Bill Elmore Testimony

Testimony on Drinking Water Infrastructure Needs
before the
Subcommittee on Water Resources and Environment
Committee on Transportation and Infrastructure
U.S. House of Representatives
by
Bill Elmore
Senior Vice-President and Chief Operating Officer
Knoxville Utilities Board
Knoxville, Tennessee
March 28, 2001

Good morning, Mr. Chairman, Congressman DeFazio, members of the subcommittee.

My name is Bill Elmore, and I am the Senior Vice-President and Chief Operating Officer of the Knoxville Utilities Board in Tennessee. This testimony was prepared on behalf of two drinking water associations: the Association of Metropolitan Water Agencies (AMWA) and the American Water Works Association (AWWA).

Knoxville Utilities Board (KUB) is an independent public agency of the City of Knoxville that provides water and wastewater service to more than 180,000 customers in Knoxville and parts of seven surrounding counties. (KUB also provides gas and electric service.) KUB treats 37 million gallons of drinking water each day, which requires two treatment plants, 22 booster pump stations and 1,442 miles of pipe, in a 189-square mile service area. KUB also operates four wastewater treatment plants, 46 effluent pump stations and a 1,275-mile collection system.

Founded in 1881, AWWA is the world's largest and oldest scientific and educational association representing drinking water supply professionals. The association's 57,000-plus members are comprised of administrators, utility operators, professional engineers, contractors, manufacturers, scientists, professors and health professionals. The association's membership includes over 4,000 utilities that provide more than 80 percent of the nation's drinking water.

AMWA represents the nation's largest drinking water agencies. All AMWA member-agencies are publicly owned. Represented by city water commissioners and utility chief executives, AMWA's member-agencies collectively serve more than 110 million Americans with clean, safe drinking water

Both AMWA and AWWA are members of WIN - the Water Infrastructure Network.

Thank you for holding this hearing to learn more about the infrastructure needs of local water utilities. Our goal is to provide you with everything you need to help water utilities resolve the enormous challenges we are facing over the next 20 years.

Overall Need and the Gap

Last fall WIN released Clean & Safe Water for the 21st Century, which summarized infrastructure needs and the funding shortfall facing drinking water and wastewater systems. The report estimates that drinking water utilities across the nation collectively need to spend about $24 billion per year for the next 20 years, for a total of $480 billion. WIN's analysis also concluded that water systems currently spend $13 billion per year on drinking water infrastructure, leaving an $11 billion annual gap between current spending and overall need.

A separate needs estimate was released in February by the U.S. Environmental Protection Agency (EPA), based on a survey of public water systems. The survey results suggest water systems will need $150 billion during the next twenty years. But according to EPA, the survey underestimates the true need. The survey is intended to be used as the basis for the Drinking Water SRF distribution formula. Because the Drinking Water SRF is primarily concerned with projects that will help systems comply with drinking water quality regulations, so is the survey. Therefore, EPA's estimate excludes many needs, such as the replacement of treatment facilities and distribution systems due to age. This is the largest infrastructure expense facing the nation's water suppliers. The survey also excludes capital projects related to raw water storage, and EPA's estimate for medium and large systems is substantially under-evaluated because the agency relied on five-year capital improvement plans (CIPs) by utilities and included them in the 20-year picture. Utilities may estimate their needs for many years into the future, but most CIPs cover five-year periods, leaving the remaining out-years undocumented, and thus excluded by the survey.

In contrast, WIN's $24 billion per year estimate is more comprehensive. It relies on historical system construction data, population figures from the Census Bureau, actual cost data from the drinking water community, data on infrastructure spending from the Department of Commerce, as well as needs estimates by EPA and AWWA.

Like the nation's other 55,000 water utilities, KUB is responsible for providing safe, clean drinking water to protect public heath and comply with drinking water regulations. In addition, our customers -- both families and businesses -- expect reliable service. My 180,000 customers expect safe water to come out of their taps each morning. Likewise, KUB supplies safe water to manufacturing, chemical, steel, electronics, and food processing plants, as well as five hospitals and thousands of businesses. These facilities and businesses expect and deserve reliable service, as well. To meet our responsibilities, old pipes and out-of-date treatment facilities must be replaced, repaired and refurbished.

Replacing and Repairing Pipes

In a recent study by AWWA looking at 20 utilities throughout the United States, researchers learned that the original pattern of water main installation from 1870 to 2000 is a reflection of the overall pattern of population growth in large cities across the country. There was an 1890s boom, a World War I boom, a roaring '20s boom, and the massive post-World War II baby boom.

The oldest cast iron pipes - dating to the late 1800s - have an average useful life of about 120 years. This means that as a group these pipes will last anywhere from 90 to 150 years before they need to be replaced, but on average they need to be replaced after they have been in the ground about 120 years. Because manufacturing techniques and materials changed, the roaring '20s vintage of cast iron pipes has an average life of about 100 years. And because techniques and materials continued to evolve, pipes laid down in the post World War II boom have an average life of 75 years, more or less. Using these average life estimates and counting the years since the original installations, it's clear that water utilities will face significant need for pipe replacement in the next couple of decades.

Pipe repair costs add another dimension to the overall need. As pipes age, they tend to break more frequently. But it is not cost-effective to replace most pipes before, or even after, the first break. Like the old family car, it is cost efficient for utilities to endure some number of breaks before funding complete replacement of their pipes.

Considering the waves of pipe installation in the last century, we can expect to see significant increases in break rates and therefore repair costs over the coming decades. This will occur even when utilities are making efficient levels of investment in replacement that may be several times today's levels. In the utilities studied by AWWA, there will be a threefold increase in repair costs by the year 2030 despite a concurrent increase of three-and-a-half times in annual investments to replace pipes.

Replacing Water Treatment Facilities

Replacement of water treatment facilities presents a different and more complicated picture from that of pipe replacement. Major investments in water and wastewater treatment plants were made in several waves following the growing understanding of public health and sanitary engineering that evolved during the 20th Century. Of course, the installation pattern of treatment facilities also reflects major population growth trends. But whereas pipes can be expanded incrementally to serve growth, treatment must be built in larger blocks. Investments in treatment thus present a more concentrated financing demand than investments in pipes.

Treatment facilities are also much more short-lived than pipes. Concrete structures within a treatment plant may be the longest lasting elements in the plant, and may be good for 50 to 70 years. However, most of the treatment components themselves typically need to be replaced after 25 to 40 years or less. Replacement of treatment facilities is therefore within the historical experience of today's utility managers. Even so, many treatment plants built or overhauled to meet EPA standards over the last 25 years are too young to have been through a replacement cycle. Many are about due for their first replacement in the next decade or so.

The concurrent need to finance replacement of pipes and of treatment plants greatly increases the challenge facing utilities. While spending for the replacement of pipes rises like a ramp over the first part of the 21st Century, spending for treatment plant replacement will occur at intervals causing "humps" in capital needs on top of the infrastructure replacement capital needs.

Other Costs Facing Utilities

AWWA estimates that water utilities will spend $27 billion per year to operate and maintain their facilities. We note this because electricity costs compose make up 20 to 80 percent of a water utility's total operating budget. The inevitable rise in energy costs will increase the O&M expenses of utilities, leaving fewer dollars for drinking water infrastructure.

Also, after city funds are spent on more pressing wastewater and storm-water infrastructure projects, there may be less room in the local budget for drinking water infrastructure. The estimated need for wastewater infrastructure is $23 billion per year.

Similarly, the cost to finance infrastructure can affect the availability of funds and whether a community can afford to build a needed water project. AWWA and EPA estimate drinking water and wastewater systems will each spend $5 billion per year to finance their projects.

Rate Inelasticity

WIN estimates that household water bills must double or triple in most communities, on average, if utilities are forced to absorb the entire infrastructure bill. This scenario is complicated by rate inelasticity. A household's water bill often covers drinking water supply, sewer and storm-water control. Raising rates to cover one, diminishes the ability to pay for the other two. Unfortunately, all three sectors are facing massive infrastructure challenges. The impact on American families is even harsher when you consider the other utility expenses, such as phone, gas and electricity.

Members of Congress who served at the local level know this debate all too well. In communities large and small across the nation, utility managers face rate inelasticity each time they propose a rate increase to cover infrastructure costs.

Demographics

Further compounding this issue is demographics. Large investments are a major source of financial vulnerability for water utilities due to the very fixed nature of the pipes and plants and the very mobile nature of the customers. When populations grow, the infrastructure is expanded, but when people move away, the pipe and the liability for repair and replacement remain behind, creating a financial burden on the remaining customers. This is true in small towns facing economic hardship, as well as cities like Detroit, where the more affluent left the less affluent to cover the water infrastructure maintenance and replacement costs. This problem, known as "stranded capacity," adds considerably to the challenge of funding infrastructure replacement in our communities.

Some Local Examples

Knoxville, Tennessee. Knoxville has spent $40 million in capital improvements over the last five years for the drinking water system, and the utility is anticipating another $64 million in water system improvements during the next five years. When you consider that this scenario is repeated hundreds of times across the United States, you begin to understand how WIN developed the $480 billion figure.

Resolving our infrastructure needs is made more onerous given that KUB is also a wastewater utility, which has its own infrastructure needs, including $63 million in sewer system improvements over the next five years in addition to the $80 million KUB spent over the previous 14.

Kansas City, Missouri. Kansas City raised rates by 100 percent over the last 10 years, and the utility plans water rate increases of four percent each year and sewer rate increases of six percent each year. The water department anticipates spending $85 million per year for the next six years just to resolve its infrastructure backlog, but these rate increases and new efficiencies will net the utility only $55 million per year, leaving an annual shortfall of $30 million.

Cleveland, Ohio. Cleveland has been investing an average of $60 million per year over the last 10 years for drinking water infrastructure. Over the next eight years, Cleveland must invest $500 million to rehabilitate and modernize three of its four water plants. To finance this, Cleveland has adopted an 18-percent annual rate increases over the next five years. This is after 10 consecutive years of increases totaling 80 percent. Yet this does not even address Cleveland's distribution system needs in any substantial way.

Portland, Oregon. In Portland, a $1 billion mandated combined sewer overflow program will result in double digit rate increases for about 15 years. At the same time, the need for infrastructure funding for drinking water is $400-800 million in the next 10 years. The likelihood that water rates can be raised to cover these costs is doubtful, given that the increase in sewer bills has virtually used up the elasticity that existed to raise rates.

How we close the $11 billion drinking water infrastructure gap between historical spending and overall need is the next question. Many water utilities can meet this demand for greater investment without assistance. To help reduce this gap, water utilities, especially large metropolitan systems, have made great strides in efficiencies, with some utilities achieving a 20-percent savings in operations and maintenance. Utilities will continue to reduce costs, seek cost-effective financing and employ innovative management strategies. Regardless, there will remain a gap between the available funds and the significant level of investment required. AMWA and AWWA do not expect the federal government to completely fill the gap, but some help is needed.

AWWA and AMWA pledge to work with Congress to develop a responsible and fair solution to this problem. Thank you, again, for holding this important hearing.