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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.
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.
US Personal Income - Click to Enlarge
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.
Links Related to This Blog Entry:
2006 EPA Report on Household Affordability
Comments (0)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.
Comments (1)US Conference of Mayors Foresees Major Spending on Water and Sewer Utilities
March 19, 2010
In a report published in February, the US Conference of Mayors is predicting that spending on water and wastewater systems will increase by by as much as four times. Depending on how fast the country’s population grows, spending could double, triple, or quadruple, according to the report. We’ve posted the full report here, which is an interesting read at just 56 pages. Toward the end of the report, the author cites the Congressional Budget Office’s so-called best management practices for utilities to reduce costs thereby, presumably, opening up financial resources to pay for the identified infrastructure needs pointed out earlier in the report. Among these best management practices:
- Demand management – conservation and the like.
- Labor productivity – automation and cross-training are mentioned
- Consolidation of systems - this sometimes goes by the name of “regionalization” and is probably one of the best recommendations to come from Washington in a long time. Physical consolidation of small systems, where possible, is a money saver.
- Asset management planning – a topic to itself, but the CBO cites increased equipment life, reduced O&M, and elimination of redundant assets as benefits to be gained.
- Innovative construction contracting - alternative contracting like design-build-operate (DBO) offer some cost savings over traditional contracting approaches.
In all, the US Conference of Mayors’ report is more on point with the issue than most reports we’ve seen. The report correctly identifies the need for increased water and wastewater utility infrastructure, estimates the annual spending at reasonable assumptions for growth, addresses the existing gap in infrastructure (between functional infrastructure and dilapidation), and correctly characterizes the funding issue as primarily a local one with a limited role in funding from federal and state sources.
Local utility rates will be the battleground where the funding issue get sorted out. Firms like StepWise, are already immersed in these issues. Understanding the need is one thing, but getting local communities to get into a “willing to pay” mode is easier said than done. Water and wastewater rate consultants know that even small increases to utility rates can lead to big problems for communities on a political and even an affordability level. We see affordability as a major issue for most utilities going forward. Making sure your water and sewer rates meet the actual costs of service, are transparent , and are clearly equitable to rate payers are principles that will be core strengths for utility managers in an era where spending is predicted to quadruple.
Click to Download “Trends in Local Government Expenditures on Public Water and Wastewater Services and Infrastrcuture: Past, Present and Future”
NYT Story on Water Infrastructure is Telling
March 16, 2010
The latest NY Times article on water infrastructure does a good job of demonstrating the seemingly impossible issues between the great need for reinvestment in water and sewer infrastructure, the reluctance of the government owners of those systems to actually pay for that investment, and the increasing consequences of infrastructure failure. The article focuses on Mr. George Hawkins, whom the author describes as a well-educated environmental activist who wound up as the general manager for one of the largest utilities in the US in Washington DC. The article shows how Hawkins has done much to point out the obvious to the city’s leaders: that our capitol city’s water and sewer infrastructure built over 100 years ago is decaying to a point where line failures are a daily routine causing everything from loss of water service to raw sewage spilling into the Potomac River.
Yet, there in Washington DC, one of the most affluent cities in the US, the push back from local politicians and citizens has been as severe as anything we’ve ever described on this blog. That nobody wants to pay for the infrastructure issues even when it affects their own community is the major point that readers should take away from this article. As we’ve said before right here at the StepWise blog, the cost of addressing the infrastructure issue is enormous. In many cases, communities are relying for critical water and sewer services from a set of pipelines installed between 50 and 100 years ago. There is a $335 billion price tag out there just for our drinking water systems, it’s a bigger price tag when you factor in the sewer systems.
The cost may be “federally-sized” when added up, but the reality is that the total cost is the summation of those for thousands of communities across the country. Water and sewer infrastructure is a local issue requiring local responsibility and local funding. It is not a federal issue, nor should it be seen as such. To those communities who address their infrastructure issues smartly – like not waiting until the entire system is in cataclysmic failure – the reward is manageable costs over the long run. To those who are less prepared, the consequences are potentially large. Flooded homes and businesses, insurance losses, sewage backups, service losses, sinkholes, etc. Every community has a choice to make with respect to infrastructure investment. Waiting for the end is probably not the best option.
Comments (0)NY Times Chimes in on Infrastructure & Misses the Point
February 18, 2010
In a recent Op-Ed in the NYT, writer Bob Herbert regales us with the story of Pennsylvania Governor Ed Rendell who is evidently on a personal crusade to cure America’s infrastructure crisis. An advocate for increased investment in infrastructure, we are told that Rendell personally increased Pennsylvania’s infrastructure spending by roughly triple only to see the number of deficient bridges in the state increase by 7%. Herbert argues that the US is falling behind major competitors like China, and that failing to invest in infrastructure will put the US at a large-scale competitive disadvantage. In all, Herbert does a very good job of describing the problem and some of it potential impacts.
But he falls short in identifying actual solutions. He implies strongly that the problem falls on Washington and that with Congress focused on deficit reductions that the infrastructure issues he identifies so well will go unaddressed. In not identifying the solution, he has missed a major part of the problem: almost all infrastructure investment falls to the state and local level, and a huge portion of it is local rather than state funded. Infrastructure problems are well known and documented. Identifying those problems now is hardly news. The actual problem isn’t misunderstanding the issue or its consequences, the problem is coming up with the money to reinvest in dying infrastructure. Herbert correctly points out that the costs of doing so are enormous, but fails to point out that those costs are largely the responsibility of local governments who lack the financial resources and/or political will to address the massive costs. The problem is all about the money, and it’s not Washington money but City Hall money we are talking about.
Read more of StepWise’s blog posts on aging infrastructure.
Comments (1)Economics of Small Water Systems
February 11, 2010
As water and sewer infrastructure across the country ages, deteriorates, and eventually fails the cost of replacing it all becomes a growing concern. The cost of replacements is fantastically large, and it doesn’t help that these needs have been largely unplanned, meaning that these large costs tend to come as a shock to oblivious rate-paying customers. It’s enough to cause even large well-heeled utilities to gnash teeth. The problem can sometimes be insurmountable for small water systems though.
According to the EPA, small systems – those serving fewer than 3,300 customers – make up nearly 85% of all water systems in the US. For these systems, the cost of infrastructure replacements is more than large, it’s unfathomable. In Lebannon, OR – a small town – the cost of replacing its incredibly old water treatment plant is going to cause water rates to go up by 60% . It’s one small example of how just one major capital replacement in one small town can cause a major disruption in the water rates.
What’s a small utility to do? First off, there are no simple answers. The days of never ending grant money for these systems is mostly gone and that means that in order to avoid a 60% hitch in rates, even small systems have to be smart about planning ahead for their needs. In the Lebannon example, the water plant had been in service since 1946! Running at capacity, the plant was only able to stay one day ahead of demand. In other words, it should have come as a surprise to no one that the plant would need to be substantially upgraded or replaced at some point (before the 64th year of operations). The costs of those upgrades and replacements can also be reasonably estimated by any professional engineer and, with enough foresight, small communities can start implementing small increases to rates to build cash funds as well as debt capacity to finance the costs of replacement. For small communities who lack access to credit markets and don’t have much cash in reserve, forward planning like this is even more critical.
Financial planning is the key. StepWise provides this service, but any utility manager can get started with the key elements of financial planning without consulting help. Start by understanding the need. Know what your fixed assets are, where they are, and when they were put there. Once you know that, you can start making reasonable estimates as to when you should expect those assets to be replaced. Then, get some estimates as to how much those replacements will cost, and you suddenly have a decent picture of what the future holds for your utility. Will rates need to be increased? Probably. The key is that you will now have some control over how much and when. Wait until the last minute though, and your options will be extremely limited.
Comments (1)A Good Example of Financial Planning
January 11, 2010
We came across this news article last night and thought it was a good example of strong financial planning by the community of Laurel, Mississippi. In this community, despite an identified need of over $11 million in line replacement costs, the city leaders used a five and ten-year financial plan to determine that they could proceed with the needed projects, issue new debt to pay for it, and all at a cost of less than 2% increases to ratepayers. Utility financial planning done right is a very powerful approach to proactively getting on top and staying on top of the problems of infrastructure replacement. Nice work, Laurel!
Comments (0)Top 10 Infrastructure Fails in 2009
December 30, 2009
There is an excellent blog entry at Water News Update listing the top 10 infrastructure fail stories for 2009. Water News Update tracked most of these stories, and many of them were also discussed here on the StepWise blog. If you read this blog, you will recognize many in the WNU list.
Water News Update is a fantastic industry blog and one that I read daily. It’s a blog from the Clean Water Council, and I highly recommend you get an RSS feed.
Comments (0)What Infrastructure Problem?
December 21, 2009
For those who remain skeptical that water/sewer infrastructures is not one of the most critical (and expensive) issues facing the United States right now, you can easily see several examples of major infrastructure failures at the following links:
Baltimore – 42″ water main breaks creating an urban river in seconds.
Pittsburgh – water main breaks creates massive sinkhole (this one has a great photo!)
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