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Utility Business
Copyright 2002 by Intertec Publishing Corporation, a PRIMEDIA Company. All
rights reserved.

Tuesday, January 1, 2002

Volume 5; Number 1; ISSN Number 10976981

Water, Water Everywhere
BY PAMELA KUFAHL, SENIOR EDITOR

To hear Jim Barr tell it, there's nothing extraordinary in the infrastructure replacement efforts that water utilities will need to undertake over the next 20 years.

"There is absolutely nothing new or particularly
complicated about the issue of infrastructure replacement,"
Barr, executive director of the American Water Works Co., told
attendees at a water conference in July 2001. "No matter what
we do to extend the useful lives of...pumps, pipes, treatment
facilities, hydrants...ultimately, they wear out and have to be
replaced. I believe it stretches credibility to suggest that this
basic, fundamental physical characteristic of any water or
wastewater system is anything other than a daily routine --
albeit a routine that requires huge investments."

However, some water companies worry that the size of the water
infrastructure replacements necessary during the next two decades
will be too costly for them to handle on their own. The U.S. water
industry will spend $250 billion during the next 20 years to
replace aging water infrastructure, most of which was installed
more than 50 years ago, according to an American Water Works
Association study. A large portion of that work will be in large
eastern cities with some of the oldest water systems in the
country. Many of these cities have lost population to the suburbs,
meaning they have lost much of their rate base to fund pipeline
replacements, says Jack Hoffbuhr, executive director of American
Water Works Association.

"Water service is the responsibility of the local utility
and local government, but we do recognize that this [replacement
rate] will be unprecedented over the next 20 years and they'll need
help," Hoffbuhr says of water companies. "We think
there's going to have to be a partnership here to make sure
utilities can make the investment in infrastructure over the next
few years."

That partnership may need to come in the form of federal
funding. The Water Infrastructure Network, a consortium of water
companies and associations that includes the American Water Works
Association, supports federal grants to pay for the replacements.
WIN says that without increased federal funding, the water industry
will fall short $11 billion per year during the next 20 years in
infrastructure replacement funding. Federal funding of just half
that shortfall would add up to 12 percent of total utility spending
on infrastructure replacement. By comparison, federal investment in
roads, bridges and airports is 80 percent.

The H2O Coalition, a consortium of three associations formerly
with WIN, opposes federal funding, particularly funding for larger
water systems. Federal grants for every system aid those who can
afford to pay more for water, says Peter Cook, executive director
of the Washington, D.C-based National Association of Water
Companies, which is a member of the H2O Coalition. The H2O
Coalition proposes that the infrastructure improvement costs be
passed along partially to customers and federal assistance be given
to low-income individuals who can't afford the rate increases.

Barr agrees. "The real challenge for our nation is to find
a way to help people in need, not water systems," says Barr.
"This could take the form of water bill payment assistance
for low-income families, much like the Low Income Home Energy
Assistance Program administered by HUD for home heating and cooling
bills."

Many systems that are worried about their infrastructure needs
"created their own problem" by not building long-term
capital investment into their rate structures, Barr says.

"It seems that some systems are now seeking federal
taxpayer dollars to bail them out of their self-created
infrastructure gap," Barr says. "This, however, would
give them an unfair economic advantage over those water systems
that have planned and implemented infrastructure
improvements." He says the federal grants and loan
forgiveness "would reward the water systems that did not plan
ahead, and financially punish the responsible water systems that
financed capital investment through revenues derived from the
delivery of water services."

Federal grants are currently given only to municipal water
companies, which puts private water companies at a disadvantage,
Cook says. Private water companies already must compete with
municipals' low rates or face being voted out of business. Handing
out federal grants to municipals but not private water companies
would only add to the inequality, Cook says.

"If you pump a huge amount of federal money into water and
wastewater systems, you would end the private water
business," Cook says. "You would tilt the industry
toward municipals."

State Revolving Fund Program


(Through June 30, 2000)
Total Funds Appropriated (Fiscal Year 1997-2000) $3.6
billion
Total Capitalization Grants to States $2.7
billion
Percentage of Total Grants Reserved for Set-Aside Activities 16.5%
($445 million)
Total Loans Made to Systems 1,200
loans ($2.3 billion)
Percentage of Total Loans Awarded to Small Systems 75% ($932
million)
Source: The Environmental Protection Agency

If the federal government must provide huge grants for a
continuing stream of assistance to municipals, then those
municipals are admitting that the model they use to run their
systems has failed because they can't provide services without
federal assistance, Cook says.

However, municipals operate differently from private water
companies. City politicians must approve rate increases and water
replacement projects, something public utility commissions --
who don't have to worry about re-election -- do for private
water companies. Water pipelines aren't the sexiest platform to run
a campaign on.

"They (municipals) are facing politics that work mightily
against the right decisions being made," says Cook.

Municipal water companies often must partner with private
companies, raise rates or look to the government for help. However,
federal government help has decreased dramatically since 1979 when
federal capital investment in water infrastructure projects stood
at more than $10 billion. By 1998, that amount had dwindled to
about $3 billion.

Seattle Public Utilities, a municipal water and electric company
in Seattle, has been raising water rates over the past five years
to fund its water projects. The municipal spends between $2 million
and $3 million a year to replace parts of its water distribution
system, according to Scott Haskins, deputy director at Seattle
Public Utilities. He says it could cost the city $3 billion to
replace all of its distribution pipes.

"We're not in a terrible situation here, but we are doing
some high-quality planning now," Haskins says. He anticipates
the city will need to increase spending on its replacement program
in the next five to 10 years. The city is completing an inventory
of its water system and determining its condition to identify the
parts that will need replacement. The city is also taking advantage
of its rapidly growing population by replacing water pipes as
housing developments are constructed and streets are built or
repaired.

WIN's Proposal for Federal Share of Partnership for Safe
Water

</br>

(in millions of 2001 dollars)

2003 2004 2005 2006 2007
Capitalize State Water and Wastewater Infrastructure Financing
Authorities $6,000 $9,000 $12,000 $15,000
$15,000
Support State Clean Water Act and Safe Drinking Water Act Programs
$400 $400 $400 $400 $400
Fund Technology and Management Innovation Cooperation Grants to Water
and Wastewater Systems $250 $250 $250 $250 $250
Fund Local Stormwater Management Pilot Projects
$150 $150 $150 $150 $150
Provide Technical Assistance to Communities Most in Need
$25 $25 $25 $25 $25
Total
$6,825 $9,825 $12,825 $15,825 $15,825
Source: Water Infrastructure Network

By comparison, American Water Works Co., Barr's private water
company in Voorhees, N.J., gets financing through the debt and
equity markets. The company invests $400 million annually for
capital projects and anticipates this level of investment to
continue for the next several years, says Barr. The largest portion
of those capital expenditures is directed at transmission and
distribution facilities to improve existing service conditions,
provide service to new areas, and allow full use of existing
sources of supply and treatment facilities by neighboring systems.
Along with investment in treatment and pumping facilities, these
costs comprise more than two-thirds of the company's annual capital
expenditure budget.

"Many investor-owned and municipal water systems have been
consistently making the capital investment to meet their
infrastructure needs," Barr says. "At the same time,
apparently, other water systems have not. It comes down to
professional water system managers who have the intestinal
fortitude to plan and execute a capital investment strategy that
extends beyond a short-term horizon."

While Barr opposes federal funding, Haskin says that Seattle
Public Utilities hasn't made a decision on whether to support
it.

"There may be a need for that, but we haven't assumed
that," he says. "If there are funds available, we'd
want to take advantage of that."

WIN says federal funding of water infrastructure improvements is
as necessary as the federal funding the government gave the
transportation and airport industries, but Barr disagrees.

"I have some trouble with the logic that suggests that
just because the federal government chose to build airports that
serve regions, it should get into the water infrastructure business
when there is compelling evidence that proves the issue has been
responsibly addressed by professional water managers," Barr
says. "Why stop with water? Why not electricity, gas,
telephone, food or any other daily essential? We've got a long
history of regional or local water systems being perfectly capable
of financing building and delivering a reliable and effective
service to residents."

The H2O Coalition supports state revolving funds, which can be
given to municipals and private water companies. Barr also supports
use of these funds as long as they are made available in an
equitable way.

"Unfortunately, many states have declared privately owned
drinking water systems to be ineligible for drinking water state
revolving fund assistance," Barr says. "This is a clear
violation of Congressional intent that these loans should benefit
customers of all public water systems, regardless of
ownership."

The H2O Coalition supports taking the caps off the private
activity bonds, which would allow private companies to get lower
interest loans. The cap has been lifted on the combined waste
recycling area for years, Cook says.

How Bad Is It?

Figures are not available on the number of water main breaks
each year, which means no one can say whether breaks are occurring
more frequently nationwide. However, if infrastructure is not
replaced soon, cities could face a major crisis as they react to
more water main breaks. The breaks could disrupt commerce, take out
roads and other infrastructure.

"When break rates start going up, then the cost of the
repairs start to exceed the cost to replace that initially,"
Cook says. That would mean increased cost to the customer.

It remains to be seen, however, how some utilities will pay for
these replacements. American Water Works Association's Hoffbuhr
says the possibility of getting federal funding for replacement
programs looks slim because the budget surplus has disappeared and
the economy is in a slump. In addition, the Sept. 11 attack has
focused attention on water infrastructure protection, not
infrastructure replacement.

However, replacement of water infrastructure is of critical
importance to the nation's cities. In fact, the National League of
Cities listed aging infrastructure, which includes water
infrastructure, as one of the top six critical issues facing cities
today.

"In the U.S., we are fortunate," Barr says.
"We live in a unique land where we can travel to any part of
our country and know that no matter where we are, we can drink the
water and that it will be plentiful. The task before us is to
continue to make difficult but long-term decisions to ensure that
those who follow us will also be able to take reliable water for
granted. It is unthinkable, if not irresponsible, for us not to do
this."

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