|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
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
|In developing its Gap Analysis, EPA noted that
further research would help better quantify the infrastructure gap.
|• 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
• 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
• 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
• Trends in operating costs — for example, the cost of chemicals and
• 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
|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
|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
|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
|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
|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
|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
|WaterWorld November, 2002