Water Sector Unites to Urge Congress to Act on Water Infrastructure

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Despite the seeming dysfunction of DC politics these days, there is growing bipartisan support for fixing our nation’s failing water infrastructure. This week, the Earth & Water Law Group and McWane Inc., convened a Congressional roundtable to facilitate a discussion among the members of the Ad Hoc Water Infrastructure Group and members of Congress and their staff.  Attached is the Ad Hoc Group’s priorities document which encourages Congress to help remove barriers to investment, provide more federal funding, encourage technology transfer, and regulatory reform.  Water-Policy-Briefing  Members in attendance included Chairman Garrett Graves and Ranking Member Grace Napolitano, House Transportation & Infrastructure Committee, and Representatives Bob Gibbs, John Katko, John Faso, Brian Babin , Randy Weber  and Tim Walberg on behalf of the House Energy & Commerce Subcommittee on Environment.

Priorities for the Nation’s Water Infrastructure

Safe drinking water, a clean environment, and vibrant local economies with good jobs depend on resilient and sustainable water and wastewater infrastructure.  However, many communities face increased challenges as a large proportion of U.S. water infrastructure approaches, or has already reached, the end of its useful life.

Local rates and charges have been and will continue to be the backbone of water system finance.  However, through the Clean Water Act and the Safe Drinking Water Act the federal government also has a role in this arena, particularly when large influxes of capital are needed beyond what local rates and charges can support.  Federal capitalization grants during the 1970s and 1980s, and low-interest federal loans since the 1990s (which cannot be used for operation and maintenance), have encouraged the build-out of our Nation’s regionalized wastewater infrastructure, but have not provided for the maintenance, rehabilitation, and modernization of those aging systems.  Moreover, drinking water systems, particularly larger systems, rely primarily on a community’s rate base resulting in a much more fragmented sector centered around cities and towns.  As a result, fragmentation in the drinking water sector (with 53,000 community water systems) coupled with underpricing of water and sanitary services, and increased federal regulatory mandates with declining financial support, has led to a significant deterioration in the condition of water infrastructure in many parts of the Nation.

Over $1 trillion[1] is needed over the next 20 years to rebuild and rehabilitate water systems.  This need cannot and will not be averted simply by providing more federal funding.  Rather, it requires a fundamental shift away from the “business as usual” approach, through a combination of new sources of funding, changed behavior through incentives and more accountability – more regulatory “carrots and sticks” –  and improved governance.  The following are recommendations that, if enacted, will lead to more innovative and sustainable water systems.The situation has been aggravated by changing demographics, the challenge for many communities to deploy full-cost pricing, and deferred maintenance and replacement of water assets, resulting in our Nation today facing a national water crisis of sorts – or localized crises for some communities.

The ideas represented in this paper all have important linkages that must be considered and advanced together when making policy decisions.  The perspectives on these important issues are numerous and varied, reflecting the different political, historical and practical realities and different perspectives involving publicly- and privately-owned systems, rural and urban communities, and drinking and wastewater systems.  These differences have historically led to debates about issues such as the role and extent of federal subsidies to support local water systems, unfunded federal mandates and the economic impact on small and rural communities, the role of private sector participation, market competition, accountability, standards setting affecting operations, and competition for limited federal resources at a time when needs are growing and resources are shrinking.

For the past nine months an inclusive group of prominent associations in the water and infrastructure sector have been working together to discuss and develop a set of ideas that could provide the positive and transformative change required to solve our water infrastructure crisis.  The participants in these discussions include the organizations whose logos appear at the end of this document, and represent a spectrum of publicly- and privately-owned systems, rural and urban communities, and drinking and wastewater systems.  The Environmental Protection Agency and the White House Council for Environmental Quality have also been consulted.  The ideas outlined in this paper reflect the results of those discussions where the various perspectives have engaged in honest discussions and agreed to continued dialogue.

Full-cost pricing of water services provides an example of the consensus-building process that underlies this paper.   While full-cost pricing and effective utility management (EUM) are laudable goals supported by almost all in concept, they are integrally tied to affordability, as many small and financially distressed communities simply cannot bear the full cost of water provision or do not have the technical capacity to implement.  Nevertheless, if full-cost pricing, factoring all costs into pricing, proves politically untenable, good management necessarily includes a basic understanding of the full cost of providing water and sanitary service.  A requirement for full-cost accounting (reflecting operations, maintenance and capital costs) thus might prove appropriate as an interim reform, but, even then, many smaller or distressed water systems would need assistance in preparing such an analysis.  Therefore, consensus support for full-cost accounting (and eventually, pricing) is contingent upon additional federal assistance and financial support for economically distressed and disadvantaged communities.  Similarly, broad support for more federal funding under the state revolving loan funds (SRFs) depends upon support for removing barriers to greater private sector participation.  And, while there is recognition of the general value of private sector participation, allowing more private entities greater access to the SRFs would result in greater competition for already limited resources.  Thus, garnering broad support for private sector participation would necessarily require more federal funding to address the needs of publicly owned systems.

1) Incentivize partnerships among water and wastewater systems and the consolidation of failing water and wastewater systems.

a. Reduce the number of water systems that lack operational, technical and financial capacity to meet federal and state water quality standards. Many failing systems serve small to midsize communities (less than 100,000 population) and lack the capacity to maintain compliant and resilient water and wastewater systems. Thousands of such systems are in significant non-compliance (SNC) and unable to meet minimal performance and health-based standards. These systems should be incentivized and, in cases where public health is seriously compromised or in long-standing SNC status, compelled, to partner with or seek a new owner/operator that can adequately provide water services. Regionalization should also be encouraged by, among other things, repurposing SRF and other grants for that purpose.

b. Provide more financial incentives and “safe harbor” protections for “Good Neighbors”. To encourage financially sound and well-managed water systems to partner with or take over distressed systems, the government must reduce the significant financial and legal liabilities posed to the acquirer or “Good Neighbor”. Provide set asides and expand SRF funding exclusively to fund consolidation. For example, California currently provides up to $5M for systems that wish to explore and implement consolidation.

2)  Provide more federal funding through Water Infrastructure Financing Innovation Act (WIFIA), SRF, and Technical Assistance.[1]

c. Increase WIFIA funding from its current level of $20M to its authorized level of $45M. WIFIA funds 49% of a project’s cost, and the balance must come from a non-federal share. Because of extremely low default rates, WIFIA will leverage funding at a ratio of at least 50:1. Fully authorized, the WIFIA program would fund $3 billion in infrastructure investment.

d. Increase funding to the state SRFs. The recommended levels: DWSRF at $3 billion and CWSRF at $3 billion.

e. Provide more technical assistance to small and rural systems. In some cases, systems are so small or geographically isolated there is no viable partnership or consolidation option. In such cases, more technical assistance, in the form of peer-to-peer assistance and circuit-riders provided by neighboring water systems or third parties, can help those systems better manage their assets. More funding for such assistance could be achieved, in part, by freeing-up more funding where partnerships and consolidation are feasible.

3) Encourage more private sector participation and investment by eliminating barriers.

a. Remove debt defeasance penalty. A simple way to accelerate investment is the elimination of the need to “defease” public bonds alongside an asset purchase. This can be achieved through a simple IRS interpretation change, thereby allowing municipal system acquisitions to improve net proceeds the municipalities receive when their systems are purchased or consolidated at their option. The current rule inadvertently deters beneficial agreements, as its requirements are often cost-prohibitive, adding up to 15-20% of the total value of the transaction. Treasury could make this change through a rule-making.

b. Remove tax-exempt water infrastructure private activity bonds from state volume caps. In addition to federal dollars, another effective option for the federal government to provide long-term, capital-intensive infrastructure projects is the private activity bond (PAB). These bonds are a form of tax-exempt financing for state and municipal governments that want to collaborate with a private entity to meet a public need. This partnership approach makes infrastructure repair and construction more affordable for municipalities and ultimately for users or customers. This well-established program would provide significant benefit to water-sector investments were the state volume cap to be lifted and defeasance penalty eliminated.

c. Provide all water systems with equal access to SRF loans. EPA has long interpreted the Clean Water State Revolving Fund (SRF) to apply only to the publicly owned systems due to the statute applying to “publicly owned treatment works” (POTW). Although EPA has long-held that private water systems are eligible for Drinking Water SRF funds, numerous states disallow such funds for private entities. This disparity prevents the private sector from leveraging federal investment to benefit the same communities (and rate payers) otherwise eligible for federal funds.

4) Modernize and streamline the SRFs.

a. Streamline procedures. Eliminate federal/state redundancies in cross-cutters and streamline the application process and paperwork to make it easier for smaller systems to seek assistance.

b. Encourage Effective Utility Management (EUM) and best practices, including full-cost accounting. Major water and wastewater associations (AMWA, NAWC, NACWA, AWWA, WEF, WERF, WRF, ASDWA and ACWA) and EPA have endorsed the ten attributes of EUM , which includes financial viability as a central tenet. Current SRF funding eligibility is contingent upon a system preparing a plan of financial viability, including managing accounts in accordance with accepted accounting procedures. However, too often, this SRF requirement is not enforced and SRF funding continues to be provided to systems without a viable financial plan. These accounting requirements should be enforced, and, moreover, this information must be made more transparent and readily available for public review.

5) Accelerate the adoption of innovative technologies.

a. Establish the National Water Test Bed Network. Countless innovative technologies that could improve efficiency and drive down costs are currently available, but due to the risk averse nature of municipalities and market barriers, such innovations are not being deployed quickly enough. To accelerate the deployment of these technologies will require a new approach to evaluate, demonstrate and approve innovative technologies.

b. Establish a national program for collaboration and sharing of Best Practices. A national program should be developed with a central focus on sharing best practices would enable urban and rural water systems, regardless of size, to share best practices, develop joint partnerships with public and private utilities, engage private sector expertise and technology and access private capital markets and funding. In addition, this network would provide small and distressed water systems with the technical capacity to comply with regulations and to undertake projects to improve or expand services.

Additional Considerations:

Although Congress should hold communities accountable for results, they should encourage federal agencies to defer to local communities and their engineers of record by the means employed. For too long Washington has imposed unfunded, one-size-fits-all mandates that have increased burdens and costs on local water systems without regard to the diverse water and wastewater infrastructure needs of local communities, who must evaluate numerous factors when considering the proper design and materials for their community and water projects. Encouraging and supporting local governance allows those closest to the problem to determine the best solutions, including the use of green infrastructure and water recovery and recycling solutions, which stimulates innovation and saves money as local communities can hold those in their community more accountable.

The recommendations described above focus on more immediate actions that either Congress or the President could initiate to help improve and rebuild the Nation’s water infrastructure. These recommendations are actions that can be taken in addition to supporting certain existing programs and policies. For example, tax-exempt municipal bonds are the principal finance tool that most utilities use to finance large-scale projects. Congress and the Administration need to protect these as tax reform moves forward. Other useful existing tools are in the Rural Utility Services programs at the Department of Agriculture and Community Development Block Grants.

Similarly, there is a type of secondary infrastructure that supports the water sector: the network of research organizations that support and execute research that guides the water sector toward smarter, more efficient water infrastructure. Currently, federal support is virtually absent for water infrastructure-related research.

In addition, while the bulk of infrastructure discussion focuses on capital assets, the people who manage and operate water systems are the sector’s most valuable assets. The sector faces the aging workforce issues that many other sectors of American society faces. While there is already a strong cadre of technical training organizations in the water sector, federal funding to facilitate ongoing sector-led training would be beneficial. EPA, through its oversight capabilities, could be a mechanism for facilitating greater coordination and consistency in training across state borders to enable the water workforce to move more easily from one state to another to meet workforce needs.

Lastly, in addition to legislative and administrative options, the President should consider issuing a Presidential Policy Directive outlining a vision for the development of integrated, efficient and effective water infrastructure strategy to (1) elevate water infrastructure modernization, improvement, and security as a national priority; (2) establishing inter-agency coordination and oversight mechanisms, resources, and staffing to align U.S. government agencies’ priorities, actions and budgets, and improve collaboration, coordination, and efficiency across federal agencies; (3) encourage local co-finance, full-cost and life-cycle accounting, and information sharing for federal assistance; (5) promoting economic growth, development, and exports of U.S. technologies, products and services; and (6) advance national security and international cooperation over water.

[1] AWWA, Buried No Longer; Confronting American’s Water Infrastructure Challenge, May 18, 2017, available at http://www.awwa.org/Portals/0/files/legreg/documents/BuriedNoLonger.pdf