Harold J. Gorman Testimony

Association of Metropolitan Water Agencies
Testimony

Before The

Subcommittee On Fisheries, Wildlife And Water
Committee On Environment And Public Works

United States Senate

By

Harold J. Gorman
Board Member
Association Of Metropolitan Water Agencies

And

Executive Director
Sewerage And Water Board Of New Orleans

October 18, 2001

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 five-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 five 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, D.C.: 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 five 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 two 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 five 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 three 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.