Good morning Mr. Chairman. I am Howard Neukrug, Director of the Office of Watersheds for the Philadelphia Water Department in Pennsylvania. The Philadelphia Water Department is a municipal water, wastewater and storm water utility serving over two million people in the Philadelphia metropolitan area. I serve as the Chair of the American Water Works Association (AWWA) Water Utility Council (WUC). I am here today on behalf of AWWA. AWWA appreciates the opportunity to present its views on S.1961, Water Investment Act of 2002 and drinking water infrastructure needs.
Founded in 1881, AWWA is the world's largest and oldest scientific and educational association representing drinking water supply professionals. The association's 57,000 members are comprised of administrators, utility operators, professional engineers, contractors, manufacturers, scientists, professors and health professionals. The association's membership includes over 4,300 utilities that provide over 80 percent of the nation's drinking water. AWWA and its members are dedicated to providing safe, reliable drinking water to the American people.
AWWA utility members are regulated under the Safe Drinking Water Act (SDWA) and other statutes. AWWA believes few environmental activities are more important to the health of this country than assuring the protection of water supply sources, and the treatment, distribution and consumption of a safe, healthful and adequate supply of drinking water.
AWWA and its members commend you for introducing S.1961 to address the growing needs facing public water systems and their customers in the coming years. In previous testimony before this committee last year and in our report entitled Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, that we provided to all members of the Committee, AWWA called for a new partnership for investing in drinking water infrastructure. AWWA recommended changing and expanding the existing Drinking Water State Revolving Fund to significantly increase federal funding for projects to repair, replace, or rehabilitate drinking water infrastructure to include the aging distribution pipes. We are pleased that many of our recommendations have been incorporated into S.1961. We appreciate the time and consideration given to drinking water suppliers by the committee staff in the drafting of this bill. AWWA looks forward to working with the committee to continue making improvements and to see this bill passed and signed into law this year. In our testimony today, we will confine most of our specific comments to the Safe Drinking Water Modifications in Title II of the bill, with a general comment about wastewater funding issues.
FEDERAL MANDATES AND THE CONTEXT FOR WATER AND WASTEWATER FUNDING ISSUES
Both drinking water and wastewater utilities face enormously expensive federal mandates that set the context for all other funding issues. 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). For both water and wastewater utilities, these needs significantly skew financing for other investments, including the replacement of aging pipes, appurtenances, and other infrastructure. Local ratepayers are often seriously challenged to pay for these mandates, and little, if any, room is left in the ratepayer's budget for other vital spending. In many cases, it appears that mandatory spending for clean water mandates has “driven out” the ability to raise rates for drinking water services.
We believe that significant federal assistance, including grants, is necessary and justified to help meet the cost of these very expensive federal mandates on water and wastewater utilities, and to meet the costs of infrastructure repair and replacement that have been, in many cases, deferred because federal mandates have consumed the ratepayer’s budget.
We would point out that, in the case of CSO and SSO mandates, federal support for the cost of those requirements is not only justified in the community receiving federal support, it also lowers costs for drinking water utilities downstream in the form of improved water quality. This is especially true in critical source water protection areas.
AWWA applauds the increase in authorizations for the Drinking Water State Revolving Fund (DWSRF) capitalization grants from the current $1 billion per year to $6 billion dollars per year in fiscal year 2007. This represents more than a three-fold increase in total authorized funds above the current authorized levels for this period of time. We believe that this authorization marks a significant step by Congress towards assisting in the enormous challenge public water systems and their customers face in meeting federal mandates and at the same time replacing aging distribution pipes in the coming years. As illustrated in AWWA's report entitled Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, the "demographics" of pipe replacement is real, it is big, and the bill is coming due soon. This challenge is exacerbated by population shifts and growth patterns over the years, economic conditions and the changed demographics of urban populations. While AWWA certainly appreciates the significant increase in federal funding for the DWSRF, we must note that the authorization is a very small fraction of the $250 billion in infrastructure replacement needs identified by AWWA. And even if every penny of the funds in this bill is appropriated and every state gives out loan subsidies to the maximum extent allowed under the bill, federal loan subsidies will amount to less than four percent of total spending by drinking water utilities over the coming five years. It is clear that the burden of paying for public water system improvements will remain overwhelmingly with utilities and their rate-paying customers.
In recognition of these facts, we believe that, if the needs of older cities with large economically disadvantaged populations are to be met, an increase in the authorization is warranted. The Water Infrastructure Network has recommended an authorization of $57 billion over five years, and we ask you to consider that level of funding. We look forward to working with the committee to ensure that authorization levels will be adequate to address the needs of older cities with economically disadvantaged populations.
LARGE PUBLIC WATER SYSTEMS
AWWA does not believe that S.1961 adequately addresses the challenges presented by large urban public water systems and particularly those with declining and economically disadvantaged populations. In Section 203, the bill authorizes up to fifteen percent of a state capitalization grant to be used for subsidizing the water bills of economically disadvantaged customers. AWWA believes that is a significant step forward for the nation. However, during the short history of the DWSRF, large public water systems have not been receiving a fair share of SRF loans. According to EPA, states have made approximately seventy-five percent of all SRF loans to small communities. In per capita terms, assistance to very small communities has averaged over $400, while loans to large communities (with over 100,000 people) have averaged a little over $50 per capita.
Committee staff has told AWWA that they believe that the overall increased authorization for the DWSRF will provide states the ability to provide assistance for more projects and thus be able to provide more assistance to large public water systems than was possible previously. AWWA is not convinced that the authorization levels in this bill are sufficient to ensure this will happen.
Current law mandates that fifteen percent of a state capitalization grant shall be reserved for small systems serving populations under 10,000 to the extent that such funds can be obligated for eligible projects. AWWA supported that set-aside in 1996, to ensure that small systems could participate in the loan program. We did not anticipate that large systems would be left out of the program, relatively speaking, and there is no corresponding set-aside for large public water systems serving populations over 100,000. As noted, the bulk of DWSRF funding is going to small systems. To assure that systems of all sizes can participate in the SRF program, AWWA believes that a corresponding set-aside of fifteen percent of a state capitalization grant should be reserved for public water systems serving a population of 100,000 or more, assuming there are eligible project applications. This will ensure that large system can participate in the DWSRF program in all States.
Aging Infrastructure: As mentioned in the introduction in the AWWA report entitled Dawn of the Replacement Era: Reinvesting in Drinking Water Infrastructure, AWWA recommended changing and expanding the existing Drinking Water State Revolving Fund to significantly increase federal funding for projects to repair, replace, or rehabilitate drinking water infrastructure to include the aging distribution pipes. This, we believe should be the major purpose of the increased DWSRF authorizations. However, S.1961 makes no mention of this purpose for the DWSRF. In discussions with committee staff, the staff notes that the U.S. Environmental Protection Agency (USEPA) has interpreted the current provisions of the Safe Drinking Water Act (SDWA) to authorize the use of DWSRF funding for the replacement and rehabilitation of aging distribution pipes as furthering the health protection objectives of the SDWA as authorized in Section 1452 of the Act. While this interpretation of the SDWA is welcome, it is not universally accepted. Nor does it signal EPA and the states that the Congress believes repair and replacement of aging infrastructure is an important priority. AWWA recommends that the DWSRF eligibility of projects for the replacement and rehabilitation of aging distribution system pipes and appurtenances be made explicit in the statute.
Security Upgrades: Since September 11, 2001, AWWA has been advocating for federal assistance for public water systems to help pay for security upgrades to protect public water systems from terrorist attack. Since that time events have validated this concern, and water utilities are undertaking comprehensive vulnerability assessments and emergency planning to protect both water quality (for health protection) and water supply (for fire suppression and sanitation). Of note are documents found in the possession of al Queda terrorists in Afghanistan that could be used to help plan an attack on a drinking water utility. Security concerns thus represent a large, immediate, and unprecedented cost for public water systems. AWWA strongly recommends that bill make explicit the DWSRF eligibility of capital projects to address security concerns.
In discussions with committee staff, staff notes that the U.S. Environmental Protection Agency (USEPA) has interpreted the current provisions of the Safe Drinking Water Act (SDWA) to authorize the use of DWSRF funding for security upgrades as furthering the health protection objectives of the SDWA as authorized in Section 1452 of the SDWA. While this interpretation of the SDWA is welcome, it rests on interpretation and is subject to change. Moreover, it does not signal that Congress believes capital projects to address security concerns should be priority projects for DWSRF funding. We strongly recommend that congress send that signal to both EPA and the states.
Source Water Protection. We applaud the provisions of the bill that authorize the use of DWSRF monies to support source water protection projects. It is increasingly important to consider source water protection as an integral part of utility resource planning, and to do so on a watershed basis. Many utilities have been in the forefront of doing this, and the ability to use DWSRF funds to support source water initiatives can be of significant assistance in those efforts.
AWWA endorses the intent of Section 203 concerning additional subsidization for disadvantaged users. AWWA believes this is a significant step forward to address the affordability of drinking water for economically disadvantaged drinking water customers. AWWA remains committed to the principle that utility operations should be fully supported by rates in the long run. This provision will enable a public water system to charge higher rates if they are appropriate, without placing an unacceptable burden on economically disadvantaged customers.
However, we believe it is important to ensure maximum flexibility in how this provision is carried out. Many public water systems currently provide some form of rate subsidy for their economically disadvantaged customers. This is done in a variety of ways. AWWA wants to ensure that this flexibility remains, and that no public water system is mandated to create a bureaucracy to administer what is essentially a social welfare program that is beyond the capability and expertise of most public water systems. Many public water systems contract with a third party, such as a community service organization, to administer their rate subsidy programs. AWWA recommends that Section 203 be amended to clarify that a public water system has flexibility in how to meet this requirement, including contracting with third party organizations.
NEW DWSRF LOAN REQUIRMENTS
AWWA has recommended streamlining many of the requirements and procedures for obtaining loans from the DWRSF. With respect to the bill, we believe careful attention is required to strike an appropriate balance between Congress’ desire to encourage certain behaviors at utilities, and the need to keep the SRF as unencumbered as possible by unproductive red tape. Congress or EPA should exempt certain types of projects or projects below a certain size threshhold from SRF red tape requirements that don’t make sense. For example, under current law SRF funds may not be used for growth. In a project that is not directed at (and with certain very tight exceptions cannot even anticipate) growth, it is not clear why it makes sense to require consultation with regional transportation planners, etc. A requirement to do so simply makes the whole notion of SRF funding less attractive for that project, without advancing any reasonable social goals. Similarly, capital investments to improve the security of the nations’ drinking water should be exempt from "red tape" to the maximum extent possible. We believe that Section 202 requires significant review with this in mind.
Planning and Engineering Phase Requirements: AWWA recommends deleting the requirements identified for consideration during the planning and engineering phase of SRF projects. These are inappropriate federal requirements for a DWSRF loan. If a public water system is otherwise financially sound, can repay the loan, and can comply with applicable drinking water regulations, these requirements are irrelevant and an additional burden to obtaining a loan. The federal requirement to consider consolidation, public-private partnerships and the use of non-structural alternatives or technologies is redundant to State requirements in most cases. AWWA believes that public-private partnerships are an appropriate utility management option; however, this is a local decision based on local circumstances. These requirements involve local planning and open the door for inappropriate federal involvement in local decisions. These provisions add nothing to improving or streamlining the DWSRF and are an invitation to federal one-size-fits-all requirements.
Rate Structure Requirements: AWWA remains committed to the principle that utilities should be self sustaining through their rates. In the long run, the objectives must be to manage the costs of replacing pipes and treatment plants and ensure financial sustainability through local rate structures. However, AWWA wishes to ensure that the provisions of S. 1961 do not lead to inappropriate federal involvement in local rate setting. Particularly in light of the enormously expensive federal mandates mentioned earlier, there are cases in which recovering the full cost of service through rates may not be possible in the short term at rates that are acceptable and affordable. We recommend that public water systems review their rates as a condition a DWSRF loan. After the National Academy of Sciences report on rates (as required in Section 303 of the bill) is published, USEPA should provide the report to States and drinking water utilities. AWWA would strongly oppose any requirement that would involve the federal government in reviewing or approving drinking water rates.
Asset Management: AWWA advocates that public water systems have an asset management plan as part of good utility management. However, it is important to ensure that the provisions of S. 1961 do not lead to federal micro-management, such as review or approval of these asset management plans. One way to accomplish this is to make the provision a "self certification" requirement with no USEPA or State role in judging the method by which the asset management plan was developed or its adequacy.
Local Planning Requirements: AWWA believes that this provision requires clarification as to what is intended and how the provision would be implemented. It appears to only require consultation in “appropriate” circumstances but it’s not clear who determines what is "appropriate.” Moreover, as noted above, many projects for which utilities might seek SRF support are not likely to be connected in any meaningful way to growth or open space considerations. At a minimum, those projects should be exempted, and for other projects, the requirement should be satisfied by a certification that utility has consulted with other local agencies as it deems appropriate.
AWWA recommends that Section 205 concerning competition requirements be deleted from the bill. The provision appears to come from the old construction grants program of the Clean Water Act and has no place as a federal mandate for a drinking water loan program. This provision that governs utility procurement would get the federal government into local procurement decisions. The provision is redundant because every States already has procurement procedures in effect. Rather than streamlining the DWSRF, this provision is an unnecessary encumbrance on the DWSRF that we cannot endorse.
RESEARCH AND DEMONSTRATIONS
S.1961 includes several provisions relating to research and demonstrations, including the demonstration program in Section 302, the rate study in Section 303, and the water resource planning provisions of Section 401. We believe it is critical that the public water supply community be substantially involved in planning and carrying out those sections of the bill to ensure that the research is relevant, credible, and coordinated with other drinking water related research efforts. The American Water Works Association Research Foundation (AwwaRF) is the internationally recognized research organization of the drinking water community. With over $37 million in federal support over recent years, the AWWARF has leveraged almost $260 million in total research on both technical and policy issues facing drinking water utilities. AWWARF should select and manage several of the demonstration projects under Section 302, carry out the rate study under Section 303, and have substantial involvement in the water resources study under Section 401.
How we address our emerging drinking water infrastructure needs is a critical question facing the Nation and this Congress. America needs a new partnership for reinvesting in drinking water infrastructure. There are important roles at all levels of government.
AWWA does not expect that federal funds will be available for 100 percent of the infrastructure needs facing the nation's water utilities. However, AWWA does believe that due to concurrent needs for investment in water and wastewater infrastructure, security projects, replacement of treatment plants, new drinking water standards, and demographics, many utilities will be very hard pressed to meet their capital needs without some form of federal assistance. Over the next twenty years, it is clear that Safe Drinking Water Act (SDWA) and Clean Water Act (CWA) compliance requirements and infrastructure needs will compete for limited capital resources. Customers are likely to be very hard pressed in many areas of the country. Compliance and infrastructure needs under the SDWA and CWA can no longer be approached as separate issues. Solutions need to be developed in the context of the total drinking water and wastewater compliance and infrastructure needs.
AWWA believes that S.1961 is an appropriate first step to achieving these goals. In our testimony we have made recommendations that we believe will improve the bill. AWWA pledges to work with Congress to develop a responsible and fair solution to the Nation’s growing drinking water infrastructure challenge. We thank you for your consideration of our views.
This concludes the AWWA statement on S.1961, Water Investment Act of 2002. I would be pleased to answer any questions or provide additional material for the committee.