nature of the funds, funds invested in the
SRFs provide about four times the purchasing power over 20 years
compared to what would occur if the funds were distributed as grants.
In addition, low-interest SRF loans provide local communities with
dramatic savings compared to loans with higher, market interest rates.
An SRF loan at the interest rate of 2.6 percent (the average rate
during the year 2000) saves communities 25 percent compared to using
commercial financing at an average of 5.8 percent (see Chart 1).
The Federal Government has provided more than $18 billion in
capitalization grants to States for their Clean Water SRFs through
FY2001. With the addition of the State match, bond proceeds, and loan
repayments, the cumulative funds available for loans from the Clean
Water SRFs were more than $34 billion of which $3.4 billion was still
available as of June 30, 2000.
Since 1988, States have made over 9,500 individual loans for a
total of $30.4 billion. In 2000, the Clean Water SRFs issued a record
total of 1,300 individual loans with a value of $4.3 billion (see Chart
2). The Clean Water SRFs have provided about $3 billion in loans each
year for several years and are widely considered a tremendous success
story.
In 1996, Congress enacted comprehensive amendments to the Safe
Drinking Water Act which created an SRF program for financing of
drinking water projects. The Drinking Water SRF was modeled after the
Clean Water SRF, but States were given broader authority to use
Drinking Water SRFs to help disadvantaged communities and support
drinking water program implementation.
Through fiscal year 2001, Congress has appropriated $4.4 billion
for the Drinking Water SRF program. EPA has reserved $83 million for
monitoring of unregulated contaminants and operator certification
reimbursement grants. Through June 30, 2001, States have received $3.65
billion in capitalization grants, which when combined with State match,
bond proceeds, and other funds provided $5.2 billion in total
cumulative funds available for loans. Through June 30, 2001, States
have made close to 1,800 loans totaling $3.7 billion. Approximately 74
percent of the loans (39 percent of dollars) were provided to small
water systems that frequently have a more difficult time obtaining
affordable financing. States also reserved a total of approximately
$575 million of SRF capitalization grants for other activities that
enhance the management of water systems, protect sources of drinking
water, and support the drinking water program. Although the Drinking
Water SRF is considerably newer than the Clean Water SRF, it is showing
the same promise as an infrastructure financing success story.
Congress should consider adding some of the flexibilities of the
Drinking Water SRF program to the Clean Water SRF program and should
extend the provision which allows States to transfer funds between
their Clean Water and Drinking Water SRFs in order to allow States the
flexibility to better direct funds toward priority needs.
Water Infrastructure--Future Needs
The Clean Water Act Sec. 516 (b)(1) and the Safe Drinking Water Act
Sec. 1452 both require that EPA periodically develop a ``needs survey''
to identify needed water infrastructure investments.
In February of this year, EPA released its second report on
drinking water infrastructure needs showing that $150.9 billion is
needed over the next 20 years to ensure the continued provision of safe
drinking water to consumers.
The survey found that water systems need to invest $102.5 billion,
approximately 68 percent of the total need, in what the report calls
``current needs.'' In most cases, current needs would involve
installing, upgrading, or replacing infrastructure within the next few
years to enable a water system to continue to deliver safe drinking
water. A system with a current need, therefore, usually is not in
violation of any health-based drinking water standard. For example, a
surface water treatment plant may currently produce safe drinking
water, but the plant's filters may require replacement due to their age
and declining effectiveness, if the plant is to continue to provide
safe water. Future needs account for the remaining $48.4 billion in
needs; for example, projects that systems would undertake over the next
20 years as part of routine replacement such as reaching the end of a
facility's service life.
The survey includes needs that are required to protect public
health, such as projects to preserve the physical integrity of the
water system, convey treated water to homes, or to ensure continued
compliance with specific Safe Drinking Water Act regulations (see Chart
3). Transmission and distribution costs are the largest category, at 56
percent of the total need, or $83.1 billion. Treatment projects make up
the second largest category of needs (i.e., 25 percent) and have a
significant benefit for public health.
Approximately 21 percent, or $31.2 billion, is needed for
compliance with current and proposed regulations under the Act. Nearly
80 percent of the regulatory need is to comply with rules which protect
consumers from harmful surface water microbial contaminants, such as
Giardia and E. coli. Most of the total needs derive from the costs of
installing, upgrading, and replacing the basic infrastructure that is
required to deliver drinking water to consumers--costs that water
systems would face independent of any Safe Drinking Water Act
regulations.
EPA's most recent survey of clean water infrastructure needs was
released in 1996, and we plan on releasing a new clean water needs
survey in 2002. The 1996 clean water needs survey estimated needs of
$140 billion, including $26.5 billion for secondary treatment projects,
$17.5 billion for advanced treatment, and $73.4 billion for various
types of sewage conveyance projects, including collectors,
interceptors, combined sewers, and storm water, and $10 billion for
nonpoint pollution control projects (see Chart 4).
EPA is working to supplement the 1996 clean water needs survey as
more accurate information becomes available. For example, the Agency
has developed a model that better predicts costs associated with
reducing sanitary sewer overflows.
BROADER CONTEXT OF WATER INFRASTRUCTURE FINANCING
Over the past year, several stakeholder groups including the Water
Infrastructure Network, the Association of Metropolitan Sewerage
Agencies, and the American Water Works Association issued reports
estimating water infrastructure needs. These estimates were all
substantially above those of EPA's Needs Surveys. Generally, these cost
estimates differ from EPA's because the methodologies and definitions
for developing them differ. For example, EPA Needs Surveys include only
projects that are eligible for SRF funding under the Clean Water Act
and Safe Drinking Water Act. Also, EPA requires that costs included in
the Needs Surveys be established by planning or design documentation.
The Agency also decided to undertake a broader review of needs and
spending for water and wastewater infrastructure, including estimating
whether there is a quantifiable gap between future needs and current
spending. This analysis B known as the Gap Analysis B has just recently
undergone independent peer review by external subject matter experts.
We expect the final analysis will be ready for public release later
this year.
EPA recognizes that effective decisionmaking concerning water
infrastructure financing benefits from a better understanding of the
broader context of this effort. Key components in the broader context
of water infrastructure that need to be more fully evaluated include
the following:
<bullet> Population Growth: Steady growth and shifts in population
put substantial pressure on local governments to provide expanded
drinking water and sewer services. While EPA does not provide funding
for projects related to population growth per se, this is an important
factor for locals.
<bullet> Aging Infrastructure: Many sewage and drinking water pipes
were installed between 50 and 100 years ago, and these pipes are
nearing the end of their useful lives.
<bullet> Current Treatment Issues: In 1998, States, Tribes, and
interstate commissions determined that wastewater treatment facilities
and combined sewer overflows were two of the leading causes of
impairment to estuaries. A June 2000 EPA report A Progress in Water
Quality estimates that by 2016, pollution levels could be similar to
levels observed in the mid-1970's if there is no increase in treatment
efficiency.
<bullet> Research and Development: Innovation, research, and
development are essential elements of promoting the use of more
effective, efficient, and affordable technologies in water and
wastewater treatment. A recent EPA report on public and private R&D
expenditures associated with water pollution abatement (``A
Retrospective Assessment of the Costs of the Clean Water Act 1972-
1997'') showed that expenditures decreased by half from the early
1970's to the late 1990's. The Federal investment in drinking water
research has increased substantially over the past 5 years.
<bullet> Increasing Operation and Maintenance Costs: As the size
and complexity of water and sewer systems increase, and facilities get
older, the costs of operations and maintenance tend to increase.
<bullet> Affordability: Although water has historically been
underpriced, some systems may find it difficult to replace or update
aging water and sewer systems and keep household user charges at
affordable levels, especially for low-income households and
communities.
A number of stakeholder groups have called for a significant
increase in Federal investment in water and wastewater infrastructure.
Certainly, there will be a continuing role for the Federal Government
in helping to meet the challenge of extensive infrastructure investment
need, but it cannot be the only solution. The solutions will have to be
multi-faceted with Federal, State, and local, public and private
investment of time, energy, money, research, and, perhaps most needed,
innovative thinking and bold actions. We must encourage States and
local governments to think strategically as they plan for forthcoming
rules and program requirements, infrastructure repair and replacement,
and overall protection of the water that sustains their communities.
Ensuring that our water infrastructure needs are addressed in a
sustainable manner will require a shared commitment on the part of the
Federal, State and local governments, private business, and consumers.
Governor Whitman and I are committed to working in partnership with
Congress, States, local governments, the private sector, and others to
better understand the water infrastructure challenges we face and to
play a constructive role in helping to define an effective approach to
meeting these challenges in the future.
CONCLUSION
We believe that the SRF mechanism has proven to be a powerful and
effective tool in helping States and utilities achieve their public
health and environmental goals. As your Committee continues to study
water infrastructure needs, the Administration would like to encourage
a constructive dialog on the appropriate role of the Federal Government
in addressing these needs. Thank you, Mr. Chairman, for giving me the
opportunity to speak with you this morning.
[GRAPHIC] [TIFF OMITTED] T0654.001
[GRAPHIC] [TIFF OMITTED] T0654.002
[GRAPHIC] [TIFF OMITTED] T0654.003
[GRAPHIC] [TIFF OMITTED] T0654.004
Statement of Stephen E. Howard, Senior Vice President, Lehman Brothers,
New York, NY
Overview of Infrastructure Project Financing Options for Public/Private
Partnerships
FINANCING APPROACHES FOR PUBLIC/PRIVATE PARTNERSHIPS
There are four basic structuring approaches based on project
ownership and operation.
----------------------------------------------------------------------------------------------------------------
Ownership Operation Agreement Model
----------------------------------------------------------------------------------------------------------------
I............................... Public............ Private........... 3 to 5 years...... Operations Only
II.............................. Public............ Private........... 15 to 25 years.... Design/Build/
Operate
III............................. Private........... Private........... 25+ years......... Build/Operate/Own/
Transfer
IV.............................. Private........... Private........... NA................ PUC/Monopoly
----------------------------------------------------------------------------------------------------------------
Structures II and III are generally considered to be true models of
public/private partnerships.
The public sponsor maintains interface with service recipients and
sets user rates.
The public sponsor and the private partner enter into a short- or
long-term operating agreement for a wholesale service under a
predetermined, negotiated fixed price service fee structure.
Under structure IV, the private company provides service with no
direct public sponsor involvement.
[GRAPHIC] [TIFF OMITTED] T0654.005
FINANCING OPTIONS FOR NEW PROJECTS--CONTINUED
Ownership and Credit Structure
<bullet> Public Ownership: Pledge of system revenues/operating
agreement
<bullet> Private Lease/Ownership: Pledge of project revenues/
operating agreements/assets
Operating Agreement Term
<bullet> The new IRS regulations (``97-13'') have extended the
permissible management contract term for certain publicly-owned
infrastructure assets financed with governmental purpose bonds from 5
years to 20 years.
<bullet> Qualifying Assets with operating agreements that do not
comply with 97-13 and/or with terms longer than 20 years must be
financed with private activity tax-exempt bonds.
Capital Improvement/Expansion Responsibility
Construction, Acceptance and Operation Risk Allocation
Availability of Grants and Revolving Loan Funds
Public Ownership
<bullet> 100 percent governmental purpose or private activity tax-
exempt debt financing possible.
<bullet> Many publicly-sponsored projects have direct access to
capital markets as well as grants and revolving loan funds.
<bullet> The taxable and tax-exempt municipal bond market provides
single source of debt funding for construction and permanent financing
Private Lease/Ownership
<bullet> 80 percent to 90 percent taxable/tax-exempt private
activity bonds, balance equity financed.
<bullet> May include some combination of construction loan and
permanent financing.
Tax-Exempt Project Debt
The tax-exempt market has been an increasing source of ``off-
balance sheet'' financing for large infrastructure projects.
Construction and operating period term financing for non-recourse
project credits with minimal negative arbitrage is possible.
Public ownership structure (including 63-20 and 501(c)3
corporations) is possible to eliminate tax-exempt volume cap
requirement for certain types of projects, but limits operating
flexibility.
Tax-exempt financing for privately-owned projects will be subject
to tax-exempt volume cap.
tax-exempt financing availability
------------------------------------------------------------------------
Private Private
Governmental activity activity
Asset class purpose no no bond with
bond cap cap\1\ bond cap
------------------------------------------------------------------------
Water/Wastewater...................... X X
Solid waste........................... X X X
Airport............................... X X
Surface transportation................ X
Ports................................. X X
Housing............................... X X
Education............................. X
Healthcare............................ X
------------------------------------------------------------------------
\1\ Public ownership
\2\ Private ownership
TAX-EXEMPT PROJECT DEBT: INVESTOR PERSPECTIVE
Constrained market and essential service characteristics of many
infrastructure projects assure strong credit fundamentals.
Strong credit fundamentals carry over to highly-structured
nonrecourse transactions with construction and operating risks properly
allocated among project participants.
Demand-based essential service infrastructure project financings
can be highly leveraged.
Construction risks are viewed as manageable for most asset
categories.
Highly-regarded private companies active in the infrastructure
market are important contract counterparties.
CONCLUSION
Tested and proven financing structures exist to finance public/
private partnerships with tax-exempt bonds under existing tax laws.
Infrastructure projects can be structured as public/private
partnerships to optimize development, construction and long-term
operation, as well as appropriate sharing of risks between the public
and the private sector.
Highly-regarded private companies active in the infrastructure
market facilitate the structuring of long-term public/private
partnerships for most asset classes.
An experienced, professional project team which includes legal,
technical and financial expertise is crucial to determine the optimal
public/private partnership implementation plan.
__________
Statement of Rick Farrell, Executive Director, Council of
Infrastructure Financing Authorities
My name is Rick Farrell and I am here today in my capacity as
Executive Director of the Council of Infrastructure Financing
Authorities.
CIFA is a national organization made up primarily of State and
local officials engaged in the development and financing of water and
wastewater pollution control projects and the operation of State
Revolving Funds for infrastructure financing. The organization counts
among its members 44 States, the District of Columbia and the
Commonwealth of Puerto Rico. The people who represent the member
entities of CIFA are some of the most respected finance officials in
the country, and bring countless years of experience in the public and
private sectors to bear in their day-to-day functions.
We appreciate the opportunity to share our views with the
Subcommittee on the important issue of improving utilization of
available water and wastewater infrastructure funding. With the ever-
increasing projections of need for environmental infrastructure of all
kinds it is clear that available resources must be utilized in ways
that maximize their effect.
I note the particular focus on financial innovations. Our members
have been in the forefront of creating and implementing financial
structures that effectively stretch the available Federal and State
dollars while operating within the limits of statute, Federal
oversight, and fiscal responsibility. An important part of the CIFA
mission is to foster such innovation and encourage the exchange of
information concerning best practices in infrastructure financing among
the States, and between the States, the national government, and the
private sector.
I want to first address the context in which the effort to foster
innovation and new approaches takes place. As Congress considers the
policy and funding questions deriving from the enormous anticipated
capital needs for wastewater and drinking water infrastructure, it is
our strong view that the foundation for future progress must remain the
State Revolving Fund programs. It is vital as well as sensible that the
SRF partnership between the Federal and State governments continue as
the basic mechanism for water infrastructure assistance to local units
of government throughout the country.
The State Revolving Loan Funds are arguably the most successful
environmental programs ever. Since 1989, the Clean Water SRF has
provided $33.6 billion in low-interest loan funding for over 9,500
individual projects, while the Drinking Water SRF has provided $3.2
billion in assistance, both loans and grants, for over 1,500 projects
in a little less than 4 years.
The proven track record argues strongly in favor of the SRFs as the
premier mechanism for delivery of environmental infrastructure
construction subsidies. With congressional support and cooperation of
the Environmental Protection Agency the SRFs are positioned to
facilitate the next wave of initiatives and activities to assure water
quality, and will do so in a cost-effective, efficient, and creative
manner.
Consistent with our strong support for the SRF model, we are
opposed to the creation of independent grant programs operating outside
of the State SRFs. The Federal-State partnership and the successes it
has created would be severely threatened by the onset of separately
delivered grant programs, earmarking, and other alternate funding
mechanisms. Separate grant programs not only complicate the funding
process at the local level but often also serve to delay project
initiation because the prospect of a grant diminishes the incentive to
pursue other assistance such as a state-revolving fund loan. These
unintended consequences of delaying project initiation and creating
unrealistic expectations are often exaggerated in the case of
economically distressed communities where the needs are often most
urgent.
Programmatically, it clearly makes most sense to provide all
infrastructure construction subsidies, be they in the form of
subsidized loans, grants, or grant equivalents such as principal
forgiveness, through the SRF structure that is already established and
has been successfully functioning in all the States since 1989. We
should strive for fewer, not more programs to make accessing them
easier for potential applicants. This saves overhead costs and reduces
the confusion to communities trying to access a multitude of programs.
Economically, it also makes most sense to provide infrastructure
construction subsidies to local communities through the SRF programs
since they can provide this assistance more efficiently than can
independent grant programs. The goal should be to provide the subsidies
necessary to get projects completed, not to provide grants to all.
Using the SRFs to target subsidies--perhaps with grants as well as with
loans--extends valuable infrastructure dollars, a key goal for us all.
Efficiency gains achieved by the SRF programs translate into more
infrastructure construction than can be achieved by comparable grant
programs. The success story of the SRFs is clearly a model that should
be built upon.
Indicative of the vitality of the SRF program to facilitate
financial innovation is the capacity it affords to leverage the funds.
Leveraging, in the SRF context, means that States have the ability to
use the Federal capital grants, as well as their matching share, as
collateral to borrow in the public bond market for purposes of
increasing the pool of available funds for project lending. This option
allows the States to use the funds as security or a source of revenue
for the payment of principal and interest on bonds, so long as the bond
proceeds are deposited back into the SRF. Security for the bonds may be
provided by any of the SRF assets including anticipated future revenues
from loan repayments. The use of the assets of the SRF to generate new
moneys which can be used immediately to fund more projects underscores
the true financial strength of the SRF model.
Leveraging the SRF can dramatically increase the funds available
for lending. Close to $9 billion has been added to the loan pool by the
24 States that have leveraged their funds. This compares with $18.3
billion in Federal capital grants thus far. The successful leveraging
occurring with the SRFs has allowed us to address serious problems much
more quickly than anyone had anticipated by delivering substantially
increased amounts of affordable capital sooner to meet critical
infrastructure needs. There are examples of leveraging that demonstrate
a multiplier effect of project funding levels at two to four times the
original investment.
The Clean Water SRF program authorizing legislation establishes a
state-operated program that utilizes Federal capitalization grants and
State matching funds to achieve the mutually desired water quality
goals. After more than 10 years of successful program operation it is
clearly the experience of CIFA member States that the more latitude and
operating flexibility the States are allowed, the greater is our
ability to accomplish the environmental and financial goals of the
program. An example of the utility of flexibility is illustrated by the
fact that among all the States and territories operating revolving
funds, no two are structured precisely alike, yet all share the same
water quality objectives. While we recognize and acknowledge that the
significant levels of Federal dollars involved call for considerable
accountability on the States' part, we also assert that excessive
oversight and ``one-size-fits-all'' administrative control by the
Environmental Protection Agency can have the effect of stifling our
ability to innovate and create program structures that best accomplish
our common goals. The SRF's are successful because their underlying
concept is based on program management and service delivery at the
State and local level with broad accountability at the Federal level.
This model should be protected, allowed to flourish, and emulated in
other program areas.
I believe a useful question for the Subcommittee to look at is why
leveraging is not an option for more States and to examine the
underlying issues and concerns of the States in this regard. While the
ultimate decision with respect to leveraging is and must remain within
the purview of the State governments, there are aspects of Federal
policy and EPA requirements which, if modified, would likely serve to
facilitate expanded leveraging. Lessening the administrative restraints
and requirements of the SRF programs would also serve to make the
programs more efficient, while remaining accountable under the precepts
of the authorizing legislation. Examples of these limitations include
the ability to freely transfer funds between the Clean Water and Safe
Drinking Water SRFs, required pre-approval for certain financing
techniques, including simple leveraging, and the various conditions
that must be satisfied by all recipients of funds made available
directly from Federal capitalization grants.
While mindful that the jurisdiction of the Committee does not
extend to tax law, I feel it is important to point out that any
comprehensive review of means available to maximize water
infrastructure funding should include consideration of the arbitrage
rebate rules as they affect the leveraged SRF programs. In this
context, arbitrage is the difference between the interest rates at
which tax-exempt bonds are issued and the rates at which the proceeds
are invested. The States that operate leveraged SRF programs are
compelled by the arbitrage rules to either limit the rate at which
funds can be invested, or rebate to the treasury the net earnings on
those portions of the SRF funds that are considered under these rules
to be bond proceeds.
This greatly reduces the resources available to fulfill the funds'
purpose of providing below-market financial assistance to help
communities meet Federal standards for their water programs.
CIFA estimates that in the absence of these restrictions, the
affected States could earn an additional $100-$200 million annually on
their SRF capitalization funds which, when leveraged, would permit an
additional $200-$400 million annual investment in needed water
projects.
The arbitrage rules, which were enacted before State revolving
funds came into existence, were intended to prevent abusive arbitrage
practices, including ``over-issuance'' of bond indebtedness beyond the
amount to be spent for a particular project as well as early issuance
before bond proceeds are actually needed. Such practices are not an
issue in the case of SRFs, whose earnings, by law, must be retained in
the revolving funds and can only be used for the fund's purpose of
financing water and wastewater facilities. Funds in an SRF, whether
capitalization grants, loan repayments, or earnings on invested moneys,
can be expended only for eligible projects listed on the State's
current-year Intended Use Plan, and Federal moneys are made available
only to the extent that verifiable project spending has or will occur.
Prompt loaning out of bond proceeds and other available fund assets is
ensured by the oversight and program audits required by the U.S.
Environmental Protection Agency. These restrictions placed on SRFs by
Federal law assure that exemption from arbitrage rebate requirements
will not lead to the abuses that inspired the arbitrage rules.
In conclusion, it is our position that any congressional
initiatives targeting water and wastewater infrastructure funding,
affecting current SRF operations, or expanding the mission of the SRFs,
should be developed with the recognition that innovative methods of
addressing water and wastewater needs are more likely to originate at
the State, rather than the Federal, level. The States are closer to the
problems that need to be addressed, and the States are capable of
tailoring their approach to best meet their unique needs. The best hope
for discovering and realizing innovative financing approaches is to
give the States wide latitude, within the constricts of appropriate
accountability, in designing and implementing their locally-tailored
solutions.
__________
Statement of Peter L. Cook, Executive Director, National Association of
Water Companies for J. James Barr, President and CEO, American Water
Works Company
Good Morning Mr. Chairman and Members of the Subcommittee, I am
here to testify for J. James Barr, President and CEO 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 that
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 H<INF>2</INF>O 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 decisionmaking, and only limited,
targeted Federal Government involvement.
---------------------------------------------------------------------------
\1\ The H<INF>2</INF>O 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.
---------------------------------------------------------------------------
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 \2/3\ rds 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 percent), particularly in comparison to
electricity (2.4 percent) and telecommunications (2.1 percent). 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 percent of all water systems serve less
than 3,300 people, and a mere 2 percent 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 moneys
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 percent. 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
percent of their annual capital outlays on modernizing and expanding
their infrastructure. My company alone has invested $6 billion since
the early 1970's, 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
percent 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 percent savings; Seattle WA, 40 percent
savings; Tampa FL, 21 percent.
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:
<bullet> Americans will continue to enjoy clean and safe water for
generations to come at reasonable and reliable rates;
<bullet> Congress and the Federal Government will have performed
their role successfully, without the need for huge, budget-breaking
grants; and
<bullet> 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 No. 1 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 decisionmakers. 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
percent, 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 percent of all community water systems nationwide and
serve about 15 percent of Americans but receive a mere 3.5 percent 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.
______
Responses from Peter L. Cook to Additional Questions From
Senator Jeffords
Question 1. You made a strong case for the benefits of public
private partnerships and you have cited several examples of municipal
water systems that are using this approach to reduce their costs. How
do you account for the savings associated with these examples? How
could the Federal Government incentivize this type of arrangement?
Response. The savings from public-private partnerships in the water
sector can be seen in the reduction of both operating and capital
costs. First, the private sector often can improve procurement
practices for the major inputs of production (purchased water,
chemicals, energy, and so on). Larger private companies can use
purchasing power to lower unit costs. Second, the private sector often
can deploy labor more efficiently and lower total personnel costs. The
labor force may be reduced over time (typically through attrition,
rather than reductions in force) although the professional and wage
opportunities for workers usually expand. Third, the private sector
emphasizes the efficient utilization of modern technologies for water
treatment and distribution. The use of the appropriate and most
efficient technology can reduce total costs, often while improving
quality and reliability. Fourth, market-based models and associated
partnerships can lower capital costs by introducing competitive
practices and innovative financing methods to major construction
projects. Fifth, larger private companies can help achieve economies of
scale by providing managerial and operating services to multiple water
systems, with or without physical interconnection. Finally, investor-
owned utilities can assume total responsibility for providing water
service and therefore release the municipality from this function
altogether. The private water company remains closely regulated by
State drinking water agencies (as to safety and health) and the public
utility commissions (as to rates and finances).
The Federal Government can provide a variety of incentives to
encourage pubic-private partnerships in the water sector. First, the
Federal Government can more aggressively encourage all States to make
private water companies eligible for Drinking Water SRF loans, as
current law allows. Similarly, Congress can allow private water utility
access to the Clean Water SRF. Second, the Federal Government, through
the Environmental Protection Agency (EPA), could provide information
and guidance on privatization in the water sector. Third, the Federal
Government could support research and demonstration projects that
provide models for privatization. Finally, the Federal Government can
explore taxation, accounting practices, and financing policies that
would level the playing field between private and public providers of
water service (see discussion of private activity bonds below).
The Federal Government should also avoid putting in place
disincentives to public-private partnerships, such as direct grants to
water utilities. Such grants can discourage public-private partnerships
and creative problem solving by municipalities.
The ``scorecard'' below, put together by Public Works Financing,
gives the status of publicprivate partnerships in the water industry.
The more than $1.5 billion of investment described within merely hint
at the potential the private sector has for assisting in addressing the
infrastructure financing challenge.
U.S. Water Privatization Scorecard--Communities with Long-term Water Partnerships
----------------------------------------------------------------------------------------------------------------
Contract
Municipality Description (system Plant size (mgd) Term Estimated Cost
type) (years) Savings
----------------------------------------------------------------------------------------------------------------
Atlanta, GA...................... Water............... 201.4............... 20 $400 million (45
percent)
Augusta, GA...................... Wastewater.......... 46.................. 10 $5 million
Bessemer, AL..................... DBO Water........... 24.................. 20 NA
Boston, MA....................... Wwtr sludge......... 125 dtpd............ 15 $95 million
Brockton, MA..................... Water/Wwtr.......... 24.................. 20 $20 million
Chicago, IL...................... Wwtr sludge......... 150 dtpd............ 20 NA
Cranston, RI..................... DBO Wastewater...... 23.................. 25 $35 million
Edmonton, ALB.................... Wastewater.......... 24.................. 8 Cdn $3.2 million
Evansville, IN................... Water............... 60.................. 10 $8.1 million
Farmington, N.M.................. Water/Wwtr.......... 20.................. 8 $4 million
Franklin, OH..................... BOT Wastewater...... 4.5................. 20 23 percent
Franklin, OH..................... BOT Water........... 5................... 20 30 percent
Fulton Co., GA................... Wastewater.......... 24.................. 10 $4 million
Hamilton, Ont.................... Water/Wwtr.......... 300/5............... 10 Cdn $12 million
Indianapolis, IN................. Wastewater.......... 250................. 14 $250+ million
Milwaukee, WI.................... Wastewater.......... 550................. 10 $145 million (30
percent)
Moncton, N.B..................... DBO Water........... 25.................. 20 Cdn $12 million
New Haven, CT.................... Wastewater.......... 45.................. 15 $53 million (30
percent)
Newport, RI...................... Wastewater.......... 10.................. 20 $22 million (24
percent)
Norwalk, CT...................... Wastewater.......... 20.................. 20 $10 million
Oak Ridge, TN.................... Utilities........... .................. 10 + 10 $70 million
Plymouth, MA..................... DBO Wastewater...... 3................... 20 $7.4 million (19.7
percent)
Rahway, NJ....................... Water............... 6................... 20 $32 million
Seattle, WA...................... DBO Water........... 120................. 25 $70 million (40
percent)
Springfield, MA.................. Wastewater.......... 67.................. 20 10 percent
Stonington, CT................... Wastewater.......... 3................... 20 NA
Tampa, FL........................ DBO Water........... 66.................. 15 + 5 $85 million (21
percent)
Tampa, FL........................ BOT Desal........... 25.................. 30 50 percent
Taunton, MA...................... Wastewater.......... 8.3................. 20 $62 million
Washington Boro, NJ.............. DBO Wastewater...... 1.2................. 15 + 5 $2.2 million (11
percent)
West Haven, CT................... Wastewater.......... 12.5................ 15 $12 million
Wilmington, DE................... Wastewater.......... 105................. 20 $60 million
Woonsocket, RI................... DBO Wastewater...... 16.................. 20 $45 million
----------------------------------------------------------------------------------------------------------------
Question 2. In your written testimony, you advocate for
consolidation where possible before infrastructure investments are
made. Can you elaborate on how you believe the Federal Government could
best provide incentives for consolidation?
Response. The Federal Government can build on the current framework
of the Safe Drinking Water Act and the Drinking Water State Revolving
Fund (SRF) to encourage cost-effective consolidation of the water
industry. First, the States should be encouraged to use the
enforcement, variance, and exemption.tools under the Act to encourage
noncompliant systems to consolidate with another water system. Second,
the States should be encouraged to fully incorporate restructuring and
consolidation in their programs for ensuring that new systems have
adequate technical, financial, and managerial capacity and for
developing the capacity of existing water systems. The Federal and
State capacity development programs can provide guidance and technical
assistance for consolidation as part of the capacity development
effort. Third, the States should be encouraged to provide State-level
incentives for restructuring from the various regulatory agencies
involved in drinking water. Fourth, projects that involve consolidation
of systems (for example, pipelines for physical interconnection or
improvements to prepare a system for acquisition) should be given
priority in Federal funding programs, particularly the SRF. Finally,
tax and other broad incentives for newly consolidated systems should be
considered. For example, tax incentives might be provided to investor-
owned water systems that assume responsibility for a troubled small
water system.
Finally, it is worth noting that unless Federal assistance programs
are carefully constructed incorporating the suggestions made above,
consolidations may actually be discouraged. Without careful planning,
Federal assistance could be used unproductively to prop up failing
systems that otherwise would be ripe for consolidation.
______
Responses From Peter L. Cook to Additional Questions from
Senator Graham
Question 1. In your written testimony, you discuss the advertised
``gap'' between infrastructure needs and available funding. You
indicate that this gap is based on a scenario where utilities do
nothing to fill this gap, and list a series of actions including
innovative rate structures, reducing cost through increased
technologies, and others that could be taken. Can you give me your best
example or case study of a utility where some of these actions have
been taken and the gap has been reduced?
Response. The so-called ``gap'' between funding needs and funding
levels is based on a static, aggregate analysis that includes
assumptions that may not be well supported at the system level, as this
question rightly recognizes. Several water utilities, private and
public, are successfully meeting the infrastructure challenge by
keeping pace with investment needs. Costs can be lowered through better
planning, improved efficiency in water production and consumption, and
the use of innovative technologies on both the capital and operating
sides. For many water systems, the actual cost of service--even when
accounting for substantial investment needs--can be recovered through
rates charged to water customers. Cost-based rates have the distinct
advantage of sending appropriate price signals to customers and
encouraging efficient water use. Cost impacts can be managed through
innovative rate structures that mitigate adverse effects in terms of
equity and affordability.
For the most part, the larger investor-owned water utilities have
tried to keep pace with the investment needs of their systems. Indeed,
private companies have positive incentives to make prudent capital
investments in a timely manner, subject to review by the State public
utility commissions. Also, private utilities generally do not have
opportunities to subsidize the cost of operations through reduced cost
loans, grants, or intergovernmental transfers. Assuming that most
companies are investing appropriately to maintain the value of their
systems, a funding gap will emerge for private companies only if they
do not receive timely recognition of prudent costs from the State
public utility commissions. The many systems owned and operated by the
American Water Works Company provide numerous examples of how investor-
owned water companies are meeting the water infrastructure challenge.
The Philadelphia Suburban Water System provides another excellent
example of a water company that is keeping pace with investment needs
and deploying financing and rate mechanisms (the Distribution System
Improve Charge) to ensure that costs are recovered.
The evidence that many municipal water utilities are also
successfully meeting the infrastructure funding challenge undermines
the case for massive subsidization of the water. The Louisville Water
System, a wholly-owned municipal corporation, is a case in point. Many
other publicly-owned water systems, however, are reluctant to both make
the necessary investment in their systems or raise rates accordingly.
We would be pleased to arrange for executives from these companies
to come to Washington to discuss these issues at your convenience.
Question 2. Can you describe the process that utilities use to
incorporate capital replacement costs into their rate structure? Do
public utilities use this same procedure?
Publicly- and privately-owned water utilities differ in that the
former tend to follow the ``cash needs'' basis for determining revenue
requirements (what they must recover through rates), while the latter
follow the ``utility basis,'' summarized as follows:
------------------------------------------------------------------------
Method of Recovery
---------------------------------------
Cash Needs
Approach Utility Basis
------------------------------------------------------------------------
Type of system:
Capital-related costs......... Many publicly- Most privately-
owned systems. owned systems
Component of total revenue
requirements:
Capital-related costs......... Capital Depreciation
expenditures
(major and
recurring).
Debt service on Return on assets
bonds. (debt and equity)
Taxes......................... Payment in lieu of Taxes
taxes.
Operation and maintenance..... Same.............. Same
------------------------------------------------------------------------
The key difference between these methods is in the recovery of
capital costs. A publicly-owned system following the cash-needs
approach will use a ``pay-as-you-go'' method for some capital
improvements, and use bonds for long-term financing. Pay-as-you go
(advocated by some) can lower total costs, but tends to add to revenue
and rate instability. A major drawback is that it can create an
intergenerational inequity by forcing today's customers to bear a
disproportionate burden for financing facilities that will benefit
future generations of customers (an intergenerational subsidy).
Financing large capital projects using debt instruments over a
reasonable period of time helps address this concern.
An investor-owned system makes a capital investment and seeks
recovery both of that investment (depreciation) and on that investment
(overall return). The overall return is used to pay for debt service
and for equity (the return to shareholders). The private company will
use a combination of debt and equity to pay for improvements.
Depreciation simply repays investors for ``using'' up the value of
an asset. Narrowly, it does not obligate further investment in the
system. (Other aspects of the regulatory compact require the regulated
utility to meet service obligations.) In practice, for most private
utilities, the depreciation expense and an associated reserve account
provides an important source of cash-flow for reinvestment. Some
publicly-owned systems also follow the utility basis for ratemaking and
charge a depreciation expense. Under the new Government Accounting
Standards Rule 34 (GASB), more municipalities may be contemplating
their depreciation and reinvestment practices.
The impact of rising costs on rates depends on several factors,
making it hard to generalize. The impact is mitigated if (1) the system
has been properly investing in and maintaining its system, (2) costs
have been consistently reflected in rates, (3) measures are taken to
lower costs as much as practical, (4) financing tools are properly used
to spread costs over time and recover costs from customers benefiting
from the associated investment, and (5) rate structures are designed to
minimize deleterious effects.
The perceived water infrastructure funding gap that has received so
much attention recently is at least in part a function of assumptions
about rates and affordability that may not be reasonable.
Question 3. In your discussion of increasing the existing volume
caps of Private Activity Bonds, you indicate that preliminary modeling
indicates that this change would, ``cost the government very little,
yet leverage huge sums of private capital.'' Can you give the
Subcommittee some more specific numbers here?
Response. Recently the U.S. Conference of Mayors, as part of their
project to remove water out from under the PAB volume caps, had some
tax modeling done on this very question. They found that removing water
and wastewater out from under the cap will cost the Federal Government
a mere $566 million over 10 years, yet bring about as much as $20
billion or more in increased investment in water infrastructure
nationwide.
It makes far more sense for the Federal Government to ``spend'' one
half a billion dollars and thus leverage $20 billion in investment than
simply grant the billions to utilities with all of the related
inequities and inefficiencies of a massive grant program.
__________
Statement of Harold J. Gorman, Board Member, Association of
Metropolitan Water Agencies and Executive Director, Sewerage and Water
Board of New Orleans
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 5-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 5 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, DC.: 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 5 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
2 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 5-
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 3 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.
__________
Statement of Paul Pinault, Executive Director, Narragansett Bay
Commission on behalf of the Association of Metropolitan Sewerage
Agencies
INTRODUCTION
Good morning Chairman Graham, Senator Crapo and members of the
Subcommittee, my name is Paul Pinault. I am Executive Director of the
Narragansett Bay Commission (``the Commission'') in Providence, Rhode
Island and Vice President of the Association of Metropolitan Sewerage
Agencies (AMSA). AMSA represents the interests of more than 260
publicly-owned treatment works (POTWs) across the country. AMSA's
members treat 18 billion gallons of wastewater every day and provide
service to the majority of the United States' sewered population. On
behalf of AMSA and the Commission, I thank you for this opportunity to
address your Subcommittee.
Adequate financial resources to States, cities, and communities
like mine are the most essential element to maintaining our Nation's
water and wastewater infrastructure. The Clean Water Act (CWA)
amendments of 1987 created a new phase of clean water funding by
replacing the Federal Construction Grants Program with the Clean Water
State Revolving Fund Loan Programs (SRF). Since 1980, according to
studies by both the U.S. Environmental Protection Agency (EPA) and the
private sector, Federal contributions have declined by 75 percent in
real terms and today represent only about 10 percent of total capital
outlays for water and wastewater infrastructure and less than 5 percent
of total water and wastewater outlays. Local governments currently
assume more than 90 percent of water infrastructure construction costs
in the form of expensive bond issuances--municipal debt--and increased
water and sewer bills.
This hearing addresses what wastewater utilities, and State and
local governments are doing to maximize limited Federal funding for
water and wastewater infrastructure improvements and what role the
Federal Government should play in ensuring the Nation's infrastructure.
I assure you that wastewater utilities must be, and are being,
extremely innovative in order to get the most out of the limited
dollars available. This testimony will address both what the Commission
is doing, what AMSA and wastewater utilities are doing nationwide, and
what the Federal Government can do to ensure that funding levels are
sufficient to meet infrastructure needs.
THE NARRAGANSETT BAY COMMISSION'S EXPERIENCE
The Narragansett Bay Commission has had a positive experience with
its State loan program and has made significant use of the monies
Congress has appropriated to the SRF. The Commission owns the two
largest wastewater treatment facilities in Rhode Island. Field's Point
was originally built in 1901, and Bucklin Point in 1952. The Commission
assumed ownership and operations of both facilities by order of the
Rhode Island General Assembly in 1982 and 1992 respectively.
The Commission has borrowed approximately $72.3 million from the
SRF since the Commission's inception in 1980, enabling us to fund a
significant portion of our sewer system projects. The Commission is the
largest borrower from the Rhode Island Clean Water Finance Agency,
which administers the SRF. Field's Point required over $100 million in
upgrades, a majority of which was funded by statewide general
obligation bonds.
In 1986, the Commission's debt service as a percentage of total
operating budget was 19 percent; in 2002, it will be 22 percent, and in
2006, it is projected to be 54 percent as a result of $350 million in
planned capital projects over the next 5 years, including construction
startup costs on the first phase of our three-phase federally mandated
combined sewer overflow (CSO) project. Phase I is estimated at $250
million and the total project budgeted at $550 million over next 20
years. While it is daunting to think that 54 cents of every dollar the
Commission receives will go for debt service rather than operations,
without the SRF, that number would be much higher.
The Commission has used the SRF to partially fund projects
including septage receiving facilities, pump station rehabilitation and
repairs, facilities planning, and solids handling facilities. Future
projects that will require Federal funds include a $60 million upgrade
at the Bucklin Point Wastewater Treatment Facility to improve
capability for nutrient removal/reduction and the $250 million Phase I
for CSO controls.
I should fully clarify that these capital funding needs are driven
by the dual forces of aging infrastructure and increasingly stringent
environmental regulations, not operational costs. The Commission and
its fellow AMSA members around the country have a 6-year documented
record of reducing operational costs. However, no amount of operational
streamlining or belt-tightening can offset the cost of replacing
critical clean water infrastructure.
As we plan for the future, we believe that the Rhode Island Clean
Water Finance Agency will need more money and a greater array of
financing mechanisms to meet the Commission's needs, as well as the
needs of the other 17 wastewater treatment facilities in the State--the
three largest of which face very expensive nutrient removal projects--
and the State's drinking water projects. If the SRF is underfunded and
unreformed, the Commission will be forced to borrow at daunting market
rates to accomplish these important projects.
An important part of the funding equation is the cost that users
pay for services. I want to stress to the Committee that The
Commission's ratepayers have been paying their fair share of the cost
of the services provided. However, it is becoming increasingly clear
that our ratepayers cannot sustain additional, substantial rate
increases. Twenty-two percent of households in the Commission service
area fall under the Federal poverty line; 15 percent of the
Commission's service area population are over 65 years of age and, most
likely, on a fixed income; and 65 percent of children at or below the
poverty line in Rhode Island live our service area.
In January of this year, the Commission raised its rates by 25
percent. This rate increase was driven primarily by the Commission's
need to increase its debt capacity to pay for the CSO project. We will
have to apply to the Rhode Island Public Utilities Commission again
shortly for additional rate increases to meet growing debt capacity
needs. For our demographic group, these increases represent substantial
financial hardship-well in excess of the 2 percent median household
income affordability levels set by the U.S. Environmental Protection
Agency (EPA).
I want to reiterate that the Narragansett Bay Commission has been
fortunate in that it has been able to access Rhode Island's State loan
fund to help us finance our water infrastructure needs. Unfortunately,
impediments such as cumbersome program administration requirements and
limited leveraging of State monies to maximize the capacity of the
program have prevented many wastewater utilities from having similar
experiences. It is clear that based on current and future
infrastructure needs, the SRF program is not--and will not be--adequate
to ensure continued compliance with our Nation's water quality goals.
THE NATIONAL PERSPECTIVE
Again, municipal debt comprises 90 percent of water infrastructure
construction costs, which includes compliance with Federal regulations.
Debt management offers a case-in-point of the innovations that
wastewater treatment plants employ, as public officials rise to meet
the funding challenge. To make municipal bonds as effective a source
for generating income as possible, municipalities are increasingly
involved in ``pooled borrowing.'' Pooled borrowing is a bond issuance
mechanism in which several municipalities join together and, instead of
issuing bonds individually, issue a single bond. By doing so, these
municipalities can ensure both a slightly better interest rate and,
more importantly, a significant reduction in issuing costs. These
activities can result in both short-term and long-term savings.
Additionally, many local utilities structure and restructure their
debt to achieve low cost, low risk debt and to minimize debt service
costs over the long-term. This often involves a delicate balancing act
between reducing an agency's debt reduction in the near term for
somewhat increased debt service costs in the future. This must be done
while ensuring that ratepayers' costs remain stable and the environment
fully protected. Some local governments have moved to longer term--30
and 40 year--debt plans that help reduce annual payments.
Public Agency Management Innovations: Minimize Costs/Maximize
Performance
Utility managers over the past decade have become better business
operators. Publicly-owned wastewater treatment plant operators have
worked diligently to be more competitive to meet the demands of the
ratepayer, protect the public's investment, and meet the Nation's water
quality goals. Environmental management systems (EMSs) and asset
management are becoming essential tools nationwide.
EMSs and more narrowly-targeted management programs, like asset
management, can and should be implemented in a complementary fashion.
EMSs can provide the overall framework for implementing these other
management programs. AMSA, in cooperation with EPA and the Water
Environment Federation, is currently engaged in a joint project to
develop comprehensive EMS guidance for wastewater utilities that will
provide a key tool to ensure a more integrated, cost-effective
management approach for wastewater utilities in the near future. Such a
system gives a utility the tools to identify and more efficiently
manage its capital assets, address a full range of environmental
impacts, focus on improving environmental performance beyond the levels
required by regulations, and do so through an open and transparent
process that addresses the needs of communities, regulators and other
stakeholders.
At the same time, AMSA is collaborating with EPA on developing a
nationwide asset management program for wastewater utilities, scheduled
for implementation in early 2002. Historically, capital investments in
the form of water and wastewater infrastructure have been placed into
service and considered candidates for rehabilitation and replacement
only when the system faces critical levels of age or deterioration.
Current physical, economic, social, financial, and institutional
factors have rendered such an approach no longer viable. AMSA's view is
that public utilities must be able to plan and optimize the maintenance
and replacement cost cycles for their infrastructure assets in order to
minimize costs and maximize performance.
An added incentive for this shift to a more measured planning
approach can be found in the June 1999 changes to financial accounting
and reporting standards issued by the Governmental Accounting Standards
Board for State and Local Governments (known as GASB 34). These
sweeping changes require governments to report depreciation of assets
or to implement an asset management system. Under the standards, any
asset management system utilized by a government must result in an up-
to-date inventory of infrastructure assets, the undertaking of
condition assessments of assets, the development of annual estimates of
the funds necessary to maintain the assets and documentation that
assets are being maintained.
The goal of the accounting requirements of the GASB is to add value
to decisionmakers nationwide. Advances in geographic information
systems, combined with effective relational data base management,
improved data collection technologies and increased analytic computer
capacity provide a unique and challenging opportunity to improve
management decisions and reduce cost.
Improved asset management practices and programs at public
wastewater utilities protect the public's investment in a vital local
service. Sound management practices enable communities to control and
potentially reduce the costs of assets required to meet service
objectives. Some estimates suggest that the potential exists for a 20
percent savings when the current capital investment approach is
abandoned and an asset management approach is implemented.
Local utility management teams currently explore new ways to
stretch available funding including environmental management systems,
asset management, bond issuances and debt management, and are
stretching their dollars to the greatest extent possible. Publicly-
owned wastewater treatment plants have a distinct mission for which
innovation must be complimented by critical changes to the State
Revolving Fund (SRF) as well as increased Federal funding.
There is ample precedent for, and clear economic principal for
supporting, a strong Federal role in funding water infrastructure.
Despite increasing Federal mandates for cleaner water, shifts in
population that strand wastewater plants in urban core cities with few
ways to pay for needed improvements, and the nearly universal need to
replace billions of dollars in aging and failing water distribution and
wastewater collection systems, current Federal funding policies and
mechanisms to meet the country's water infrastructure needs are
woefully inadequate. As is true of America's highway and airport
infrastructure, there is a compelling need and rationale for a long-
term, sustainable, and reliable source of Federal funding for clean and
safe water.
EVOLVE THE SRF INTO A COMPREHENSIVE FINANCING PROGRAM
Every day, the agencies that comprise AMSA ensure that waste is
removed from millions of American businesses and households and that
the environment is clean and safe. For decades, AMSA has been a partner
with Federal, State and local stakeholders to make environmental
progress through the improvement of municipal wastewater services. The
importance of wastewater infrastructure was well understood in the late
1960's as the Nation watched the quality of its waters decline
precipitously and chose, in the 1972 Clean Water Act, to spend Federal
tax dollars to reverse this trend. A large number of publicly-owned
treatment works (POTWs) have built their secondary and advanced
treatment capabilities as a result of the EPA's Construction Grants
Program. According to EPA's 2000 report entitled Progress in Water
Quality, a total of $61.1 billion ($96.5 billion as constant 1995
dollars) was distributed to municipalities through construction grants
from 1970 to 1995. State SRFs have received about $16 billion for the
11-year period between 1988 and 1999. The wastewater treatment
infrastructure funded with this grant and loan money is coming to the
end of its useful life. And the SRF, as currently structured and
funded, is becoming an out-dated financing mechanism.
As the broad national benefits of improved water services accrue,
the number of people served by POTWs is rising, regulatory mandates are
skyrocketing, ratepayers' bills are continually increasing, and
infrastructure is aging. During this same time, available funding
options have been narrowed--to loans only--while program eligibilities
have been greatly expanded. Local communities need a full range of
funding options from an improved EPA water infrastructure financing
program. The current State revolving fund program needs to modernized.
As we increasingly approach our water quality challenges on a watershed
basis, our financing mechanisms must be consolidated, streamlined and
updated to accommodate the most effective and efficient approaches to
funding environmental protection.
Some public wastewater treatment agencies, like the Narragansett
Bay Commission, have been able to take advantage of the funds to help
offset the tremendous costs of upgrading, rehabilitating and replacing
their wastewater treatment facilities. Other communities, however,
simply cannot afford to pay back a loan. These communities should be
afforded a full range of funding options--including grants--to meet
their infrastructure needs. AMSA member agencies report different
levels of success in dealing with their State-run loan programs.
THE NEEDS ARE GREATER THAN THE SRF
The needs of hundreds of communities across the Nation are not
being met by EPA's current wastewater loan program. We face financial
challenges in the water infrastructure sector today that far exceed
historical investment patterns. In addition, communities must plan to
reach multiple environmental programmatic goals simultaneously. We're
upgrading and replacing our plants, controlling sewer overflows,
protecting wetlands, managing coastal areas, controlling stormwater,
upgrading and replacing pipe, dealing with nonpoint sources and taking
on the challenges represented by a whole host of other water quality
duties. With the limited amount of funds available, we must make
certain that our dollars are spent in the most efficient and effective
manner possible. In short, Congress must modernize the SRF.
AMSA supports the recommendation contained in the recent WINow
report by the Water Infrastructure Network that calls for the next
generation of the SRF--State water and wastewater infrastructure
financing institutions. In order to effectively manage all of the water
quality programs and challenges previously mentioned, communities
should not have to deal with more than one SRF. As you are aware, this
is not a new idea. Already, 30 States have combined their wastewater
and drinking water SRFs. By creating one centralized financing program,
States can eliminate duplication, streamline government, save money,
and gain other efficiencies. By taking this common-sense approach,
States will have more money to help fund their communities' needs. The
expanded SRFs should have all the necessary financial tools needed by
local governments to efficiently and effectively meet their needs.
Federal EPA funds should be administered through flexible statewide
water and wastewater financing institutions that would use appropriate
combinations of grants, loans, loan subsidies and other types of
financial assistance instruments.
The evolution to a more modern EPA water infrastructure financing
program would also create an opportunity for Federal and State
government officials to streamline their funding programs. Areas of
focus should include Federal and/or State paperwork requirements
associated with Federal funding assistance, simplification of the
application processes, reduction of oversight and reporting
requirements where they no longer serve the Federal or State interests,
and flexibility in meeting requirements that do serve Federal and State
interests.
AMSA's agencies know that change does not come easily, nor is it
without some cost. For years, publicly-owned treatment works have been
changing the way they do business. By becoming more competitive, we
have cut costs and become more effective and more efficient. As States
take the next step in streamlining their operations, AMSA supports
additional funding for the States to combine and modernize their water
infrastructure financing programs.
SOLVING THE PROBLEM THROUGH A FISCAL PARTNERSHIP
EPA's clean water SRF cannot satisfy our current financial and
regulatory needs. Both our systems and our watersheds are at a critical
juncture in their life cycles. A combination of reduced Federal
spending and increased Federal mandates to meet treatment requirements
is taking its toll. The collective aging of our pipes and systems
further compounds our ability to meet the objectives of the Clean Water
Act. Any additional deferral of the needed investments to repair and
renew our systems will lead to greater increases in the costs
associated with providing clean and safe water services, threats to
public health, and environmental degradation.
The challenge of closing the water infrastructure financing gap can
be met, but not without a substantial and concerted effort by the
Federal Government to join with States, local communities and consumers
in a fiscal partnership. To bridge the investment gap, the Federal
Government should meet localities halfway by authorizing an average of
$11.5 billion per year in capitalization funds over the next 5 years.
States would receive the funds and, in turn, offer grants and loans to
local agencies. AMSA further supports the following recommendations in
the WINow report to reform this country's water and wastewater
infrastructure financing program:
<bullet> Create a long-term, sustainable, and reliable source of
Federal funding for clean and safe water;
<bullet> Authorize capitalization of the next generation of State
financing authorities to distribute funds in fiscally responsible and
flexible ways, including grants, loans, loan subsidies, and credit
assistance;
<bullet> Focus on critical ``core'' water and wastewater
infrastructure needs and nonpoint source pollution;
<bullet> Streamline Federal administration of the funding program
and encourage continuous improvement in program administration at both
the Federal and State levels;
<bullet> Adequately finance strong State programs to implement the
Clean Water Act and the Safe Drinking Water Act;
<bullet> Establish a new program for clean and safe water
technology and management innovation to reduce infrastructure costs,
prolong the life of America's water and wastewater assets, and improve
the productivity of utility enterprises; and
<bullet> Provide expanded, targeted technical assistance to
communities most in need.
AMSA and other stakeholders recognize that no single solution
addresses the full range of water and wastewater infrastructure funding
needs. All levels of government and the private sector must share
responsibility for effective, efficient, and fair solutions.
CONCLUSION
Significant progress has been made in financing the clean up of our
Nation's waters over the past 30 years through the Construction Grants
Program and the SRF. However, much remains to be done. The fundamental
challenge for Congress today is to fund a comprehensive financing
program for the 21st century that will allow State and local
governments to meet their water and wastewater infrastructure needs
without putting unnecessary stresses onto the Nation's ratepayers.
The critical role of our Nation's water infrastructure has become
clearer as a consequence of the tragic events of September 11.
Obviously, dollars will have to be stretched even further now not only
to ensure that utilities are protected from internal threats such as
aging pipes, but also from external threats. AMSA has played a leading
role in organizing a Wastewater Infrastructure Security Task Force and
AMSA members have already earmarked significant funds toward efforts to
ensure that these security challenges are met.
AMSA and the 40 organizations in the Water Infrastructure Network
support the inclusion of water infrastructure in an economic stimulus
package. We propose that $5 billion in grants should be made available
to water and wastewater utilities for construction projects that are
ready to go. This would serve both as an immediate job creation program
and would also demonstrate a strong commitment to the long-term,
sustainable and reliable source of funding of water and wastewater
infrastructure upgrades and repair, and the environmental well-being
and public health of our Nation.
AMSA, and the Water Infrastructure Network, have supported a 5-
year, $57 billion plan for new Congressional authorizations and funding
to capitalize State-administered grant and loan programs for water and
wastewater infrastructure. AMSA also understands the need to consider
other potential long-term options beyond this 5-year period, and looks
forward to discussing this further with this Subcommittee and other
Members of Congress.
Chairman Graham, Senator Crapo and Members of the Committee, we
look forward to working with you to develop the right solutions to fund
our national water infrastructure needs. I will be happy to answer any
questions.
______
Responses from Paul Pinault to Additional Questions from
Senator Jeffords
Question 1a. In your written testimony, you discuss improved asset
management practices and programs as a means of improving management of
capital assets at water utilities.
Is there a federal role in creating incentives for individual
utilities to adopt these practices?
Response. The appropriate incentives are already in place for
individual utilities to adopt plans that optimize the maintenance and
replacement cost cycles for infrastructure assets.
The primary incentive for the ongoing shift to a more measured
planning approach can be found in the June 1999 changes to financial
accounting and reporting standards issued by the Government Accounting
Standards Board for State and local governments (know as GASB 34).
These sweeping changes require governments to soon begin reporting
depreciation of their assets or to implement an asset management
program. Under the standards, any asset management system utilized by a
government must result in an up-to-date inventory of infrastructure
assets, the undertaking of condition assessments of assets, the
development of annual estimates of the funds necessary to maintain the
assets and provide documentation that assets are being preserved.
Question 1b. If so, is this something you would recommend Congress
address in legislation or is this something EPA should address through
training programs and regulations?
Response. Asset management is most effective when developed and
implemented at the local level and should not be addressed by Congress
in federal legislation. The Association of Metropolitan Sewerage
Agencies (AMSA) is committed to bringing an innovative training and
education program to the public wastewater and water utility sector in
the coming months.
AMSA, in partnership with the Association of Metropolitan Water
Agencies, the American Water Works Association and the Water
Environment Federation, will conduct a series of dynamic regional asset
management workshops in 2002. Managing Public Infrastructure Assets to
Minimize Cost and Maximize Performance is designed to assist agency
directors and engineers, and planning and financial staff to develop a
better understanding of the concepts and benefits of asset management
programs. Member anticipation of the workshops has been very high and
AMSA expects these sessions to be extremely popular with public utility
personnel.
Question 2a. In your testimony, you mention that some communities
cannot afford to pay back a loan which limits their ability to receive
funds from the SRF.
Do you believe that the tools provided by the SRFs today in terms
of low interest or zero interest loans, etc. are inadequate?
Response. The tools provided by today's SRFs should be expanded to
include a full range of flexible financing options designed to satisfy
the wide variety of needs in America's cities, counties, towns and
communities. Federal funding should be administered through flexible
statewide water and wastewater financing institutions. These water and
wastewater infrastructure financing authorities would have broad
latitude to meet needs within their States using appropriate
combinations of grants, loans, and other financial assistance
instruments. It is AMSA's experience that local governments can attract
more loan funds if provided with some grant funds.
Question 2b. What would you recommend in lieu of these options?
Response. AMSA and the Water Infrastructure Network (WIN),
recommend that a complete line of modern financing options be made
available to localities through State water infrastructure financing
institutions. Forms of assistance should include grants, loans and loan
subsidies, including interest rate discounts, zero interest rate loans,
principal forgiveness and negative interest rate loans. AMSA and WIN
strongly recommend loan terms of up to 30 years, provided such terms do
not exceed the useful lives of investments.
Responses by Paul Pinault to Additional Questions from Senator Graham
Question 1. In your testimony, you discuss the use of environmental
management systems as a tool used to minimize costs and maximize
performance. Are water utilities seeking certification with EMS
standards such as ISO 14001 or are water utilities creating their own
EMS based on individual needs?
Response. Environmental Management Systems (EMS) can be developed
and implemented by wastewater utilities either utility-wide or for
individual processes. The National Biosolids Partnership (NBP), a
partnership among AMSA, WEF and the EPA, is an excellent example of the
EMS program for managing the Nation's biosolids. Now in its third year,
the NBP is setting the industry standard for best practices, community
involvement and the implementation of environmentally sound management
programs. AMSA also is in the early stages of a project that would
explore the feasibility of the implementation of utility-wide EMS for
the Nation's wastewater utilities.
During the past year, France proposed the creation of an ISO
standard for the ``standardization of service activities relating to
the supply of drinking water and to wastewater and rainwater
sewerage.'' AMSA supported the U.S. (American National Standards
Institute--ANSI) position on the proposal which states that the AFNOR
proposal does not take into account other similar work underway, is a
subject more appropriate for national and local standards, has too
broad a scope, and only appears useful for European companies wanting
to expand internationally but has little value for the U.S. Since it
now appears that work on a new voluntary international standard will
proceed, AMSA will help to ensure that it has appropriate
representation on the technical committee and will support the work of
the ANSI team.
Question 2. In your discussion of evolving the SRF into what you
term a ``comprehensive financing program'', you state in your written
testimony that ``financing mechanisms must be consolidated,
streamlined, and updated to accommodate the most effective and
efficient approaches to funding environmental protection.'' Can you
describe the specific actions you believe need to be taken by Congress
to modify the SRF to meet these goals?
Response. Over half of the States have combined the management of
their clean water and drinking water State revolving loan funds. AMSA
believes that Congress should encourage the remaining States to take
similar steps to reduce administrative costs and to create new
efficiencies. Combined State financing authorities have proven to be
successful and are the next generation of today's State revolving
funds. Local governments, including wastewater authorities, are cutting
costs and implementing more efficient management in order to become
more competitive. AMSA believes that States, too, could become more
competitive by consolidating the administration of the SRFs. Joint
administration could improve priority-setting and ensure that the most
critical needs are addressed first. AMSA also believes that addressing
both wastewater and drinking water needs on a watershed basis can
ultimately save the taxpayer money.
Question 3. You also recommend the creation of a ``long-term,
sustainable, and reliable source of federal funding for clean and safe
water.'' Can you describe your idea as to what this source of funds
would be and how we can ensure that it is sustainable?
Response. AMSA and WIN have recommended that Congress establish a
formal process to evaluate alternatives for, and recommend the
structure of, a longer-term and sustainable financing approach to meet
America's water and wastewater infrastructure needs. While AMSA does
not have specific recommendations on a new funding structure at this
time, it believes that the hearings initiated by the Senate EPW
Committee will help to further the national dialogue and identify a
permanent funding solution to guarantee the health of our critical
water infrastructure system.
__________
Statement of The American Society of Civil Engineers
Mr. Chairman and Members of the Subcommittee:
The American Society of Civil Engineers (ASCE) appreciates the
opportunity to present this statement to the Subcommittee on Fisheries,
Wildlife, and Water for its consideration during the oversight hearing
on innovative financing techniques for wastewater infrastructure
improvements.
ASCE was founded in 1852 and is the country's oldest national civil
engineering organization.
It represents more than 125,000 civil engineers in private
practice, government, industry and academia who are dedicated to the
advancement of the science and profession of civil engineering. ASCE is
a 501(c)(3) non-profit educational and professional society.
I. INFRASTRUCTURE PROBLEMS
The American people value a strong working public infrastructure.
Unfortunately, in many cases what they see are crumbling wastewater and
drinking-water facilities and (sometimes) contaminated water supplies.
In March of this year ASCE released its 2001 Report Card for
America's Infrastructure. That assessment showed the Nation's
infrastructure to be in alarmingly bad shape. The cumulative grade,
covering 12 infrastructure categories, including drinking-water and
wastewater treatment plants, was a D.
We attribute such a dismal grade to explosive growth in population
that is outpacing the rate and impact of current investment and
maintenance efforts and to the growing obsolescence of our Nation's
aging water infrastructure generally.
ASCE estimates that the United States needs to invest a staggering
$1.3 trillion over the next five years just to meet current
infrastructure demands. Virtually all federal spending on water
systems, highways, and other aspects of the infrastructure is subject
to annual congressional appropriations, and these appropriations have
not come close to meeting funding needs in recent years.
Infrastructure, by its very nature, is a long-term investment. The
current federal budget process is structured for short-term investment.
This creates major problems in the planning, design and construction
processes for long-term investments.
Generally, we believe that a Federal capital budget could create
the mechanism to help reduce the constant conflict between short-term
and long-term needs. Without long-term financial assurance, the ability
of the Federal, State and local governments to do effective
infrastructure investment planning is constrained severely.
ASCE supports the establishment of a Federal multi-year capital
budget for all public works infrastructure construction and major
rehabilitation, similar to those used by State and local governments.
The capital budget must be separated from non-capital Federal
expenditures.
Moreover, ASCE supports the creation of a ``Clean Water Trust
Fund'' that would support clean water, drinking-water and nonpoint-
source-related infrastructure projects throughout the country. Congress
should reauthorize the Clean Water Act to provide adequate funding
based on construction needs and compliance schedules.
We turn now to the matter of innovative financing methods for all
infrastructure improvements generally, including wastewater treatment
plants and their related facilities.
II. A UNIQUE SOLUTION: H.R. 1564
Representative Dennis Kucinich (D-Ohio) and Representative Steve
LaTourette (R-Ohio) have developed what we believe to be a unique
funding solution to the Nation's infrastructure crisis. They have
proposed legislation that would make money available from the Federal
Reserve Board to invest in State and local infrastructure.
Let us describe the Kucinich-LaTourette plan briefly.
The bill, H.R. 1564, Rebuilding America's Infrastructure Act of
2001, would fund capital projects undertaken by State and local
governments. It would use existing funds to create a stable, long-term
source. This is how it would work:
<bullet> The Federal Reserve System holds a large amount of
Treasury securities in order to add liquidity to the monetary system.
The Kucinich-LaTourette bill would transfer a portion of those
securities to a new bank, the Federal Bank for Infrastructure
Modernization, the FBIM.
<bullet> The FBIM would act as a subsidiary bank, using the
transferred funds to issue loans. Since the mortgages would be
integrated by the central bank's Federal Open Market Committee (FOMC),
the Federal Reserve would be better able to maintain economic
stability. More importantly, no congressional appropriations would be
necessary.
<bullet> The bill would authorize FBIM loans to any State or local
government, any Native American tribe, or any regional or multistate
organization to fund certain types of capital infrastructure projects
dealing with transportation, education, water, or hazardous waste.
<bullet> The FBIM would be authorize to offer approximately $50
billion annually in loans over a period of 10 years. Thus, $500 billion
would be lent out during the initial authorization of the FBIM.
The Federal Reserve's FOMC would direct the issuance of the loan
amounts each year so as to integrate the FBIM's operations with its
own. The FOMC would be able to vary the $50 billion dispersal if it
decided that the economy needed a boost.
This money would have a greater effect on the economy than a
lowering of interest rates, which does no more than create an incentive
to invest. Loans from the FBIM would represent actual investments and
thus would have a direct effect on the economy. The FOMC would need to
maintain some control over these funds so that it could vary the
amounts available each year in response to economic conditions.
By providing zero-cost loans to States to fund infrastructure
projects, the Kucinich-LaTourette bill would help slash the cost of
infrastructure projects in half, making them much more affordable.
States would also be able to make decisions about which projects
would be eligible for funding under the bill. At least 20 percent of
the total amount of loans would have to be invested in schools.
Loan allocations would also be based on population. Additionally,
the loans would have to be paid back in 10 to 30 years, and each loan
would bear an administrative fee of 0.25 percent.
All infrastructure projects financed under the new law would first
have to be approved by a State certifying officer or, in the case of a
regional project, by an officer from each of the States involved before
the FBIM could clear a loan. In the case of Native American tribes, the
Secretary of the Interior would have to give her approval.
Finally, it should be noted that the funds made available through
the FBIM would not be subject to the annual congressional budget and
appropriations processes. The money would be paid out directly to the
qualified agencies from the Federal Reserve, thereby having no
consequences for federal budget surpluses or deficits.
Mr. Chairman, that concludes our statement. Thank you again for
your courtesy in hearing our proposals. If the Committee has any
questions, please contact Michael Charles of our Washington Office at
(202) 789-2200.
Statement of Clean Water Action, National Citizens' Environmental
Organization
DISCUSSION OF INNOVATIVE FINANCING TECHNIQUES FOR WASTEWATER
INFRASTRUCTURE IMPROVEMENTS SHOULD PUT PUBLIC HEALTH AND THE
ENVIRONMENT FIRST
At today's Senate Subcommittee on Fisheries, Wildlife, and Water
hearing on financing techniques for wastewater infrastructure
improvements, Clean Water Action supported augmenting the declining
federal clean and safe water investment and urged Congress to see that
protection of public health and the environment guide any financing
decisions.
Clean Water Action noted that increasing concerns over hazard
reduction and security, as well as overall attention to protection of
public health and the environment, should drive decision making, not
abstract notions of efficiency. ``Funding mechanisms that emphasize
efficiency as the primary value, not protection of public health and
the environment, are not a sustainable solution,'' said Clean Water
Action National Policy Coordinator Paul Schwartz.
Clean Water Action also asked Congress to reject emphatically the
notion that financial burdens on public and private wastewater agencies
justify delay or weakening of regulations intended to protect public
health and the environment. Clean Water Action also calls on Congress
to consider funding cost-effective innovative and alternative
decentralized wastewater systems and pollution preventing green
infrastructure solutions.
Discussion of financing solutions should include contributions from
major sources of wastewater contamination, including large-scale
industries, corporate agriculture and large users of water resources.
Taxing inputs such as pesticides and fertilizers should be considered
as well. ``Taxpayers and consumers should not be footing the whole bill
for wastewater clean-up when large polluters are creating a good
portion of the problem,'' said Schwartz.
Clean Water Action supports a significant increase in the Federal
Government's contribution to drinking water and wastewater
infrastructure. In particular, Clean Water Action supports the Water
Infrastructure Network's call for a $57 billion increase in federal
funding over a 5-year period. And as the economic stimulus package is
shaped up, Clean Water Action supports a set aside of $5 billion as an
initial downpayment that will quickly generate up to 200,000 jobs,
increase the security of our water infrastructure and put the public's
health and a clean environment on firmer footing now and for the
future.
Clean Water Action notes that the Senate Subcommittee on Fisheries,
Wildlife, and Water should have scheduled an environmental community
representative to testify at today's hearing. ``The absence of a voice
for public health and the environment on this important topic is an
oversight which we hope is not repeated again,'' said Schwartz.
__________
Special Report By Public Citizen's Critical Mass Energy and Environment
Program, Washington, DC
WATER PRIVATIZATION: A BROKEN PROMISE--CASE HISTORIES FROM THROUGHOUT
THE UNITED STATES
Rising rates, increased shortages, legal and legislative battles,
source depletion and crumbling infrastructure have drawn attention to a
resource that the United States has long taken for granted--water.
We expect an unending flow of clean water every time we open the
tap. We also expect this life-giving resource to be available to
everyone at affordable prices because our health and our survival
literally depend on it.
Today, over 80 percent of Americans receive their water from public
utilities. Many of these public providers, however, find themselves in
a very difficult position. The Nation's water and wastewater
infrastructure--with its leaky, decades-old pipes and pumps--is in
desperate need of repair and upgrading.
The Water Infrastructure Network estimates that an additional $23
billion a year would have to be spent to adequately improve the
infrastructure over a 20-year period.\1\ Without the help of the
Federal Government, which has not placed water projects high on its
priority list, cities and counties are in a bind.
Coming to the rescue of local governments, or so they say, are
private corporations. Fully aware that elected officials are averse to
raising taxes, corporate executives are seeking to parlay public
financing problems into profit opportunities. Corporations are
promising local government officials the world: They'll buy or operate
their water or wastewater systems and, in the process, save taxpayer
money, comply with ever-enhancing environmental standards, and
eliminate the headaches associated with operating these increasingly
complex systems.
Even though the historical record supplies evidence that
privatization is not a panacea for ailing water and wastewater systems,
more and more municipalities are beginning to consider handing over
their systems to the private sector.
Backers of privatization--which also goes by the names of public/
private partnerships, outsourcing, procurement, and operation and
maintenance contracts--like to highlight their successes.
The U.S. Conference of Mayors, for instance, champions
privatization as an innovative solution to the country's water
challenges. In a study of 20 local governments that privatized water/
wastewater utilities, the organization's Urban Water Council portrays
private companies as their saviors.\2\ The study, however, carefully
steers clear of communities that had negative experiences with
privatization.
The Conference of Mayors' glowing assessment of privatization comes
as no surprise, given that the membership of its Water Development
Advisory Board includes major private water companies American Water
Works (the largest in the U.S.), Severn Trent, OMI, United Water, U.S.
Filter and U.S. Water.\3\
The Conference of Mayors had good reason to leave out the negative.
There are more than enough cases that expose the opposite side of water
privatization.
No matter what form privatization takes, there is always a risk it
could backfire.
A government agency can hire a private company to complement or
replace its engineering department to perform repairs or new
construction. San Francisco, for example, last year hired a Bechtel-led
alliance for consulting services that some argue overlaps with the
city's management. Public officials can also decide to outsource
management alone, as did Pittsburgh this past March.
The contracting out of operations and maintenance (O&M), and often
management, is becoming a very popular form of privatization. Under
such a structure, the community retains ownership of water and sewer
systems and continues to set the prices, but a private company
effectively operates and manages the system for a fee. Atlanta's
privatization is an example of such arrangement. Design-Build-Operate
(DBO) contracts often include the operation component because public
officials believe that they encourage private companies to construct
high-quality infrastructure. Under this arrangement, the public
generally retains ownership of the new facilities.
Concession is a form of privatization that is more common abroad.
Under such an arrangement, which usually has a duration of 20-30 years,
a government agency concedes operations of its water systems to a
private company for a number of years. The company becomes responsible
for maintaining the system, performing capital improvements, providing
customer service and setting rates. As a rule, the company also makes a
one-time payment to the government.
This type of privatization is more popular with communities whose
water systems are in need of capital infusions they cannot afford.
Concession is not a complete transfer of ownership. Once the concession
expires, however, transferring responsibilities back to the public
sector may prove difficult. As in the case of O&M, by the time the
contract expires, the government would likely have lost both the
expertise and the employees necessary to run the system.
Finally, the sale of public water and sewer system to a private
company is the most extreme form of privatization. This option is much
more popular among communities that serve small populations, because
local governments in such cases rarely have the expertise, resources or
incentive to operate water and sewer systems. Without consolidation,
public operation can prove rather costly. Private operators could
reduce these costs through economies of scale. Privatization, however,
is not the only way save money, connecting to a larger public provider
can be a sensible alternative.
Here, then are 13 case histories that should give any public
official pause before handing over a public resource to a private, for-
profit corporation. Some of these experiences have made local
governments second-guess the wisdom of privatizing.
OPERATION AND MAINTENANCE--LEE COUNTY, FLORIDA
In 1995, ST Environmental Services, a subsidiary of the British
company Severn Trent, won a contract to operate and maintain the water
and sewer systems in Lee County, Fla., after underbidding employees by
some $6.8 million. ST promised to save money by increasing efficiency
and cutting almost half of the workforce, from 91 people to 52.
Some county officials questioned whether the company could operate
the systems with so few employees. Among the doubters was the county's
public works director, J.W. French. He did not anticipate big problems,
however, because ``the company would have to perform at the cost it
bid, even if it has to hire people not specified in the proposal.''\5\
Privatization proponents celebrated the company's performance: The
number of employees reduced dramatically, the amount of pipe inspected
increased, and old gasguzzling vehicles were replaced with newer, more
fuel-efficient models.\6\
Five years after start of the contract, however, a variety of
problems began to surface. Paul Adams, a former ST vice president in
Lee County, told the county that the company had neglected the systems.
In a letter to county officials, Adams wrote that ``critical facilities
were in danger of imminent failure through lack of proper corrective
maintenance.'' \7\ He also alleged that when a superintendent was given
a list of more than 500 meters that needed replacement, the company's
direction was to ``lose the list.'' \8\ ST refuted the accusations.
ST sued Adams, claiming libel, interference with a business
relationship and breach of contract. When he left the company, Adams
agreed not to make comments that are derogatory or may damage the
company in its business, or its public or private affairs.\9\
Notwithstanding the public benefit it may have brought, the breach
of contract may create legal problems for Adams. Libel may be difficult
to prove, however, because auditors indeed found problems with ST's
operations, substantiating some of Adams' claims.
At the time ST was pursuing renewal of its contract, Azurix Inc.
also submitted a bid. Contesting the county's intent to award the
contract to ST, Azurix echoed some of Adams' allegations after its own
investigation.\10\
In October 2000, Lee County's Internal Audit Department released a
report on ST's contract performance. The findings included:
<bullet> STs flushing program was not as effective and efficient as
it could have been, resulting in wasted water and lower than required
chlorine levels, necessary for proper filtering.\11\
<bullet> ST did not perform required lime softening at the Olga
Water Treatment Plant, even though the company was being paid do to the
work. \12\ At the same time, in its monthly reports to Lee County
Utilities (LCU), ST claimed that all requirements that involved lime
softening were being met. According to LCU's former director, lime
softening is ``effective in removing heavy metals, radionuclides,
dissolved organics, viruses and coliform.'' \13\
<bullet> The wastewater collection system was in poor to fair
condition, and the maintenance level was inadequate to sustain the
facilities in an acceptable operating condition.\14\
<bullet> ST was not operating one of the wastewater treatment
plants according to Florida Department of Environmental Protection
permit requirements, as required by the contract, for at least part of
February 2000 and possibly several months prior.\15\
<bullet> Several operational errors occurred at a wastewater
treatment plant, including spills and contamination of re-use water in
February and March 2000.\16\
<bullet> Preventive maintenance at a wastewater treatment plant was
not always performed timely or to minimum manufacturer recommended
standards, as required by the contract.\17\
<bullet> ST failed to perform $108,310 worth of maintenance work on
water meters.\18\
<bullet> A large number of monthly customer billings were delayed
from April to July 2000, resulting in $596,614 not being billed in
timely manner. The number of billing employees and meter readers may
not have been sufficient for timely billing.\19\
<bullet> The Lee County Department of Natural Resources found
concerns with the handling of hazardous materials in its assessments in
1998 and 2000, with conditions in the latter year being worse.\20\
In response to the problems with ST and to the battle between ST
and Azurix, the county's Board of Commissioners voted in October 2000
to return the water and sewer to public control.\21\
The following spring, county utilities director Rick Diaz sent a
memo to the county's new public works director, Jim Lavender, outlining
STs failure to properly maintain the infrastructure as required by the
contract. The memo said it would cost more than $8 million to bring the
neglected infrastructure up to par. According to Diaz, the contract
required ST to clean more than 2.3 million linear feet of sewer lines
over 5 years, but the company reported cleaning less than 1 million
feet. The contract also obligated the company to make 23,000 manhole
inspections, Diaz said, however less than 10,000 were actually
completed.\22\
Lee County and ST are currently in postcontract discussions
regarding the performance issues. Assistant county attorney David Owen
anticipates that the two parties will evaluate their legal positions
and options if the negotiations result in an impasse.\23\
ATLANTA, GEORGIA
In 1998, the city of Atlanta awarded United Water, a subsidiary of
the French water giant Suez Lyonnaise des Eaux, a contract to operate
the city's water system. The company promised cost savings in exchange
for a $21.4 million annual fee. Three years into the contract, the
question of whether residents are benefiting from it continues to be
raised.
In 2000, some Atlanta residents began to find debris in their
water. Additionally, the water assumed brown tones, which usually
signals high levels of iron oxide--rust. The company, however, did not
initially acknowledge there was a problem.\24\ Four months later,
residents were still experiencing the same problems.\25\
Moreover, cases of dry or inoperative fire hydrants have been
reported. Again, United Water did not promptly address the problem,
even though inoperative fire hydrants could be a matter of life and
death. And, in response to residents' inquiries, the company has said
that testing the fire hydrants after they were repaired was the city's
obligation--a claim city has rejected, holding that the company should
ensure that fire hydrants are in working order after repair or
replacement.\26\
Complaints of delays and slow service have also been registered.
For example, when the Breakwater homeowners association paid $2,700 in
March 1999 to have three meters installed, United Water told the group
that the request would take 10 weeks to fulfill. Six months later the
company installed the first meter. According to the contract, the
company has 1 day to respond to leaks and 15 days to install a
meter.\27\ One reason for delays may be understaffing. Today, United
Water has just 327 employees, down from 731 in 1997, a year before
privatization.\28\
The city is currently conducting a comprehensive review and audit
of the company's performance.\29\
NEW ORLEANS
The city of New Orleans has contracted out its sewage treatment
operations and maintenance (O&M) since 1992. The original contractor,
Professional Services Group (PSG), transferred its O&M operations to
U.S. Filter, which was in turn acquired by the French conglomerate
Vivendi.
This past July 26, an electrical fire interrupted operations at the
East Bank Sewage Treatment Plant, which serves about 440,000 people,
for two and a half hours.\30\ Raw sewage backed up, covering the
surrounding land and making its way through some of the plant's
offices. The plant's operators diverted raw sewage into the Mississippi
River for 2 hours before the plant was returned to operation.
Joe Puglia, a spokesperson for the city's Sewerage and Water Board
(S&WB), claimed it was not possible to estimate the amount of sewage
diverted into the river.\31\ Because sewage systems generally have flow
meters, and because flow estimates are usually easy to calculate, this
claim is open to debate. Interestingly, Puglia is an employee of a
private firm, the Public Relations Group, which carries out a bulk of
S&WB's public relations work.\32\
According to City Council member Jim Singleton, S&WB officials told
him that U.S. Filter was aware of problems with equipment for several
weeks and the dangers they could create, but failed to address
them.\33\
The fire came only a few months after the sewage plant's two broken
incinerators resulted in the trucking of excess untreated sewage sludge
out of the plant through the neighboring Arabi Park and Carolyn Park
communities of St. Bernard Parish. Residents there were exposed to the
putrid odor for more than 2 months.\34\
Ironically, the fire took place just a day after the S&WB voted to
invite bids to privatize the city's water and wastewater treatment
systems, despite apprehensive citizens and the labor community. U.S.
Filter is among several companies that have expressed interest in
running the city's water.
JERSEY CITY, NEW JERSEY
In 1996, the city contracted United Water Resources to operate and
maintain its water system. Five years later, the city no longer
expresses as much enthusiasm about the arrangement. According to
Kathleen Deely of the Municipal Utility Authority (MUA), the city has
learned that the private operation is ``no worse, no better.'' United
Water did improve bill collection, but overall the quality of water
service did not change.\35\
Though still set by the MUA, rates are greatly influenced by
operation fees paid to United Water. According to a senior MUA
official, a lack of financial transparency prevents the city from
evaluating whether the price commanded by the company is reasonable.
The company is not required to open its books for a municipal review.
Instead, it just sends a bill. The contract does not prevent the
company from overcharging because no review process is built in.\36\
According to the same MUA official, United Water's customer service
is in need of improvement. Customer service representatives often
direct citizen complaints to the MUA, even though in many cases the
company is responsible for the problems triggering these complaints,
and some of the problems are preventable. And, United Water contracts
out meter reading to another company. A combination of broken meters
and underpaid readers often leads to erroneous billing.\37\
The MUA official does not believe that the ``public/private
partnership'' is a bona fide partnership. The company's goal is to make
a profit, regardless of the consequences. It has little concern, the
officials said, for public good and is resistant to doing work unless
it is compensated for it.\38\
PRIVATE OWNERSHIP AND THE MOVE TO DEPRIVATIZE--CHARLESTON, WEST
VIRGINIA
In the Year 2000 Water and Wastewater Rate Survey of 194 U.S.
cities and counties performed by a leading consulting firm, Raftelis
Financial Consulting, Charleston stood out due to its exceptionally
high rates.
Monthly water charges for an average customer using 7,480 gallons
of water were $46.21, some $31.84--or 221 percent higher than the
$14.37 average for cities of comparable size. This amount was augmented
by an additional $12.69 monthly fee--once again, the highest in the
category. Finally, the affordability index showed that the cost.of
7,480 gallons of water amounted to 1.65 percent of the median income in
Charleston. The city was the only one in its category with an index of
more than 1 percent. The cost of water as a percentage of median income
was more than 3.5 times higher than the amount for like-sized
cities.\39\
Charleston residents get their water from West Virginia-American, a
subsidiary of American Water Works Co., the largest private water
company in the U.S. According to the West Virginia Public Service
Commission, average bills increased by 66.5 percent for the company's
customers over the last decade.\40\ West Virginia-American has
increased its rates 15 times during that period.\41\
Roy Ferrell, the company's rates and revenues director, attributes
the skyrocketing rates to West Virginia's mountainous landscape that
makes it difficult to lay pipe and new construction. According to
Ferrell, the company has consolidated its plants, reducing the number
from 26 to nine. Eight of the remaining plants were either refurbished
or replaced. To provide remote locales with access to water, extensions
had to be built. The company claims to have spent $240 million on
construction.\42\
Billy Jack Gregg, director of the Consumer Advocate Division in
West Virginia's Public Service Commission, sees the picture a little
differently. Gregg agrees that infrastructure construction is very
costly, but he believes West Virginia-American is forcing existing
customers to finance its own expansion. The company has extended its
water service to areas where operations are not cost-effective. The
investment required for such areas can be twice as high. Single tariff
pricing, however, shifts costs to present customers. New service areas
not only receive access to new infrastructure built with existing
customers' money, but they also receive service at prices lower than
real costs, thanks to higher rates paid by existing urban customers.
Earlier this year, West Virginia-American filed for yet another
rate increase, which would translate into an additional $1 million in
annual revenues. Gregg says the company is seeking to recover $750,000
it spent trying to acquire the water system in Parkersburg, West
Virginia.\43\
Ferrell pledged that the company would not request another rate
hike for the next 20 years, because after the current request is
approved all major construction will be finished.\44\ Given that
American Water Works depends on rate increases for higher profits and
dividends, it remains to be seen whether this is a promise the company
can keep.
In extending water lines to remote regions, West Virginia-American
is mainly driven not by a sense of civic responsibility, but by the
simple desire for higher profits. Single tariff pricing allows the
company to expand to non-profitable areas, knowing it can easily
increase rates statewide to maintain existing profit margins.
The Raftelis survey shows that the median sewer charges for the
cities of comparable size are 20 percent higher than the water rates .
However, in Charleston the situation is reversed. The sewer charges
don't amount to even a half of the water rates level.\45\ The solution
to this paradox may lie in the fact that the sewer service is provided
by the city, and not by a private company.
CHATTANOOGA, TENNESSEE
In 1998, the city of Chattanooga moved to buy out Tennessee-
American, also a subsidiary of American Water Works, which has owned
the utility for 130 years\46\ Chattanooga's Mayor Jon Kinsley, who
spearheaded the takeover effort, projected that public ownership would
result in a 25 percent rate reduction and some $100 million overall
savings for customers over 10 years.\47\
Kinsley was also responding to the company's exorbitant fire
hydrant fees and to the possible export of city water to Atlanta
without public approval. Tennessee-American Vice President Richard
Sullivan admitted discussing supplying water to Atlanta with officials
there.\48\
Unwilling to sell, the company launched an extensive public
relations and legal fight as the city filed a condemnation suit. In its
quarterly earnings report, American Water Works acknowledged spending
$6 million on costs incurred by the subsidiaries fighting takeover
attempts in Chattanooga and Peoria, Illinois\49\ According to the
company's officials, most of these pre-tax costs were in
Chattanooga.\50\ Tennessee-American hired Burson Marsteller, a New
York-based public relations firm, and Baker Donelson, Tennessee's
largest law firm, to fight the takeover attempt.\51\
Among other firms used by the company in the public relations
offensive were Wirth Worldwide, which handled opinion polling, National
Media, which handled advertisements, Moriah Group, which provided
political insight, and a temporary agency, Special Counsel, which
performed background checks on Mayor Kinsley and Ken Hays, his former
chief of staff.\52\
The public relations effort succeeded. In October 1999, the city
reached a settlement with Tennessee-American under which the company
agreed to lower its fire hydrant fees from $301.50 to $50 per hydrant,
or from about $1.2 million to $200,000 a year.\53\ Such a significant
drop raises the question whether the city was paying reasonable fees in
the first place. The agreement also requires Tennessee-American to ask
permission from local citizens before exporting water.\54\
DUVAL, NASSAU AND ST. JOHNS COUNTIES, FLORIDA
This past August 1, United Water Resources (UWR) accepted a $219
million offer from the Jacksonville Electric Authority to buy out the
company's Florida holdings in Duval, Nassau and St. Johns counties. JEA
is a municipal authority serving residents of Jacksonville and
surrounding areas. JEA's operations are expected to lower average water
and sewer bills of former UWR customers by 25 percent.\55\
The rate cut will be welcomed by many county residents. In 1997,
when UWR was providing water and sewer services for the three counties,
residents saw their rates increase by an average of $9.44 per month.
Many residents expressed indignation with the rate hike. Richard H.
Harlan, Jr., who was among the affected ratepayers quoted in the local
media, called the company ``the biggest bunch of highway robbers.''\56\
In 1998, the company requested yet another rate increase, which the
Florida Public Service Commission granted the following year. Water
rates then increased by 12.5 percent and sewage rates by 5.4 percent.
When reviewing the rate hike request, the PSC found that United Water
overestimated its expenses by $1.05 million.\57\
HINGHAM AND HULL, MASSACHUSETTS
Massachusetts-American, another American Water Works subsidiary,
owns the water system in the communities of Hingham and Hull. In 1996
the company doubled water rates\58\ in the face of many objections.
Massachusetts-American justified the hike by the need to build a new
water treatment facility. Meanwhile, American Water Works profits grew
by 10.4 percent that year.\59\
This year yet another rate increase was approved for the company,
which relied on claims of higher infrastructure spending and increased
operation costs.
When approached with a request for rate schedules in effect before
the 1996 increase and those currently in effect, Connie Chapman of
Massachusetts-American provided information on rates immediately after
the increase, but not those preceding it. When asked again, she claimed
that the 1995 rate schedules would be difficult to locate, even though
locating the rate information just 1 year later apparently did not pose
a problem.\60\
According to James Lampke, Hull's town attorney, the two
communities have some of the State's highest water prices.\61\ Lampke
said the city understands that rates have been influenced by
construction of the new plant. He believes, however, that the company
chose a process that augmented the costs by spending millions of
dollars that could have been avoided.
For example, the company spent excessively to obtain approval for a
site that was an unlikely location for the plant. According to Lampke,
the State Department of Telecommunication and Energy, which regulates
private water providers, has agreed with the city that the plant could
have been built with less money.\62\
HUBER HEIGHTS, OHIO
In 1993, Florida-based Avatar elected to sell its water holdings,
including Ohio Suburban Water, a small outfit that provided water for
40,000 customers in Huber Heights and parts of the Mad River Township.
American Water Works expressed its desire to buy the utility.
The city voiced concerns about the New Jersey-based water giant
controlling its water. It feared the company would raise rates and
extend service to areas beyond the city limits without annexation, thus
impairing the city's ability to grow.\63\ Water services are an
important incentive that municipalities use to expand. As a rule,
outlying areas have to become part of a city before obtaining access to
municipal water.
The city attempted to acquire the water system from Avatar but was
outbid by American Water Works. The Ohio Public Utilities Commission
simultaneously approved the transfer and denied the city a hearing to
plead its case.\64\
The city's fears soon materialized. In 1993 the company increased
its rates by 30 percent.\65\ At the same time the company moved to
contract with Industrial Water to deliver up to 2 million gallons of
Huber Heights' water a day to the Wiley Industrial Park, located
outside the city.
In an effort to prevent further rate hikes and to reclaim control
of economic development, the city initiated proceedings to take over
the system through the power of eminent domain.
Once again, American Water Works unleashed a public relations
campaign to prevent the takeover and collected enough signatures to put
the issue on the ballot. The effort collapsed when city residents voted
overwhelmingly in support of the city's efforts to acquire the
system.\66\
While the city continued to fight the legal battle to reclaim
control of the water system, the company continued its efforts to
export Huber Heights water outside the city. The city protested,
arguing that water pipes should be extended only in the event of
annexation.
However, in pursuit of additional profits, the company disregarded
the city's pleas and began piping Huber Heights water to the industrial
park. Because the park used only 10,000 gallons a day, county officials
wanted to make excess water available to the remainder of Bethel
Township.\67\
In March 1995 the city avoided a lengthy legal battle by
negotiating an out-of-court settlement with the company and proceeded
with the buyback. Even after the buyback, however, American Water Works
continued to cause problems. Industrial Water, through which water was
channeled to the industrial park, had subsequently sold its contract to
neighboring Miami County, which claimed rights to two million gallons
of water per day. Under the settlement, the city would continue piping
water to the park ``until Ohio Suburban's obligations, if any, are 61
resolved.'' \68\
Because of American Water Works questionable actions, the city is
now under a legal obligation to act against its own interests, due to
the fact that Bethel Township is unfairly reaping benefits of the water
infrastructure funded by Huber Heights' ratepayers and taxpayers, while
avoiding paying city taxes. The city continues to argue that the
township must be annexed to Huber Heights in order to have access to
its water. The conflict remains unresolved.
PEKIN, ILLINOIS
In 1982, Illinois-American, another subsidiary of American Water
Works, acquired Pekin's water system from a local private owner. In the
18 years that followed, rates increased by 204 percent. At the same
time the company failed to keep infrastructure up to date.
According to Pekin City Manager Dick Hierstein, pressure problems
have plagued several parts of the city, especially those experiencing
commercial growth. However, the company hesitated to construct the
water tower it promised to build, while failing to upgrade undersized
mains.\69\ The company's behavior negatively impacted the city's
economic growth and added to its expenses.\70\
In response to soaring rates and questionable quality of service,
the city chose to consider acquiring the local water company from
Illinois-American through its eminent domain powers. A report by the
Water Study Committee, commissioned to evaluate feasibility of the
acquisition, made a strong case for purchasing the water system. The
committee found that the company's service record left much to be
desired.
For example, there was an instance of street flooding for over 24
hours before any action was taken. In another case, water service to
two schools was interrupted for a week. Company workers taped a message
to school doors just before the students arrived for classes, instead
of notifying the school officials in advance.\71\
Citizens For Locally Owned Water (FLOW), a group that advocated
public ownership of the water system, projected that with the present
rate of infrastructure upgrades, it would take Illinois-American some
268 years to replace all city mains. Given that some water mains were
over 75 years old, FLOW found this rate of improvement unacceptable.
The group also pointed out that in 1990 a local business was destroyed
by fire after firefighters were confronted with broken fire hydrants
and low water pressure.\72\ Hierstein also argued that the city could
obtain financing for infrastructure improvements at lower interest
rates than the company.\73\
To remedy the problems, some city officials, including the city
manager, began to advocate a buyout.
Yet another elaborate public relations campaign by American Water
Works sought to convince residents that the city did not have enough
expertise to run the system properly. PR firms hired by Illinois-
American conducted surveying and placed television, newspaper and radio
ads to fight the takeover efforts.\74\ Even the company's president was
invited pay a visit in an effort to convince residents to support
private ownership of the water system.\75\ The city estimates the
company's public relations offensive cost about $1 million. Meanwhile,
the city spent $30,000 on public outreach.\76\
Illinois-American then hired a firm to collect enough signatures to
put the issue on the ballot. The company narrowly won the election, 54
to 46 percent,\77\ but the referendum was advisory, not binding.
As a result of the close outcome and the battle preceding the
referendum, Illinois-American did become more responsive to the public.
The buyout question remains on hold, but Hierstein believes it will
inevitably be raised again because of the stark differences in
priorities of a ``profit-driven national company versus a service-
oriented and costconscious local government.'' Having been the city
manager in communities with both private and public providers,
Hierstein is convinced that citizens and the government are served
``far better'' by publicly-owned systems.\78\
PEORIA, ILLINOIS
In October 1998, the Peoria City Council voted to buy back the
city's water system from American Water Works subsidiary Illinois-
American Water. The city believed that public ownership would stabilize
rates and reduce operating costs.\79\
According to Terry Kohlbuss, coordinator of the takeover effort,
Peoria's rates at the time were among the highest in the rate survey
prepared by Raftelis Financial Consulting.\80\ (The company has since
stopped providing Peoria information to Raftelis, and in the 2000
survey the city is not listed).
Takeover proponents estimated that public ownership would result in
a 31 percent rate reduction over the first 10 years.\81\
The city also argued that the buyback would place the much-needed
control over economic development back into the city's hands. City
officials have characterized the company as being less than cooperative
in economic development initiatives. In fact, a group of business
leaders offered to lend the city up to $1 million for the takeover
attempt.\82\
Moreover, a financial analysis prepared by Raftelis showed the city
would have $6 million a year in excess revenues if it owned the company
itself.\83\
City officials argued that the 1889 franchise agreement allowed
Peoria to buy local assets of Illinois-American. The company disagreed
and challenged the city's position in court.\84\ Soon thereafter
Illinois-American, requested an 8.2 percent rate increase,\85\ as just
3 years after an 8.8 percent increase,\86\
Earlier this year, the U.S. Environmental Protection Agency fined
Illinois-American $168,488 for failing to promptly report a release of
chlorine vapors in 1998. The company waited 20 hours before reporting
it. According to EPA spokesperson James Entzminger, the notification
should have been made within 15 minutes of the spill. A Peoria
firefighter was hospitalized after breathing the fumes.\87\
The buyout effort is now on hold pending the outcome of the legal
battle.\88\
WASHINGTON COURT HOUSE, OHIO
In 1991, Washington Court House, decided to take over its water
system from Ohio Water Service Co. The city believed it could operate
the utility more efficiently and at a lower cost.
As usually has been the case, the company mounted legal and public
relations campaign, collecting enough signatures to put the issue on
the ballot. Residents voted to retake control of the system and, after
a 2-year legal battle, the city purchased the water system for $10
million.\89\
City operations proved to be a true success story. One of the
conditions of the bond issued by the city to raise money for the
purchase required the city to collect approximately 20 percent more in
revenues than it spent to operate the system. Yet just 2 years
following the takeover, the city was collecting 60 percent more and
enjoying $500,000 annual surpluses. Not only did the city live up to
its promises not to raise rates in the 3 years following the takeover,
it was actually able to issue rebates to local ratepayers.\90\
CONSULTING AND MANAGEMENT--SAN FRANCISCO, CALIFORNIA
San Francisco is among a large number of U.S. cities whose water
systems require intensive repairs and upgrades. The century-old Hetch
Hetchy water system, which provides water to 2.3 million people in San
Francisco, San Mateo, Santa Clara and Alameda counties, needs as much
as $8 billion worth of seismic upgrades.\91\
The city hired a private consulting firm as it embarked on this
ambitious project. Last year, after much controversy, the city awarded
a $45 million contract to an alliance led by Bechtel Corporation, the
world's largest engineering firm and an emerging player in private
water market. The city's Public Utilities Commission (PUC) claimed that
hiring Bechtel would produce as much as $45 million in savings over 4
years and allow access to the necessary expertise.
Many spoke out against the contract, including city budget analyst
Harvey Rose, who disagreed with the claim of prospective savings
because no supporting evidence had been provided.\92\ Supervisor Tom
Ammiano questioned the alliance's ability to produce cost-savings and
suggested that the contract would eventually lead to further
privatization.\93\ Nevertheless, the city Board of Supervisors approved
the deal.
Almost a year into the contract, many have voiced concern about its
value. According to David Novogrodsky, the executive director of the
Professional and Technical Engineers Local 21, Bechtel has so far done
very little other than charge ``outrageous'' fees. Bechtel's workers do
not work closely with the city engineers. Additionally, there are a few
``higher-ups'' who go beyond their contractual role as consultants and
often attempt to manage PUC staffers. And, there are many Bechtel
support staff with no knowledge or experience unique to Bechtel.
Moreover, said Novogrodsky, most staff members are not qualified,
and it is not unusual to see Bechtel employees sitting down studying
for their engineering exams, instead of performing actual work.\94\
According to the San Francisco Bay Guardian, many city workers feel
Bechtel is not aiding them in their work, and is actually slowing
progress because the company has to approve certain in-house jobs. City
workers also feel that instead of acquiring valuable skills from
Bechtel's engineers, as was originally intended, they have to explain
even basic operations to them. Finally, staffers feel the city is being
billed for work already performed by city employees.\95\
The city's first semiannual audit found the Bechtel consortium's
performance to be satisfactory, although many tasks were not evaluated
because they were in the startup phase.\96\ The auditor did find that
of the $75,943 in reimbursement requests submitted by the consortium,
$2,766 was not identified as allowable under the contract. These costs
included refreshments and lunches, telephone charges, and relocation
and travel expenses.\97\
The auditor also found that the consortium did not inform the PUC
about changes in staff work locations, which is essential in order for
the city to determine whether the consortium is charging correct
rates.\98\
Additionally, a Bay Guardian investigation documented many
instances of wasteful spending. Bechtel, for instance, was paid nearly
$500,000 to restore and change the format of data already prepared by
the city. Most of Bechtel's work, the newspaper said, was either
``unnecessary, duplicated work that city staffers had already done, or
wasn't specialized enough to require a highly paid outside consultant''
\99\
CONCLUSION
Not every private company provides poor service, and not every
operation and maintenance contract is a failure. In their marketing
efforts, however, companies exploit their successes while carefully
concealing their failures. And, analyses conducted by financial
consultants are often biased in favor of privatization.
As a result, the debate over the merits of transferring operations
or ownership of public utilities to the private sector tends to be
biased. The case histories in this report are intended to bring much
needed balance to the debate, while helping government officials better
assess the risks involved.
Not every public utility has a satisfactory performance record.
However, the solution lies in more government accountability and more
investment in aging systems not in signing them away and admitting
defeat. The risks that privatization brings are simply too great to be
dismissed.
Notes
1. Cited in Water Infrastructure Network ``Water Infrastructure
Now: Recommendations for clean and safe water in the 21st century.''
Feb 2001. p. 1.
2. Ibid. p. 5.
3. See ``Case studies of selected cities.'' The United States
Conference of Mayors. Urban Water Council.'' Feb 2000, http://
www.usmayors.org/USCM/urbanwater/case--studies/.
4. Ibid. Appendix B.
5. Winton, Pete. ``Protests delay vote on private operation of Lee
utilities.'' News-Press (Ft. Myers, FL), 14 Jan 1995.
6. Matrullo, Tom. ``Charlotte Utilities: A Raging bull. County
tries to tame utilities.'' Sarasota Herald-Tribune, 3 Aug 1997.
7. As cited in Whitehead, Charlie. ``Former Lee utilities firm
files lawsuit against ex-vice president.'' Bonita Daily News, 9 May
2001.
8. Whitehead, Charlie. ``Former Lee utilities firm files lawsuit
against ex-vice president.'' Bonita Daily News, 9 May 2001.
9. Ibid.
10. Whitehead, Charlie. ``Audit reveals problems with way Lee
wastewater treatment plants run.'' Bonita Daily News, 8 Jul 2000.
11. Lee County Utilities, ST Contract Performance Audit Report,
Internal Audit Department, Lee County Clerk of Courts, Lee County, Oct
2000. p. 5.
12. Ibid. p. 5.
13. Ibid. p. 6.
14. Ibid. p. 8.
15. Ibid. p. 9.
16. Ibid. p. 10.
17. Ibid. p. 10.
18. Ibid. p. 12.
19. Ibid. p. 13.
20. Ibid. p. 15.
21. Lee County Board of Commissioners meeting minutes for 17 Oct
2000. Available at: www.lee-county.com/minutes/101700.htm.
22. Whitehead, Charlie. ``Utilities boss: $8M in work not done.''
Bonita Daily News, 5 May 2001.
23. Personal communication with David Owen, assistant county
attorney, Lee County. 27 Sep 2000.
24. Soto, Lucy. ``Faucets spewing fears, confusion. Watered-down
solutions: Virginia-Highland residents get lots of answers about
problems with their drinking water. But which should they believe.''
The Atlanta Constitution, 1 May 2000.
25. ``Work will start soon on intown water line.'' The Atlanta
Journal, 4 Sep 2000.
26. Campbell, Colin. ``Too many hydrants don't go with the flow.''
The Atlanta Journal, 30 Mar 2000.
27. Hardie, Ann. ``City, firm up to their necks in complaints.
Spotlight on a flood of excuses: Getting a problem with your water
service solved has proven as difficult as figuring out who is to
blame.'' The Atlanta Journal, 6 Sep 2000.
28. Personal communication with Cherry Yeboah, United Water Human
Resources Department, phone, 20 Aug 2001.
29. E-mail from Melinda Langston, Atlanta Department of Water, 17
Sep 2001.
30. ``Fire temporarily closes sewage plant'' The Times-Picayune
(New Orleans), 27 Jul 2001.
31. Finch, Susan. ``Untreated waste diverted to river.'' The Times-
Picayune (New Orleans), 27 Jul 2001.
32. Personal communication with the Office of Intergovernmental
Relations, Sewer & Water Board, phone, 13 Aug 2001.
33. Finch, Susan. ``Untreated waste diverted to river.'' The Times-
Picayune (New Orleans), 27 Jul 2001.
34. ``Sewer plant blamed for Arabi odors. Broken incinerators to be
repaired soon.'' The Times-Picayune, 30 May 2001.
35. Personal communication with Kathleen Deely, Municipal Utility
Authority, Jersey City, phone, 26 Jul 2001.
36. Personal communication with a senior official of Municipal
Utility Authority, Jersey City, NJ, phone, 14 Aug 2001.
37. Ibid.
38. Ibid.
39. Raftelis Financial Consulting. ``Year 2000 Water and Wastewater
Rate Survey.'' Raftelis Financial Consulting: Charlotte, 2000.
40. Consumer Advocate Division of Public Service Commission.
Monthly residential utility rates 1991-2001, Charleston, chart.
41. West Virginia-American Water Company. Historical Rate
Increases, chart.
42. Personal communication with Roy Ferrel, Director of Rates and
Revenues, West Virginia-American Water, phone, 9 Aug 2001.
43. Personal communication with Billy Jack Gregg, Director of
Consumer Advocate Division, West Virginia Public Service Commission,
phone, 08 Aug 2001.
44. Personal communication with Roy Ferrel, West Virginia-American
Water, phone, 9 Aug 2001.
45. Raftelis Financial Consulting. ``Year 2000 Water and Wastewater
Rate Survey.'' Raftelis Financial Consulting: Charlotte, 2000.
46. Sullivan, Drew. ``Chattanooga plans to regain control of water
department.'' The Tennessean, 2 Dec. 1998.
47. Gilbert, Kathy. ``Mayor releases figures on water takeover.''
The Times & Free Press, 22 Aug 1999.
48. Sohn, Pam and John Commins. ``Panels pass bill to prevent
diversion of Tennessee River water outside basin.'' The Times & Free
Press, 6 Apr 2000.
49. Securities and Exchange Commission filings. Form 10-Q, third
quarter. p. 14.
50. Flessner, Dave. ``Company spent $5 million in 2 water fights.''
The Times & Free Press, 6 Nov 1999.
51. Flessner, Dave. ``Company spent $5 million in 2 water fights.''
The Times & Free Press, 6 Nov 1999.
52. Flessner, Dave. ``Winning water company ads hailed.'' The Times
& Free Press, 22 Jul 2000.
53. Gilbert, Kathy and Judy Walton. ``Council OKs water
settlement'' The Times & Free Press, 27 Oct. 1999.
54. Gilbert, Kathy and Judy Walton. ``Council OKs water
settlement'' The Times & Free Press, 27 Oct. 1999.
55. Jacksonville Electric Authority. ``JEA and United Water reach
innovative agreement.'' JEA News. Available online: http://www.jea.com/
about/news/press/unitedwateragreement.asp, 20 Aug 2001.
56. Magee, Keri. ``Utility's rate hike enrages residents.'' The
Florida Times-Union, 10 May 1997.
57. Chapin, Veronica. ``Water bill mistakes resolved. Agreement
reached with United Water.'' The Florida Times-Union, 12 May 1999.
58. Personal communication with Connie Chapman, Customer Service
Supervisor, Massachusetts-American Water, phone, 6 Aug 2001.
59. Based on the company's Securities and Exchange Commission
filings.
60. Personal communication with Connie Chapman, Customer Service
Supervisor, Massachusetts-American Water, phone, 6 Aug 2001.
61. Personal communication with James Lampke, Hull, town counsel,
10 Aug 2001.
62. Ibid., 13 Aug 2001.
63. Denger, Laurie. ``Wrestling control of water. Heights has
battle plan.'' Dayton Daily News, 15 Dec 1993.
64. Denger, Laurie. ``Water issue nears boil in Heights. City
develops strategy for Jan. 11 election.'' Dayton Daily News, 3 Nov
1993.
65. Denger, Laurie. ``Wrestling control of water. Heights has
battle plan.'' Dayton Daily News, 15 Dec 1993.
66. Denger, Laurie. ``Win begins water war in Heights.'' Dayton
Daily News, 12 Jan 1994.
67. Bebbington, Jim. ``Lines pipe water to businesses. Miami
industrial park seals deal with supplier.'' Dayton Daily News, 16 Nov
1994.
68. Babcock, Jim. ``Lawsuit--water fight begins in Miami County.''
Dayton Daily News, 3 Nov 1997.
69. E-mail from the City Manager Dick Hierstein, 23 Jul 2001.
70. ``City ownership of Pekin's water system makes good sense.
Here's why.'' Citizens For Locally-Owned Water, 2000.
71. Water Study Committee Report, city of Pekin, IL, 15 July 1999.
72. City ownership of Pekin's water system makes good sense. Here's
why.'' Citizens For Locally-Owned Water, 2000.
73. Szoke, Anita. ``Pekin voters reject city buyout of water
company franchise.'' Peoria Journal Star, 8 Nov 2000.
74. E-mail from the City Manager Dick Hierstein, 23 Jul 2001.
75. Szoke, Anita. ``Water company against Pekin taking over.
Illinois-American president says private ownership is in customers'
best interest.'' Peoria Journal Star, 27 May 1998.
76. E-mail from the city manager Dick Hierstein, 23 Jul 2001.
77. Szoke, Anita. ``Pekin voters reject city buyout of water
company franchise.'' Peoria Journal Star, 8 Nov 2000.
78. E-mail from the city manager Dick Hierstein, 24 Jul 2001.
79. Ramsey, Mike. ``Pekin vote won't deter Bud Grieves.'' Peoria
Star Journal, 9 Nov 2000.
80. Personal communication with Terry Kohlbuss, phone, 2 Aug 2001.
81. Flessner, Dave. ``Utility spent $5 million to win water war.''
The Times & Free Press, 4 Mar 2000.
82. Ramsey, Mike. ``Illinois-American cuts jobs while bidding to
expand base. Buying the Water.'' Peoria Journal Star, 24 Oct 1999.
83. Personal communication with Terry Kohlbuss, phone, 2 Aug 2001.
84. Ramsey, Mike. ``Illinois-American cuts jobs while bidding to
expand base. Buying the water.'' Peoria Journal Star, 24 Oct 1999.
85. Howard, Clare. ``Proposed increase renews interest in buyout''
Peoria Journal Star, 18 Apr 2000.
86. Ramsey, Mike. ``Illinois-American's rate request gives mayor a
big gun.'' Peoria Journal Star, 20 Apr 2000.
87. Hopkins, Elaine. ``EPA: Firm late in reporting leak.'' Peoria
Journal Star, 24 Aug 2001.
88. Personal communication with Terry Kohlbuss, phone, 2 Aug 2001.
89. Baird, Don. ``City-owned water system pays off in first
rebates.'' The Columbus Dispatch, 10 Sep 1995.
90. Ibid.
91. Epstein, Edward. ``Price estimate doubles for fixing Hetch
Hetchy. S.F. mayor seeks ways to cover $8 billion in repairs.'' The San
Francisco Chronicle, 15 November 2000.
92. Wilson, Yurni. ``Analyst for S.F. criticizes water contract
award. PUC can't prove that moneys saved.'' The San Francisco
Chronicle, 15 Jul 2000.
93. Epstein, Edward. ``S.F. Board Oks Hetch Hetchy pact. Bechtel-
led consortium to renovate water system.'' The San Francisco Chronicle.
29 Aug 2000.
94. David Novogrodsky, Professional and Technical Engineers Local
21, Phone conversation, 23 Jul 2001.
95. Blackwell, Savannah. ``Blocking Bechtel.'' The San Francisco
Bay Guardian, 20 Jun 2001.
96 Audit of San Francisco Water Alliance contract, Controller's
Office, City and County of San Francisco, July 2001, p. 8.
97. Ibid. p. 7.
98. Ibid. p. 8.
99. Blackwell, Savannah. ``Bechtel's $45 million screw job.'' San
Francisco Bay Guardian, 12 Sep 2001.