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Congress Today Guide to Congress Capitol Hill Basics THOMAS    (US Congress Internet) Congressional Record Database

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EPA, GAO Examine Water Industry Financing
To gain a better understanding of the funding challenge facing the clean water and drinking water industries, the Environmental Protection Agency conducted a study to identify whether there is a quantifiable "gap" between current levels of spending and projected water investment needs over the 20 year period from 2000 to 2019.
The General Accounting Office also released a recent report on Water Infrastructure: Information on Financing, Capital Planning, and Privatization. Both reports were requested by Congress to help with planning federal funding for water.
EPA's Clean Water and Drinking Water Infrastructure Gap Analysis found that a significant funding gap could develop if the nation's utilities maintain current spending and operations practices.
 

The Gap Analysis presents the projected funding gap over the 20–year period in two ways: a "no revenue growth" scenario that compares the projected need to current spending levels; and a "revenue growth" scenario that assumes spending will increase by 3 percent per year. This annual increase represents a real rate of growth of 3 percent over and above the rate of inflation — a projection which is consistent with long-term growth estimates of the economy, according to EPA.

Under the "no revenue growth" scenario, the analysis estimates a total capital payments gap of $122 billion, or about $6 billion per year, for clean water and $102 billion, or about $5 billion per year, for drinking water. The O&M gap is estimated at $148 billion, or $7 billion per year, for clean water and $161 billion, or $8 billion per year, for drinking water.
Under the "revenue growth" scenario, the capital gap is $21 billion, or about $1 billion per year for clean water and $45 billion, or about $2 billion per year, for drinking water. The O&M gap is estimated at $10 billion, or $0.5 billion per year, for clean water, while no O&M funding gap would occur for drinking water.
Each of these numbers represents an average within a range of estimates. Under the assumptions used to calculate the funding gaps, some of the models predict that total spending will exceed the total need over the next 20 years.
In broad terms, the gap analysis concludes that clean water and drinking water systems will need to use some combination of increased spending and innovative management practices to meet projected needs.
EPA acknowledged that its study understates future spending and ignores other measures, such as asset management processes or capacity development, that systems could adopt to reduce both capital and O&M costs.
In reality, increasing needs will likely prompt increased spending, EPA said. However, the analysis presents an approximate indication of the funding gap that will result if the nation's utilities ignore the challenge posed by an aging infrastructure network.
More Information Needed
In developing its Gap Analysis, EPA noted that further research would help better quantify the infrastructure gap. For example:
• A better inventory of the nation's clean water and drinking water capital stock and its condition is needed. That includes developing an improved picture of the remaining life of capital assets such as treatment plants, piping networks and storage systems. Such information would greatly improve decision-making about investment needs for maintaining, upgrading, and expanding infrastructure.
• The relationship between O&M needs and capital stock is not fully understood. A more refined approach than the one adopted in the Gap Report would investigate how O&M needs vary as a function of gross (not net) capital stock and the age or condition of the capital stock. These data, other than in purely speculative form, are not yet available.
• Clean water and drinking water systems will incur significant costs over the next 20 years as they expand capacity to serve current and future growth. Methods for estimating capital investment needs associated with growth and changes in service standards were excluded from the analysis.

 
A Qulitative Assesment of the Sensitivity of the Gap Estimate

According to EPA, its analysis would benefit from research into an array of issues that ultimately will determine, or at least influence, the scale of future capital investment needs. These issues will also determine how future capital investment needs are met. More research is needed on a variety of topics. For example:

• How implementation of best management practices, including asset management and capacity development, would benefit the funding gap.
• Restructuring, integrating, and combining water and wastewater utilities to generate better economies of scale.
• Pricing policies and their effect on demand for water
• Demographic shifts within the United States
Efficiencies gained or lost due to the installation of the latest technology
• Trends in operating costs — for example, the cost of chemicals and energy
• Criticality analysis — which components of a system should take precedence for investment due to age, condition, and importance)
Copies of the Gap Analysis and the Needs Surveys are available from the Safe Drinking Water Hotline at 800-426-4791, the Office of Water Resource Center at 800-832-7828, and on the Internet at www.epa.gov/ow.
GAO Report
Congress asked GAO to examine several issues relating to the funding available to help meet the capital investment needs of the nation's drinking water and wastewater facilities. Given the broad scope of the request, GAO agreed to provide the information in two reports. The first Water Utility Financing and Planning report, issued in November 2001, addressed the amounts and sources of federal and state financial assistance for drinking water and wastewater infrastructure during fiscal years 1991 through 2000.
This second report, issued in September, examines how the amount of money generated through user charges and other local funding sources compare with the cost of providing service at public and private drinking water and wastewater utilities serving populations greater than 10,000. It also discusses how such utilities manage existing capital assets and plan for needed capital improvements, and what factors influence private companies' interest in assuming the operation or ownership of publicly owned drinking water and wastewater facilities.

 
No Revenue Growth Scenario: 2000 - 2019

GAO found the amount of funds obtained from user charges and other local sources of revenue was less than the full cost of providing service — including operation and maintenance, debt service, depreciation, and taxes — for over a quarter of drinking water utilities and more than 4 out of 10 wastewater utilities in their most recent fiscal year.


 
Revenue Growth Scenario: 2000 - 2019

While revenues from user charges and other local sources were adequate to cover at least operation and maintenance costs for nearly all of the utilities; an estimated 29 percent of the utilities deferred maintenance because of insufficient funding. Revenues from user charges accounted for most of utilities' locally generated funds — at least three quarters of all funds from local sources for at least three-quarters of utilities.

GAO's survey found that more than a quarter of utilities lacked plans recommended by utility associations for managing their existing capital assets, but nearly all had plans that identify future capital improvement needs. Among the utilities that had plans for managing their existing assets, more than half did not cover all their assets or omitted key plan elements, such as an assessment of the assets' physical condition.
In addition, while most utilities had a preventive rehabilitation and replacement program for their pipelines, for about 60 percent of the drinking water utilities and 65 percent of the wastewater utilities, the actual rate of rehabilitation and replacement in recent years was less than their desired levels, and many had deferred maintenance, capital expenditures, or both.
Many utilities also had plans for financing their future capital needs, but nearly half believed that their projected funding over the next 5 to 10 years would not be sufficient to meet their needs.
GAO found that revenues from user charges exceeded the cost of service at an estimated 39 percent of the drinking water utilities and 33 percent of the wastewater utilities. (For the purpose of this analysis, GAO defined a utility's cost of service as operation and maintenance expenses, taxes, depreciation, and debt service.)
When revenues from user charges were combined with funding from other local sources, such as hook-up and connection fees and sales of services to other utilities, an estimated 71 percent of the drinking water utilities and 59 percent of the wastewater utilities covered their cost of providing service.
According to GAO's survey results, about 85 percent of drinking water utilities and 82 percent of wastewater utilities covered at least the operation and maintenance portion of the cost of providing service using revenues from user charges alone. Moreover, adding other locally generated funds to the user charges, about 93 percent of the utilities covered their operation and maintenance costs.
GAO found that more than half of utilities whose revenues from user charges and other local sources did not cover their cost of providing service raised their rates two times or less during the 10-year period from 1992 to 2001. Overall, GAO found no statistically significant differences in the frequency of rate increases between the utilities that did not cover their costs and those that did.
A significant percentage of drinking water and wastewater utilities—about 27 percent and 31 percent, respectively—did not have plans for managing their existing capital assets, although some utilities were in the process of developing such plans.
Further, of the utilities with plans, more than half did not include all of their assets or omitted one or more key elements recommended by industry associations; for example, 16 percent of drinking water utilities' plans and 21 percent of wastewater utilities' plans did not include information on the condition level at which the utility intends to maintain the assets. GAO found no statistical differences among utilities of different sizes with regard to the inclusion or exclusion of any of the key elements in their asset management plans. However, GAO found that the plans developed by privately owned drinking water utilities tended to be more comprehensive than those developed by publicly owned utilities.
According to GAO's survey results, some utilities had significant portions of pipelines in poor condition; for example, more than one-third of the utilities had 20 percent or more of their pipelines nearing the end of their useful life. Nevertheless, for about 60 percent of drinking water utilities and 65 percent of wastewater utilities, the actual levels of pipeline rehabilitation and replacement in recent years were less than the utilities' desired levels.
For example, GAO's survey indicates that roughly half of the utilities actually rehabilitated or replaced 1 percent or less of their pipelines annually, even though an estimated 89 percent of drinking water utilities and 76 percent of wastewater utilities believed that a higher level of rehabilitation and replacement should be occurring.
Further, in each of three categories—maintenance, minor capital improvements, and major capital improvements—about one-third or so of the utilities had deferred expenditures in their most recent fiscal years, and 20 percent had deferred expenditures in all three categories. With one exception, there were no statistically significant differences among utilities of different sizes; however, GAO found that public drinking water utilities were more likely than their privately owned counterparts to defer maintenance and major capital projects.
Copies of the General Accounting Office report on Water Infrastructure: Information on Financing, Capital Planning, and Privatization, can be downloaded in PDF format at http://www.gao.gov/.
WaterWorld November, 2002

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