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The WIN Report Water Infrastructure Now

Q: What is the source of the needs figures presented in the WIN report, Water Infrastructure Now: Recommendations for Clean and Safe Water in the 21st Century?

A:  Water and wastewater funding needs figures in this report come from WIN's previous report, Clean and Safe Water for the 21st Century.  Those figures came from the US EPA, the US Bureau of the Census, the American Water Works Association, the Association of Metropolitan Sewerage Agencies, and the Water Environment Federation.  More detail is presented below:

Historical capital and O&M Spending:  US. Bureau of the Census[1]

Projected O&M Needs: trend-line projections of recent O&M spending patterns from the US Bureau of the Census, reduced to assume that operating efficiencies of 20% are captured over a 10-year period. Projected Capital Needs:  US Environmental Protection Agency (water and wastewater needs surveys; Office of Water revised estimate of SSO needs), WIN's estimate of wastewater asset replacement, and AWWA's estimate of water asset replacement.

For water supply, replacement costs are taken from a recent analysis undertaken by the American Water Works Association.[2] This method uses a simulation model to project the future costs of replacing distribution systems at then-current costs.

Wastewater assets were assumed to be replaced once they exceeded their useful lives. Historical data on municipal expenditures for wastewater capital facilities like treatment plants, collection systems, and pumping stations and other fixed assets like vehicles, machinery, and equipment were accumulated into annual values of total capital stock &emdash; essentially the value of the nation's wastewater infrastructure. These estimates of capital stocks or capital "assets" were then depreciated by asset class, according to average lives within each class &emdash; 50 years for sewers and collection systems, 25 years for treatment facilities, and 10 years for other assets (one 27-year depreciation period averaged across the mix of assets "in the ground" over the past several decades). Annual costs of replacement, then, is equal to annual values of depreciation.   This method was originally developed by the US Department of Commerce for a Congressionally mandated infrastructure council in the 1980s.[3] US EPA Needs Survey estimates were reduced to avoid double counting associated with the cost of replacing water and wastewater assets as derived above.

Q: Why are these numbers different than EPA's Needs Surveys?

A: EPA estimates needs pursuant to both the Clean Water Act and Safe Drinking Water Acts as  the costs to local governments of meeting the objectives of the acts. 

Accordingly, EPA's needs estimates cover only the costs to comply with statutory and regulatory requirements, which principally derive from investments needed to comply with individual regulations governing the quality of effluent and biosolids under the Clean Water Act and drinking water purity under the Safe Drinking Water Act.  Regulations pursuant to each act and administrative procedures governing the collection of needs estimates further restrict the definition of a "need" under the EPA Needs Surveys. WIN, on the other hand, took the perspective of the local providers of water and wastewater services, who have to make the investments captured under the EPA Needs Surveys plus other investments to deliver reliable and adequate quantities of services consistent with demands of people living within the areas they serve.  From the local perspective, total capital outlays needed to stay in business and deliver expected levels of service exceed &emdash; sometimes dramatically &emdash; needs to remove X mg/l of a single contaminant from a wastewater discharge.  So, in addition to investments needed to meet eligible categories under the Clean Water Act and Safe Drinking Water Act, WIN's needs estimates included investments to replace aging and failing infrastructure.  Local capital investment budgets must meet both types of investments.

Q: Is there any evidence at the utility level that needs are higher than projected by EPA and that rates will, indeed double or more in the future?

A:  Yes.  Based on recent analyses of 18 water and two wastewater utilities, the American Water Works Association has demonstrated that asset replacement needs at these utilities tracks closely the order of magnitude differences between WIN's national estimate of total needs and EPA's estimates of needs to comply with the Clean Water and Safe Drinking Water Acts.  To accommodate these future investments in infrastructure replacement, on average, these 20 water and wastewater systems will have to increase real investment by a factor of 2.5 between 2000 and 2020.

Q: What purpose will these future infrastructure replacement investments serve?

A:  Future replacement of water and wastewater infrastructure will serve three purposes: maintenance of service levels, protection of public health, and environmental improvement.


Q: Why are future replacement costs for water and wastewater infrastructure so much higher than current costs?

A:  By its nature, infrastructure wears out.  In the water and sewer sectors, the major investments in infrastructure (pipes, plant, pumping stations, etc) took place around the turn of the century, around World War I, and around World War II.   In the 1970s and 1980s, the nation invested heavily in new wastewater treatment plants and water supply treatment facilities.  In many locations, the original investments in infrastructure are only now beginning to wear out and in some locations, infrastructure put in pace in each of these successive periods is all wearing out more or less, at the same time over the next 10-30 years.  As a nation, we have never faced the replacement of these infrastructure assets since the oldest pipes lasted 100-120 years.


Q: Why will local water and wastewater rates double or more if all needs are met through local rates alone?

A: Much of the WIN report focuses on capital needs and the financing implications of meeting those needs, but trends indicate that over the next 20 years, all local water and wastewater costs will go up.  These trends were documented in two recent reports, the first published by the Association of Metropolitan Sewerage Agencies (AMSA) and the Water Environment Federation (WEF)[4], and the second by the US EPA.[5]  If over the next 20 years, local water and wastewater rates increased sufficiently to cover projected increases in the cost of operations and maintenance, which historically has increased at about 6% a year more than inflation, plus the cost of meeting projected capital needs over the same period, local water and wastewater rates would more than double (123% real increase over 20 years), on average nationwide. This estimate does not consider several trends that could increase local costs, and rates, even further, including new capital needs associated with meeting new federal and/or state regulatory requirements, and increased O&M costs either from aging capital stock or increased levels of treatment.

Q What sort of rate increases will cities experience if WIN's proposed $57 billion federal funding package is implemented?

A:  Annual household water and wastewater bills would increase by an estimated 81% (in real dollars) between 2000 and 2019 if half the future unmet capital needs were funded with federal grants as opposed to local sources.  If only half the federal contribution to unmet needs is provided as grants and half as market-rate loans, average annual household rates (in real dollars) will just double over the period.  Since WIN recommends federal funding as both grants and loans, with the final proportions of each to be determined by the states, the final effect on average household rates will be somewhere between these two figures, but closer to a 100% increase.

Q: What is the federal contribution to total local spending for water and wastewater today?

A: WIN calculates that the combination of federal earmarked grants for water and wastewater plus the subsidy in below-market rate loans offered by federally capitalized water and wastewater SRFs accounts for roughly 10% of the total local spending on water and wastewater operations, maintenance, direct capital investment, and capital servicing (payments on local water and wastewater bonds and loans).

Local O&M in 1996:[6]              $15.3 billion
Local Capital in 1996 (from own sources): $7.9 billion
Federal Capital in 1996 (estimated):  $2.5 billion
Total Investment in 1996 (from all sources):  $25.7


Q:  The WINreport assumed that local water and wastewater utilities currently finance capital improvements using a combination of 25% cash and 75% bonds.  Is this expected to change if the federal program as recommended in the WIN report is implemented?

A:  Yes.  Assuming that the current mix of sources of local capital investment is indeed, 25% cash and 75% debt (this is an estimate in and of itself), the local share of total capital investment would shift marginally toward more debt if the WIN program goes forward.  This is because the federal contribution under the WIN recommendation would come in the form of additional capitalization of state water and wastewater infrastructure banks, which in turn, will make a large portion of these federal capitalization grants available to local water and wastewater utilities as loans.  On balance, this will increase total borrowing and increase the proportion of debt to cash used in local water and wastewater capital financing.

Q: What would be the impact of no new federal investment in water and wastewater infrastructure as WIN has recommended?

A: Without any additional federal funding, it is unlikely that investment will be sufficient to meet projected capital needs in all water and wastewater systems across the nation.  In relatively new systems, those that are large and growing, and those that serve relatively wealthy populations, rate revenue may well prove to be sufficient to meet all investment needs.  Under those circumstances, rates will increase substantially, but in all likelihood, remain affordable.  

In small cities, rural areas, and cities with shrinking populations and/or local economies, real water and sewer rates would have to double, triple, or more to meet all needs.  This seems unlikely, especially in low-income communities and in older urban core cities where populations have migrated to the suburbs, leaving fewer users to finance replacement of a fixed infrastructure base.  Under these circumstances, it would be logical to expect declining service levels resulting in violations of state and federal clean and safe water requirements and threats to public health, safety, and the environment.  In turn, these effects will discourage commerce and community well-being, leading to further population loss, reductions in economic output, and a general worsening of the physical and financial health of water and sewer systems.  There would be little to reverse this downward spiral. Inevitably, pressure will be brought to bear on the federal and/or state governments for fiscal relief.

In systems facing high regulatory requirements or replacement of the oldest water and sewer infrastructure, these types of effects would be felt within the next five to ten years.   Facing a revenue shortfall, water systems will defer maintenance, cut costs (if they can), and deplete reserve funds.  These strategies can work only in the short term, since deferred maintenance results in earlier capital replacement needs, only so much operational cost-cutting is possible, and reserve funds typically cannot cover revenue shortfalls for more than a few years.

Q: WIN recommends consolidation of existing water and wastewater SRFs into a single state Water and Wastewater Infrastructure Financing Authority, or WWIFA.  What is the rationale behind this recommendation?

A: Currently, about 30 states manage their clean water and safe drinking water SRFs more or less as a single entity.  The other 20 states manage two separate SRFs.  The concept of a single WWIFA follows the model of consolidated management of both types of investments &emdash; those in clean water and those in safe drinking water.  Consolidation of management offers two types of benefits: reduced overhead costs per dollar of infrastructure funded and increased public health and environmental protection per dollar of investment funded.  

With regard to reduced overhead, the Clean Water Act and Safe Drinking Water Act enable states to set aside 4% each of their federal allocations to their clean water and safe drinking water SRFs.  While there is little empirical evidence available, it is clear that a certain portion of any organization's cost base is fixed and the remainder is variable.  If, say only 25% of the cost of administering an SRF is fixed, then consolidated management of a single WWIFA compared to two separate SRFs would free up 1% of total state clean and drinking water allocations for investment in infrastructure as opposed to administration.   Under the WIN recommendation, the nation would enjoy some $570 million in additional infrastructure through consolidated management of a single entity compared to two separate entities. 

In support of the latter observation, it is not difficult to imagine that upgrading an upstream wastewater treatment plant to produce higher quality effluent would result in reduced treatment needs in a downstream drinking water facility.  Similarly, an investment in watershed protection upstream could improve ambient water quality conditions to the point of obviating a downstream investment in nutrient removal at a wastewater treatment plant.  Coordinating these investments in the future becomes increasingly important to the extent that WWIFAS finance investments in non-point source controls.

Q: WINrecommends that WWIFAs be given broad authorities drawn from those of both the current water and wastewater SRFs.  Which authorities in particular are needed for WWIFAs?

A: The current drinking water SRF is generally considered to be more flexible than the clean water SRF.  WWIFAs should have at least the provisions of the drinking water SRFs plus others, as outlined in the WIN report, to enable them to act as broadly enabled banks to the water and wastewater sector.  Examples of such flexibility include: ability to provide financing to both public and private owners of water and wastewater utilities, ability to offer financing packages comprised of grants, loans, and loan subsidies to meet the financial capabilities of recipients and address critical public health and environmental concerns, and ability to extend loan terms to 30 years for both water and wastewater investments.

In its report, WIN recommends specifically, that WWIFAs be required to provide between 25-50% of each years' federal capitalization allotment as grants and 10-25% of each year's allotment as subsidized loans.  These provisions will help ensure that the nation meets its clean and safe water goals even in economically disadvantaged communities and in communities that face critical public health and/or environmental threats.

Q:  Doesn't WIN's recommendation for more grants undermine the revolving and leveraging attributes of today's federal financing program?

A: Absolutely not.  In fact, WIN's recommendations will accelerate the pool of funds available in perpetuity for additional revolving loans.  Even if Congress required WWIFAs to set aside the maximum amount of WIN's recommended $57 billion financing package as grants, the amount going into revolving loans would nearly triple compared to today's program.  This, in effect, will greatly increase the long-run capacity of WWIFAs to sustain their revolving loan programs compared to today's SRF programs.

Currently the leveraging of federal capitalization grants is a matter of state policy. WIN has made no recommendations as to the merits of leveraging in the future.  Assuming, however, that the current rates of leveraging continue without change, WIN's recommended funding levels will result in nearly $18 billion in additional leveraged investment over the period 2003-2007, even if WWIFAs make the maximum recommended amount of assistance available to local utilities in the for of grants.

Q: The WIN report incorporates a 20% reduction in operations and maintenance costs for both water and wastewater utilities over the next 10 years.  What is the source of this estimate?

A: Several WIN members &emdash; specifically, the Association of Metropolitan Sewerage Agencies, the Association of Metropolitan Water Agencies, the Water Environment Federation, and the American Water Works Association &emdash; have been studying the competitiveness of  public water and wastewater utilities in the US since the mid-1990s.[7]   Based on this work, WIN members have delivered more than 25 workshops to more than 2,500 utility managers, representing more than 150 public water and wastewater utilities across the US.  Findings from these workshops indicate that between 20 and 25 percent of current O&M costs could be cut from existing public utility budgets by applying best management practices, reforming work processes, reorganizing management structures, and using technology.  Many public water and wastewater utilities have already cut operating costs by this much or more.  In a recent publication, AMSA and AMWA document four such cases: Ft. Wayne, Indiana; Orange County Public Utilities, Florida; Colorado Springs, Colorado; and Houston Public Utilities, Texas.[8] In recent presentations to the Environmental Financial Advisory Board to the US EPA, several consultants actively working in the field corroborated this estimate.[9]

[1] US Department of Commerce, Bureau of the Census, Government Finances data series.

[2] American Water Works Association, Infrastructure Needs for the Public Water Supply Sector, prepared by Stratus Consulting, December 22, 1998.

[3] US Department of Commerce, Office of Economic Affairs, "Effects of Structural Change in the US Economy on the Use of Public Works Services," September 1987, prepared for the National Council on Public Works Infrastructure.

[4] Association of Metropolitan Sewerage Agencies and the Water Environment Federation, The Cost of Clean: Meeting Water Quality Challenges in the New Millennium, 1999.

[5] US Environmental Protection Agency, Office of Water, "Gaps Analysis," 2001.

[6] All figures from the US Bureau of the Census and expressed in 1997 dollars.

[7] See, for example: Association of Metropolitan Sewerage Agencies and Association of Metropolitan Water Agencies, Thinking, Getting, and Staying Competitive: A Public Sector Handbook, 1998.

[8] See Thinking, Getting, and Staying Competitive: A Public Sector Handbook.

[9] See presentations of Garret Westerhoff, Malcolm Pirnie, Inc., Alan Manning, EMA Services, Inc. and Kenneth Rubin, PA Consulting Inc., to EFAB, March 5, 2001, the National Pres Club, Washington, D.C. (available through EFAB staff, George Ames, US EPA).





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