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Don’t Think Aging Pipelines are a Real Problem? Think Again.

July 27, 2010

Here’s is an aerial photo of a home that has been engulfed by a sinkhole caused by a sewer pipe failure.  The cost of underground infrastructure failures is much higher than average people want to believe.  Sinkholes are one type of failure; water main breaks and other types (or, modes) of failure can have devastating effects as well, including widespread flooding with water, or worse, raw sewage soaking homes and businesses. In this case, the bad sewer line in question cost this family only EVERYTHING they had.

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Why Affordability is the New Challenge for Water and Sewer Utility Owners

July 20, 2010

It’s not that affordability hasn’t always been a concern, but a recent look at some important data now suggests that affordability has become a major concern for providers of water and sewer utility services in the US.  For the first time since the 1950′s, personal income in the United States has experienced negative annual growth – meaning personal income has actually fallen in real terms for the first time in almost 60 years.  That may come as no surprise to those who read the daily news and understand the recession’s deepening hold on the US economy, but utility providers may want to pay special attention because while water and sewer rate increases were never popular, they are even less so when family income is declining instead of increasing.

This decrease in personal income comes at a time when the water and sewer industries are also in great need for capital investment.  Aging infrastructure for water and sewer systems cause major service disruptions and damage to local residences, businesses, and even damage to local waterways.  The US Conference of Mayors recently released a report showing that capital spending on water and sewer infrastructure could quadruple  from current levels.

Of course, affordability means different things to different people.  The EPA version of affordability is that a utility bill is unaffordable if it exceeds 2.5% of the median household income.  Income is unevenly distributed in the economy though and one thing that often goes overlooked in rate setting is the difference in water usage between newer, presumably more affluent homes, and older neighborhoods with presumably lower incomes.  The argument is often made that affluence equates to higher water usage, and this has been one  rationale used to argue for increasing unit prices for increased usage levels (i.e. inclining block rates).  However, that argument is many times based on a false premise.  In Milwaukee, for example, research found that water usage was highest in older neighborhoods and found an inverse correlation between household income and water usage, the lowest incomes had the highest usage (Mikwaukee Wisconsin Journal Sentinel, July 17, 2010).   High usage in older neighborhoods is very much a possibility in every community due to newer homes being constructed under newer building codes with more stringent plumbing requirements that tend to conserve water; older homes were not subject to those codes and have older plumbing fixtures that tend to use more water (including more sewage thanks to older toilets and sinks).

So, while there is increasing pressure to increase water and sewer rates to pay for very expensive infrastructure replacements, the burden on customers is also becoming more severe in relative terms as their own personal incomes decline.  Older neighborhoods with lower household incomes could actually be using more water than originally thought, and therefore the impact on those customers’ bills is even more pronounced.  It is very possible that affordability in  your community may be a more difficult thing to measure than just comparing the average utility bill to the median household income (the method the EPA uses).  A more detailed analysis might show that affordability in your community’s most economically disadvantaged neighborhoods is a real problem.

By developing methods for tracking important metrics like affordability, utility managers can stay on top of these issues and proactively manage them.  Financial planning tools from StepWise can provide tracking of key metrics.  A good financial plan should be as valuable a tool to your organization as any master plan and adopting management goals for key metrics allows managers to quantify financial results that matter to all stakeholders, including ratepayers, bondholders, employees, regulators, and any other party with a stake in the utility’s success.  StepWise can prepare a simple monitoring dashboard that, when integrated to a comprehensive financial plan, can give you a simple and effective way to measure affordability  (or other metrics) as your plans and budgets change in the future.

Links Related to This Blog Entry:

2006 EPA Report on Household Affordability

StepWise’s Credit Rating Scorecard

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Colorado’s Proposed Amendment 61: More Problem Than Solution

July 8, 2010

At last count (and still counting), the US Federal Budget deficit stands at $1.43 trillion, and the national debt is now $13.2 trillion.  Those are big dollars, but the US is a mighty economic engine even in these recessionary times.  Still, the national debt is now over 90% of the nation’s entire economic output for a year.  Put another way, if we took 100% of all income from everyone and everything in our entire country for a whole year, we would just barely repay the current $13.2 trillion debt.   Those are disturbing numbers, and they are part of what is driving a set of ballot initiatives slated for the November elections in Colorado.

Amendment 61 is one of these initiatives and arguably holds the most potential harm for the water and wastewater industries.  As professionals in these industries, we are all well aware of the large amounts of money it takes to construct, repair, replace, and retire our infrastructure assets throughout their lifecycles.  Amendment 61 would limit local governments’ ability to finance those assets in two ways: it would require voter approval of capital acquisitions requiring financing, and it would limit financing terms to no longer than 10 years.  On its face, to everyday voters, Amendment 61 would seem like a somewhat logical check against government sector spending.  However, what Amendment 61 would actually accomplish would be to nearly eliminate investment in capital infrastructure that is sorely needed in many areas but especially to replace our aged water and sewer infrastructure.

Proponents of Amendment 61 claim that the amendment is an answer to “massive deficit spending.” However, unlike federal spending, there is no deficit spending in Colorado as the State Constitution requires a balanced budget.  Local governments also require balanced budgets, and bonds, to the extent they are used, are used for construction projects.

Imagine having to earn voter approval to replace a broken lift station, or a collapsed segment of water transmission pipe.  Then, imagine financing those improvements over 10 years instead of a more typical 20 to 30.  Now, take a big project like the Southern Delivery System in Southern Colorado, or the Prairie Waters Program in Aurora.  Imagine financing $700 million to $1.5 billion in 10-year notes.  Here’s some quick math: a $700 million project financed at 10 years at 5% will cost over $90 million/year; the same project financed for 30 years would cost $45 million.  Because utilities are funded annually by user fees, the difference in this example equates to Amendment 61 costing ratepayers twice as much each year.

In essence, Amendment 61 creates an unfunded mandate that supporters of the measure would usually decry.  With the proposed amendment in place, water and sewer utilities would have to compile massive reserve funds to cash-fund necessary infrastructure, which will also require dramatically higher user charges.  As usual, small communities are likely the hardest hit.  Mike Brod, director of Colorado’s State Revolving Fund loan program says that the State would not be able to issue bonds to leverage the federal grants that capitalize the program, thus cutting annual SRF lending to about one-third of the current amount, and the SRF loans would be limited to 10-year terms as well.

The amendment comes to the ballot in November, and current polls show it would pass if the vote were today.  At a time when the water and sewer industries are in the most need for capital investment in a generation, Amendment 61 would make that investment nearly impossible and prohibitively expensive for ratepayers. It causes problems when what we need is solutions.  Our industry can’t afford Amendment 61.

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