Testimony of Elmer Ronnebaum,

General Manager of the Kansas Rural Water Association

For the National Rural Water Association

Before the U.S. Senate

Committee on Environment and Public Works

Subcommittee on Fisheries, Wildlife, and Water

February 28, 2002

S. 1961

Good afternoon. Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to be here today to discuss small communities and their water funding concerns.

My name is Elmer Ronnebaum. I am General Manager of the Kansas Rural Water Association. We have more than 650 small community members that operate water utilities and most operate wastewater utilities. Kansas Rural Water Association is governed by the local communities. The mission of the Association is to improve and protect water quality through grassroots technical assistance of utility operation and maintenance and training. Every community wants to provide the best possible water quality to their consumers. Rural Water provides the resources and training to achieve this objective in a common sense, hands-on manner systems can utilize. I have personally worked with hundreds of small communities in Kansas on problems ranging from securing SRF or other funding, to water supply, to explaining to a new operator or city council member what the Safe Drinking Water Act, the Clean Water Act, and the Federal Register are and what they require. Kansas Rural Water is similar to the state rural water association in each of your states. I am honored to speak on their behalf today.

On behalf of all small and rural communities, I would like to thank the Committee for your efforts to assist small communities with compliance with the federal Clean Water Act and Safe Drinking Water Act and to provide the safe drinking water and highest quality of effluent possible. Rural Water looks forward to working with you to move these ideas into laws and actual dollars in the field.

The five principle dynamics of small communities that we believe need to be recognized in discussing funding policies are:

· One, that small communities make up the overwhelming percentage of water and wastewater utilities – over ninety percent of regulated communities.

· Two, that due to a lack of economies of scale, small town consumers often pay high water and sewer rates. Water bills of more than $50 for 5000 gallons of water are not uncommon in rural areas. This dynamic often results in very high compliance costs per household in rural systems. Simultaneously, the rural areas have a greater percentage of the nation's poor and a lower median household income. This results in very high compliance cost per household in rural systems coupled with a lesser ability to pay.

· Three, small systems often have limited technical and administrative resources to deal with compliance and navigate through funding programs. In the smallest systems, one person may run both the water and sewer system and in some cases communities can only afford a part-time or volunteer operator. This lack of resources makes small systems a challenge for state agencies – the more complicated we make funding programs the more likely the small communities, which need the funds most, will not be able to participate.

· Four, small community water systems have been the historical solution to rural families living without water. Small water systems were ONLY started to improve the public health. The result is dramatic improvements in public health by providing an alternative for families from gathering their drinking water from untreated streams, shallow and contaminated wells, roof collection and cisterns. In 2001, there are hundreds of thousands of rural families that still don’t have piped water in their homes. Millions of rural families still have water delivered to their homes. According to the USDA at least 2.2 million rural Americans live with critical quality and accessibility problems with their drinking water, including an estimated 730,000 people who have no running water in their homes. About five million more rural residents are affected by less critical, but still significant, water problems.

· Five, consolidation and privatization are limited solutions for small systems. Consolidation can work in some situations, but only for a small portion of small systems and only when the systems are in close proximity and the economics make sense. Rural Water is the lead proponent of consolidation when it makes sense (when it results in better service for the consumer) and we have consolidated numerous communities in all the states. Consolidation and regionalization that is in the consumers’ best interest will happen naturally at the local level regardless of federal policy on issue. Federal policy that favors consolidation over the locally preferred solution is a step in the wrong direction for consumers (i.e. 42 U.S.C. Sec. 300g-3(h) Consolidation Incentive). Privatization is rarely a less costly solution for very small communities. In the very small communities it is, perhaps, more common to see private systems being transferred to public bodies so they can obtain better financing and local governmental control. The missions of private water and rural water systems are fundamentally different, the reason being the lack of profitability in sparse rural populations.

In 1996, another Senator from Idaho, Dirk Kempthorne, made a significant policy change in the Safe Drinking Water Act. At every opportunity, he ameliorated the Act by including as much flexibility as possible. Nowhere is this more apparent than in the state revolving fund section. Under the Kempthorne approach states were given all sorts of discretion on how to spend the money to meet their local priorities. For example, a state can make grants, can fund set-asides, expand technical assistance efforts, create new prevention programs, increase state staff, or choose to do none of these and retain the traditional low interest loan focus.

Small communities’ message here today is that this was a monumental step in the right direction. This flexibility has made state SRFs better and more responsive to nearly every stakeholder. Small systems have seen a level of inclusion and benefits from the drinking water SRF that we could not imagine based on our experience with the wastewater SRF that does not include these flexible provisions.

Some state rural water associations have not been impressed with the way their state has chosen to utilize their discretion. Some states have steered funds to larger systems with less urgent needs, in their opinion, to make fund administration easy and keep bond ratings high. However, this is not a complaint that is appropriate for this committee. Those concerns are best handled in the states and each year locals have a better chance to improve their own state’s program.

My state of Kansas is an exemplary case for success in SRF implementation. Many of our small systems are receiving large funding packages from the SRF. The state has made small system funding a priority in Kansas and we have expanded technical assistance to small systems. Assistance is also provided to help small systems through the funding process. The Kansas application for drinking water funding is streamlined and simple enough for a small system operator (with too little time and too much to do) to complete.

Also in Kansas, Mr. Kempthorne’s creative experiment in policy ignited innovation in governmental programs. Our state’s drinking water administration has exploited the provisions in the SRF to invent one of the best local-state partnerships in all of government. As you consider crafting new funding legislation, small and rural communities urge you to include a few key provisions dealing with flexibility and targeting of funding that have made the drinking water program more responsive to small systems.

Mr. Chairman, I would like to summarize the key elements for small and rural communities in modifying the wastewater the drinking water SRFs as follows: Make the wastewater fund more like the drinking water fund and put more money in both.

We urge you to include three legislative provisions in both water and wastewater that would ensure communities in the greatest public health and economic need receive prioritization in funding programs. One, the communities exhibiting the greatest need should receive funding first. Second, programs should not be limited to making loans because in many situations, small communities will not have the ability to pay back a loan – even with very low interest rates. Third, a minimum portion of the funds should be set-aside for small systems. This ensures that a state must set up a process for dealing with small communities. Once established, local pressures and priorities will determine the actual portion directed to small systems, which we expect will often be greater than the minimum prescribed. All of these provisions were included in some manner in the drinking water SRF – balancing the federal priorities with the state’s flexibility to tailor individual programs and discretion on implementation of each these programs.

The SDWA included the following three provisions to ensure that funds would result in the greatest advancement in public health/environmental protection and be used to assist the consumer with the most economic needs.

1) A small system set-aside like the drinking water SRF (this serves as an incentive to create a useful process for outreach to small systems). SECTION 1452 (a)(2) USE OF FUNDS-Of the amount credited to any State loan fund established under this section in any fiscal year, 15 percent shall be available solely for providing loan assistance to public water systems which regularly serve fewer than 10,000 persons to the extent such funds can be obligated for eligible projects of public water systems.

2) A requirement to target systems most in need like the drinking water SRF. SECTION 1452 (b)(3)(A) IN GENERAL -An intended use plan shall provide, to the maximum extent practicable, that priority for the use of funds be given to projects that -- (i) address the most serious risk to human health; (ii) are necessary to ensure compliance with the requirements of this title (including requirements for filtration); and (iii) assist systems most in need on a per household basis according to State affordability criteria.

3) Grants (some type of mechanism to make funding useful for hardship communities). SECTION 1452 (d) ASSISTANCE FOR DISADVANTAGED COMMUNITIES (1) LOAN SUBSIDY- Notwithstanding any other provision of this section, in any case in which the State makes a loan pursuant to subsection (a)(2) to a disadvantaged community or to a community that the State expects to become a disadvantaged community as the result of a proposed project, the State may provide additional subsidization (including forgiveness of principal). (2) TOTAL AMOUNT OF SUBSIDIES- For each fiscal year, the total amount of loan subsidies made by a State pursuant to paragraph (1) may not exceed 30 percent of the amount of the capitalization grant received by the State for the year. (3) DEFINITION OF DISADVANTAGED COMMUNITY- In this subsection, the term `disadvantaged community' means the service area of a public water system that meets affordability criteria established after public review and comment by the State in which the public water system is located. The Administrator may publish information to assist States in establishing affordability criteria.

Our specific comments on Senate Bill 1961 include:

1. We appreciate that the bill did not include new priorities for funding, set-asides for various size systems, and changes in the disadvantage community determination. We have been told that large system groups believe too high a percentage of the present drinking water SRF funding is going to small communities. However, a significant portion of the funding should flow toward small systems because, generally, they need it more. Rates are often much higher per household in small communities – often from compliance requirements. EPA rules on the horizon will likely triple water rates in rural systems. Also, rural communities often have lower median household incomes. The CWA and SDWA axiom in rural areas is: much higher cost per household with much lower income. No large system is facing cost increases on a per household basis comparable to what is facing small systems. It only makes sense that federally subsidized funding would flow toward the communities with the greatest need – that is to small systems.

2. We appreciate that the bill retains the three SDWA provisions (mentioned above) that ensure funding results in the greatest advancement in public health/environmental protection and be used to assist the consumer with the most economic need. This keeps the money tied to the regulations. Funds should be used for the greatest health protection, which should be what the regulations are targeting. To target funding for issues outside of the scope of the regulations would infer that the regulations are not covering the greatest health risks.

3. We urge the Committee to include the three SDWA provisions [sec. 1452 (b)(3)(A) - above] in wastewater program in a comparable form. This will ensure the more critical projects with the greatest need receive priority.

4. We urge the Committee to include the same set-aside amounts for the wastewater and drinking water programs; 15% minimum for small systems as like the drinking water program and 30% disadvantaged community subsidy like in the drinking water programs. This parity will ensure states have the tools to help the systems most in need and will be especially important if the two funds have transfer authority between them.

5. Corporate water systems should not be eligible for state revolving funding. Taxpayer subsidies should be prohibited from profit generating companies or companies paying profits for shareholders/investors. Private companies argue that they have to comply with the same regulations. However, they voluntarily chose to get into this “business” and compliance is not the over-riding principle that should be considered in this discussion. We believe that the distinction in mission between public and private is the core principal that should be considered. Private systems are in the business to maximize profit. Public water utilities were and are created to provide for public welfare (the reason why public water continues to expand to underserved and non-profitable populations). This is a significant difference. And while we believe that maximizing profit is a noble virtue and as American as safe water, we do not think that taxpayers should help the cause of privately owned systems. In addition, the needs of less affluent public water systems and families with no piped water dwarf the current SRF allocations. The state of Florida has a novel compromise to this issue. Florida limits SRF funds to private water systems less than 1,500 people – ensuring funds are limited to the class of private water systems that did not get into the business as a corporate enterprise. Also, this group of private systems could be included in the state’s needs assessment which determines allocations under the bill.

6. The bill includes many new requirements for applicants including: environmental, land use planning, capacity, actual cost of water, common industry practices, etc. We urge you to exercise caution for increasing demands on applicants as each new demand makes the process too complicated for small systems and therefore less attractive. We believe that the current review process is fully adequate to ensure repayment of loans, progressive environmental planning, and long-term capacity of applicants. Nationalizing policy industry practices and determining actual cost of water could lead to gold-plating of water utility practices which is not in the best interests of consumers.

7. We urge the Committee to limit the ability of any portion of a water or wastewater system to be eligible for disadvantage type subsidies or other special treatment. To assist any portion of a system moves the effort from an environmental-public health program to a social program. If particular low-income consumers are having problems paying their water bills, we don’t think the SRF should be used as the solution. That may be an issue for agencies other than the EPA. It is important to note that a state can determine a large system disadvantaged as well as a small system. Funding a portion of a system seems to be a way to skirt the current process which is working so well at prioritizing systems most in need. Also, this moves the SRF in a direction contrary to the CWA and the SDWA’s regulatory structure which only applied on a system-by-system scope.

8. We urge the Committee to consider including provisions guiding the percent of a project that can be used for engineering/consulting services on projects. USDA has such a provision [PART 1780 - WATER AND WASTE LOANS AND GRANTS, §1780.39(b) Professional services and contracts related to the facility]. In Kansas, our research shows that engineering fees are sometimes charged at twice as much in programs that don’t have such guidance on engineering fees.

9. It is not clear exactly what defines “public-private” partnerships. This may be too ambiguous and means various things to various people – left open to EPA or state determinations may result in unintended consequences. Also, the states are doing a fine job of public outreach under the current rules. Before requiring more “significant” public outreach, we should first conclude the current is not working (which states and why would be useful information).

10. The proposed wastewater program is limited to “municipal” systems and privates. We urge you to consider opening it up to a variety of non-profit systems including districts and other quasi-governmental systems, which we believe was intended and is consistent with the drinking water programs. Many rural wastewater systems are not legally municipalities, but rather district or other non-profit utilities.

11. We urge the Committee to consider allowing states the discretion to 30 years loans to any small community – not just to communities designated disadvantaged.

The coming arsenic rule will increase the number of small systems facing funding challenges. Dozens of small systems in Kansas (thousands across all the states) will need funding to comply with the arsenic regulation.

One municipality in Kansas that will be greatly affected by Arsenic Rule, established at 10 ppb, is the City of Atwood (population of 1,300) surrounded by farmland and an agricultural economy.

Past arsenic water quality results for the City of Atwood has shown a range of 12 to 18 ppb in the three currently used municipal wells. The proposed arsenic MCL of 10 ppb allows the City two general feasible options to attain the MCL. The community has an option to develop new well fields in the Ogallala formation located several miles from the community. However, while Ogallala formation generally provides better water quality and perhaps an arsenic concentration below the 10 ppb, it is a much more cemented and finer formation. This fine formation decreases production of wells. Thus to develop a sufficient municipal water supply, more area for wells is required since they must be a greater distance apart. The estimated cost of this option would be $2,200,000 based on a five-mile transmission main with four wells to meet daily water demand. A second option available is treatment of the existing water supply sources.

The city presently does not have a single point of entry into the distribution system. Each well is directly connected into the distribution system. All wells are located in separate areas of the existing system. Over 3,000 feet of distance exist between the two farthest wells. In order to implement a point of use treatment plant, a new dedicated transmission main would have to be constructed between the wells. Land and easements would have to be procured to build a treatment facility. Atwood’s sulfate concentrations in the range of 90 to 309 mg/L will affect treatment efficiencies in an ion exchange process requiring frequent regeneration. This creates higher operation and maintenance cost (O&M). The estimated treatment facility cost would range from $1,300,000 to $2,100,000 depending on the Best Available Technologies (BAT) selected. Atwood could experience a budget increase of $50,000 to $75,000 per year with the incorporation of a treatment plant. These budget increases are due to operation and personnel requirements. Special by-product disposal requirements could require more operation costs.

In order to provide funding for capital construction and O&M assuming a 5% interest rate and 20-year loan period that corresponds with the life of a treatment facility with 700 connections, the monthly water rate would have to increase by $18 to $29 per connection. Again, please keep in mind this does not include the current water rate and upgrades currently necessary to keep the system in compliance. [MILLER & ASSOCIATES CONSULTING ENGINEERS, P.C., McCook , NE 2001]

This is a conservative estimate and does factor in all the costs for compliance. Rate increases on this type of a community could be devastating.

However, Mr. Chairman, while no system will be in greater need for federal assistance than Atwood, KS the challenge is how to craft a funding program that will work for those most in need. Cost estimates of the funding needed to sustain a healthy U.S. water supply are staggering. The Water Infrastructure Network, of which Rural Water is a member, estimates an $11 billion annually funding gap over the next 20 years. This estimate is over 4 times the current combined federal contribution in the USDA, EPA Drinking Water, and EPA Wastewater programs.

Rural Water is not the type of organization that can present an accurate cost figure on the future need for funding. However, we can acknowledge the extreme shortfall in both EPA SRF and the USDA water programs, as indicators that the current needs are not being met. The USDA program, which is the core-funding program for small water and wastewater projects, is currently experiencing a $3.2 billion backlog. We believe this is the most accurate indicator of need because all of the systems in USDA’s backlog have applied for funding. They have met the requirements of USDA’s strict needs requirement (including lack of commercial funding availability and high ratios of median household income to water rates).

In addition to this current need, EPA is proposing more regulations. Many of the regulations will force small towns to come up with millions in financing – many systems will be stressed to comply. I think it is significant to observe a new dynamic in EPA regulations: the regulation of naturally occurring contaminants and the regulations of operations and maintenance in utilities. The result of this new effort by EPA will be to greatly expand the number of systems forced into costly compliance with EPA rules. For example, very few systems were required to treat for EPA’s previous rules on organic contaminants, many with anthropogenic origins. However, the forthcoming arsenic rule could capture as many as 4,000 communities; this will greatly drive the demand for additional funding resources. Upcoming EPA rules that may be expensive in thousands of rural communities include: standards for certification of operators, filter backwash, radon, surface water treatment rules, arsenic, disinfection byproducts, ground water disinfection, etc.