Associations Look to Future of Industry

Much of the drinking water and wastewater infrastructure in the United States must be replaced in the next three decades.

By James Laughlin, Editor, WaterWorld

Much of the drinking water and wastewater infrastructure in the United States must be replaced in the next three decades. While industry associations are working to generate increased federal funding, ultimately the rate-paying public will have to finance the bulk of the replacement costs.

This will be especially challenging for water utilities who must educate their customers about the true value of water while at the same time raising rates dramatically.

WaterWorld recently talked with the major associations serving the drinking water and wastewater markets in the US to get their impressions on the state of the industry and where the market is headed in terms of construction/rehabilitation.

They all agreed the industry faces a looming infrastructure funding crisis.

"In terms of construction and rehabilitation over the next few years, AWWA forecasts investment needs that will rise steadily," said Jack Hoffbuhr, P.E., DEE, Executive Director of the American Water Works Association.

"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," Hoffbuhr said.

"Replacement of water treatment assets presents a different picture from that of the pipes, but greatly complicates infrastructure funding for utilities. Many treatment plants built or overhauled to meet EPA standards over the last 25 years will be due for their first replacement in the next decade or so. Spending for treatment plant replacement will occur at intervals causing 'humps' in capital needs on top of the infrastructure replacement capital needs," he said.

Any discussion about water infrastructure management also must include a growing list of other expenses, including the expansion of water systems to handle population growth, Hoffbuhr said.

New security needs also have affected the infrastructure funding landscape. Utilities have spent approximately $2 billion since 2002 to improve physical security with more fences, locks, cameras, guards and other protections.

Another very significant expense for water utilities is the cost of compliance with new federal mandates. Investments in treatment present a more concentrated financing demand than investments in pipes, and these investments will continue as regulations continue to evolve, Hoffbuhr said.

"There is a serious gap between current investment and the levels of investment required to sustain adequate drinking water service over the long run," he said. "And in addition to the above competing interests, the general public undervalues water to the point that utilities nationwide face major challenges in setting responsible rates."

The wastewater side of the market faces the same basic problem - how to pay for the needed construction and rehabilitation, said Ken Kirk, Executive Director of the Association of Metropolitan Sewerage Agencies.

"The major challenge at the local level is how to pay for these projects. They are going to do them, but the question remains where the money is going to come from," Kirk said.

The only real answer is increased federal funding, despite the current climate of reduced federal spending, he said.

"If you have attitude that federal funding is not likely to materialize, then it will not. Our view is that it must materialize. We are doing everything in our power to insure that it does materialize," Kirk said.

AMSA is working with other water industry organizations to develop draft legislation to establish a national trust fund to help finance water infrastructure. Kirk said he hopes to have details of the legislation worked out in time to be introduced when the new Congress convenes in early 2005.

"We hope this legislation would result in an injection of significant additional funds to support the SRF and highlight high priority projects in the wastewater and drinking water arena," Kirk said.

However, members of the Water Environment Federation's Utility Management Committee don't expect a significant increase in federal funding, said Lynn Orphan, the 2004-2005 President of the Water Environment Federation (WEF). Based in Reno, NV, Orphan is senior engineer and regional manager of business development at Kennedy/Jenks Consultants.

"They don't expect to see major federal funding outside of the State Revolving Fund," Orphan said. "They recognize that Congress does not see water infrastructure as a crisis that needs to be funded by a federal program -- not like the Clean Water Grants program days when water was seen as a crisis in the public's eyes."

While that's a concern for economically depressed communities, utilities with economically stable or growing communities should be able to meet their funding needs, she said.

"We can raise enough money to pay for our infrastructure, and will do so. And, frankly, many utilities would rather raise their own money than have some kind of federal tax or program where the administration in Washington takes some off the top before they send the money back to the states," Orphan said.

"There is a need to provide funding for rural communities and for cities that are economically depressed, but more based on need then than a general program available to all cities," she said. "The USDA rural development funding program offers a combination of grants and low interest loans, and is based on the economic need of the community. That's been very successful."

Orphan said she supports increased funding for existing programs, rather than establishment of any new federal programs.

While drinking water groups have been cool to a Federal trust fund for water, the federal government must play a role in funding water infrastructure, Hoffbuhr said.

"The critical federal role should include significantly increasing low-interest, long-term loan funding for projects to repair, replace, or rehabilitate drinking water infrastructure, and increasing funding for research on infrastructure management, repair and replacement technologies," he said.

However, ultimately, the rate-paying public will have to finance the replacement of the nation's drinking water infrastructure, Hoffbuhr said.

"AWWA advocates for local financing to meet the great majority of the nation's water infrastructure needs and remains committed to the principle of full-cost recovery through rates," he said.

AWWA recently released a new report, Avoiding Rate Shock: Making the Case for Water Rates. It provides utilities with insights into gaining community support for necessary improvements to drinking water infrastructure and successfully communicating their needs to elected leaders and consumers.

"It's time we moved the dialogue about the value of our drinking water infrastructure above ground," Hoffbuhr said.

The Water Environment Federation, along with the other associations, is working to keep the State Revolving Loan Fund at it's current $1.35 billion annual level. Congress is currently considering a bill that could cut funding by some $500 billion in 2005.

Utilities looking for funding can still take advantage of the SRF. Other sources include raising funds locally through higher user fees or bond sales, or obtaining other funding in the private financial market, said Tim Williams, WEF's Managing Director of Government Affairs.

"Most projects will likely be funded through a combination of all these sources," Williams said. "All of these funding scenarios will require enhanced efforts to educate the public and local ratepayers about the public health, economic, and environmental benefits of clean water - something the water profession has not done a good job of in the past. WEF hopes to help change this with our new water infrastructure education campaign."

Of course, funding is not the only challenge faced by the industry. AWWA launched a comprehensive survey this year that identifies trends and issues in the water industry. The survey will be conducted annually as an industry "check-up". A full State of the Industry Report was to be published in the December 2004 Journal of the AWWA. A synopsis of the report can be found on the Internet at http://www.awwa.org/communications/journal/2004/October/News/1004persp.pdf

The report will show that the water industry is in reasonably good shape, but serious short- and long-term challenges exist. Chief among them are: Increased regulation and security requirements are draining financial and personnel resources; the industry's aging infrastructure demands considerable investment; and future water source concerns are intensifying as populations grow and source water protection becomes more arduous.

"Funding these capital-intensive needs is clearly a daunting task for today's water utilities," Hoffbuhr said.

The drinking water community faces a complex array of expensive new federal requirements and new standards, including standards for arsenic, radon, disinfection byproducts, enhanced surface water treatment and others. Wastewater utilities also face enormously expensive federal mandates, such as those relating to Combined Sewer Overflows (CSO) and Sanitary Sewer Overflows (SSO), Hoffbuhr said.

"For both water and wastewater utilities, these needs significantly skew financing for other investments, including the replacement of aging pipes and other infrastructure. Many local ratepayers may be seriously challenged to pay for these mandates. In many cases, it appears that spending for clean water mandates has limited a community's ability to raise rates for drinking water needs.

"Because federal mandates have consumed the ratepayer's budget, more routine repair and replacement of drinking water infrastructure has been deferred in many cases," he said.

Other challenges for the industry are an aging work force and related knowledge management issues; the need to integrate data management systems; wet weather management issues, and the need for some utilities to develop rate strategies, Williams said.

Another for wastewater utilities is the movement in this country to deal with water quality issues on a watershed basis, Orphan said.

"The challenge comes in trying to manage all of the loads in a watershed. Conceptually that sounds easy, but the real challenge is to figure out where you get the biggest benefit for your dollar," Orphan said. "Do you spend $150 million on a municipal wastewater plant, or do you change farming practices or improve erosion control? Where do we need to focus our energies? There is a real need to balance the environmental benefits with the costs."

Despite the challenges, the municipal water industry continues to do a good job of serving its customers.

"I would characterize the water industry as strong, vibrant and moving forward, but at the same time moving forward with a number of constraints that are going to push out schedules to address limited availability of funding," Kirk said. "To the extent that more money is coming down the pipeline from all sources, then we will see a vibrant industry. To the extent that doesn't happen, we will see a less vibrant market."

Orphan also feels the industry is strong right now. Especially from her view as a consulting engineer, construction and rehab projects are moving forward and the market is brisk.

"Rehabilitation of collection systems is one hot market. Every community that we deal with is putting more and more of their council budget into rehab of their collection systems," she said. "For treatment plants, we are seeing more and more activity ... contractors are so busy that sometimes we only see one or two bidders. Contractors just aren't as hungry."

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