TESTIMONY OF
THE NATIONAL ASSOCIATION OF WATER COMPANIES
BEFORE
THE SUBCOMMITTEE ON FISHERIES, WILDLIFE AND WATER
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ON
INNOVATIVE FINANCING TECHNIQUES
FOR WATER INFRASTRUCTURE IMPROVEMENTS
THURSDAY,
OCTOBER 18, 2001
PRESENTED
BY
PETER L. COOK for J. JAMES BARR
NATIONAL ASSOCIATION OF WATER COMPANIES
Good Morning Mr. Chairman and Members of the Subcommittee, I am here to testify for J. James Barr, President and C.E.O. 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 the 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 H2O 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 decision making, and only limited, targeted federal government involvement.
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 2/3rds 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%), particularly in comparison to electricity (2.4%) and telecommunications (2.1%). In many respects, water services are a “bargain” to average households. As such, one of our most precious resources remains very affordable for almost all of the nation’s citizens. Therefore, before Congress considers 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% of all water systems serve less than 3,300 people, and a mere 2% of systems serve more than 50,000. Where possible, consolidation of these many small systems could result in significant savings to the customers. Therefore, for these systems having infrastructure replacement, financial and/or compliance problems, consolidation should be considered before any public monies are sought.
Finally, it is worth considering exactly what the appropriate federal government role is. Water infrastructure has traditionally been a local or regional function. Geography and different treatment needs dictate this. There is no national water “grid”. The federal government, on the other hand, has stepped in where there is a national interest in a national infrastructure; 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 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%. 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% of their annual capital outlays on modernizing and expanding their infrastructure. My company alone has invested $6 billion since the early 1970s, 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% 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% savings; Seattle WA, 40% savings; Tampa FL, 21%
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:
· Americans will continue to enjoy clean and safe water for generations to come at reasonable and reliable rates;
· Congress and the federal government will have performed their role successfully, without the need for huge, budget-breaking grants; and
· 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 number one 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 decision-makers. 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.
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.
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%, 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.
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% of all community water systems nationwide and serve about 15% of Americans but receive a mere 3.5% of all DW-SRF assistance, it is clear that 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.
[1] the H2O Coalition is made up of the National Association of Water Companies, the Water and Wastewater Equipment Manufacturers Association, and the National Council on Public-Private Partnerships