Howard Neukrug Testimony

AMERICAN WATER WORKS ASSOCIATION
BEFORE THE
ENVIRONMENT AND HAZARDOUS MATERIALS SUBCOMMITTEE
COMMITTEE ON ENERGY AND COMMERCE
U.S. HOUSE OF REPRESENTATIVES
STATEMENT ON
DRINKING WATER NEEDS AND INFRASTRUCTURE
MARCH 28, 2001
PRESENTED BY
HOWARD NEUKRUG, DIRECTOR
OFFICE OF WATERSHEDS
PHILADELPHIA WATER DEPARTMENT
PHILADELPHIA, PENNSYLVANIA

INTRODUCTION
Good morning Mr. Chairman. I am Howard Neukrug, Director of the Office of Watersheds for the Philadelphia Water Department in Pennsylvania. The Philadelphia Water Department is a municipal water, wastewater and stormwater utility serving over two million people in the Philadelphia metropolitan area. I serve as the Vice Chair of the American Water Works Association (AWWA) Water Utility Council and am here today on behalf of AWWA. AWWA appreciates the opportunity to present its views on drinking water needs and infrastructure.

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 members are comprised of administrators, utility operators, professional engineers, contractors, manufacturers, scientists, professors and health professionals. The association's membership includes over 4,2000 utilities that provide over 80 percent of the nation's drinking water. AWWA and its members are dedicated to providing safe, reliable drinking water to the American people.
AWWA utility members are regulated under the Safe Drinking Water Act (SDWA) and other statutes. AWWA believes few environmental activities are more important to the health of this country than assuring the protection of water supply sources, and the treatment, distribution and consumption of a safe, healthful and adequate supply of drinking water.

AWWA is also a member of the Water Infrastructure Network (WIN) - a broad-based coalition of drinking water, wastewater, municipal and state government, engineering and environmental groups, dedicated to preserving and protecting the hard-won public health, environmental and economic gains that America's water and wastewater infrastructure provides.

AWWA and its members thank you for holding this hearing concerning the infrastructure needs of the Nation's drinking water utilities. AWWA looks forward to working with the subcommittee in its efforts to address the growing infrastructure costs facing drinking water utilities and consumers.

The Drinking Water Infrastructure Need

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. That report estimates that the total drinking water and waste water infrastructure needs over a twenty-year period approaches one trillion dollars. According to report estimates, 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. The report identified 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 water systems. The survey results suggest water systems will need $150 billion during the next twenty years. However, the EPA estimate is limited to identifying eligible Safe Drinking Water Act compliance needs for the Drinking Water State Revolving Fund (DWSRF) and does not include many needs, such as the replacement of treatment facilities and distribution systems due to age. These needs are not eligible for funding from the DWSRF yet they are the largest infrastructure expense facing the nation's water suppliers. EPA also relied on five-year capital improvement plans (CIPs) by utilities and included them in the 20-year period, leaving the remaining out-years compliance needs undocumented.
None-the-less, both estimates suggest an emerging large cost for drinking water infrastructure.

Why is the need emerging now?

Water is by far the most capital intensive of all utility services, mostly due to the cost of pipes - water infrastructure that is buried out of sight. Most of drinking water pipes were originally installed and paid-for by previous generations. They were laid down during the economic booms that characterized the last century’s periods of growth and expansion. Pipes last a long time (some more than a century) before they cost very much in maintenance expense near the end of their useful life, or ultimately need replacement. For the most part, then, the huge capital expense of pipes is a cost that today’s customers have never had to bear. However, replacement of pipes installed from the late 1800s to the 1950s is now hard upon us at the beginning of the 21st Century and replacement of pipes installed in the latter half of the 20th Century will dominate the remainder of the 21st Century. This is a significant change that ushers in a completely new era in water utility financing.

Recognizing that we are at the doorstep of a new era in the economics of water supply, the replacement era, the American Water Works Association (AWWA) has undertaken an analysis of 20 utilities throughout the nation to understand the nature and scope of the emerging infrastructure challenge. The project involved correlating the estimated life of pipes with actual operations experience in the sample of 20 utilities. Projecting future investment needs for pipe replacement in those utilities yields a forecast of the annual replacement needs for a particular utility, based on the age of the pipes and how long they are expected to last in that utility. By modeling the demographic pattern of installation and knowing the life expectancy of the pipes, we can estimate the timing and magnitude of that obligation. This analysis graphically portrays the nature of the challenge ahead of us. We will summarize the highlights of the analysis in this statement and AWWA will provide the subcommittee with a copy of the report when it is completed shortly.

Pipe Replacement Value

The original pattern of water main installation from 1870 to 2000 in 20 utilities throughout the nation analyzed by AWWA 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 needs for pipe replacement in the next couple of decades.

The cumulative replacement cost value (the cost of replacement in constant year 2000 dollars) of water main assets has increased steadily over the last century in our sample of 20 utilities. In aggregate across our sample of utilities, the replacement value of water mains in today’s dollars is about $2,400 per person. This is more than three times what it was in 1930 in constant year 2000 dollar terms. The difference is not due to inflation; rather, there is simply more than three times as much of this infrastructure today as there was in 1930, in order to support improved service standards and the changing nature of urban development. In older cities the per capita replacement cost value of mains today is as high as nine times the 1930 level (in constant year 2000 dollars) due to loss of center city population.

Reflecting the pattern of population growth in large cities over the last 120 years, the AWWA analysis forecasts investment needs that will rise steadily like a ramp, extending throughout the 21st Century. By 2030, the average utility in our sample of 20 will have to spend about three and half times as much on pipe replacement as it spends today.

Many water systems all across America have seen this day coming and have already begun to ramp-up their expenditures on pipe rehabilitation and replacement. But it is clear that for most utilities this problem is just emerging and is enormous in scope.

Pipe Repair Costs

As pipe assets 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 huge wave of aging pipe infrastructure created 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 three-fold increase in repair costs by the year 2030 despite a concurrent increase of three and one- half times in annual investments to replace pipes.


Water Treatment Plant Costs.

Replacement of water treatment assets presents a different picture from that of the pipes, but greatly complicates infrastructure funding for utilities. 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 assets 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 assets 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 assets 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. This is graphically illustrated in the attached "Relative Asset Replacement Projections" graph of the BHC Company water utility in Bridgeport, Connecticut, from the forthcoming AWWA report. This pattern has been found to be common in many water utilities and has been nicknamed "The Nessie Curve" because of its resemblance to depictions of the Loch Ness Monster.

Demographic Changes.

Water utilities are the last natural monopolies. The large investment required in pipe networks makes it impossible to have more than a single provider of water service within a given area. These large investments are also a major source of financial vulnerability for water utilities due to the very fixed nature of the assets and the very mobile nature of the customers. When populations grow, the infrastructure is expanded, but when people move away, the pipe assets and the liability for repair and replacement remain behind, creating a financial burden on the remaining customers. This problem, known as "stranded capacity" (essentially, capital facilities that are not matched by rate revenue from current customers), is typical of the demographics of older cities and adds considerably to the challenge of funding replacement in these cities.

In Philadelphia, over the one hundred years from 1850 to 1950, the population grew from 100,000 to 2 million people. But from 1950 to the end of the century, Philadelphia lost 25 percent of its population, dropping to 1,500,000. This situated was replicated again and again throughout the older cities of the Northeast and Midwest. The effect is to increase the burden of replacement funding on the remaining residents of the city.

As previously mentioned, the average per capita value of water main assets in place today across our sample of 20 utilities is estimated to be three times the amount that was present in 1930. In Philadelphia, however, that ratio is almost eight times the average per capita value of water main assets in 1930 due to population declines since about 1950.
Demographic change, then, places financial strain on all public water systems and has a direct impact on affordability of the investment required.

Affordability of Rates

A central question for policy makers and utilities, then, is whether the increased rate of infrastructure spending that utilities now face over the next 30 years can be financed by the utilities themselves at rates customers can afford.

WIN estimates that total water and wastewater infrastructure bills will have to double or triple in most communities to meet these needs, if consumers are forced to bear the entire infrastructure cost. The cost of compliance with storm water regulations alone may dwarf domestic drinking water and wastewater expenditures. Therefore, the impact on household affordability and rates of projected drinking water infrastructure expenditures must be viewed in the context of the total water and wastewater utility infrastructure bill to be paid by the consumer.

In the sample of 20 utilities studied by AWWA, the analysis showed an aggregate increase in needed utility expenditures above current spending levels of $3 billion by 2020 and $6 billion by 2030. This implies the need for collection of an additional $1,575 per household for infrastructure repair and replacement over 30 years. The estimated $1,575 per household is an average of the individual results. The individual utilities in the survey present wide-ranging needs for increased expenditure (from $550 per household over 30 years to $2,290 per household over 30 years) and "lumpy" patterns of increased expenditure needs that are unique to each set of circumstances.

The sample of 20 utilities represents relatively large utilities that are on the "cutting-edge" of utility management. The household expenditure increase will be much higher in small systems that do not have a large rate-base over which to spread the costs. Extrapolating from EPA’s estimated 20-year capital need for small systems, the AWWA analysis projects the total 30-year expenditure for infrastructure repair and replacement in small systems might be in a range of $1,490 per household to $6,200 per household.
Moreover, there is no guarantee that the projected expenditures per household can be spread evenly or taken on gradually over the 30-year period. There are "humps" for treatment plant replacement throughout the period. Additionally, expenditure "humps" for compliance with a dozen or more new regulations is not included in this analysis.

Conclusion

How we address our emerging drinking water infrastructure needs is a critical question facing the Nation and this Congress. To help reduce the burden on consumers, many water utilities have made great strides in efficiencies, with some utilities achieving a 20 percent savings in operations and maintenance. Water utilities will continue to reduce costs, seek cost-effective financing and employ innovative management strategies. Regardless, there will be significantly increased costs for needed infrastructure investment.

AWWA does not expect that federal funds will be available for 100 percent of the increase in infrastructure needs facing the nation's water utilities. However, AWWA does believe that due to concurrent needs for investment in water and wastewater infrastructure, replacement of treatment plants, new drinking water standards, and demographics, many utilities will be very hard pressed to meet their capital needs without some form of federal assistance. Over the next twenty years, it is clear that Safe Drinking Water Act (SDWA) and Clean Water Act (CWA) compliance requirements and infrastructure needs will compete for limited capital resources. Customers are likely to be very hard pressed in many areas of the country. Compliance and infrastructure needs under the SDWA and CWA can no longer be approached as separate issues. Solutions need to be developed in the context of the total drinking water and wastewater compliance and infrastructure needs.

AWWA pledges to work with Congress to develop a responsible and fair solution to the Nation’s growing drinking water infrastructure challenge. As a start, AWWA will provide a copy of the forthcoming AWWA report to members of the subcommittee to assist the subcommittee deliberations on this issue. We thank you for your consideration of our views.

This concludes the AWWA statement on drinking water needs and infrastructure. I would be pleased to answer any questions or provide additional material for the committee.

Attachment:
BHC Water Utility, Bridgeport, Connecticut

Asset Sets Modeled: Water Mains & Water Supply Plant - Estimated Replacement Value $1,663 M