TESTIMONY OF ANDREW M. CHAPMAN, PRESIDENT
ELIZABETHTOWN WATER COMPANY
ON BEHALF OF
THE NATIONAL ASSOCIATION OF WATER COMPANIES
BEFORE THE SUBCOMMITTEE ON FISHERIES, WILDLIFE AND WATER
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ON S. 1961, THE WATER INVESTMENT ACT OF 2002
THURSDAY, FEBRUARY 28, 2002
Good afternoon, Mr. Chairman and Members of the Subcommittee, my name is Andrew Chapman. I am the President of Elizabethtown Water Company in New Jersey, and I am a Vice-President of the National Association of Water Companies.
NAWC is a non-profit trade association that exclusively represents private and investor-owned drinking water utilities. I am offering this testimony on behalf of NAWC’s membership—the 200 members in 39 States—which provide safe reliable drinking water to more than 22 million Americans everyday. I’m pleased to report that NAWC has members in nearly every state represented on this Subcommittee; Florida, Idaho, Montana, Missouri, Nevada, Virginia, New York, Rhode Island, New Jersey, and Colorado.
Mr. Chairman, NAWC commends you and this Subcommittee for taking on the important issue of water infrastructure financing, introducing S. 1961, the Water Investment Act of 2002, and holding these hearings today. The challenge of replacing and upgrading infrastructure is one of the greatest and most pressing facing our industry today. Congressional interest in this challenge, as demonstrated by the introduction of S. 1961 and the several hearings on the issue held over the last year, underlines this fact.
We are particularly encouraged that this legislative project is being undertaken in a bipartisan fashion, a practice that drinking water issues have enjoyed in this committee for some time, and one that we sincerely hope continues far into the future.
NAWC along with our colleagues in the H2O Coalition support S. 1961 and urge this committee to consider and report the bill to the full Senate at the earliest possible date.
This bill embraces many of the principles the H2O Coalition has been advocating for more than a year now. It encourages utilities to use creative public-private partnerships, consolidation and other solutions in addressing their infrastructure challenges. The bill will also keep the industry on the path to self-sustainability through rational rate structures and sound asset management practices. The authors of the bill have wisely thought outside the box with an innovative program designed to assist disadvantaged consumers, instead of the entire utility in circumstances where only some of the utility’s customers are disadvantaged. Finally, S. 1961 at last puts the customers of privately owned utilities on full and equal footing with those of municipal utilities by extending private utility eligibility to the Clean Water SRF (CW-SRF) and encouraging all States to extend private utility eligibility to both the CW-SRF and Drinking Water SRF (DW-SRF).
Conversely, S. 1961 wisely does not authorize a large grant program which some have been advocating. We are encouraged, Mr. Chairman, that you and your colleagues in drafting this bill saw the error in authorizing an old fashioned and outdated grant program that would do more harm than good for the entire water industry, waste taxpayers’ money, and add to the federal budget deficit.
DW-SRF and CW-SRF Restructuring – First, S. 1961 signals Congressional support for creative non-governmental solutions to the infrastructure financing challenge by explicitly tying SRF assistance (both DW-SRF and CW-SRF) to:
1. Consolidating ownership and/or management functions with other facilities.
There are over 50,000 community water systems in the United States many of which are very small. In many, but not all, cases the financial challenges facing these utilities can be addressed by achieving economies of scale through consolidation. By tying consideration of consolidation with SRF assistance, Congress will encourage localities to put aside parochial interests, expand their vision and do what is right for the customer.
2. Forming public-private partnerships or other cooperative partnerships
Municipalities large and small all over the country have realized great savings and success through partnerships with private firms. These partnerships take many forms, from contracting out small portions of a utility’s operations, such as billing or meter reading, to multi-year all inclusive management contracts wherein a private firm runs and manages all aspects of a municipally owned utility, to the transfer of assets to a private company. Cost savings that localities have realized over the years from such arrangements range up to 40%, freeing up much needed capital for infrastructure replacement, without burdening either the customers or the American taxpayer.
Second, S. 1961 seeks to avoid some past mistakes of government assistance programs by requiring utilities receiving DW-SRF and CW-SRF assistance to have in place:
1. A rate structure that reflects the actual cost of service, taking into account capital replacement funds, and
2. A sound asset management plan conforming to generally accepted industry practices and including a schedule of investments to meet and sustain performance objectives.
These provisions require managers to take an enterprise approach to utility management and move all systems toward self-sustainability. The provisions will force utilities to solve their infrastructure problems in ways that are the least onerous to the American taxpayer, yet are responsible, efficient and effective.
Absent these important safeguards we could relive many of the problems of past government subsidy programs wherein:
1. Small or inefficient utilities were artificially propped up, discouraging consolidation and regionalization;
2. Utilities became dependent on the government funds and needed regular infusions creating greater reliance on government money;
3. Because of the subsidy, the American people got a false impression of the true cost of water, discouraging conservation; and
4. The private sector was effectively barred from participation in the industry, thus denying utilities the benefits of the free marketplace and its associated innovations and economies.
Some will argue that these provisions represent a too heavy-handed government approach to legislating, and are thus a step backward. We disagree. While both the CW-SRF and DW-SRF are administered through the States and include some state matching money, the vast majority of the SRFs’ corpora are made up of federal money coming from the American taxpayer. Therefore, the federal government has a responsibility to the American taxpayer to be sure their money is distributed and used in an efficient and accountable manner, as S. 1961 would do.
There may be many instances, particularly in larger utilities, where there are many disadvantaged customers who need assistance paying their bills, even though the vast majority of the customers of the particular utility have the means to pay the full cost of service. In such cases it makes no sense for the DW-SRF to subsidize the entire utility, when in fact only a percentage of customers need the assistance. This innovation will allow states to target assistance to where it is most needed, freeing up money for the worthiest projects.
Private Utility Access – As you can imagine, the NAWC, as the representative of the private water industry, is particular happy to see that all utilities are treated equally in S. 1961, regardless of ownership. First, the bill makes private utilities eligible for the first time for assistance from the CW-SRF. This is a long delayed and much needed innovation to that program that will place all systems on a level playing field.
Private utilities have had access to the DW-SRF since it was established in 1996. When Congress established the DW-SRF it correctly determined that benefits of the DW-SRF would flow to the customers of the utilities, not to the owners or shareholders. This is no less true for the customers of privately owned wastewater utilities.
Second, we are also greatly supportive of provisions in S. 1961 that will bring fairness to the State SRF allocation process. The bill’s provisions require States that include private utilities in their needs survey (thus maximizing the State’s total DW-SRF allocation) to also ensure that private utilities are actually eligible for such assistance. As incredible as it may sound, currently there are 13 States that include private utilities in their needs survey but exclude those same utilities from eligibility for loans because of state laws or practices. S. 1961 will end this practice in the DW-SRF and keep it from happening in the CW-SRF.
Authorizations – S. 1961 would authorize $35 Billion over the next five years for the two SRFs, with a combined $7 Billion in FY 2006, and an eye-popping $12 Billion in FY 2007. We question whether Congress will ever appropriate anything close to these levels, considering that such appropriations would increase EPA’s budget about 2.5 times.
We are concerned that such large authorizations, with relatively little chance of similar appropriations, may send counterproductive signals to utility operators. Utilities may defer making the necessary investments and hard choices required today with the false hope of significant federal assistance coming their way in the future.
I understand that this, being a tax issue, is outside of the jurisdiction of this committee. It is, however, one of the most important modifications Congress can make to give local governments the tools they need to meet this coming infrastructure challenge.
Since 1986 Congress has limited, under arbitrary state volume caps, the use of tax-exempt financing by private entities working for the public good. The cap has the unfortunate effect of limiting the use of private sector approaches for providing vital services, such as water services. Preliminary modeling indicates that this minor alteration in the tax code would cost the federal government very little ($147 million over 10 years), yet leverage huge sums of private capital.
This proposal has precedent. Congress has exempted other environmental facilities (certain waste disposal facilities) from the state volume caps because of a perceived public need.
This proposal enjoys far reaching support. In the House, bipartisan legislation has been introduced which would make these changes. Also, the U.S. Conference of Mayors, the Water Infrastructure Network (WIN), and the U.S. Environmental Protection Agency’s Environmental Financial Advisory Board have endorsed the proposal.
Compliance with Drinking Water as a Defense in Lawsuits – We have reported many times to this Committee on a disturbing trend that has been observed recently in many parts of the country, which could directly affect the ability of all utilities (both publicly and privately owned) to face the infrastructure financing challenges.
This trend involves coordinated litigation aimed squarely at America’s water industry, and the drinking water quality standard setting and regulatory system under which it has operated for many years. Massive civil lawsuits involving hundreds of plaintiffs have been organized and commenced against water suppliers in several states for allegedly supplying contaminated water even when these utilities have been in full compliance with State and Federal drinking water quality standards. These suits have targeted both privately-owned and municipal water systems.
To address this problem the entire drinking water industry has come together to support legislation that would make compliance with drinking water standards a defense in such lawsuits. Such legislation would not only deter unfounded lawsuits but would also assure the viability of federal standards that would otherwise be eroded by juries second-guessing the national regulatory process. A regulatory process that has given our citizens the safest water in the world. Therefore, NAWC, along with five other associations representing public, private and rural utilities support legislation that would make compliance with federal drinking water standards a defense in lawsuits involving contaminants covered by such standards.
If Congress does not pass such legislation the repercussions of expensive, unfounded lawsuits could be extremely costly to our industry, the EPA, and the public. Costs include significant utility defense costs, higher liability insurance costs, and the costs of any adverse judgements that may be imposed by the courts, even when the utility has been in full compliance with EPA’s standards.
In addition, if lawsuits like these are successful and proliferate, it will be a terrible blow to the drinking water standard setting process. In effect EPA’s standards, which are developed through an open and scientifically based regulatory process established under the SDWA of 1996 after long deliberations, will be replaced with standards established by juries all around the United States, who have no scientific training or water expertise. Any new “safe” levels established by these juries will become de facto standards and undermine the legal authority of EPA’s national standards, producing chaos within the industry, since utilities will not know which standard to comply with.
We do not need this at a time when there are other pressing needs, such as infrastructure replacement, increased security, and compliance with new standards, such as arsenic. These costs will eventually have to be borne by the customers of the water utilities, increasing their costs without providing any commensurate benefits, and increasing the chance that water, America’s best value, will become unaffordable.
Two years ago the U.S. Supreme Court confirmed the principle of compliance with federal regulations as a defense in a tort action Geier v. American Honda Motor Company. The action alleged that Honda was negligent in failing to equip its 1987 Accords with airbags, even though Honda was in compliance with U.S. Department of Transportation (DOT) standards, which provided for a phase in of passive restraints over time. The Court held that the plaintiffs attempt to establish a different standard was pre-empted by the uniform Federal regulations.
The Honda case is directly controlling over the recent drinking water cases, and we believe that utilities that are in compliance will ultimately win these lawsuits—but only after expensive trials and lengthy appeals. In a time of scarce resources we believe that Congress has an opportunity to resolve the issue now, and we encourage this Committee to include in S. 1961 language making compliance with drinking water standards a defense in lawsuits.
Mr. Chairman, we appreciate the leadership role that you and this Subcommittee have taken to address drinking water infrastructure problems. S. 1961 is an excellent response to the infrastructure challenge and we look forward to working with you, the entire Committee, and your staffs in advancing this legislation through Congress.
In conclusion, Mr. Chairman, thank you very much for the opportunity to present our views, and I would be happy to respond to any questions.