[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                DRINKING WATER NEEDS AND INFRASTRUCTURE
=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON ENVIRONMENT AND HAZARDOUS MATERIALS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 11, 2002

                               __________

                           Serial No. 107-107

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house








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                               __________
                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

          Subcommittee on Environment and Hazardous Materials

                    PAUL E. GILLMOR, Ohio, Chairman

JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
JOHN SHIMKUS, Illinois               SHERROD BROWN, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
VITO FOSSELLA, New York              KAREN McCARTHY, Missouri
  (Vice Chairman)                    THOMAS M. BARRETT, Wisconsin
ROBERT L. EHRLICH, Jr., Maryland     BILL LUTHER, Minnesota
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania        HENRY A. WAXMAN, California
MARY BONO, California                PETER DEUTSCH, Florida
GREG WALDEN, Oregon                  JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska                    (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)








                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Beider, Perry C., Principal Analyst, Congressional Budget 
      Office.....................................................    24
    Bella, Joseph A., Executive Director, Passaic Valley Water 
      Commission, on behalf of the Association of Metropolitan 
      Water Agencies.............................................    61
    Gloriod, Terry L., President, Illinois-American Water 
      Company, on behalf of the National Association of Water 
      Companies..................................................    86
    Grumbles, Benjamin H., Deputy Assistant Administrator, Office 
      of Water, U.S. Environmental Protection Agency.............    14
    Moore, Joseph A., Alderman, on behalf of the National League 
      of Cities..................................................    67
    Neukrug, Howard, Director, Office of Watersheds, on behalf of 
      American Water Works Association...........................    73
    Ronnebaum, Elmer, General Manager, Kansas Rural Water 
      Association, on behalf of National Rural Water Association.    80
    Rutherford, Jay L., Director, Water Supply Division, Vermont 
      Department of Environmental Conservation, on behalf of the 
      Association for State Drinking Water Administrators........    55
    Schwartz, Paul D., President, Clean Water Action.............    93
    Wood, David G., Director, Natural Resources and Environmental 
      Issues, General Accounting Office..........................    31
Material submitted for the record by:
    Grumbles, Benjamin H., Deputy Assistant Administrator, Office 
      of Water, U.S. Environmental Protection Agency, responses 
      for the record.............................................   103
    Muller, Clair, Atlanta City Councilmember, letter dated April 
      9, 2002, to Hon. Paul E. Gillmor...........................   102

                                 (iii)

  


                DRINKING WATER NEEDS AND INFRASTRUCTURE

                              ----------                              


                        THURSDAY, APRIL 11, 2002

              House of Representatives,    
              Committee on Energy and Commerce,    
                            Subcommittee on Environment    
                                   and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2123, Rayburn House Office Building, Hon. Paul E. Gillmor 
(chairman) presiding.
    Members present: Representatives Gillmor, Shimkus, Wilson, 
Bass, Pitts, Walden, Terry, Fletcher, Tauzin (ex officio), 
Pallone, Brown, Green, McCarthy, Barrett, Luther, and Harman.
    Staff present: Bob Meyers, counsel; Jerry Couri, policy 
coordinator; Hollyn Kidd, legislative clerk; and Dick Frandsen, 
minority counsel.
    Mr. Gillmor. The committee will come to order, and the 
Chair recognizes himself for the purpose of an opening 
statement.
    Today's hearing focuses on the pressing needs of drinking 
water systems across our country. The provision of safe 
drinking water is one of the most important public health and 
environmental duties that Congress addresses.
    Water quality directly relates to the future health and 
well-being of our population and its economy. One of the 
benefits of living in this country is that over 76,000 water 
systems have taken great pains to construct networks that 
deliver safe and affordable water.
    This luxury, which we largely take for granted, is not 
available in every place throughout the world as the Health and 
Environment Subcommittee has previously examined. We must 
ensure that a solid drinking water delivery system is in place 
to guarantee safe drinking water to all Americans.
    Today, while the Senate is preparing to move a water 
infrastructure bill through its committee, and the House 
Transportation and Infrastructure Committee recently passed a 
waste water funding bill out of their committee, as this 
committee is the committee solely responsible for drinking 
water programs, I believe that we need to work more diligently 
and in a bipartisan fashion to understand the scope of any 
problems to the system, and ensure that a high standard of 
public health protection is achieved.
    Providing clean drinking water is more than just pumping 
water to a certain location. Providing good drinking water 
embraces the root goals of the Safe Drinking Water Act to help 
guide communities in a way that will protect their citizen's 
drinking water from contaminants through a network of lines, 
pipes, and direct disinfection efforts.
    The Safe Drinking Water Act of 1996 required the EPA to 
survey the needs of water systems every 4 years. I believe 
anyone who has taken time to carefully look at this matter 
understands that the pursuit of cleaner drinking water in local 
communities can become quite pricey, and demands additional 
resources.
    While local and State taxes can be raised to meet these 
obligations, it is really the revolving loan fund, under the 
Safe Drinking Water Act, that helps localities afford safe 
drinking water.
    As someone who has been a long supporter of funding Federal 
mandates on local governments and State governments, I believe 
the SRF is crucial to providing Federal resources to entities 
trying to simultaneously comply with Federal standards and also 
protect public health.
    Today's witnesses will help us better understand the 
drinking water needs of our communities across the country. Our 
first panel brings the perspectives of EPA, who last year 
released their findings on drinking water needs assessment.
    We will also have GAO provide testimony on EPA's funding 
and comments on their own reviews of the drinking water 
revolving loan fund.
    Finally, we will have the Congressional Budget Office 
testify to their preliminary findings on the actual needs of 
drinking water systems and the EPA's work in this area. I am 
particularly interested in the comments of CBO as this will be 
their first public airing of one of the more unbiased analyses.
    Our second panel will also provide important insight into 
the drinking water needs of local government, large and small 
water systems, State drinking water administrators, and 
environmental groups, including their past work and future 
financial requirements.
    I recognize that many of the members of our panel have 
various concerns about the Safe Drinking Water Act, and I share 
many of those concerns that our Nation has drinking water 
standards that are protective of human health and the 
environment.
    Our hearing today has been set up under bipartisan 
agreement of the staff to focus solely on drinking water needs. 
As this year progresses, I intend to exercise our committee's 
jurisdiction and authority to review EPA's implementation of 
the Safe Drinking Water Act and its work on contaminant levels 
and standards setting.
    So I want to thank the witnesses for coming, and I want to 
thank Mr. Pallone for his staff's cooperation in setting up 
this hearing. It is vital that we assess where drinking water 
system needs lie.
    The EPA currently believes that $102 billion is immediately 
needed by all sizes and forms of systems, and that another $50 
billion will be required over the next 20 years to guarantee 
that safe drinking water reaches those who need it.
    Certainly just putting pipes into the ground to deliver 
water is not enough. The emphasis on this extra funding needs 
to be on a comprehensive public health campaign that seeks to 
mobilize public and private resources to purify water from its 
initial source through its distribution channels, and finally 
out of the tap.
    I look forward to hearing from our panels, and I am pleased 
to recognize the ranking member of our panel, the distinguished 
gentleman from New Jersey, for the purpose of an opening 
statement.
    Mr. Pallone. Thank you, Mr. Chairman. I want to thank you 
for holding today's hearing on drinking water needs and 
infrastructure. I have to say that when I walked into the room 
today that I was about as shocked to see that as I look out on 
the audience that I am able to see myself three times here 
across the room.
    And a lot of times in the morning, I don't even want to 
look at myself in the mirror, but I don't have any choice now 
when I get in here. It is a little weird.
    But in any case, I am pleased that we are finally moving 
forward ont his important issue, and I would hope that this 
hearing would serve as a conduit for a legislative proposal 
from our subcommittee, and that we might work together to 
alleviate our country's problems with adequate funding.
    So hopefully we can put something together. As a general 
matter, large water systems also possess much better economies 
of scale than small systems, and are able to spread capital and 
operation costs across a broader base of rate payers.
    At the same time, however, I recognize that small systems 
often have to serve customers spread out in low densities and 
in small towns, and in rural communities, driving their costs 
up.
    To put things in perspective the EPA has estimated that the 
typical cost to install a new drinking water treatment plant 
may be 88 percent higher per household than a system serving a 
thousand residents, versus a hundred-thousand people.
    Clearly, this is one of many issues that must be taken into 
consideration before we can begin to assess the funding 
problem, which as you mentioned, Mr. Chairman, is a huge 
problem here.
    It is no secret that there are ongoing concerns over the 
available funds for ensuring the quality of our Nation's 
drinking water. According to the February 2001 needs survey, 
the EPA has estimated that $150.9 billion will be needed during 
the next 20 years to repair, replace, and upgrade the Nation's 
55,000 community water systems.
    The water infrastructure network has said that drinking 
water utilities across the Nation collectively need to spend 
about $24 billion per year for the next 20 years on 
infrastructure, for a total of $480 billion.
    Other estimates show large long term needs as well, and I 
don't think that anyone in this room would argue that a 
significant need exists.
    In recognition of the large current and future 
infrastructure needs of drinking water systems, Congress 
approved authorization of the Drinking Water State Revolving 
Fund in 1996.
    And this fund was authorized at a level of $1 billion per 
year through 2003, including another $600 million in prior year 
authorizations.
    In general, the DWSRF is designed to provide low cost loans 
to drinking water systems in order to fund infrastructure 
projects which are needed to ensure the provision of safe 
drinking water.
    As these loans are gradually repaid by drinking water 
systems, new loans can be issued to other systems in excess of 
the amount which would have otherwise been provided directly 
through the initial Federal grants.
    Now, current estimates show that DWSRF will ultimately be 
able to revolve $500 million per year at a sustainable level. I 
find it interesting, Mr. Chairman, that although the 
administration has recognized significant needs for our 
Nation's water infrastructure, they haven't even put the 
authorized $1 billion in the Drinking Water SRF.
    And it just does not add up. The EPA survey stated that our 
needs are over $100 billion now, but the budget doesn't even 
have $1 billion. I don't really understand what the message is 
that the President is trying to say.
    If he is saying that the drinking water doesn't matter, 
obviously we are not going to agree with that. But I am hoping 
today in this hearing that we might be able to understand a bit 
better when the administration and the EPA are coming from, and 
gain a more clear understanding of the need.
    It seems that everyone is saying, including the 
administration, that we need a lot more money, and yet the 
money isn't being provided in the budget, and what the 
President and the administration are recommending. So obviously 
there is a problem there, and I don't know exactly how we are 
going to solve it.
    But I do hope that we can put a legislative initiative 
together on a bipartisan basis, and I know that you and I have 
worked together, Mr. Chairman, so far in this session on a 
couple of things in that regard, and hopefully we can do it 
again. Thank you.
    Mr. Gillmor. Thank you, Mr. Pallone.
    The gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I appreciate this 
hearing today. As you know, we have one of the best supplies of 
drinking water in the world, and this is largely due to the 
commitment by States; Federal, State, and local agencies, and 
local--either co-op water systems, and municipal water systems, 
or privately owned waters systems.
    As part of this commitment, we must continually review the 
needs and effectiveness of this water delivery system. This 
allows us to plan for future needs, and identify problems in 
the system before they occur.
    The Drinking Water State Revolving Fund has been a great 
asset to our Nation's water systems. As this subcommittee 
drafts legislation to reauthorize the program, I would like to 
emphasize a need to help rural and other disadvantaged 
communities.
    Not only do the people in these communities have less 
financial resources, but they often are served by small water 
systems which tend to lack the economy of scale, and that make 
infrastructure projects more affordable in larger systems.
    Of course, at the Federal level, we keep increasing the 
standards tremendously which stress these very systems that we 
are trying to help, and many of them are in crisis situations 
because of increased standards.
    There always has to be a debate on the cost benefit 
analysis based upon sound science, and that should always be 
part of the debate and how we are trying to deploy safe water 
to our residents.
    I look forward to hearing from our distinguished panel 
today on the needs of our drinking water system. I still want 
to continue to focus on the fact that as we debate on standards 
that there is always costs, and there is a time when the costs 
outweigh the benefits that we receive.
    And in small rural districts the new standards make it 
prohibitive to even provide safe drinking water. So let's bring 
some common sense to this debate. There is no one on earth that 
is going to promote a policy of providing unsafe drinking 
water.
    That is a cry of the left, while the cry in rural America 
goes unheard, and with that, Mr. Chairman, I yield back my 
time.
    Mr. Gillmor. I thank the gentleman.
    The gentleman from Ohio, Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. I look around as Frank 
Pallone does at these Big Brother screens and I am a little 
perplexed. While the majority says we can't afford to fund 
prescription drugs, we certainly can fund tax cuts, and hi-
technology, big expensive technology in our committee rooms, 
and that's nice to know.
    Mr. Chairman, thanks for calling the hearing and it is an 
important issue. Thank you, Mr. Chairman, for your good work to 
improve the quality of our Nation's drinking water. As my 
colleagues have already stated, it is clear that our Nation 
faces a considerable gap in funding for infrastructure to treat 
drinking water over the next 20 years.
    And in northeast Ohio, a region that Chairman Gillmor and I 
have the privilege to represent here in Congress, there are 
many communities where underground pipes that deliver drinking 
water are 50, and in some cases, 100 years old.
    Over the next 2 decades, there will be an enormous need to 
update water distribution systems in communities like these, 
and there will also be a substantial need to bring the water 
systems in more newly established communities into compliance 
with the Safe Drinking Water Act.
    The program was authorized at $1 billion annually, and this 
figure was recognized as too small, but in fiscal year 2002 and 
2003, the Bush administration has only requested appropriations 
of $150 million.
    This simply is not enough to ensure safe drinking water for 
all Americans in the future. Unfortunately, Mr. Chairman, 
drinking water infrastructure and numerous other needed 
investments have been under-funded in the administrations' 
budget to make way for the President's politically attractive, 
at least to his richest contributors, his politically 
attractive tax cuts, but unaffordable tax cuts.
    The tax cuts will result in budget deficits and 
infrastructure deficit as far as the eye can see. These 
deficits will leave a gaping hole, just not in our fiscal 
infrastructure, but in our human infrastructure as well.
    These tax cuts have already meant that we are not fully 
funding health care, and we are not fully funding the 
President's own education plan. Yesterday in committee, it was 
shown that there is a $7 billion deficit already in his new 
education bill.
    And we have not yet fully funded the Brownfields program, 
to which the chairman gets great credit for getting it out of 
this subcommittee last year. Are these the legacies--a budget 
deficit and infrastructure deficit--that we want to leave for 
our children and our grandchildren.
    As a founding member of the House Water Infrastructure 
Caucus, I join Representatives Bilirakis, the Chair of the 
Health Subcommittee, and Representatives Boehlert and Borski in 
December of 2000, to ask CBO to prepare a comprehensive report 
of the needs gap.
    I hope the President's budget allows us to fill that gap. I 
thank the Chairman.
    Mr. Chairman, I would ask for unanimous consent to include 
in the record a report from Public Citizen, and their testimony 
if I could.
    Mr. Gillmor. Without objection that will be done.
    Mr. Brown. Thank you.
    [The information referred to follows:]
                  Prepared Statement of Public Citizen
    Public Citizen, a consumer advocacy organization with over 150,000 
members nationwide, is pleased that the House Committee on Energy and 
Commerce is taking affirmative steps to address the water 
infrastructure needs of many communities across the United States. As 
an increasingly larger share of water infrastructure approaches the 
point of replacement and as the water quality standards become more 
stringent, the local communities are struggling to find viable means of 
financing the necessary capital projects.
    The Water Infrastructure Network (WIN), a broad-based coalition of 
local elected officials, drinking water and wastewater service 
providers, state environmental and health program administrators, 
engineers and environmentalists, estimate that upgrading the nation's 
infrastructure will cost $23 billion a year. Financing this need with 
rates alone would double the rates on average in the United States, 
resulting in an economic hardship for at least a third of the U.S. 
population using the EPA affordability guidelines. That is why adequate 
federal assistance is imperative to ensuring that citizens have access 
to safe and affordable drinking water.
    The private water companies are proposing privatization of the 
country's water system as a way of meeting the infrastructure needs. 
The initial text of the companion bill introduced in the U.S. Senate by 
Senators Bob Graham (D-Fla.), James Jeffords (I-Vt.), Michael Crapo (R-
Idaho) and Robert Smith (R-N.H.), S.1961, contained provisions that 
both encouraged the transfer of public water system operations and 
ownership to private companies and made it easier for private utilities 
to gain access to federal funds for improving infrastructure. Many 
groups, including the National League of Cities, Association of 
Metropolitan Sewer Agencies, and Public Citizen have expressed 
opposition to these provisions. We believe that the managers' amendment 
will strike out this language.
    It is important that the Sponsor(s) of the House water 
infrastructure bill refrain from including similar language in the 
legislation. Public Citizen respectfully submits this statement to 
better illustrate the risks associated with privatization of water 
services.
    While governments may expect to lower debt and transfer the costs 
of infrastructure repair and maintenance via privatization, the 
willingness of private companies to make such investments depends on 
the profit stream. In fact, debt reduction, increased spending for 
upgrades and the companies' guaranteed profit margins will ultimately 
be borne by citizens through higher bills. Privatization saddles 
consumers with the dual responsibilities of public debt reduction and 
corporate profitability, usually guaranteed by government contracts.
    The National Association of Water Companies (NAWC), which 
represents the private water utilities, is intensively lobbying 
Congress and the Environmental Protection Agency to encourage water 
privatization and give private companies access to the same low-
interest financing that public agencies can obtain. NAWC also lobbies 
to block higher water quality standards.
    Keeping this lobbying effort in mind, we are disappointed to see 
important policy decision--such as the privatization of our nation's 
municipal water systems--dealt with in a stealthy manner by the 
legislature, regulatory agencies and the Internal Revenue Service. Most 
citizens are completely unaware that there is growing pressure from 
transnational water companies to privatize water systems in the U.S. 
The move towards privatization is taking place behind closed doors and 
without the input or knowledge of the majority of people.
    The companion legislation, S. 1961 initially tried to tie federal 
assistance to municipal water systems to the recipient's consideration 
of privatization. The House Committee on Energy and Commerce should 
avoid making a similar mistake. Any move here in the United States 
towards privatizing water should be subject to a vigorous public 
debate, not forced on communities as a result of special interest 
influence in Washington, D.C. Any language promoting privatization 
would not only jeopardize public access to safe and affordable drinking 
water, but would force a major policy change without adequate public 
notice or discussion.
    We would like to address specific concerns with regard to public-
private partnerships and regulatory structure that makes it easier for 
private companies to gain access to federal funds. We would also like 
to comment on proposals to recover all operation, maintenance, and 
capital costs through user rates.
                     1. public-private partnerships
    To this day, the federal government has not made a systematic 
assessment of water privatization's benefits and liabilities. 
Privatization of water and wastewater services is a relatively new 
phenomenon in the United States. Since the early 1900s, water service 
generally has been regarded as a public responsibility, and public 
providers have served most of the United States. Today, public 
utilities provide reliable water service to 85 percent of the country's 
population. But a 1997 change in law opened the door for long-term 
privatization contracts. Consequently, some communities have entered 
into 10- and 20-year privatization contracts.
    Privatization advocates are quick to argue--usually without any 
supporting evidence--that switching from publicly owned enterprises to 
privately owned firms will lead to greater economic efficiency, and 
that the positive effects will permeate through the economy by way of 
stabilized rates, reduced public debt and improved budgetary 
management. Privatization proponents argue that public-private 
partnerships, a euphemism for privatization, can foster savings and 
improve service. However, because not one of these long-term contracts 
has been in place for more than five years, it is impossible to 
determine whether these claims are sound.
    In reality, privatization more often than not fulfills none of 
these promises, and instead creates problems that did not exist before. 
Vulnerable to corruption and operating according to a profit-driven 
corporate agenda fundamentally incompatible with delivering an 
essential human need, water companies are failing citizens in both 
developed and developing countries.
    Privatization involves many risks. The promised cost savings could 
be neutralized by change orders--reimbursement requests for services 
not enumerated in the contract. For example, the private company 
promised the City of Atlanta at least $400 million in savings over 20 
years. However, the company soon requested to increase the contract by 
$80 million. Additionally, an audit of the contract showed that the 
company requested almost $38 million in change orders between January 
2000 and May 2001. Public utilities, on the other hand, often absorb 
these additional costs without asking for a budget increase or a rate 
hike.
    And the pursuit of lower operational costs and higher profits, 
private companies could neglect maintenance, especially if a contract 
is close to expiration. After assuming operations in Atlanta, the 
private company cut the workforce in half. Today, three years into the 
contract, the maintenance backlog is growing and meter installation 
takes twice as long as required under the contract.
    Financial stability of the private water companies is also of 
concern. The case of Enron has taught us that the company's filings may 
not reflect its financial situation and its debt-to-equity ratio. An 
incredible pace of consolidation in the water industry over the last 
five years makes one question whether the water companies have the 
means to satisfy all terms of their contracts over the long term. If 
the company becomes insolvent, who will ensure that the users have 
access to adequate water service? Will the city have to pick up the tab 
at the expense of the taxpayer? These are among many questions that 
water privatization raises.
    Further, when the city officials who were closely involved in the 
original contract negotiations are no longer in office, disputes over 
contract language could end up in court. In the end, the city may not 
receive what it paid for. Even industry consultants agree that this 
could prove problematic.
    It is true that some communities have had positive experiences with 
public-private partnerships. Not every private company provides poor 
service and not every operation and maintenance contract is a failure. 
However, it is important to recognize that privatization involves 
significant risks. For example:

 In Lee County, Fla., county officials in October 2000 chose to 
        return the water and sewer systems to public control after an 
        audit revealed serious problems with the private contractor. 
        Equipment was not maintained in acceptable working condition. 
        Hazardous waste was poorly handled and reported. Preventive 
        maintenance was performed late and some work was not done at 
        all. After public control was restored, the county's utility 
        director estimated the company's failure to properly maintain 
        infrastructure would cost citizens more than $8 million.
 In Atlanta, which contracted out the operation and maintenance 
        of its water system in 1998, the city soon began receiving 
        complaints of slow service, broken fire hydrants and brown 
        drinking water flecked with debris. A recent audit of a the 
        contract reported a growing maintenance backlog, the company's 
        failure to meet its financial obligations, and significantly 
        lower training hours than required by the contract. The company 
        also experienced difficulties meeting performance targets for 
        pH, turbidity, and phosphate at one of its plants and took 
        longer than required by the contract to install meters and 
        respond to meter leaks. At the same time, the company asked for 
        almost $38 million of additional payments through change orders 
        and sought to increase the contract by $80.
 In Peoria, Ill., a process is underway to buy back the city's 
        water system. The city feels that public ownership would reduce 
        the operating costs and cut the rates by 30 percent in the 
        first ten years of public ownership (the company's rates are 
        among the highest in the country). A financial analysis 
        prepared by a leading consultant showed that the city would 
        have $6 million a year in excess revenues if it owned the water 
        system itself. However, money is not the only driver. In 2001, 
        the U.S. Environmental Protection Agency fined the company 
        $168,488 for failing to promptly report a release of vapors in 
        1998. A Peoria firefighter was hospitalized after breathing the 
        fumes.
 In Tampa, Fla., Tampa Bay Water, a public agency that provides 
        water to customers in Tampa, Fla., is being forced to buy the 
        desalination plant currently under construction from Covanta 
        Energy to assure its timely completion and to avoid fines from 
        the Southwest Florida Water Management District. Stone & 
        Webster, engineering firm originally hired to design and build 
        the plant went bankrupt, and on April 1, 2002, Covanta Energy, 
        which replaced it, filed for Chapter 11 bankruptcy protection. 
        Earlier, the company failed to put up a performance bond as 
        required under the contract, jeopardizing Tampa Bay Water's 
        efforts to obtain financing for the plant. Covanta was to 
        operate the plant for several years after the completion.
 In Pekin, Ill., private operations brought a 204 percent water 
        rate increase over 18 years--significantly higher than 
        increases in Illinois cities with public water systems. 
        Infrastructure repairs were not performed on a timely basis. 
        During the 1998-1999 school year, service to two schools was 
        cut off for a week, with teachers being notified by a note 
        taped to the door just before students arrived. In response, 
        city officials began to advocate reclaiming public control. The 
        company responded with an estimated $1 million public relations 
        campaign, which succeeded in halting the initiative, at least 
        temporarily.
    It is important to reemphasize that the long-term operations and 
maintenance contracts do not yet have a solid case history of success. 
Privatized water systems could lead to many problems in the future, 
including higher rates and water quality problems. Many issues have not 
even been considered. For instance, a community's growth and economic 
development could potentially be paralyzed because the private water 
company refused to extend water lines or provide adequate and 
reasonably-priced services to the new businesses, the legislature will 
be held responsible.
    Although in theory privatization is presumed to introduce 
competition to water services, it often does exactly the opposite by, 
in effect, sanctioning a private monopoly. And just as government is 
responsible to the public, private company is responsible to its 
shareholders. Because of this, public interest may clash with the 
company's objectives. Entrepreneurship and profit motive are certainly 
not objectionable qualities. However, in this case they may not reflect 
public interest.
    Another concern is the municipality's ability to assume the 
operation and maintenance task after the privatization contract 
expires. After several years of private operations, the municipality 
would lose both the expertise and the workforce required to run the 
increasingly complex water and wastewater systems. This would limit the 
options available to the local government in choosing the best 
alternative for its constituents and would force the community into 
another contract.
    Additionally, as the private share in the water services grows, 
water companies would have an incentive to pressure policymakers to 
amend environmental and water quality regulations that cut into their 
profits, thereby promoting an agenda that counters the interests of 
public health and environment. Some trade groups in the water sector 
are already lobbying to prevent higher water quality standards from 
being adopted.
    Finally, all major water companies operating in the United States 
today are foreign-based. The security of sensitive information about 
water systems is in question because these companies do not disclose 
facts about security of their data transmission lines and the level of 
access its employees overseas have to sensitive data.
    Foreign ownership is also an issue in light of the continuing 
negotiations on the General Agreement on Trade in Services (GATS). If 
water services are listed under GATS, the agreement's language working 
together with national legislation favoring privatization could 
effectively limit the options available to local governments in 
deciding how water services should be provided.
    If the local government and its citizens become displeased with the 
delivery of water services, it is possible that an international trade 
agreement could limit the communities ability to withdraw from the 
contract, under the threat of an international trade tribunal. While 
this is fairly new territory, investment treaties have become invoked 
on several occasions already to challenge government actions concerning 
water.
    We strongly urge the House Committee on Energy and Commerce not to 
include pro-privatization language in its water infrastructure 
financing legislation.
                          2. private utilities
    The eligibility for state revolving funds should not be extended to 
private water companies. Private water systems are businesses that 
should be responsible for keeping their assets in adequate condition 
without public subsidies. Federal regulations do not justify their 
eligibility for taxpayer bailouts. The U.S. government does not 
subsidize automakers to help them comply with federal auto-safety and 
fuel-emission standards. Neither should water companies expect federal 
assistance. Most businesses in the United States have to comply with 
federal or state regulations and few of them expect the government to 
reimburse the cost of these regulations. Moreover, while arguing for 
public subsidies, private water utilities continue to pay unreasonably 
high salaries to their executives.
    We urge you to change the eligibility requirements to reflect the 
aforementioned principles.
                         3. full cost recovery
    The Senate companion bill mandates that the recipients of federal 
assistance achieve a rate structure that to the maximum extent possible 
reflects the actual cost of service and capital improvements (S.1961, 
Section 103 (j)(2)(A). The House water infrastructure bill should not 
contain similar provisions. The majority of the utilities today already 
charge rates that reflect the cost of service and capital improvements. 
At the same time, their rate-setting autonomy provides room for 
flexibility, essential to better calibrate rates in response to local 
priorities.
    Any full cost recovery requirement would add yet another layer of 
bureaucratic constraints to the SRF application process. This will be 
costly and burdensome for the states and is not prudent expenditure of 
the taxpayers' money. And the full cost recovery provisions would 
discourage the most vulnerable communities from participating in the 
state revolving fund programs.
    Finally, if sufficient federal appropriations for water 
infrastructure are not made, the rates will double, on average across 
the nation, according to WIN, resulting in a third of the country's 
population experiencing economic hardship using the EPA's conventional 
affordability criteria. These hardships would be significantly more 
acute in small, rural, low-income, or older shrinking urban 
communities, according to WIN. In such case, the full cost recovery 
principles could be devastating to the population. For example, many 
residents of New Orleans, a city with some of the highest poverty rates 
in the nation, will find it increasingly difficult to pay for water 
service as the rates double over the next five years.
    Again, thank you for the opportunity to comment on the upcoming 
water infrastructure legislation. This legislation is an important step 
in assuring that communities across the United States have the means to 
implement capital improvement programs essential to their ability to 
provide water service in compliance with all federal and state 
standards. But it should not be used as a surreptitious vehicle for 
privatizing our nation's public water systems. Public utilities are 
already taking affirmative steps to reduce cost of service through 
restructuring and improving efficiency, often achieving results that 
exceed those of private companies. Still, the savings will not be 
sufficient to meet the financing shortfall. It is essential that the 
Congress authorizes and appropriates sufficient funding, at levels 
proposed by WIN, to keep public water utilities capable of providing 
adequate and affordable water service.

    Mr. Gillmor. Mr. Pallone.
    Mr. Pallone. I also wanted to ask for unanimous consent to 
enter the statement of our ranking member, Mr. Dingell, into 
the record.
    Mr. Gillmor. Without objection, so ordered.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, over one year ago the Subcommittee held its first 
hearing on the financial needs facing large and small cities across the 
country of rehabilitating and replacing aging drinking water 
infrastructure. This is a critical issue for cities like Detroit where 
pipes first installed in 1887, over 100 years ago, are still being 
used. The infrastructures of our public water systems are vital to 
protect the public health and provide safe drinking water for our 
citizens.
    Today, at the Subcommittee's second hearing we will hear from many 
of the same organizations representing cities and drinking water 
utilities of all sizes that the needs are just as great as they were 
one year ago. We will hear from the Congressional Budget Office that if 
we take the midpoint between their high and low estimate of the gap 
between what public water systems are now spending and what needs to be 
spent annually over the next 20 years, we are looking at an additional 
four billion dollars a year for twenty years or twenty billion dollars 
over the next five years.
    Other witnesses have higher estimates of financial needs. The 
Environmental Protection Agency has reported that the current needs to 
ensure provision of safe drinking water to our people are $102.5 
billion and growing, a huge sum of money. Billions more were documented 
as necessary for future years.
    Against the well-documented financial needs for replacement and 
rehabilitation of aging drinking water infrastructure, I must note that 
the President's budget for FY 2003 contains a $150 million shortfall in 
fully funding the drinking water State Revolving Loan Fund which this 
Committee created in 1996. This budget level ignores the needs of our 
cities and public water systems. On top of the budget inadequacy, the 
Administration recently testified that the increased spending 
authorized for waste water and drinking water infrastructure needs in 
the bipartisan Senate bill (S. 1961) was quote ``not consistent'' with 
Administration priorities. This is most disappointing.
    I suggest that this Subcommittee go forward on a bipartisan basis 
to be clear that providing safe drinking water is consistent with our 
priorities. Readily accessible and safe drinking water is critical to 
the health, livability, and well being of our communities. Thank you, 
Mr. Chairman, for calling this hearing. I look forward to Subcommittee 
action on this vital issue.

    Mr. Gillmor. The gentlelady from New Mexico, Mrs. Wilson.
    Mrs. Wilson. Thank you, Mr. Chairman. I also appreciate 
your willingness to hold this hearing today. I think these are 
important issues to look at how we are going to finance our 
public water systems.
    I also am going to have some questions about recent EPA 
regulations and their impact on the State of New Mexico. The 
decision to move the arsenic standard down to 10 parts per 
billion, which is a dramatic reduction from the current 50 
parts per billion, places an enormous financial strain on rural 
water systems that cannot pay for those improvements.
    To my knowledge there has been no progress in developing 
low-cost treatment for water systems, and in the State of New 
Mexico alone, 25 percent of our water systems are going to be 
impacted by these new rules; one out of every four water 
systems in the State of New Mexico.
    And for those who are concerned about the environment, this 
is naturally occurring arsenic, where you have volcanic soil 
that has arsenic in it, and the water flows over it, and so 
people have been drinking it for thousands of years in the 
State of New Mexico.
    I would also note that the health effects that are 
supposedly associated with arsenic are unusually low in New 
Mexico. We are at the bottom of the scale nationally, which as 
I have said before probably proves that green chili is the 
natural antidote.
    The real impact though is going to be on the availability 
of treated water for people in the State of New Mexico. It is 
between $400 million, and $500 million in capital expense 
alone, spread among 2 million people across the State.
    The annual operating costs will go up between $16 and $21 
million. What does that mean for a family in a large water 
system in Albuquerque? Our water bills are going to go up 
between $38 and $42 a month per household.
    In smaller water systems, like Bernleo, New Mexico, with a 
population of 6,700 people, their water bills are going to go 
up $91 a month because of EPA's new rules. That is over $1,000 
a year more for water.
    The median household income in Bernleo, New Mexico, is 
about $24,000 a year. I am going to have some serious questions 
for the EPA on how the Federal Government is going to help 
States like New Mexico meet this standard, because we are going 
to be drilling wells again in backyards because we can't afford 
your standards.
    I think that this is an important issue for about three 
States in this country, who don't have a lot of people, but 
have a lot of naturally occurring arsenic, and this rule is the 
responsibility and the obligation of the Federal Government to 
pay for.
    Thank you, Mr. Chairman, and I would also like to enter 
into the record with unanimous consent a statement of Pete 
Maggiore, the Secretary of the New Mexico Environment 
Department, into the record.
    Mr. Gillmor. Without objection, it is so ordered.
    [The prepared statement of Peter Maggiore follows:]
Prepared Statement of Peter Maggiore, Secretary, New Mexico Environment 
                               Department
    Thank you for the opportunity to provide testimony today on behalf 
of the New Mexico Environment Department regarding the new drinking 
water standard for arsenic.
    Governor Whitman's announcement of the 10 parts per billion arsenic 
drinking water standard on October 31, 2001, while protective of public 
health, create a significant financial and logistical burden on states 
and municipalities which may not have been anticipated or intended by 
the USEPA. These impacts are so large that the State of New Mexico and 
the City of Albuquerque filed suit against the USEPA last year. 
Ironically, and unlike many contaminants that the USEPA regulates, 
arsenic that exists in the groundwater in New Mexico is naturally 
occurring. Although I am pleased to report that settlement discussions 
related to this litigation are on-going, there remains a tremendous 
amount of work to be done in the areas of developing funding sources, 
technology development and infrastructure improvement before this new 
standard can be effectively implemented.
    It appears that one strategy underlying the multi-year 
implementation schedule for the new standard was to allow sufficient 
time for cost-effective treatment technologies to be developed. At 
present, there does not appear to be a cost-effective technology for 
arsenic removal for either large or small water systems. Although the 
EPA plans to allocate $20 million over the next two years in this area, 
the fact remains that where arsenic levels exceed this new standard, 
local governments cannot secure bond funding to finance treatment 
systems. This inability to secure funding is associated with a 
necessary prerequisite for securing bonds which requires a 
demonstration that the technology being purchased has been proven. 
While it may be true that significant advancements in treatment 
technologies can be achieved over the next few years, there is no 
guarantee that these technologies will be affordable for 
municipalities. The EPA should extend the implementation schedule until 
cost-effective technologies can be demonstrated.
    The decision to lower this drinking water standard marks the first 
time the arsenic standard has been changed in over 50 years. The 50 
part per billion standard was established by the USEPA in 1975; and 
that standard was based on a Public Health Service standard originally 
established in 1942. Given the significant financial stress placed upon 
municipalities and water system owners, it appears prudent to maximize 
the flexibility granted to impacted municipalities and water system 
owners implementing this standard. In addition, Congress and the EPA 
must adequately fund the implementation of this standard through a 
robust grant (not loan) process. The absence of a robust grant process 
could cause widespread non-compliance with this new standard, or 
alternatively, the substitution of unsanitary water supplies for 
sanitary ones.
    Thank you for your consideration of my testimony and these 
concerns.

    Mr. Gillmor. And the Chair recognizes the gentlelady from 
Missouri, Ms. McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman. I thank you for this 
hearing, and for the study we are about to undertake. I think 
it is critical to the future of our country, and also the 
economic future of our communities, and particularly our 
States.
    I am just going to submit my remarks for the record, Mr. 
Chairman, so that we can get on with the important testimony 
that we have before us today. But again I thank you, and I 
think this is going to be very important for this subcommittee.
    Mr. Gillmor. Thank you. The gentleman from New Hampshire, 
Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman. I have no opening 
statement.
    Mr. Gillmor. Are there other members having an opening 
statement? If there are none----
    Mr. Terry. Mr. Chairman.
    Mr. Gillmor. Oh, I'm sorry. The gentleman from Nebraska, 
Mr. Terry.
    Mr. Terry. The forgettable gentleman from Nebraska.
    Mr. Gillmor. The best for last.
    Mr. Terry. I appreciate that, Mr. Chairman. Before my 
statement or opening remarks, I would say that one of the 
differences between the sides of the kiosk here, Mr. Brown, you 
thought that was Big Brother. I just thought--I am trying to 
figure out a way to get that into my living room.
    I want to share the concerns that are brought up, 
especially from Heather in New Mexico; we have similar issues 
in the State of Nebraska. Our community systems are aging, and 
as I understand there are about 55,000 community water systems, 
and a need of at least a $151 billion for upgrade.
    Certainly as I have heard from our community water officers 
in our towns throughout Nebraska, that the Drinking Water State 
Revolving Fund is an important tool for them, but their 
frustration has been with the moving target placed on them by 
the EPA.
    Now, whether it is copper and an inflexibility on how to 
deal with that issue, and with the water that is slightly above 
the acidic levels that causes leaching in the piping, EPA's 
only solution mandate is to change the water systems.
    Now, with the new arsenic level changes, similar to the 
drinking water in New Mexico, Omaha, Nebraska, uses ground 
water that has typically more than 10 parts per billion level 
of arsenic.
    But yet we in Nebraska have been drinking this water for 
hundreds of--at least 100 years, and then of course those 
people that had the land before then for time and beyond--
without the type of safety and health risks that we are being 
told about.
    So something just isn't jibing here between the science the 
EPA is relying on, but yet hundreds of years history of actual 
case studies.
    Now, the frustration that faces our municipal, small 
municipal water systems, especially in our smaller towns in 
Nebraska, as Mr. Pallone pointed out, we don't have the economy 
of scale. In a town of 500 or a thousand people, they don't--
they are faced with rather dramatic draconian choices.
    And they have communicated to me the same thing that they 
are communicating to Ms. Wilson in New Mexico, that they will 
just abandon a community water system, and in essence tell each 
one of the residents put in your own well.
    So perhaps the more draconian efforts to clean up our water 
beyond what we will be proud of in this country for our safe 
drinking water is now forcing communities to go the opposite 
direction of what we actually intend.
    So I am interested in hearing the testimony of our 
witnesses to see how we strike the balance to make sure that we 
continue to be able to take pride in the cleanest drinking 
water in America, but yet not go to such an extreme that we 
make it unaffordable and inaccessible to the people in our 
rural areas. Thank you.
    Thank you, Mr. Terry. If there are no further opening 
statements, the Chair will call up the first panel, and also 
announce that we will permit any members to submit their 
statements in writing.
    [Additional statements submitted for the record follow:]
   Prepared Statement of Hon. George Radanovich, a Representative in 
                 Congress from the State of California
    Mr. Chairman, today's hearing is a vital step in protecting and 
preparing our Nation's drinking water supply against possible 
disruption of water service and the biological, chemical or 
radiological contamination of drinking water supplies.
    With the threat of terrorism, it is imperative we constantly 
conduct vulnerability tests on our Nation's water supply system and 
formulate the safest emergency response plan. We can achieve these 
goals by using the most recent physical and cyber vulnerability tools 
to perform new assessments. It is crucial that we immediately implement 
improved methods to protect water supply systems after the tragic 
events of September 11th.
    In the end, I hope we can work together to protect the drinking 
water that our citizens depend on each and every day and build on our 
Committees' recent progress and result in continued improvements in our 
Nation's water supply system.
    Thank you, Mr. Chairman, for holding this hearing today. I look 
forward to the witnesses' testimony.
                                 ______
                                 
  Prepared Statement of Hon. Gene Green, a Representative in Congress 
                        from the State of Texas
    I'd like to thank the Chairman of the Subcommittee for holding this 
important hearing. I look forward to hearing the testimony of the 
witnesses on how we can address the crucial drinking water 
infrastructure needs facing our nation.
    Hopefully, this hearing will clarify how large a problem we face in 
funding the infrastructure necessary for safe drinking water. That 
``problem'' ranges in size from the $105.9 billion estimate of the EPA 
over the next 20 years, to the $220 billion 20-year estimate of the 
Water Infrastructure Network.
    Today, one of the ways that states are addressing these needs is 
through the Drinking Water State Revolving Fund (DWSRF). Since its 
authorization as part of the 1996 Amendments to the Safe Drinking Water 
Act (SDWA), it has received approximately $5.25 billion. Of that 
amount, the EPA has provided grants totaling $4 billion.
    While that may seem like a large amount of money, when compared to 
the estimate of the needs it is just a drop in the bucket. In FY 2002, 
Texas received approximately 7.7% of the more than $775 million 
available in the DWSRF, for a total of more than $62 million.
    The Texas Water Development Board, however, received proposals for 
more than $600 million for improvements to existing water 
infrastructure. Even when you add in the state match of more than $12 
million, that is a shortfall of approximately $525 million.
    These are real systems in need of equipment or improvement to meet 
federal drinking water standards.
    And the situation long-term in Texas isn't any better than the 
national picture. The EPA estimates our infrastructure investment needs 
over the next 20 years to be in the $12 billion range.
    That's a lot of money, and it's money that our states and 
localities can't afford. While I am fortunate enough to come from an 
urban area that can bear more of the investment burden, many members 
don't represent a large city like Houston, and their communities can't 
afford to get this bill.
    I hope that this hearing leads to further action by this Committee 
on the pressing needs of our drinking water infrastructure. Again, I 
thank the Chairman for this hearing, and I yield back.

    Mr. Gillmor. On this panel, we have Mr. Perry Beider, who 
is the principal analyst at the Congressional Budget Office; 
Dave Wood, Director of Environment and Natural Resources Issues 
at the General Accounting Office; and Ben Grumbles, who is the 
Deputy Assistant Administrator for the Office of Water at the 
United States EPA.
    Gentleman, thank you for coming today. We have your written 
statements, and I will provide each of you 5 minutes to 
summarize your statements before the members of the panel get a 
chance to ask you questions. And you may begin when you are 
ready.
    Mr. Grumbles.

     STATEMENTS OF BENJAMIN H. GRUMBLES, DEPUTY ASSISTANT 
 ADMINISTRATOR, OFFICE OF WATER, U.S ENVIRONMENTAL PROTECTION 
   AGENCY; PERRY C. BEIDER, PRINCIPAL ANALYST, CONGRESSIONAL 
 BUDGET OFFICE; AND DAVID G. WOOD, DIRECTOR, NATURAL RESOURCES 
      AND ENVIRONMENTAL ISSUES, GENERAL ACCOUNTING OFFICE

    Mr. Grumbles. Thank you very much, Mr. Chairman. It is an 
honor to be here and to appear before the subcommittee. First, 
let me convey Tracy Mehan's regrets for not being able to be 
here to testify. We are hopeful that his health will continue 
to improve, allowing him to be back in the office in the coming 
weeks.
    I welcome the opportunity to come and to talk about a very 
important subject, and that is the Drinking Water 
Infrastructure needs and the challenges that lie ahead. And 
what I would like to do in my amount of time is just briefly to 
summarize the written testimony and focus on some of the key 
areas.
    First of all, as all of you know on this subcommittee the 
accomplishments that have been realized under the Safe Drinking 
Water Act, more than 265 million Americans rely on public water 
systems, and they enjoy one of the safest supplies of drinking 
water in the world.
    But obviously there are some major challenges ahead, and 
water infrastructure, and its current and future needs, is 
certainly one of those challenges. The Safe Drinking Water Act 
requires that EPA develop every 4 years a survey to assess the 
drinking water investment needs.
    Last year, as has been mentioned we published the second 
infrastructure survey report, and that showed that $150.9 
billion is needed over the next 20 years to ensure the 
continued provision of safety drinking water.
    Transmission and distribution projects; that is, the pipes, 
the pipes that convey the source of water to the treatment 
facility, and then to the consumers represents the largest 
category of need, 56 percent.
    Treatment projects directed at protecting public health 
make up the second largest category of need at 25 percent. And 
here is another important point. About $103 billion, or 68 
percent of the total needs, is needed now to protect public 
health and repair or replace existing pipes.
    This current need reflects the age and the deteriorated 
condition of water infrastructure, but it also simply reflects 
the continuing costs of operating, replacing, and improving 
water systems. Most systems with current needs, therefore, are 
not in violation of any health based drinking water standard.
    Future needs. These are projects to be undertaken over the 
next 20 years as part of routine replacement. The costs there 
account for about $48 billion, the remaining amount of $150 
billion.
    Although all of the 74,000 State Revolving Fund eligible 
projects in our survey would protect public health, about 21 
percent of the total need, that is, $31.2 billion, is for 
compliance with current and proposed regulations under the Safe 
Drinking Water Act.
    Thus, of the total need, nearly $4 out of every $5 derives 
from the inherent costs of being a water system, and that is 
independent of any Safe Drinking Water Act regulation.
    The survey also found that systems serving fewer than 3,300 
people comprise more than 80 percent of the Nation's community 
water systems, but account for only 22 percent of the total 
national need.
    For systems serving more than 50,000, they constitute just 
2 percent of the Nation's water systems, but yet account for 
more than 44 percent of the national need. Nonetheless, because 
small systems lack economies of scale, the costs they bear on a 
per household basis are almost fourfold higher than those of 
large systems.
    The daunting economics of small systems is one of the 
reasons that Congress, and in particular this committee, 
created the Drinking Water State Revolving Fund. Let me just 
talk briefly about the broader context of investment and 
infrastructure needs.
    Various recent studies and reports by various groups, 
including EPA's GAP analysis, which is undergoing final 
administration review, present varied estimates of future 
needs.
    But a few key points need to be kept in mind. One is that a 
funding gap will result if the challenge posed by an aging 
infrastructure network, significant parts of which are 
approaching the end of their useful life, is ignored.
    Second, the Nation, through our partnership, needs to put 
more resources into water infrastructure in the future than we 
have been doing.
    At the same time, we need to reduce the costs, and we do 
that by ensuring a more efficient and productive use of such 
resources through an approach that emphasizes the development 
of a system's self-sustaining capacity to operate, manage, and 
fund its infrastructure.
    Just a few words, Mr. Chairman, about infrastructure 
investment and fiscal sustainability. Looking forward to the 
President's fiscal year 2003 budget, that continues Federal 
support for drinking water infrastructure, and it requests $850 
million for the Drinking Water State Revolving Fund.
    As your committee continues to study the drinking water 
infrastructure needs, the administration would like to 
encourage a constructive dialog on the appropriate role of the 
Federal Government in addressing these needs.
    The touchstone of our strategy, Mr. Chairman, is building 
fiscal sustainability. That requires work on both the fiscal 
demand side, that is, how to define and manage infrastructure 
needs, and the supply side, how to pay for those managed needs.
    There are several basic principles that should guide us, 
and I will just mention these briefly, and then I will 
conclude. One of them is to foster greater private sector 
involvement and encourage an integrated use of all local, 
State, and Federal sources of infrastructure financing.
    Another key component of the strategy is to promote 
sustainable systems by ensuring the capacity of water systems 
and creating incentives to adopt best management practices, to 
improve efficiency, economies of scale, and reduce the average 
cost of service.
    Also, encouraging cost-based in affordable rates is a key 
component. Creating incentives to support research and 
development of innovative and alternative technologies to help 
reduce the costs, and provide improved services.
    Promoting smarter water use by encouraging water 
conservation and reuse, and finally promoting a watershed base 
decisionmaking process that includes directing funds to the 
highest priority projects.
    And in conclusion, Mr. Chairman, I just would like to say 
that the administration recognizes that this is a serious 
challenge and that infrastructure is very important, and this 
dialog that you are having and that the committee has convened 
is absolutely integral to coming up with innovative solutions 
to help meet the infrastructure challenges.
    And I would be happy to respond to questions and answer 
them at the appropriate time. Thank you, Mr. Chairman.
    [The prepared statement of Benjamin H. Grumbles follows:]
     Prepared Statement of Benjamin H. Grumbles, Deputy Assistant 
     Administrator for Water, U.S. Environmental Protection Agency
    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
Ben Grumbles, Deputy Assistant Administrator for Water at the U.S. 
Environmental Protection Agency (EPA). First, please let me convey 
Tracy Mehan's regrets for being unable to attend today's hearing.
    I welcome your invitation to discuss the Nation's investment needs 
for drinking water infrastructure--the pipes, treatment plants and 
other critical components that deliver safe drinking water to our taps. 
The challenge of preserving the integrity of this infrastructure--so 
that public health can continue to be protected--will form the basis of 
my comments.
    As a Nation, we have made great progress over the past quarter 
century in ensuring the safety of drinking water. Our success in 
improving drinking water quality is the result of many programs and 
projects by local, State and federal governments in partnership with 
the private sector. More than any single effort, however, it is the 
cooperative, intergovernmental investment in drinking water and 
wastewater infrastructure facilities that has paid dramatic dividends 
for public health.
    Today, I will summarize what EPA knows about the need for future 
investment in drinking water and identify the key challenges I see in 
meeting this need. I will conclude with some thoughts about how 
Congress and others could proceed when addressing the problems of 
financing drinking water infrastructure.
Safe Water--Accomplishments and Challenges
    Most Americans would agree that the quality of drinking water has 
improved dramatically over the past quarter century.
    We have made significant progress in improving the safety of our 
Nation's drinking water. Disinfection of drinking water is one of the 
major public health advances in the 20th century. In the early 1970's, 
however, growing concern for the presence of contaminants in drinking 
water around the country prompted Congress to pass the Safe Drinking 
Water Act--which now forms the cornerstone of a solid foundation that 
ensures that all Americans can continue to enjoy safe drinking water.
    Today, the more than 265 million Americans who rely on public water 
systems enjoy one of the safest supplies of drinking water in the 
world.
    Under the Safe Drinking Water Act, EPA has established standards 
for 90 drinking water contaminants. Public water systems have an 
excellent compliance record--more than 90 percent of the population 
served by community water systems receive water from systems with no 
reported violations of health based standards.
    In the past decade, the number of people served by public water 
systems meeting federal health standards has increased by more than 23 
million. Although compliance with drinking water contaminant standards 
is good, a substantial investment is needed to ensure the safety and 
security of our drinking water.
Water Infrastructure--Future Needs
    The Safe Drinking Water Act requires that EPA develop--every four 
years--a survey to assess the Nation's drinking water investment needs. 
The first survey report was released to Congress in 1997.
    Last year, we published the second infrastructure survey report. 
The new survey showed that $150.9 billion is needed over the next 20 
years to ensure the continued provision of safe drinking water to 
consumers.
    The survey includes needs that are required to protect public 
health, such as projects to preserve the physical integrity of the 
water system, convey treated water to homes, and to ensure continued 
compliance with specific Safe Drinking Water Act regulations.
    Transmission and distribution projects--that is, the pipes that 
convey water from a source to a treatment facility and then to 
consumers--represented the largest category of need (56%), with $83 
billion needed over the next 20 years. This result is not surprising 
given that, for most water systems, the majority of their capital value 
exists in the form of transmission and distribution lines. Treatment 
projects, which have a significant benefit for public health, make up 
the second largest category of needs at 25%.
    The survey also distinguished between ``current needs'' and 
``future needs.'' About $103 billion, or 68% of the total need, is 
needed now to protect the public health and maintain existing 
distribution and transmission systems. That systems require such a 
large investment to meet the current need reflects the age and 
deteriorated condition of their infrastructure. However, it is 
important to note that in most cases, current needs would involve 
installing, upgrading or replacing infrastructure that would enable 
water systems to continue to deliver safe drinking water. A system with 
a current need, therefore, usually is not in violation of any health-
based drinking water standard. For example, a surface water treatment 
plant may currently produce safe drinking water, but its filters may 
require replacement due to age and declining effectiveness to ensure 
the continued provision of safe water.
    Future needs account for the remaining $48.4 billion in needs. 
Future needs generally include projects that systems would undertake 
over the next 20 years as part of routine replacement such as reaching 
the end of a facility's service life.
    Although all of the 74,000 projects in the survey would promote 
public health protection, water systems also identified capital needs 
directly related to specific regulations under the Safe Drinking Water 
Act. Approximately 21% of the total need, or $31.2 billion, is needed 
for compliance with current and proposed regulations under the Act. 
Therefore, most of the investment needs documented in the survey (i.e., 
approximately 79%) stem from the costs of installing, upgrading and 
replacing the basic infrastructure that is required to deliver drinking 
water to consumers--costs that water systems would face independent of 
any Safe Drinking Water Act regulations. These findings indicate that 
most of the total need derives from the inherent costs of being a water 
system, which involves the almost continual need to install, upgrade, 
and replace the basic infrastructure that is required to provide safe 
drinking water.
    The survey also examined investment need by system size. The survey 
found that small systems (serving fewer than 3,300 people) comprise 
more than 80% of the nation's community water systems, but they account 
for only 22% of the total national need. By contrast, large systems 
(serving more than 50,000) constitute just 2 percent of the nation's 
water systems, yet account for more than 44% of the national need. This 
finding reflects the fact that small systems collectively serve far 
fewer people--about 26 million--than large systems, which serve about 
138 million people.
    Although the total small system need is modest compared to the 
needs of larger systems, the costs borne on a per household basis by 
small systems are almost 4-fold higher than those of large systems. 
Small systems often face challenges in obtaining financial assistance 
to address these costs--which is one of the reasons Congress created 
the drinking water State Revolving Fund.
Other Estimates of Investment Needs
    Several groups, including the Water Infrastructure Network and the 
American Water Works Association, have also issued reports estimating 
water infrastructure needs. These estimates were all substantially 
above those of EPA's assessment. The difference owes to the dissimilar 
methods used to calculate the needs. The other studies used models to 
estimate needs, whereas EPA's estimate is derived from projects that 
systems themselves identified and documented on a questionnaire. 
However, regardless of which number is used to characterize the 
magnitude of investment needs, all of these estimates are significant--
as are the challenges faced by the Nation's water systems in meeting 
these needs.
Broader Context of Investment Needs
    EPA believes the key to understanding the water infrastructure 
financing challenge is to consider a broad context of factors, 
including: aging infrastructure, population growth, increasing 
operations and maintenance costs, and affordability--especially for 
low-income households and communities.
    To better understand the issues related to water infrastructure 
investments and financing, the Agency is reviewing issues related to 
long-term needs, assessing different analytical approaches to 
estimating those needs, and estimating the gap between needs and 
spending. Last summer, EPA presented a portion of this analysis--known 
as the Gap Analysis--to a diverse panel of experts drawn from academia, 
industry, think tanks, and consulting firms. Overall, the reviewers 
commended the report as a credible effort to quantify the gap. We have 
made revisions to the analysis based on the peer review and we expect 
to release the Gap Analysis shortly.
    In considering these studies and analyses, it is important to keep 
in mind a few points. First, there is no single ``correct'' number to 
describe the gap. Any gap study must be built using methods and 
definitions of need, which in turn rest on varying assumptions about 
present conditions nationwide, and desirable or appropriate policies to 
follow in the future. The second point is that these gap studies are 
limited to quantifying the investment gap, and therefore they cannot 
themselves be a clear guide to policy; for example, they do not 
consider how the various roles of federal, State and local governments 
should be balanced. Third, under any of these studies, funding gaps are 
not inevitable. They occur only in the unlikely event that capital 
spending remains--for the next 20 years--unchanged from present levels. 
An honest evaluation would conclude that a funding gap will result only 
if the challenge posed by an aging infrastructure network--a 
significant portion of which is beginning to reach the end of its 
useful life--is ignored.
    I believe that most decision makers at the federal, State and local 
levels would agree that, through our partnership, the Nation needs to 
put more resources into water infrastructure in the future than we have 
been doing. At the same time, we need to reduce costs by ensuring a 
more efficient and productive use of such resources through an approach 
that emphasizes the development of a system's self-sustaining capacity 
to operate, manage, and fund its infrastructure.
Drinking Water State Revolving Loan Fund
    The primary mechanism that EPA uses to help local communities 
finance drinking water infrastructure projects is the State Revolving 
Loan Fund (SRF) established in the 1996 Safe Drinking Water Act 
amendments. The SRF was designed to provide a national financial 
resource for clean and safe water that would be managed by States and 
would provide a funding resource ``in perpetuity.'' These important 
goals are being achieved. Other federal, State, and private sector 
funding sources are also available for community water infrastructure 
investments.
    Under the SRF program, EPA makes grants to each State to capitalize 
its SRF. States provide a 20% match to the federal capitalization 
payment. Local governments get loans for up to 100% of the project 
costs at below market interest rates. After completion of the project, 
the community repays the loan and these loan repayments are used to 
make new loans on a perpetual basis. Because of the revolving nature of 
the funds, the dollars invested in the SRF provide about four times the 
purchasing power over twenty years compared to what would occur if the 
funds were distributed as grants.
    In addition, low interest SRF loans provide local communities with 
dramatic savings compared to loans with higher, market interest rates. 
An SRF loan at the interest rate of 2.4% (the average rate during the 
year 2001) saves communities approximately 23% compared to using 
commercial financing at an average of 5.3%.
    The drinking water SRFs, which this Committee created as part of 
the 1996 amendments to the Safe Drinking Water Act, were modeled after 
the clean water SRFs, but included a few differences.
    States were given broader authority to use drinking water SRFs to 
help disadvantaged communities, and to provide technical assistance for 
management and operations of drinking water systems.
    In addition, the law provided each State the flexibility to 
transfer funds between its clean water and drinking water SRFs. The 
Administration supports continuing this mechanism to help States fund 
their priority needs.
    Through fiscal year 2002, Congress has appropriated $5.3 billion 
for the drinking water SRF program. Through June 30, 2001 States had 
received $3.6 billion in capitalization grants, which when combined 
with State match, bond proceeds and other funds provided $5.2 billion 
in total cumulative funds available for loans. Through June 30, 2001, 
States had made close to 1,800 loans totaling $3.8 billion, with 
another $1.4 unallocated or available for loans. Approximately 75% of 
the agreements (41% of dollars) were provided to small water systems 
that frequently have a more difficult time obtaining affordable 
financing. States also reserved a total of approximately $576 million 
of SRF capitalization grants for other activities that support the 
drinking water program, such as protecting sources of drinking water 
and providing technical assistance to small systems.
Infrastructure Investments and Fiscal Sustainability
    The President's FY 2003 budget continues to maintain federal 
support for drinking water infrastructure and requests $850 million for 
the drinking water SRF. By the end of FY 2002, we expect loans issued 
by State drinking water SRFs to reach 2,400, with about 850 SRF funded 
projects having initiated operations by that date.
    This proposed FY 2003 funding will help communities across the 
country finance important drinking water projects. As your Committee 
continues to study the drinking water infrastructure needs, the 
Administration would like to encourage a constructive dialogue on the 
appropriate role of the federal government in addressing these needs.
    Ensuring that our drinking water infrastructure needs are addressed 
will require a shared commitment on the part of the federal, State and 
local governments, private business, and consumers.
    To meet these future challenges, the Administration believes that 
the touchstone of our strategy should be building fiscal 
sustainability. In particular, several basic principles should guide 
our pursuit of safe drinking water:

 Utilizing the private sector and existing programs: Fostering 
        greater private sector involvement and encouraging integrated 
        use of all local, State, and federal sources for infrastructure 
        financing.
 Promoting sustainable systems: Ensuring the technical, 
        financial, and managerial capacity of water systems, and 
        creating incentives for service providers to avoid future gaps 
        by adopting best management practices to improve efficiency and 
        economies of scale, and reducing the average cost of service 
        for providers.
 Encouraging cost-based and affordable rates: Encouraging rate 
        structures that cover costs and more fully reflect the cost of 
        service, while fostering affordable water service for low-
        income families.
 Promoting technology innovation: Creating incentives to 
        support research, development, and the use of innovative 
        technologies for improved services at lower life-cycle costs.
 Promoting smart water use: Encouraging States and service 
        providers to adopt holistic strategies to manage water on a 
        sustainable basis, including a greater emphasis on options for 
        reuse and conservation, efficient nonstructural approaches, and 
        coordination with State, regional, and local planning.
 Promoting watershed-based decision-making: Encouraging States 
        and local communities to look at drinking water source water 
        protection on a watershed scale and to direct funding to the 
        highest priority projects needed to protect public health and 
        the environment.
Conclusion
    This is an important and serious challenge, and I commend your 
Subcommittee for holding this hearing and gathering such experts, 
advocates, and colleagues. Already, we see the means to realize these 
principles in practice, taking shape all across the country. Many 
States and local governments have been changing the way they do 
business. As a result, they've successfully managed many of these 
infrastructure needs, using creative, individualized approaches that 
are cost-effective, environmentally protective, and socially 
equitable--efficient, clean, and fair.
    Thank you, Mr. Chairman, for this opportunity to discuss EPA's view 
of the drinking water infrastructure challenges that the Nation is 
facing. I pledge that EPA will continue to work in partnership with 
Congress, States, local governments, the private sector and others to 
better understand the drinking water infrastructure needs we face and 
to play a constructive role in helping to define an effective approach 
to meeting these needs in the future.
    I will be happy to answer any questions.

    Mr. Gillmor. Thank you, Mr. Grumbles. I would like to ask 
for unanimous consent that we recognize the chairman of the 
full committee for an opening statement? Is there an objection.
    Hearing none, the chairman is recognized.
    Chairman Tauzin. Thank you, Mr. Chairman. I apologize for 
being late. I had a leadership meeting this morning discussing 
important new business before the Congress in welfare reform, 
and so I apologize for being a little later for you.
    But I wanted to thank you for scheduling today's hearing, 
and apologize for interrupting our witnesses today. But I want 
to note that this is the second hearing that this subcommittee 
has held on this important subject, and I think that indicates 
the gravity and the enormity of the issue, because at stake is 
both the protection of the public health, and the possible 
expenditure of billions upon billions of Federal and State, and 
local dollars here.
    Now, this is no small hearing, no small process, and no 
small concern of this committee. In reviewing the testimony 
today, I know that the Deputy Assistant Administrator for the 
Office of Water, Ben Grumbles, has indicated that the 
administration, ``would like to encourage a constructive dialog 
on the appropriate role of the Federal Government in addressing 
the drinking water needs of our country.''
    I would say at the outset that I welcome and encourage this 
dialog, and we are absolutely determined to work with you in, 
hopefully, a productive fashion to see if we can't come to some 
conclusions about what should be that role, and what should be 
the level of Federal support.
    On a broader level, and as Mr. Grumbles and others will 
point out in their testimony, the issue of drinking water need 
is far from a static concept. Future need may be influenced by 
many factors, including changes in technology and efficiency, 
and need may vary greatly from region to region and locality to 
locality.
    And it is influenced heavily by such uncontrollable factors 
such as the type of soil which surrounds the underground pipes, 
and its proclivity to erode concrete. A need also has to be 
built up over time, including some communities having inherited 
the unwanted legacy of old and leaking systems, and huge 
amounts of drinking water lost in those systems.
    We also know obviously that weather systems are changing, 
and the availability of clean water, and rainfall, and weather 
conditions dramatically affect the availability of those 
supplies.
    And while there are certainly immediate needs, and perhaps 
even more urgent needs, the need only exists over the long term 
that proper resources are not devoted to drinking water systems 
repair and replacement.
    And we know robbing Peter to pay Paul is not a new concept, 
and this is deferral of maintenance in order to address short 
term budgetary considerations, a new concept. We know that 
everybody does it.
    So we have to strive to create and encourage an intelligent 
system of financing for our drinking water systems, while being 
careful to maintain proper incentives at all levels of 
government and the private sector.
    So whatever size the need gap is, or the timing of its 
occurrence, we risk disinvesting our limited public resources 
if we don't design a financing system that will meet the twin 
tests of time and human economic behavior.
    In short, it is clear that we are going to have to solve 
the drinking water needs gap, and it has to do with one 
sentence, piece legislation, indicating that X-amount of 
dollars is authorized over the next 20 years.
    The world is a little too complex for that. So this hearing 
will help give us I think a sense of how we deal with some of 
these complexities, and daunting as the task may be, I want to 
congratulate the chairman.
    And I know that this committee in the past has taken on 
these kind of challenges, and dealt with them, and since 1996, 
with the amendments to the Safe Drinking Water Act, the 
committee has reviewed on a regular basis the implementation of 
the law.
    We have worked with the GAO specifically to analyze the 
operation of the State Revolving Funds that were created by the 
legislation. And, most recently, the committee acted in a 
bipartisan fashion to craft legislation to address threats to 
drinking water systems imposed by the intentional acts of 
terrorism.
    And that legislation requires vulnerability assessments of 
drinking water systems, emergency response plans that were 
built on those assessments. That legislation also authorizes 
funds to help drinking water systems conduct those assessments. 
And to take steps that address basic security enhancements, as 
well as efforts to detect attacks and to provide protection to 
the supplies of safe drinking water.
    So I commend these measures as you know now being 
considered in a conference with the Senate, and we are trying 
to resolve that conference as we speak.
    Chairman Gillmor and I look forward to the challenge ahead, 
and as the CBO witness quite accurately states, I quote, 
Society as a whole pays 100 percent of the costs of water 
systems, either through rate payer bills or indirectly through 
taxes. That is the bottom line, like so many things in our 
country that we fail to recognize.
    The consumer ends up paying a hundred percent of the bill, 
and what we have to do is come up with a rational way of 
dividing the responsibility between the general taxes collected 
and the rate payer assessments that are on rate payer bills.
    So the journey before us requires not only an unwavering 
attention to public health goals, but a recognition that there 
is no free lunch, and that somebody is going to have to pay for 
all these improvements, and that somebody we know is the 
consumers of America, whom we call constituents. And so we have 
to do a very rational and sensible, common sense job of this. 
That is going to take all of us working together. So, Mr. 
Chairman, again, thank you for allowing me to interrupt the 
schedule to encourage our witnesses in this hearing, and also 
to thank you and encourage this subcommittee in its work.
    Again, I want to stress this. There are some things in the 
new polls that are taking what people list as necessities in 
life, and they include VCRs, and personal computers, and now 
DVDs, and all sorts of other devices that are necessities of 
life.
    But when I grew up, we knew what the real necessities were, 
and we still do I think, and they include good, clean, safe, 
drinking water, one of the most critical components of a good 
society.
    And, Mr. Chairman, you are on this one, and stay on it, and 
together we will find some good answers I think, and the 
country will be better for it. Thank you, Mr. Chairman.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    First, I want to thank Subcommittee Chairman Gillmor for scheduling 
today's hearing on drinking water needs and infrastructure. I would 
note that this is the second hearing that this Subcommittee has held on 
this important subject. The gravity and enormity of this issue is 
clear--at stake is both protection of the public health and the 
possible expenditure of billions upon billions of federal, state and 
local tax dollars.
    In reviewing the testimony for today's hearing, I noted that Deputy 
Assistant Administrator for Water, Ben Grumbles, indicated that the 
Administration ``would like to encourage a constructive dialogue on the 
appropriate role of the federal government in addressing (drinking 
water) needs.'' I would say at the outset that I welcome and encourage 
this dialogue and would be happy to work with the Administration in a 
productive fashion.
    On a broad level--and as Mr. Grumbles and others will note in their 
testimony--the issue of drinking water ``need'' is far from a static 
concept. Future need may be influenced by many factors, including 
changes in technology and efficiency. Need may vary greatly from region 
to region or locality to locality, influenced heavily by such 
uncontrollable factors as the type of soil which surrounds underground 
pipes and its proclivity to erode concrete. Need has also built up over 
time, with the some communities having inherited an unwanted legacy of 
old and leaking systems which can waste huge amounts of treated 
drinking water.
    While there are certainly immediate needs, perhaps even urgent 
needs, need only exists over the long term if proper resources are not 
devoted to drinking water system repair and replacement. Robbing Peter 
to pay Paul is not a new concept, nor is the deferral of maintenance in 
order to address short-term budgetary considerations. Therefore, we 
must strive to create and encourage an intelligent system of financing 
drinking water systems while being careful to maintain the proper 
incentives at all levels of government and the private sector. Whatever 
the size of any ``needs gap'' or the timing of its occurrence, we risk 
disinvesting our limited public resources if we do not design a 
financing system which will meet the twin tests of time and human 
economic behavior.
    In short, it is clear that we are not going to solve any drinking 
water ``needs gap'' with a one sentence piece of legislation indicating 
that X amount of dollars is authorized over the next 20 years. 
Unfortunately, our world is far too complex for such a straightforward 
solution, as well-intentioned as the object of the spending might be. 
Instead, we will need an intensive examination of complex public policy 
issues, a review of various options, and a thorough vetting of 
legislative alternatives. I believe today's hearing moves us further 
along in that direction
    Daunting as this task may seem, I would note that this Committee 
has been successful in our previous efforts to tackle the many 
difficult issues surrounding the basic human necessity of providing 
safe drinking water. The Committee made substantial alterations to the 
standard-setting provisions of the Safe Drinking Water Act and various 
enhancements to the underlying statute through the 1996 Amendments. In 
the years since the 1996 Amendments, the Committee has reviewed, on a 
regular basis, the implementation of this law and worked with the 
General Accounting Office to specifically analyze the operation of the 
State Revolving Fund created by that legislation.
    Most recently, this Committee acted in a bipartisan fashion to 
craft legislation to address threats to drinking water systems that may 
be posed by intentional acts of terrorism. This legislation requires 
vulnerability assessments of drinking water systems and emergency 
response plans based on these assessments. The legislation also 
authorizes funds to help drinking water systems conduct assessments and 
to take steps that address basic security enhancements as well as 
efforts to detect attacks and protect supplies of safe drinking water. 
Our committee's measure is now being considered in conference with the 
Senate.
    Chairman Gillmor and I therefore look forward to the challenge 
ahead. As our CBO witness quite accurately states, ``society as a whole 
pays 100 percent of the costs of water systems, either through 
ratepayer's bills or taxes.'' The journey before us then, requires not 
only an unwavering attention to the public health goals which underpin 
the Safe Drinking Water Act, but a recognition that there is no free 
lunch. Altogether, we will need to strike a delicate balance between 
public and private expenditures while seeking to preserve a drinking 
water system which has been a major success in preserving the health of 
American citizens during the 20th century.

    Mr. Gillmor. I thank Chairman Tauzin for his remarks. The 
gentleman from Wisconsin has asked to be recognized.
    Mr. Barrett. Thank you very much, Mr. Chairman. I will be 
brief. Mr. Chairman, as a person who represents Wisconsin and 
whose district lies on the shores of Lake Michigan, I recognize 
the importance of clean water and fresh water.
    The Great Lakes provide 20 percent of the world's known 
fresh water supply, and they supply the drinking water for 34 
million Americans. So even though I am on the shores of this 
great supply of fresh water, there is still concerns in my 
State and in my community.
    My community was hit several years ago very hard by a 
breakout of cryptosperdium, which threatened the water supply 
probably in the most dramatic way that we have seen in this 
country in the last generation.
    And now we are faced with issues of sewerage overflow, 
where sewerage is pumped right into Lake Michigan, which has 
raised concerns among many throughout the State of Wisconsin.
    So I applaud you for holding this hearing.
    I think that this is a very, very important issue. As the 
Chairman said, there is nothing more important than our 
drinking water supply. And I think that working together on a 
bipartisan basis, we can ensure that millions of Americans for 
years to come will have a fresh drinking water supply. Thank 
you.
    Mr. Gillmor. Thank you.
    Mr. Perry Beider.

                  STATEMENT OF PERRY C. BEIDER

    Mr. Beider. Mr. Chairman, and members of the subcommittee, 
I am pleased to be here today to discuss future investment in 
drinking water infrastructure. My testimony draws on an 
analysis done by me and Dr. Natalie Tawil of the Congressional 
Budget Office, in response to a request from this subcommittee 
and your colleagues on the Transportation and Infrastructure 
Committee.
    Last year, CBO testified that estimates of future 
investment spending are very uncertain and that existing 
estimates may be too large. Today, I can make those points more 
concretely by presenting CBO's estimates of a low-cost and a 
high-cost case, which are intended to span the most likely 
outcomes within the full set of possibilities.
    Specifically, CBO estimates that annual capital costs for 
drinking water infrastructure will average $11.6 billion from 
2000 to 2019 under the low-cost case and $20.1 billion under 
the high-cost case.
    All costs here are in 2001 dollars. Data on actual 
investment spending in 2000 and 2001 are not yet available. The 
estimates measure costs as financed: that approach takes 
account of the use of borrowing to spread out the investment's 
financial burden and thus reflects the impact on water systems 
and ratepayers at a given point in time.
    Specifically, for each year in the 20-year period, CBO's 
estimate covers the cost of new investments made on a pay-as-
you-go basis out of funds onhand, and the debt service--
principal and interest--paid that year on previous investments 
financed through loans and bonds.
    CBO's low-cost and high-cost cases draw on the same primary 
sources used by the Water Infrastructure Network, or WIN, but 
differ from each other and from WIN's scenario in the values 
assumed for six factors.
    The most important factor is the rate at which drinking 
water pipes will be replaced over the 20-year period. The other 
five are the savings from efficiency gains, the costs 
associated with future drinking water rules, the share of 
investments that will be financed through borrowing, the 
average borrowing term, and the average interest rate.
    For a comparison, CBO estimates that drinking water 
investment in 1999, the latest year for which information is 
available, was $11.8 billion--again, measured in terms of costs 
as financed.
    That is an estimate, because calculating 1999 debt service 
payments required many assumptions--for example, about the 
extent to which water systems borrowed to finance investments 
over the previous 20 years.
    The difference between that 1999 baseline and estimated 
average investment costs from 2000 through 2019, sometimes 
dubbed the funding gap, is essentially zero in the low-cost 
case and $8.3 billion per year in the high-cost case.
    The low-cost case result contradicts conventional wisdom, 
but CBO considers it reasonable given the uncertainty about how 
soon pipes will need to be replaced, the prospects for 
increased efficiency, and the potential for water systems to 
borrow more and to do so at longer terms. In contrast, the 
high-cost case would imply an increase of about 70 percent over 
1999 investment costs.
    WIN's estimate of needs over the 2000-2019 period does not 
measure investment in terms of costs as financed. In 
particular, it includes all debt service paid on investments 
financed during the period, even though much of that debt 
service will be paid after 2019.
    When expressed in costs as financed, WIN's estimate is 
roughly $10 billion per year higher than CBO's low-cost 
estimate but only about $1 billion more than the high-cost 
figure.
    It is not surprising that CBO's high-cost estimate is close 
to WIN's, since we used the same basic modeling approach and 
the specific assumptions in the high-cost scenario are broadly 
similar to WIN's.
    The lesson that CBO draws from comparing the low case, high 
case, and WIN projections is that given the basic approach, 
fairly pessimistic assumptions are required to obtain estimates 
as high as WIN's.
    At the household level, CBO estimates that average bills 
for drinking water and wastewater services combined represented 
0.5 percent of average income in the late 1990's. In the 
absence of increased taxpayer support, we project that by the 
year 2019, that share will rise to 0.6 percent and 0.9 percent 
in the low-cost and high-cost scenarios, respectively. Of 
course, those figures are averages, and households with low 
incomes or those served by high-cost systems would tend to pay 
larger shares.
    In conclusion, CBO agrees with the consensus of industry 
experts that the Nation's drinking water systems will require 
additional investment in the decades to come. But our estimates 
illustrate that the timing of the increase is not at all clear, 
nor is its ultimate size once savings from improved management 
and new technology are taken into account.
    Of course, society as a whole pays 100 percent of the cost 
of water systems either through ratepayers' bills or taxes. And 
so in an aggregate sense, the only way to make water services 
more affordable is to reduce the total costs of providing them.
    I will be happy to try to answer any questions.
    [The prepared statement of Perry C. Beider follows:]
Prepared Statement of Perry C. Beider, Principal Analyst, Congressional 
                             Budget Office
    Mr. Chairman and Members of the Subcommittee, I am pleased to be 
here today to discuss future investment in drinking water 
infrastructure. My testimony draws on findings from a forthcoming 
Congressional Budget Office (CBO) study that was requested by this 
Subcommittee and by your colleagues on the Transportation and 
Infrastructure Committee.
    CBO's testimony before the Subcommittee last year emphasized that 
estimates of investment spending through 2019 are very uncertain--in 
part because many important data are not readily available--and 
existing estimates may be too large. Today, I can make those points 
more concretely by presenting CBO's estimates of a low-cost and a high-
cost case, which are intended to span the most likely outcomes within 
the full set of possibilities.
    I will begin by presenting estimates of average annual investment 
costs under the two cases and then discuss how CBO derived the 
estimates and how they differ. I will also compare those projections 
with an estimate of the current burden of investment in drinking water 
infrastructure and examine how future investment might affect household 
budgets. Finally, I will compare CBO's estimates with the much-
publicized figures from the Water Infrastructure Network (the WIN 
coalition). My testimony focuses on capital investment in drinking 
water systems, but it also presents estimates of future operations and 
maintenance (O&M) costs under both a low-cost and high-cost scenario.
    Before discussing specific dollar figures, I would like to 
emphasize that society as a whole pays 100 percent of the costs of 
water systems, either through ratepayers' bills or taxes. Thus, the 
goal of many water-industry advocates to make water services more 
``affordable'' can be met only by reducing the total costs of providing 
such services or by using taxes and government subsidies to 
redistribute their costs from some people to others. Depending on the 
method used, the net effect of such redistributive efforts may be to 
shift costs from low-income to high-income households, from large to 
small users of water, or from ratepayers served by high-cost systems to 
those served by low-cost systems. Taxes and subsidies may also distort 
prices and reduce the incentives for efficient choices by system 
managers and consumers, resulting in the unwanted side effect of higher 
total national costs for water services.
                        cbo's 20-year estimates
    CBO projects that annual capital costs for drinking water 
infrastructure will average $11.6 billion from 2000 to 2019 under the 
low-cost case and $20.1 billion under the high-cost case. (Unless 
otherwise specified, all costs are in 2001 dollars.) Annual O&M costs 
over the same period are projected to average $25.7 billion under the 
low-cost case and $31.8 billion under the high-cost case. CBO chose the 
2000-2019 period for its analysis to make it easier to compare its 
estimates with those of the WIN coalition. Data on actual investment 
spending in 2000 and 2001, which are provided by the Census Bureau's 
Survey of State and Local Government Finances, are not yet available.
    Three more points will help clarify the nature of CBO's estimates. 
First, they are intended to represent the minimum amount required to 
achieve the goals of maintaining desired levels of service to water 
customers, meeting federal standards for drinking water quality, and 
maintaining and replacing assets cost-effectively.1 They 
exclude investments whose sole purpose is to serve future growth; that 
is because much of the data underlying them come from the Environmental 
Protection Agency's (EPA's) Drinking Water Infrastructure Needs Survey, 
which focuses only on investments eligible for assistance from the 
state revolving funds, or SRFs.2 Because of a lack of data, 
CBO's estimates also exclude investments to increase the security of 
drinking water systems. Preliminary indications suggest, however, that 
security costs will be small relative to the estimates presented here.
---------------------------------------------------------------------------
    \1\ That scope is similar to the one used in the needs survey of 
the Environmental Protection Agency (see text). Al though the survey is 
restricted to investments ``required to protect the public health,'' 
most of those public health needs simply reflect ``the inherent costs 
of being a water system which involves the nearly continual need to 
install, upgrade, and replace the basic infrastructure that is required 
to deliver safe drinking water to customers'' (Environmental Protection 
Agency, Drinking Water Infrastructure Needs Survey: Second Report to 
Congress, February 2001, p. 12). CBO's formulation explicitly 
recognizes that a water system's investment requirements depend on the 
standards of service that it chooses. The formulation also targets the 
minimum amount of spending necessary to achieve the identified goals.
    \2\ Investments to serve new or future customers are eligible for 
SRF assistance only if they respond to a public health problem (for 
example, a project to hook up users of contaminated wells) or are 
components of projects triggered by the needs of existing customers 
(for example, replacing a deteriorated water main with a larger-sized 
one to allow for expected growth). As discussed later, the other source 
of data underlying CBO's estimates is an analysis by Stratus Consulting 
that focused on the costs of replacing existing water pipes and thus 
also excludes investments relating to future growth.
---------------------------------------------------------------------------
    Second, the estimates measure costs ``as financed'' and thus take 
into account the use of borrowing to spread the investments' financial 
burden over time. In particular, for each year of the 20-year period, 
CBO's estimate includes two things: the costs of that year's new 
investments that are paid for out of funds on hand--that is, on a pay-
as-you-go basis; and the debt service (principal and interest) paid 
that year on previous investments financed through loans and bonds. 
Economists usually measure investments in terms of their current 
resource cost--which covers the capital cost of all current 
investments, regardless of how they are paid for, and excludes payments 
on past investments. The current resource cost is preferred over other 
measures of investment volume for analyzing the efficient use of 
society's resources, such as the costs and benefits of water-quality 
regulations. But CBO's present analysis takes the water-quality and 
service goals as a given and focuses on the costs of meeting those 
goals. For that purpose, measuring costs as financed is more useful 
because it better indicates the burden facing water systems and their 
ratepayers at a given point in time.3
---------------------------------------------------------------------------
    \3\ Because O&M costs are generally paid for without borrowing, 
resource costs and costs as financed are the same in that case.
---------------------------------------------------------------------------
    Third, the relatively large difference between CBO's estimates of 
20-year investment requirements under the low-cost and high-cost 
cases--the former is 42 percent below the latter--reflects the 
limitations of the available data. Indeed, although the two cases are 
intended to bracket the most likely outcomes, CBO does not rule out the 
possibility that the actual level of investment needed could lie 
outside that range.
                     how cbo derived its estimates
    As CBO's previous testimony emphasized, some key data for 
estimating future investment, such as the average age and condition of 
the nation's existing water infrastructure, are not readily available. 
Since CBO could not fill that gap by collecting new data from the 
nation's 45,000 community water systems, its strategy in developing its 
low-cost and high-cost cases was to take maximum advantage of existing 
data and analyses.
    In particular, CBO analysts used the basic approach developed by 
the WIN coalition, working from a study of pipe replacement needs by 
Stratus Consulting for the American Water Works Association and from 
estimated requirements for other investment categories derived from 
EPA's Needs Survey. CBO chose not to rely on the Needs Survey alone; 
even though the survey strives to include all relevant investments over 
a 20-year period for drinking water systems nationwide, EPA reports 
that its results do not fully cover the whole period. (According to 
EPA, planning documents used by many systems as the basis for their 
responses to the survey often cover just one to five years.) The 
Stratus study used a different approach than the survey uses to 
estimate pipe replacement needs: it combined some national-level data 
and various assumptions to estimate the number of drinking water 
systems nationwide (classified by size and region), the miles of pipe 
per system, the distribution of pipe mileage by pipe size, the 
replacement cost of pipes of each size, and the rate of pipe 
replacement.
    Although CBO's low-cost and high-cost cases draw on the same 
sources of data, they differ in the assumptions for six factors: three 
concern the capital costs estimated by Stratus and EPA, and three 
involve the costs of financing the investments (see Table 1). The most 
critical assumption is the rate at which drinking water pipes will be 
replaced over the 20-year period: the low-cost case assumes an average 
annual rate of 0.6 percent, and the high-cost case assumes a rate of 1 
percent. That factor alone accounts for most of the difference--$8.5 
billion annually--between the two sets of estimates. Using a rate of 
0.6 percent in the high-cost scenario would narrow the difference to 
$3.4 billion, a reduction of 60 percent.
    The lack of data on the condition of existing water pipes is the 
basis for CBO's view that plausible estimates of the annual replacement 
rate could be as far apart as 0.6 percent and 1 percent. Both rates 
have their genesis in the Stratus study. The study's primary analysis 
assumed an average annual replacement rate of 1 percent, apparently as 
a compromise between the rates implied by standard rules of thumb about 
pipe service lifetimes and the rates actually reported in studies from 
the mid-1990s. However, the Stratus study also presented another 
approach: analysts estimated when pipes would reach the end of their 
useful lifetimes on the basis of the assumption that the rate at which 
pipe miles were installed over time was proportional to the rate of 
population growth. According to that analysis, the bulk of the 
replacement cost will not occur until some time after 2020, and the 
average replacement rate required from 2000 through 2019 will be on the 
order of 0.6 percent.4
---------------------------------------------------------------------------
    \4\ More precisely, the study reported separate average annual 
replacement rates for three pipe lifetimes (50 years, 75 years, and 100 
years) and two decades (2000 to 2009 and 2010 to 2019). The average of 
the six individual rates was 0.58 percent. In contrast, the implied 
long-run rates for the three lifetimes are 2.0 percent, 1.33 percent, 
and 1.0 percent, respectively, for an average of 1.44 percent.

   TABLE 1. FACTORS DISTINGUISHING CBO'S LOW-COST AND HIGH-COST CASES
------------------------------------------------------------------------
                                                   Low-Cost    High-Cost
                                                     Case        Case
------------------------------------------------------------------------
Capital Factors
Annual Rate of Pipe Replacement (Percent).......        0.6         1.0
Savings from Improved Efficiency (Percent)......         15           5
Annual Costs for Regulations Not Yet Proposed             0        0.53
 (Billions of 2001 dollars).....................
Financing Factors
Real (Inflation-Adjusted) Interest Rate                 3.0         4.0
 (Percent)......................................
Borrowing Term (Years)..........................         30          25
Pay-as-You-Go Share (Percent)...................         15          30
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.

    Similar uncertainties underlie the rest of the differing 
assumptions that CBO used in the low-cost and high-cost cases. Examples 
of improved management methods and new technologies here and abroad, 
plus conversations with industry experts, lead CBO to believe that 
efficiency gains will reduce future investment needs--but whether the 
savings will be on the order of 5 percent or 15 percent is hard to 
predict with any confidence. CBO also cannot precisely determine the 
costs associated with future drinking water rules, the share of 
investments that will be financed through borrowing, the average 
borrowing term, or the real (inflation-adjusted) interest rate.
    CBO's analysis of future O&M spending used simpler methods, and 
only one factor distinguishes the estimates under the two cost 
scenarios. For the high-cost case, CBO merely extrapolated a linear 
trend from real 1980-1998 spending on O&M for the low-cost case, CBO 
started with the same linear trend but phased in savings of 20 percent, 
resulting from improved efficiency, over the period from 1995 through 
2004.5 Those simpler methods probably do not capture as much 
of the true uncertainty surrounding future O&M costs as do CBO's more-
detailed models of capital investment, but again, O&M was less central 
to the analysis--in part because it is not eligible for aid under 
current federal programs.
---------------------------------------------------------------------------
    \5\ The WIN coalition's analysis also assumed savings of 20 
percent.
---------------------------------------------------------------------------
              comparing future costs and current spending
    One useful way to view estimates of future investment costs is by 
comparing them with a baseline of current spending. For the present 
purpose, however, the available data on current spending are inadequate 
because they do not measure spending in terms of costs as financed. 
Specifically, the data include the capital costs of all investments 
made in a given year--whether the burden of those projects falls on 
ratepayers in that year or is being deferred through borrowing--and 
exclude the principal being repaid on previous borrowing.
    For 1999, the latest year for which the necessary information is 
available, CBO's best estimate of investment spending is $11.8 billion, 
measured in terms of costs as financed. However, developing that 
baseline required CBO to make many assumptions--for example, about the 
extent to which drinking water systems borrowed to finance investments 
over the previous 20 years. Alternative assumptions could have changed 
the result, perhaps by 20 percent.
    The difference between that estimate of 1999 investment spending 
(as financed) and CBO's estimates of average annual investment from 
2000 through 2019--sometimes dubbed the funding gap--is essentially 
zero in the low-cost case and $8.3 billion in the high-cost case. The 
possibility reflected in CBO's low-cost scenario--that the average 
yearly burden of investment in drinking water infrastructure through 
2019 might not exceed the 1999 level--contradicts conventional wisdom; 
however, CBO considers that scenario reasonable, given the uncertainty 
about how soon pipes will need to be replaced, the prospects for 
increased efficiency, and the potential for water systems to fund more 
of their investments through borrowing and to borrow for longer terms. 
Of course, the estimate of future needs under the high-cost case' 
representing an increase of about 70 percent over estimated spending in 
1999--is also considered reasonable, if less optimistic.
      the potential impact of higher costs on household ratepayers
    Supporters of increased federal aid for investment in water 
infrastructure often argue that rising costs will make households' 
water bills ``unaffordable.'' Under CBO's high-cost case, bills for 
drinking water and wastewater combined would still represent less than 
1 percent of income for the average household, although that share 
would be larger for many households that have low income or that are 
served by high-cost systems.
    CBO estimates that in the late 1990s, average bills for drinking 
water and wastewater services combined represented 0.5 percent of 
average household income. To derive that estimate, CBO used data from 
the Consumer Expenditure Interview Survey (conducted by the Census 
Bureau under contract with the Bureau of Labor Statistics), which 
analysts supplemented by imputing bills for the 39 percent of survey 
respondents who did not report their own. That imputation, which was 
based on the water bills of respondents with comparable income, may 
bias the estimate upward, because many respondents without separate 
water bills are apartment-dwellers, who use less water for lawns and 
gardens than do residents of single-family homes.6
---------------------------------------------------------------------------
    \6\ CBO's estimate may also overstate the percentage of income 
devoted to water bills by accepting at face value all incomes reported 
in the survey. (Some analysts believe that many incomes at the very low 
end of the distribution are understated.)
---------------------------------------------------------------------------
    To analyze the impact on households of future investment and O&M 
spending by drinking water and wastewater systems, CBO first estimated 
the rates that would be required by 2019 to pay for that spending, 
holding support from all levels of government constant. It then 
compared the result with incomes in that year, taking into account 
projections of real income growth. The share of average household 
income going to water bills in 2019, CBO estimates, would be 0.6 
percent and 0.9 percent under the low- and high-cost scenarios, 
respectively.
    Of course, averages can mask important differences in individual 
cases (see Figure 1). For example, half of all households spent 1 
percent or less of their income on water bills in the late 1990s while 
others spent significantly more.
                  comparing cbo's and win's estimates
    The WIN coalition's estimates of future investments in drinking 
water and wastewater infrastructure do not measure costs either as 
financed or in terms of resource costs. When its estimates for the 
2000-2019 period are expressed in terms of costs as financed, they are 
close to CBO's for the high-cost case.
    For each year of the period, WIN's estimates add the cost of that 
year's pay-as-you-go investments to the total debt service (principal 
plus interest, in constant dollars) to be paid in later years for newly 
financed investment.7 Thus, where a costs-as-financed 
estimate includes the current debt service paid on past investment, 
WIN's estimates include future debt service on current investment--much 
of which will be paid after 2019.
---------------------------------------------------------------------------
    \7\ Equivalently, WIN's annual estimate combines the current 
resource costs for all of that year's investments and the sum (in real 
dollars) of all future interest costs for the portion of the 
investments financed by borrowing.
---------------------------------------------------------------------------
    The impact of that difference is substantial (see Table 2). WIN's 
published estimate of average annual drinking water investment needs 
from 2000 to 2019 is $26 billion (in 2001 dollars); using costs as 
financed reduces the estimate by about 18 percent, to $21.4 
billion.8 The reason for the decrease is that the cohorts of 
investment financed yearly from 1980 through 1999, and still being paid 
off from 2000 through 2019, are smaller than the new cohorts that are 
projected to be financed during the latter period. When expressed in 
comparable terms, WIN's estimate is roughly 6 percent and 84 percent 
higher, respectively, than the estimates for CBO's high- and low-cost 
cases.
---------------------------------------------------------------------------
    \8\ As originally published, WIN's estimate was expressed in 1997 
dollars and was $24 billion. Note that the revised costs-as-financed 
estimate of future investment needs merely reframes results from WIN's 
own analysis and does not change any modeling assumptions.

              TABLE 2. CBO'S AND WIN'S ESTIMATES OF INVESTMENT NEEDS FOR DRINKING WATER, 2000-2019
                                          (In billions of 2001 dollars)
----------------------------------------------------------------------------------------------------------------
                                                                      CBO                Water Infrastructure
                                                         ----------------------------           Network
                                                                                     ---------------------------
                                                            Low-Cost      High-Cost                   Costs-as-
                                                              Case          Case        Published     Financed
                                                                                        Estimate      Estimate
----------------------------------------------------------------------------------------------------------------
Average Annual Investment Need..........................         11.6          20.1            26          21.4
Increase Above Recent ``Baseline'' Investment...........     -0.2 \1\       8.3 \1\        13 \2\   9.4 \1\,\3\
----------------------------------------------------------------------------------------------------------------
SOURCES: Congressional Budget Office; Water Infrastructure Network.
\1\ Relative to a 1999 baseline.
\2\ Relative to a 1996 baseline.
\3\ CBO's approximation of WIN's results.

    Similar contrasts emerge in comparing average future investment 
with baseline spending. Again, WIN's estimate of the difference between 
the two levels of investment drops significantly--from $13 billion per 
year to $9.4 billion--when it is expressed in terms of costs as 
financed. And again, the latter figure is roughly $1 billion higher 
than the estimate for CBO's high-cost case and $10 billion above the 
estimate for its low-cost scenario.9
---------------------------------------------------------------------------
    \9\ CBO did not have enough information to directly calculate WIN's 
own estimate of 1999 debt service, a key component of baseline spending 
in costs-as-financed terms. Instead, CBO approximated it by multiplying 
WIN's estimate of average 2000-2019 costs for annual debt service on 
pre-2000 investments by a scaling factor that it obtained from a mock 
re-creation of WIN's model. The resulting estimate of baseline spending 
as it would have been calculated in WIN's analysis is $12.0 billion, 
which is very close to the estimate of $11.8 billion used in CBO's 
scenarios.
---------------------------------------------------------------------------
    The fact that WIN's estimates are close to those of CBO's high-cost 
case when both are expressed in comparable terms should not be 
interpreted as independent support for estimates of that magnitude. CBO 
and WIN used the same modeling approach, and CBO's high-cost scenario 
used specific assumptions that are broadly similar to 
WIN's.10 Thus, it is not surprising that the resulting 
estimates are also similar. The lesson that CBO draws from comparing 
the three estimates is that under the basic framework of the modeling 
approach, fairly pessimistic assumptions are required to obtain 
estimates as high as WIN's.
---------------------------------------------------------------------------
    \10\ CBO's high-cost case differs from WIN's scenario not only in 
its easier borrowing terms and savings from increased efficiency but 
also in its higher costs for complying with federal standards for 
drinking water quality and somewhat greater reliance on pay-as-you-go 
funding.
---------------------------------------------------------------------------
    Given WIN's estimates, it is also not surprising that the coalition 
sees water bills as accounting for a larger share of future household 
budgets than CBO does. In particular, WIN projects that 22 percent of 
households will be paying more than 4 percent of their income for water 
services by 2009 (halfway through the study period) and talks more 
generally about ``a third or more of the population'' reaching that 
level as rates continue to adjust. (The fraction of households paying 
more than 4 percent of their income is simply one of many summary 
measures that can be derived from the distribution of water bills. 
There is no economic or scientific significance to 4 percent as the 
threshold at which water bills become ``unaffordable.'') 11 
In contrast, CBO's estimates for the end of the study period in 2019 
show 11 percent of households paying above 4 percent in the low-cost 
case and 21 percent doing so in the high-cost case.
---------------------------------------------------------------------------
    \11\ WIN chose 4 percent on the basis that EPA has, at various 
times, used 2 percent of median household income as a benchmark in 
evaluating the ``affordability'' of average rates charged by both 
drinking water and wastewater systems. But in a community whose water 
systems charged rates that together collected 4 percent of median 
household income, many households with income below the median would 
probably be paying more than 4 percent. Thus, there is no logical 
connection between the EPA and WIN benchmarks.
---------------------------------------------------------------------------
    Part of the difference between CBO's and WIN's projections lies not 
in the different estimates of future levels of investment but simply in 
different conclusions about current spending. CBO estimates that 7 
percent of households paid more than 4 percent of their income for 
water services in the late 1990s; using other data sources, WIN 
estimates that 18 percent paid that much. WIN's approach is more 
limited, in two respects. First, the approach uses data only from the 
state of Ohio, which WIN finds to be representative of the nation as a 
whole in its costs for drinking water relative to household income. 
Second, the approach relies on system-level data (specifically, data 
from 1997 on drinking water and wastewater charges for using the 
equivalent of 250 gallons per day) rather than on the actual bills paid 
by individual households based on their own use. WIN's method may bias 
its results if low-income households tend to use less than 250 gallons 
of water per day.
    In conclusion, CBO agrees with the consensus of industry experts 
that the nation's drinking water systems will require additional 
investment in the decades to come. But CBO's estimates make clear that 
the timing of the increase is not at all certain, nor is its ultimate 
size predictable, once savings from improved management and new 
technology are taken into account. Similarly, CBO agrees that higher 
rates for drinking water and wastewater services over the next 20 years 
may lead households to pay a larger share of their income for them. 
However, CBO's estimates of the potential impact higher rates would 
have on households are much smaller than those reported by the WIN 
coalition. Moreover, economists would argue that such considerations 
should be addressed through policies that redistribute income--not 
those that manipulate the price of water.

[GRAPHIC] [TIFF OMITTED] 79463.001

    Mr. Gillmor. Thank you very much, Mr. Beider.
    Mr. Dave Wood of the General Accounting Office.

                   STATEMENT OF DAVID G. WOOD

    Mr. Wood. Thank you, Mr. Chairman. I am pleased to be 
here.Over the past few years, GAO has done a body of work 
related tothe Safe Drinking Water Act, designed to help provide 
the Con-
gress with information on the nature of problems faced by 
waterutilities, and how well existing programs are working.
    In addition to reviewing EPA's activities, on several 
occasions wehave used nationwide surveys to obtain information 
about how theAct is being implemented on the ground.
    My testimony today is based primarily on two recent 
reports, and discusses three issues pertinent to assessing the 
Nation's drinking water infrastructure needs. First, the 
precision of EPA's most recent estimates of national and State 
level needs.
    Second, the States' use of their drinking water State 
Revolving Loan Funds to assist communities that the States 
define as disadvantaged. And, third, the amounts of assistance 
that other Federal agencies and States provide for water 
infrastructure.
    On the first matter, we found that EPA took a number of 
steps to ensure that it gathered valid data with which to 
estimate the infrastructure needs of drinking water systems. 
However, we also observed that EPA may not have achieved its 
target level of precision for those estimates, which was 
generally to come within 10 percent of the actual need for 
reasons associated with some of its sampling methods.
    Because of its importance to the allocation of funds to 
States under the Revolving Loan Program, we recommended that 
EPA calculate the precision of its estimates, and determine 
whether it should revise its methods for the next drinking 
water needs survey in 2003.
    EPA concurred that such calculations would be helpful and 
indicated that it would take this into account when designing 
the 2003 survey. Regarding the second issue, we found that the 
States have made limited use of their options to use loan 
subsidies under their drinking water revolving funds to help 
disadvantaged communities.
    Specifically, we found that as of December 2000, 21 States 
offer additional loan subsidies, such as forgiving a portion of 
the loans. But only 14 States have actually provided loan 
subsidies for disadvantaged communities.
    Another 10 States offered longer repayment terms for 
disadvantaged communities. The 19 States that had not 
established such programs cited reasons such as concerns about 
depleting the revolving funds, the availability of below market 
rate loans to all fund borrowers, and the availability of other 
Federal or State assistance for disadvantaged communities.
    This brings me to the third and final issue discussed in my 
testimony. In November, we reported on the financial aid made 
available for both drinking water and waste water 
infrastructure by EPA, other Federal agencies, and State 
programs.
    We gathered this information for a 10 year period, fiscal 
years 1991 through 2000. Our State data do not include four 
States that did not respond to our survey. We found that EPA 
was the main provider of Federal assistance, contributing about 
$3.7 billion in drinking water State revolving fund grants, and 
about $16.6 billion for the similar Clean Water Act program.
    The States had contributed about $10.1 billion to match 
those funds. However, other Federal agencies also provided 
significant amounts of financial aid. The Departments of 
Agriculture, Housing and Urban Development, and Commerce, as 
well as a few other agencies, made about $19 billion available 
for water infrastructure in the form of grants, direct loans, 
or guaranteed loans.
    About 11 percent of this assistance was specifically for 
drinking water facilities. Another 40 percent was available for 
either drinking water or waste water facilities. Some of this 
assistance was directed primarily to distressed or lower income 
communities.
    Finally, the States had collectively made about $9.1 
billion in grants and loans under State sponsored programs, and 
another $4.4 billion in loans backed by State bond issues.
    Excluding the required matching contributions for the State 
revolving loan fund programs, about 30 percent of the State 
assistance was specifically for drinking water facilities, and 
another 26 percent was available for either drinking water or 
waste water facilities.
    In closing, Mr. Chairman, I would like to mention that we 
have work underway in which we have sent surveys to several 
thousand drinking water and waste water utilities to obtain 
information on their funding sources and their financial 
planning practices.
    We anticipate reporting on that work later this summer. 
That concludes my prepared remarks. I will be happy to respond 
to any questions that you may have.
    [The prepared statement of Dave Wood follows:]
 Prepared Statement of David G. Wood, Director, Natural Resources and 
          Environment, United States General Accounting Office
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
testifying before you today as you consider the infrastructure needs 
facing the nation's drinking water systems. As you know, the U.S. 
Environmental Protection Agency (EPA) is required to conduct an 
infrastructure needs assessment every 4 years to estimate the future 
capital investment needs of local drinking water systems. In its most 
recent national survey, EPA estimated that nearly $151 billion will be 
needed over the next 20 years to repair, replace, and upgrade the 
nation's 55,000 community water systems. The needs assessment survey, 
which EPA uses to estimate infrastructure needs for each state, serves 
as the basis for EPA's grants to the states under the Drinking Water 
State Revolving Fund (DWSRF) program. This program helps communities 
finance the infrastructure projects needed to comply with federal 
drinking water regulations and protect public health. EPA requests 
annual appropriations to capitalize the states' revolving loan funds 
and then makes specific allotments to each state. The states, which are 
required to match a portion of the grants, use the funds to make low-
interest loans to their local water systems; as the loans are repaid, 
the states' funds are replenished, enabling them to make loans to other 
eligible drinking water projects. For projects located in communities 
that qualify as ``disadvantaged,'' the states may extend loan repayment 
periods or use a portion of their grants to provide additional 
subsidies.
    In addition to EPA, a number of federal agencies provide financial 
assistance for drinking water facilities through a variety of grant and 
loan programs, some of which also may be used for wastewater 
facilities. Further, some states sponsor their own financial assistance 
programs for local drinking water and wastewater facilities.
    My testimony today discusses several issues critical to assessing 
the nation's drinking water infrastructure needs: (1) the precision of 
EPA's most recent estimate of drinking water infrastructure needs, (2) 
states' use of EPA's drinking water state revolving funds to aid 
disadvantaged communities, and (3) the amounts and types of drinking 
water infrastructure funding EPA, other federal agencies, and the 
states have made available. The information provided in this testimony 
is based on two recently-issued reports: our January report for this 
subcommittee and committee 1 and our November 2001 report on 
federal and state financial assistance for water 
infrastructure.2 We focused on certain aspects of EPA's 
methodology in reviewing the agency's needs assessment, specifically 
the impact of sampling on the estimate's precision. In addition, we 
surveyed all 50 states to determine how they use their drinking water 
state revolving loan funds to assist disadvantaged communities. 
Finally, we obtained information on federal and state drinking water 
and wastewater infrastructure funding over a 10-year period (fiscal 
years 1991 through 2000) by collecting data from the nine federal 
agencies responsible for the majority of the federal assistance and, 
using a detailed questionnaire, surveying the states to collect 
information on state-sponsored programs. Forty-six states responded to 
our funding survey. We converted the annual amounts reported by the 
federal agencies and the states to constant year 2000 dollars.
---------------------------------------------------------------------------
    \1\ U.S. General Accounting Office, Drinking Water: Key Aspects of 
EPA's Revolving Fund Program Need to Be Strengthened GAO-02-135 
(Washington, D.C.: Jan. 24, 2002)
    \2\ U.S. General Accounting Office, Water Infrastructure: 
Information on Federal and State Financial Assistance GAO-02-134 
(Washington, D.C.: Nov. 30, 2001)
---------------------------------------------------------------------------
    In summary, our work has shown the following:

 EPA took a number of steps to help ensure that it collected 
        valid data to estimate drinking water infrastructure needs, 
        such as conducting site visits to selected systems and asking 
        states to review supporting documentation. However, EPA and 
        other users of the needs assessment cannot tell how closely the 
        estimates reflect actual state-by-state needs because EPA did 
        not calculate the precision of the estimates. EPA set a target 
        level of precision--generally, the agency wanted to be 95 
        percent certain that its estimates were within 10 percent of 
        the ``true'' needs. We found indications that the level of 
        uncertainty was higher than EPA's target level of precision, 
        possibly by a considerable amount, for reasons associated with 
        some of EPA's sampling methods. Because the results of the 
        survey are used to estimate both national and state-level 
        needs, they can influence the level of congressional 
        appropriations for the drinking water state revolving fund 
        program, and they form the basis for EPA's allotment of these 
        funds to the states. Accordingly, we recommended that EPA 
        calculate and report the level of precision actually achieved 
        in its recent needs assessment, and determine what 
        implications, if any, its findings have on the methodology to 
        be used to conduct future needs assessment surveys. EPA 
        concurred that such a calculation would confirm whether the 
        survey met its precision targets and stated that it would 
        revisit the issue in the design of the 2003 survey.
 Thirty-one states have established programs under their 
        revolving loan funds to assist disadvantaged communities, 
        according to the results of our 50-state survey. Of the states 
        with programs, 21 provided about $94 million in special 
        subsidies--mainly loan principal forgiveness--and 23 offered 
        extended loan terms. While criteria for defining disadvantaged 
        communities vary, states typically use some measure of 
        household water rates relative to a community's median 
        household income. In addition, states reported that other 
        factors, such as concerns about depleting the fund and the 
        availability of assistance from other federal and state 
        sources, influenced their decisions to offer assistance to 
        disadvantaged communities under the revolving fund program. 
        Because providing additional loan subsidies can affect the 
        extent to which states' revolving loan funds are replenished--
        and therefore potentially the extent to which future federal 
        funds will be requested--we attempted to estimate of the number 
        of systems potentially eligible for such assistance. On the 
        basis of limited information provided by the states, we 
        estimate that about 28 percent of the nation's smallest water 
        systems could qualify for additional subsidies.
 In fiscal years 1991 through 2000, nine federal agencies made 
        available about $44.0 billion in grants, loans, and loan 
        guarantees for drinking water and wastewater capital 
        improvements. Of this amount, EPA provided about $3.7 billion 
        in drinking water state revolving loan fund grants and about 
        $16.6 billion under a similar program for wastewater 
        facilities. EPA's assistance, combined with that of three other 
        agencies--the Departments of Agriculture, Housing and Urban 
        Development, and Commerce--accounted for about 98 percent of 
        the total federal assistance. About 11 percent of the federal 
        aid was specifically for drinking water facilities and another 
        40 percent was for either drinking water or wastewater 
        facilities. Also, according to responses to our survey, state 
        governments made a total of about $25 billion in state funds 
        available for water infrastructure programs over the 10-year 
        period, including over $10 billion to match EPA's 
        capitalization grants. State-sponsored grant and loan programs 
        accounted for about $9.1 billion of the states' contributions, 
        including $800 million specifically designated for drinking 
        water facilities and $6.3 billion that could be used for either 
        drinking water or wastewater facilities (and in some cases for 
        other types of infrastructure projects). In addition, states 
        reported that they made another $4.4 billion available for 
        loans by selling general obligation and revenue bonds, and 
        contributed about $1.4 billion from other state sources for 
        purposes such as matching non-EPA federal funds and financing 
        state-designated specific drinking water or wastewater 
        projects.
Background
    Under the 1996 amendments to the Safe Drinking Water Act, EPA is 
required to conduct an infrastructure needs assessment every 4 years to 
estimate the future capital investment needs of water systems eligible 
for assistance through the DWSRF program.3 Of the estimated 
$150.9 billion capital investment needed according to EPA's most recent 
survey, 80 percent ($119.7 billion) is linked to projects involving the 
installation, upgrade, and replacement of the basic infrastructure 
needed to deliver safe drinking water to the public. The remainder of 
the estimated needed investment--$31.2 billion, or about 20 percent--
will go to projects directly associated with existing, proposed, or 
recently issued regulations.
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    \3\ Eligible systems include community water systems and not-for-
profit noncommunity water systems. Community systems serve at least 25 
people or 15 connections year-round. Noncommunity systems serve at 
least 25 people for more than 60 days but less than year-round.
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    Water systems vary in size, which is often measured by the number 
of customers they serve. In its most recent survey, EPA obtained 
information from 100 percent of the largest 1,111 community water 
systems (those serving more than 40,000 people) and samples of the 
remaining 7,534 medium systems (those serving from 3,301 to 40,000 
people) and 44,373 small systems (those serving 3,300 or fewer people). 
Small water systems represent over 80 percent of all community water 
systems, but they only account for about 22 percent of the estimated 
infrastructure needs. In contrast, the largest water systems represent 
about 2 percent of the community systems and account for nearly 44 
percent of the needs.4
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    \4\ For both large and small systems, these percentages are 
calculated excluding the estimated $9.3 billion in needs associated 
with proposed or recently promulgated regulations.
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    Subsidized loan assistance is an integral part of the DWSRF program 
in that the interest rates that states offer to local water systems 
must be at or below the current market rate.5 In addition, 
the Congress has authorized states to use an amount equal to up to 30 
percent of their DWSRF capitalization grants to provide additional 
subsidies to communities that qualify as ``disadvantaged'' under state-
defined affordability criteria. States with disadvantaged community 
programs may opt to forgive a portion of the loan principal or issue a 
loan at a negative interest rate. States also have the option of 
extending the loan repayment period from the standard 20 years to up to 
30 years, provided that the repayment period does not exceed the 
expected design life of the project.
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    \5\ According to EPA, the weighted average interest rate of DWSRF 
loans in 2001 was 2.4 percent, or about 3 percent lower than the market 
rates reported by the states.
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    U.S. drinking water and wastewater systems encompass thousands of 
treatment facilities, collection facilities, and related works and well 
over a million miles of pipes and conduits. While the investment, made 
over decades, in these facilities is enormous, even more funds will be 
needed in the future to support efforts to maintain clean and safe 
water. The Water Infrastructure Network--a consortium of industry, 
municipal, and nonprofit associations--recently estimated needs of up 
to $1 trillion over the next 20 years for drinking water and wastewater 
systems combined, when both the capital investment needs and the cost 
of financing are considered. User rates serve as the major source of 
facilities' financing, but both federal and state government agencies 
offer financial support as well. In the 107th Congress, legislation has 
been introduced in both the House and the Senate that would increase 
the amount of federal assistance available through EPA's revolving loan 
fund programs.
EPA Took Steps to Validate Needs Data, But Did Not Calculate the 
        Precision of Its Estimates
    The 1996 amendments to the Safe Drinking Water Act require EPA to 
use the results of its most recent needs assessment survey to allocate 
the amount of each state's annual DWSRF allotment. EPA allocates the 
DWSRF funds on the basis of each state's share of the total estimated 
national need, except that each state receives a minimum share of 1 
percent. According to EPA, its periodic surveys are therefore intended 
to provide ``statistically precise'' estimates of the needed capital 
investments, not just in total for the nation, but within each state.
    EPA took a number of steps to ensure that it collected valid 
information about infrastructure needs at local water systems, and the 
cost of addressing those needs. For example, EPA took the following 
measures:

 For large and medium-sized systems, EPA used a questionnaire 
        to collect information on capital projects needed to protect 
        the public health. According to EPA's report to the Congress, 
        6 the agency asked the surveyed water systems to 
        provide detailed information on each project including 
        documentation explaining (1) why it is needed, (2) the basis 
        for the project (e.g., whether it addressed a current or future 
        need), and (3) the project's estimated cost (or enough 
        information on the design capacities so that EPA could use a 
        model to estimate the cost.)
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    \6\ U.S. Environmental Protection Agency, Drinking Water 
Infrastructure Needs Survey Second Report to Congress EPA 816-R-01-004 
(Washington, D.C.: February 2001), p. 58.
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 For the smallest water systems, EPA sent trained water system 
        specialists on site visits to collect data after deciding that 
        specialists would provide better information than a 
        questionnaire because small systems generally have neither the 
        data nor personnel to complete a questionnaire of this type.
    In the case of the large and medium-sized systems, EPA obtained 
information from a sufficient number of systems to estimate 
infrastructure needs on a state-by-state basis. (EPA surveyed 100 
percent of the largest water systems--those serving populations of more 
than 40,000--and a statistical sample of medium-sized systems, which 
amounted to about one-third of the systems serving populations from 
3,301 to 40,000.) For these systems, which typically comprise the 
majority of a state's needs, EPA set a precision target of plus or 
minus 10 percent, at the 95 percent confidence level. This means that 
EPA wanted a 95 percent likelihood that its estimate of the needed 
capital investment in a particular state would fall within 10 percent 
of the actual or ``true'' need for that state.
    For the small systems, the agency's precision target for the 
national-level estimate was similarly set at plus or minus 10 percent 
at the 95 percent confidence level. EPA officials explained that the 
agency did not have the resources to send specialists to enough small 
systems to get an accurate picture of small-system needs on a state-
level basis. (Specifically, EPA estimated that it would have to conduct 
site visits at approximately 22,000 small water systems to collect 
enough data to estimate needs on a state-by-state basis.) Instead, EPA 
selected a sample of about 600 small water systems for these site 
visits. EPA used the results of these visits to calculate a national-
level estimate of small system infrastructure investment needs. EPA 
then apportioned this estimated total among the states on the basis of 
the number of each state's small systems, categorized by population 
served and type of water source.
    In an effort to assess the precision of EPA's needs estimates, we 
performed a limited review of EPA's methodology, focusing on the impact 
of sampling on the estimate's precision. We concluded that EPA probably 
did not achieve its intended level of precision. More specifically, we 
found indications that the level of uncertainty, or sampling error, 
7 was higher than EPA's target level of precision, possibly 
by a considerable amount. For example, we found that:
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    \7\ Sampling error is a measure of the amount of uncertainty that 
exists about the true cost when costs are estimated from a sample of 
systems rather than from data collected from all systems.

 The agency's approach did not account for the fact that it 
        extensively used average costs estimated from models when 
        calculating its sample size.8 Thus, EPA's sample 
        sizes were probably too small, and it is likely that EPA did 
        not collect data from enough systems to achieve its precision 
        target.
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    \8\ For example, in its current needs assessment, EPA had to rely 
on modeling--and substituted the average costs generated by the 
models--for 67 percent of the capital projects identified in its needs 
survey, including over 80 percent of the projects associated with small 
water systems. Modeling was necessary because project-specific 
documentation was not available in many instances.
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 Even though EPA's technical experts believed that a simple 
        random sample 9 would be required to achieve the 
        target level of precision for small-system needs, EPA deviated 
        from this sampling methodology in two important ways. First, to 
        avoid the travel costs associated with visiting about 600 
        randomly selected systems located throughout the country, EPA 
        used statistical sampling to select 100 geographical areas and 
        then chose six systems within each area. Although an acceptable 
        approach, such a statistical sampling technique can require a 
        considerably larger sample size than when simple random 
        sampling is used to achieve the desired level of precision. EPA 
        did not increase its sample size to account for the change in 
        technique. Second, based on recommendations from an advisory 
        workgroup,10 EPA intentionally selected at least one 
        area in each of the 50 states, Puerto Rico, and the U.S. Virgin 
        Islands. Such geographical constraints had the potential of 
        increasing the sampling error, thereby reducing the level of 
        precision of EPA's estimate.
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    \9\ In a simple random sample, each system has an equal chance of 
being included in the sample.
    \10\ The workgroup consisted of state, American Indian, Alaskan 
Native Village, Indian Health Service, and EPA representatives.
---------------------------------------------------------------------------
    Although EPA has calculated and reported the actual precision 
levels for other surveys, EPA officials told us that doing so for the 
most recent drinking water needs assessment would not be worthwhile, 
because it would not affect the allocation of DWSRF funds to the 
states. In addition, according to an EPA official responsible for 
managing the periodic needs surveys, EPA has already invested 
approximately 4 years and $3.6 million to implement its most recent 
assessment and summarize the results. The official said that 
calculating the actual precision of the cost estimates would cost at 
least an additional $30,000 to $40,000. Moreover, actually achieving 
the precision target could cause the agency to incur further costs, 
depending on how many additional site visits were needed.
    On the other hand, there are arguments in favor of calculating the 
precision of EPA's estimates. A number of leading survey research 
associations advocate for the calculation and reporting of the 
precision level to fully inform users of a sample's 
limitations.11 More importantly, determining the precision 
level of its estimates could help EPA identify any needed changes in 
its survey methodology--for example, larger or differently selected 
samples designed to minimize sampling error--to improve the future 
surveys required by the Safe Drinking Water Act. In commenting on a 
draft of our January report, EPA agreed that the calculation of 
confidence limits would confirm whether the survey met its precision 
targets. EPA also stated that it would fully consider our 
recommendation and that it would revisit the issue in the design of the 
2003 survey.
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    \11\ The American Association for Public Opinion Research, ``in the 
spirit of upgrading current survey practice,'' has promulgated a list 
of best practices that includes reporting a measure of each estimate's 
precision along with the estimate, rather than reporting only the 
statistic itself. In addition, the Council of American Survey Research 
Organizations' code of standards and ethics requires that estimates of 
sampling error be calculated and ``available.''
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States Have Made Limited Use of the Optional DWSRF Provision to Assist 
        Disadvantaged Communities
    Under the 1996 amendments to the Safe Drinking Water Act, the 
Congress authorized states to use an amount equal to up to 30 percent 
of their DWSRF capitalization grants to provide additional subsidies to 
communities that qualify as ``disadvantaged.'' The subsidies may take 
the form of forgiving a portion of the loan principal or issuing a loan 
at a negative interest rate.12 States have the flexibility 
to develop their own criteria to define a disadvantaged community. 
States with disadvantaged community programs typically use some measure 
of household water rates relative to the community's median household 
income, allowing the states to assess the impact of capital project 
debt on the community's water rates and measure the project's 
affordability.
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    \12\ States may also extend the loan repayment period from the 
standard 20 years to up to 30 years, provided that the repayment period 
does not exceed the expected design life of the project. While an 
extended loan term makes financing a project more affordable to a 
community by reducing the amount of monthly payments, it is not 
considered a loan subsidy.
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According to our state survey:
 Thirty-one states have adopted a disadvantaged community 
        program and offer assistance in the form of loan subsidies or 
        extended loan terms. Three more states reported plans to offer 
        such assistance as part of their DWSRF programs within the next 
        3 years. As of December 31, 2000, 25 of the 31 states had 
        provided assistance to qualified communities.
 Of the 31 states with a disadvantaged community program, 27 
        have adopted criteria that consider local water rates, often in 
        conjunction with a community's median household income. In 
        total, 21 states use median household income as a criterion in 
        determining whether communities qualify as 
        disadvantaged.13
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    \13\ The state of Utah also reported an income-based criterion, but 
the state uses the median adjusted gross income rather than household 
income.
---------------------------------------------------------------------------
 Most states that have a disadvantaged community program offer 
        principal forgiveness or extended loan terms for capital 
        improvement projects. States rarely offer negative interest 
        rate loans to disadvantaged communities. (According to state 
        DWSRF officials, they find this option difficult to explain to 
        local communities and difficult to administer.)
 Of the 14 states that had provided loan subsidies, 
        14 only Maine, which had used 23 percent of its 
        grants for assistance to disadvantaged communities, came close 
        to reaching the 30 percent cap.
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    \14\ Although 21 states offer subsidy assistance in their 
disadvantaged community programs, only 14 states have actually forgiven 
a portion of the loan principal or reduced the loan interest rate below 
zero percent.
---------------------------------------------------------------------------
    In our survey, we asked the states that had not adopted a DWSRF 
program for disadvantaged communities to report the reasons why. Of the 
19 states without disadvantaged community programs,
 16 states cited concerns about maintaining the body of the 
        fund or the long-term viability of the fund as a major (12) or 
        moderate (4) reason for not establishing a disadvantaged 
        community program;
 14 states cited the fact that their DWSRF program already 
        offers loans at below-market interest rates as a major (9 
        states) or moderate (5 states) reason for not offering 
        additional assistance to disadvantaged communities; and
 12 states cited the availability of other federal or state 
        programs to address the needs of disadvantaged communities as a 
        major (5 states) or moderate (9 states) reason for not 
        providing assistance through the DWSRF.15
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    \15\ Our responses do not add to 12 because some states cited the 
availability of both federal and state funding as reasons for not using 
their DWSRF to assist disadvantaged communities.
---------------------------------------------------------------------------
    Non-DWSRF financing from other federal and state sources is 
available to help disadvantaged communities, and many states coordinate 
with these sources to help disadvantaged communities secure the funding 
they need. According to the state drinking water officials we 
interviewed, disadvantaged communities often receive a combination of 
DWSRF and non-DWSRF funding to finance their drinking water projects. A 
significant amount of funding is available for local drinking water 
projects from other federal agencies and through state-sponsored grant 
and loan programs. In our survey on assistance to disadvantaged 
communities, more than half the states indicated that they provided 
some type of financial assistance for drinking water projects. Six of 
the 19 states without DWSRF-related disadvantaged community programs 
had state grant or loan programs intended specifically to help 
economically distressed communities to finance drinking water 
improvement projects.
    Because providing additional loan subsidies to disadvantaged 
communities can affect the rate at which states' revolving funds are 
replenished--and therefore potentially the extent to which future 
federal funds will be requested--we attempted to determine the 
proportion of the nation's community water systems that might qualify 
as ``disadvantaged'' and thus be eligible to receive special 
assistance. According to EPA officials, the vast majority of systems 
serving disadvantaged communities are likely to be small 
systems.16 Therefore, we used the same statistical sample of 
small water systems that EPA had selected for its infrastructure needs 
assessment. (A statistical sample allows generalizing the results to 
the universe of small systems, thereby obtaining a national estimate.)
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    \16\ Among other problems, small water systems often lack the 
economies of scale that make infrastructure projects more affordable at 
larger systems.
---------------------------------------------------------------------------
    We identified the specific systems included in EPA's sample--from 5 
to 34 systems in each state--and as part of our survey asked the states 
to determine which of those systems they would consider to be 
disadvantaged. We asked states that were able to apply their own 
criteria to determine whether each system initially qualified as 
disadvantaged or qualified as a result of the additional costs needed 
to improve it. Other states were asked to use GAO surrogate criteria 
(i.e., to qualify as ``disadvantaged,'' a community's water rates would 
have to exceed 1.4 percent of its median household income).
    Our effort met with limited success for several reasons. The 
primary reasons were that some states did not have the information 
necessary to readily make a determination about a system's 
disadvantaged status or they lacked the time and resources to collect 
the information for us.17 In total, we obtained information 
on a portion of EPA's sample representing 24,334 systems, or nearly 55 
percent of the 44,373 small community water systems in the United 
States. On the basis of EPA's sample and the states' determinations, we 
estimated that 6,925 systems, or about 28 percent of the 24,334 small 
systems reflected in the results of our survey, qualified as 
``disadvantaged.'' 18 However, the high non-response rate 
associated with this analysis left us without information on the 
systems representing the remaining 45 percent of the universe. As a 
result, we could not determine whether our findings matched the actual 
percentage of systems that would qualify as disadvantaged. 
Specifically, we had no way of determining whether the systems for 
which we had information were systematically different from those 
systems for which we lacked information in a way that would make the 
estimated percentage of disadvantaged communities higher or lower.
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    \17\ Determining which systems might fall into the disadvantaged 
category because of the high cost of a project, for example, would 
require a case-by-case analysis.
    \18\ Another way of looking at this is to compare the number of 
systems estimated to be disadvantaged (6,925) with the total number of 
small systems (44,373). Using this approach, we could conclude that 
``disadvantaged'' systems comprised a minimum of about 16 percent of 
small systems.
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Federal Agencies Made About $44 Billion Available for Drinking Water 
        and Wastewater Infrastructure, While States Provided About $25 
        Billion
    From fiscal years 1991 through 2000, nine federal agencies made 
about $44 billion in financial assistance available for drinking water 
and wastewater infrastructure projects. Of this amount, EPA provided 
about $3.7 billion in drinking water state revolving loan fund grants 
and about $16.6 billion under a similar program for wastewater 
facilities. EPA's assistance, combined with that of three other 
agencies--the Departments of Agriculture, Housing and Urban 
Development, and Commerce--accounted for about 98 percent of the total 
federal assistance. About 11 percent of the federal aid was 
specifically for drinking water facilities and another 40 percent was 
for either drinking water or wastewater facilities. Over 82 percent of 
the total assistance was provided in the form of grants; the remainder 
consisted of loans and loan guarantees. Although the programs differed 
in terms of eligibility criteria, allowable uses, and funding 
priorities, for the most part, the financial assistance was available 
to a broad range of entities.
    We use the term ``made available'' to encompass several forms of 
federal funding. Because of differences in the programs and in the ways 
that federal agencies account for their financial assistance, the 
information that best reflected the amounts made available for drinking 
water and wastewater facilities came from data on appropriations, 
obligations, or expenditures, depending on the agency and the specific 
program in question. For example, EPA's data include appropriated 
amounts for the revolving loan fund capitalization grants to the states 
for each year; the states may not have loaned the funds (i.e., actually 
made them available) to local water systems until after the end of the 
fiscal year in which they were appropriated. In contrast, the data for 
HUD and Commerce consist of obligated amounts--that is, the amounts of 
funds allocated by the agencies to drinking water and wastewater 
infrastructure projects during the fiscal year. For the loan programs 
of the Small Business Administration and USDA's Rural Utilities 
Service, the amounts represent the face value of the loans or loan 
guarantees that were available to be made for the fiscal year; however, 
because most of these loans are repaid, the ultimate cost to the 
federal government is significantly less than the face value.
    More specifically:

 EPA's financial assistance came primarily in the form of 
        grants to the states to capitalize the Drinking Water and Clean 
        Water State Revolving Funds. In addition, EPA provided $4.5 
        billion in grants for drinking water and wastewater projects 
        specifically designated in the appropriations process.
 USDA provided local communities $4.5 billion in grants, $7.1 
        billion in loans, and $550 million in loan guarantees. USDA 
        also provided $376 million in grants for water and wastewater 
        projects specifically designated in the appropriations process.
 HUD provided $4.4 billion in block grants--some directly to 
        large communities and others to states for distribution to 
        smaller communities--to be used for water and wastewater 
        projects. HUD provided another $39.9 million for specific 
        projects designated in the appropriations process.
 Commerce's Economic Development Administration provided $1.1 
        billion in grants to local communities for water and wastewater 
        infrastructure.
    The remaining federal assistance, which totaled about $1.1 billion 
over the 10 years, was provided by the Appalachian Regional Commission, 
the Federal Emergency Management Agency, the Department of the 
Interior's Bureau of Reclamation, the Small Business Administration, 
and the U.S. Army Corps of Engineers.
    In addition to the assistance available to disadvantaged 
communities under EPA's DWSRF program, other federal programs give 
priority to projects in economically distressed areas. For example, to 
be eligible for USDA assistance, facilities generally must serve rural 
areas with populations of 10,000 or less and must be unable to finance 
their needs from their own resources or obtain credit at reasonable 
rates and terms. Proposed projects must be located in economically 
distressed areas to obtain funding under Commerce's program, and 
projects in severely distressed areas are eligible for higher funding 
levels.
    According to our state funding survey responses, state governments 
made a total of about $25 billion in state funds available for water 
infrastructure programs from fiscal years 1991 through 2000. 
Specifically, the states reported that they collectively:

 Contributed about $10.1 billion to match EPA's capitalization 
        grants for the drinking water and wastewater state revolving 
        funds. This amount consisted of about $3.3 billion from state 
        appropriations or other state sources, and about $6.8 billion 
        that the states leveraged--that is, raised through the sale of 
        state-issued bonds backed by the funds.
 Made about $9.1 billion in grants and loan commitments under 
        state-sponsored programs, including $3.4 billion through a 
        variety of grant programs and $5.7 billion in 
        loans.19 The states reported having a total of 56 
        state-sponsored grant programs, 29 state-sponsored loan 
        programs, and 35 state-sponsored programs that include grants 
        and/or loans. Of this funding, $800 million was specifically 
        designated for drinking water facilities while $6.3 billion 
        could be used for either drinking water or wastewater 
        facilities or for other types of infrastructure projects.
---------------------------------------------------------------------------
    \19\ Approximately $1.8 billion of the state-sponsored loan 
programs were available for other local projects, such as solid waste 
disposal facilities, in addition to drinking water and wastewater 
infrastructure.
---------------------------------------------------------------------------
 Made another $4.4 billion available for loans by selling 
        general obligation and revenue bonds (15 states).
    In addition, the states reported that they contributed about $1.4 
billion from state appropriations, interest earnings, and other state 
sources for purposes, such as matching non-EPA federal funds and 
financing state-designated specific drinking water or wastewater 
projects.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to respond to any questions that you or other Members of the 
Subcommittee may have at this time.

    Mr. Gillmor. Thank you very much. Let me also apologize to 
the panel. I have had to leave a couple of times. I am also on 
the Financial Services Committee, which is holding a major 
mark-up right across the hall on the corporate responsibility 
bill, and so they come over here and grab me for a vote once in 
a while.
    Let me start with Mr. Grumbles. Yesterday, the New York 
Times published a story on a new assessment of drinking water 
and waste water needs. And, I understand that this assessment 
is now at OMB. And, recognizing that you don't work for OMB, 
can you assure me that EPA will work expeditiously within the 
administration to issue a final report on this matter?
    Mr. Grumbles. That's correct, Mr. Chairman. Our staff are 
in a very constructive and constant discussion and dialog with 
OMB on the GAP analysis report.
    Mr. Gillmor. Thank you very much. And, Mr. Beider, your 
report says that it is reasonable to assume that a large 
drinking water investment gap doesn't exist. Everybody else has 
been saying for some time that it does exist.
    Now, recognizing that you also provide a high case 
estimate, could you defend for a moment your low case estimate? 
And I guess some people would be wondering how you can be right 
on this, and everybody else can be wrong.
    Mr. Beider. I believe what we have done is provide a 
clearer picture of the range of uncertainty that surrounds 
attempts to estimate 20-year needs. The fact is, as we said 
last year in our testimony, that there is much that we don't 
know about the true state of the Nation's drinking water 
infrastructure.
    The estimates that have been done so far rely on simple 
national-level assumptions to try to make up for the lack of 
specific ground-level, system-by-system data. And when you look 
at the results that are generated by studies from the ground 
up, from system-by-system data, such as EPA's needs survey and 
the 20-system survey done by the American Water Works 
Association, those results are fully consistent with, if not 
even below, the low-cost scenario that CBO laid out in our 
testimony today.
    In terms of the national-level assumptions that have been 
made by people like the WIN coalition and that we also make in 
our scenarios, the key issue is the rate at which pipes will 
need to be replaced.
    The WIN assessment used an assumption of 1 percent per 
year, but that was drawn from a previous report done by Stratus 
Consulting for the American Water Works Association, which 
presented that figure as an assumption and also outlined a 
rationale for a completely different assumption of 0.6 percent 
per year. And that latter figure was the assumption that we 
used in our low case. When you put that in and some other 
reasonable assumptions about savings for efficiency 
improvements, and some of the assumptions about financing 
costs, the result is that the burden of investment costs may 
not increase on average over the next 20 years relative to what 
we are already used to spending.
    Again, that is only one possible outcome. We provide a low 
case and a high case to indicate what we think is the range 
bounding most of the likely possibilities.
    Mr. Gillmor. Let me follow up quickly, and this is maybe a 
broad question, but how do you think CBO's report can help 
guide the debate in this committee over drinking water 
infrastructure?
    In other words, if you were sitting in our place, what 
other data do you believe might be helpful to have?
    Mr. Beider. Well, I can think of a lot of data that would 
be helpful. It is harder to know what data you can actually 
expect to get your hands on soon. I would have to defer to my 
colleagues here on the panel and specifically at EPA, I think, 
to suggest what other information could be provided by the 
Nation's drinking water systems.
    Certainly, I think the study done by the American Water 
Works Association looking at 20 systems was a thorough job of 
analysis on a limited base of systems, and, again, I found the 
results from that study very interesting in coming up with much 
lower annual costs than had been provided from some of the 
previous analyses.
    Mr. Gillmor. Thank you very much. My time has expired, and 
the gentleman from New Jersey.
    Mr. Pallone. Thank you, Mr. Chairman. Mr. Grumbles, over 40 
days ago, every member on the Democratic side of the aisle sent 
Administrator Whitman a letter asking for answers to seven 
important questions relating to your office's role in ensuring 
the security of public water systems in the surrounding 
communities.
    And the response was due 1 month ago, but we have not 
received anything. So I just wanted to ask you why the EPA is 
stalling and failing to answer our questions, and try to get an 
answer of when you are going to get back to us.
    Mr. Grumbles. Congressman, I wouldn't say that the EPA is 
stalling. I would say that we are taking very seriously the 
thoroughness and the importance of the issues that are raised 
in that letter, and these are not routine, simple, questions 
that can be answered pretty quickly.
    So I apologize that the letter has not gotten back to you, 
but I can say that it is going through a thorough review, a 
policy review, and----
    Mr. Pallone. How about a date when you are going to get 
back to me? I was going to suggest tomorrow, but I am sure you 
will say that is not happening. So why don't you give me a date 
approximately?
    Mr. Grumbles. I know that it is kind of out of my hands, in 
terms of the pecking order as to who sends and signs the 
letter.
    Mr. Pallone. Why don't I suggest that you get back to us 
within the next 2 weeks.
    Mr. Grumbles. That is certainly understandable, and I will 
do whatever I can to make sure that we follow that.
    Mr. Pallone. All right. I appreciate it. Mr. Grumbles, in 
1999 the EPA released its drinking water infrastructure needs 
survey and found that $102.5 billion was needed now, and a 
total of $150 billion was needed over the next 20 years. You 
have stated that.
    Mr. Grumbles. Yes.
    Mr. Pallone. But how do you reconcile the huge need of more 
than $100 billion with the fact that the President's fiscal 
year 2003 budget only asks for $850 million, and that is less 
than 1 percent of the unmet needs.
    And also a shortfall of $150 million from the billion 
authorized by this committee for the State revolving loan fund. 
I mean, where are we going? It just seems that the needs are so 
out of proportion to what the administration is proposing in 
its budget.
    Mr. Grumbles. Congressman, a couple of things. One, in 
terms of the level of funding for the SRF that is in the fiscal 
year 2003 budget. As you know, that level is $850 million and 
its highest level that has been in requests from this or 
previous administrations for the Safe Drinking Water Act SRF.
    I think the administration is proud of the fact that this 
fiscal year budget that the drinking water and clean water SRFs 
combined is the highest request----
    Mr. Pallone. I am not arguing that, and I am not trying to 
be difficult. I guess I just feel like we keep talking about 
these huge amounts, and I am assuming that if we don't at least 
bump this up in terms of a higher authorization and higher 
budget that that means that either drinking water isn't going 
to be safe because the infrastructure needs won't be met.
    Or alternatively that the cost to rate payers will be 
incredibly increased, and I guess I am afraid of both. So 
comment on that. What is it going to mean if we don't 
increase----
    Mr. Grumbles. Well, you make some good points, and I think 
one of the important points that I would like to make is that 
we very much welcome constructive dialog with the authorizing 
committee, in terms of the authorization levels for the 
drinking water, as well as the Clean Water State Revolving 
Funds.
    In terms of trying to reconcile the fact that we say that 
$150 billion needs, and that we are also working on a gap 
analysis report, which has very large numbers in it, in terms 
of the gap, I think that really the important message is to 
keep in mind that we recognize that there is a Federal funding 
role and involvement.
    And we certainly are proud of the success and the track 
record of the State Revolving Fund that this committee 
established in the 1996 amendments. But one of the other things 
that we are trying to convey is, and I think most stakeholders 
will acknowledge this, we are missing the picture if we focus 
unduly on the level of Federal funding to address this issue.
    This is such a huge issue, and involves so many players, 
and it did not occur overnight. It has taken decades, a 
century, to get to this point.
    Mr. Pallone. Well, I understand all of that, but I guess 
what I would like--I guess you are pretty much saying that you 
think you are suggesting that is the most money that we are 
going to get out of the administration. I think that is what 
you are saying.
    But then what is the response as to whether or not the 
utilities are going to be able to meet the infrastructure needs 
with that level of Federal funding. Are they going to be able 
to do it? What is going to be the consequence, in terms of the 
safety of the drinking water?
    Mr. Grumbles. I think the response is going to be a couple 
of things. One is as people increasingly recognize of let's 
focus on the costs and not just the supply side, in terms of 
new infusions of Federal, State, or local dollars, but look at 
the costs.
    How can we enter into asset management structures or 
encourage more cost effective public-private partnerships. I 
think one of the important things that we want to emphasize is 
that in this opportunity, in terms of reauthorizing the 
infrastructure laws, the more we can promote fiscal 
sustainability, where those who are running the system actually 
look and manage their assets, look at more cost-based rates, 
and look at a water-shed approach that takes into account 
source water protection to try to reduce the costs at the end 
of the pipe in order to get the water clean.
    There are a variety of mechanisms in addition to just the 
new money from the Federal, State, or local sources. Mechanisms 
such as encouraging and really getting aggressive about 
research and development of technologies, improved and more 
cost effective technologies, asset management, more effective 
structuring of systems small and large, public and private.
    Essentially to get more bang for their buck. So that is 
part of the dialog that we are very enthusiastic about engaging 
in with this committee to try to whittle away at that gap, 
however large that gap actually is.
    But to make progress without reducing the standards that 
are required and that the American public wants, in terms of 
the Safe Drinking Water Act.
    Mr. Pallone. Thank you.
    Mr. Gillmor. The gentleman, Mr. Shimkus, for questions.
    Mr. Shimkus. Thank you, Mr. Chairman. Mr. Grumbles, I would 
like to put some positive aspects on the request by this 
administration for $850 million. Isn't it true that this 
exceeds the average amount authorized for the entire 8 years of 
the previous administration? If you take an average request, 
isn't $850 million more?
    Mr. Grumbles. I believe it is. As we were discussing, the 
level of the request is the highest level as well from this 
administration.
    Mr. Shimkus. And I would like just for my colleagues' 
benefit, I stumbled upon this. We did ask for a GAO report on 
water infrastructure, and that is dated November of 2001. And 
it is really amazing.
    From fiscal year 1991 to fiscal year 2000, nine Federal 
agencies made available about $44 billion in a variety of forms 
for drinking water and waste water capital improvements. The 
EPA provided $20 billion. The USDA provided local communities 
$4.5 billion in grants; and $10.1 billion in loans, and $550 
million in loan guarantees.
    HUD, $4.4 billion. Commerce and Economic Development, $1.1 
billion. The remaining Federal agencies, which total about $1.1 
billion over 10 years, was provided by the Appalachian Regional 
Commission, the Federal Emergency Management Agency, the 
Department of Interior's Bureau of Reclamation, the Small 
Business Administration, and the Army Corps of Engineers.
    So my question is, and this whole debate on the States' 
revolving fund, are we leaving some partners out?
    Mr. Grumbles. Well, I would feel a bit nervous about 
talking about other partners, in terms of Federal agencies. I 
try to keep myself limited to the EPA.
    Mr. Shimkus. But if we are talking about safe drinking 
water for the country, and you have nine partners, and we are 
talking about infrastructure, I don't think we are--the 
infrastructure needs are national, correct?
    Mr. Grumbles. Yes, sir.
    Mr. Shimkus. So we have a national need, and we are talking 
about one fund where there are nine other partners that are 
trying to meet these similar needs. There seems to be a 
disconnect for me.
    I think you would conclude--if you have national needs, 
then why aren't we including all nine partners in the 
assessment of what steps we are doing to meet those needs?
    Mr. Grumbles. Well, we take very seriously the partnership 
that we have with some of those other agencies, like the Rural 
Utility Service, particularly when it comes to rural and small 
town drinking water needs. We are partnering with them and 
other agencies as well.
    Mr. Shimkus. But let me interrupt, but I think the point is 
valid. If this is a need assessment for the Nation, and trying 
to indicate that this one fund is not meeting all the needs, 
and we have eight different additional agencies that are trying 
to do that, we are missing part of the equation.
    Would everyone--and not only you, but what about your 
colleagues on the panel? Do you agree with that?
    Mr. Beider. I would certainly say that, yes, if you are 
looking at the Federal policy context, you want to take account 
of all of the existing programs.
    Mr. Grumbles. And if I could just elaborate, Congressman. I 
think the response that I was giving as well to Congressman 
Pallone is that when we have $150 billion needs assessment, 
that is national, and it is not--our intent is certainly not to 
say that this is the dollar amount that should be the 
authorization level for the Safe Drinking Water Act SRF.
    It is more of a national assessment, and a separate 
question is how to go about at the Federal, State, and local, 
public and private sectors, how to respond to that need.
    Mr. Shimkus. And, Mr. Wood, would you like to respond?>
    Mr. Wood. Yes, I would just concur with my colleagues and 
say that you all are faced with a difficult task in trying to 
figure out how much to put into this SRF each year. But I would 
certainly want to take into account, if I were you, the streams 
of funding that are available from the other agencies.
    Mr. Shimkus. Let me--and I am treading in other 
jurisdictional areas, but do you think there is some 
inefficiencies and loss of buying power, and loss of focus 
because we have in essence nine different agencies involved in 
this issue?
    Mr. Wood. We have not done any work specifically directed 
to that issue, comparing one to another. What I can say is that 
a lot of those programs have somewhat different parameters.
    In other words, obviously the assistance provided by FEMA 
would be only to communities that have been hit by disaster. 
The USDA's programs are directed strictly at rural areas, and 
some of the Department of Interior's money is strictly for 
Indian water systems.
    So it is sort of compartmented, but again I would encourage 
looking at the whole picture as you are going about your work.
    Mr. Shimkus. And my final question would be, first, Mr. 
Grumbles, tell me the benefits or disadvantages of the direct 
grants versus the loan issue on the State Revolving Fund?
    I have actually dealt with it on the USDA rural development 
safe water rural water issues. I believe that they bring 
partnership. You do some granting and you do some loaning. What 
is your analysis of the percentage of both, and the benefits or 
the disadvantages?
    Mr. Grumbles. Well, that is a fundamentally important 
question to the whole debate, and I think where the 
administration is, is essentially where this committee ended up 
in 1996, and that was that rather than authorize a national 
grant program, or site specific grant programs, that there 
would be a drinking water State revolving fund modeled on the 
Clean Water Act State Revolving Fund.
    And then this committee and the Congress went even a step 
further and said we acknowledge, we recognize that there are 
specific situations, particularly disadvantages communities, 
where without undermining the corpus of the fund, the SRF, 
there should be the opportunity for States to exercise the 
flexibility to provide negative interest loans or principal 
forgiveness, mirroring in essence a grant in those specific 
situations where disadvantaged communities would not be able to 
avail themselves or get any use out of the loan.
    Mr. Shimkus. Thank you, Mr. Chairman. I will just say that 
those numbers that I gave didn't include the billions of 
dollars that the States had done themselves to address this 
problem also, and thank you, Mr. Chairman, and I yield back.
    Mr. Gillmor. Thank you.
    And does the gentleman from Texas have questions?
    Mr. Green. Yes, sir, Mr. Chairman. I appreciate the 
opportunity. I want to follow up my colleague with the 
information that $44 billion from these nine funds were spent, 
and the estimated need is $150 billion, does EPA coordinate 
with these other Federal funds, these other funds that 
provided, whether it be the Department of Agriculture, or 
whether it be HUD, or anyone else?
    And I know, for example, that we have cases where agencies 
say that we don't have the funding available, but you could 
apply over here, because maybe you fit in the Agriculture. Do 
you know if there is coordination between the EPA and these 
other funds?
    Mr. Grumbles. Congressman, it certainly is our intent to 
coordinate with the other agencies, and I know that we do 
coordinate with them, and in instances where we don't, I think 
OMB steps in to help us coordinate with the other Federal 
agencies.
    I know in particular with respect to affordability concerns 
that the EPA is in the process of entering into a memorandum of 
understanding with the rural utility service on being able to 
more effectively target financial assistance under the two 
programs toward small areas and adding compliance costs, 
particularly with arsenic.
    Mr. Green. Mr. Chairman, I think that our colleague brings 
up a food point that if there is a way that we can get 
information, and again it may not be in the purview of our 
jurisdiction, but to see if the coordination from the 
agencies--and maybe the CRS or GAO.
    I know that we always get the CBO from our committee, but 
maybe we could see if there is some coordination between these 
agencies. I hope that just common sense does it, but again I am 
glad that it was brought up in our committee.
    I was looking at what the State of Texas, the Water 
Development Board, and I come from a very urban area. So if we 
can't find it in one pot, we will try and find it somewhere 
else, whether it is the EPA, or HUD, or somewhere else.
    But I was looking at the list for my revolving fund in 
Texas, and we have $70 million available, but the requests are 
$606 million for the revolving loan fund. Is that pretty 
typical of urban States? Because I know that Texas and 
California, and New York, are high usage States, and might they 
have that much shortfall?
    And again these requests are from cities, water districts, 
throughout the State of Texas, and this is for the Revolving 
Loan Fund. This is not for grants.
    Mr. Grumbles. Two things. One, I would be most comfortable 
in saying that we would provide for the record and to your 
office a more specific, detailed response, because I certainly 
don't know off the top of my head as to what the levels or the 
percentages are, and how frequent they are.
    The second thing that I can say with confidence is that the 
States take very serious their responsibility to come up with 
their priorities and their lists of projects to receive 
assistance under the State Revolving Funds and they would 
certainly want to have more--I mean, they never have a problem 
coming up with needy and necessary important projects to 
receive funding.
    Mr. Green. Well, we can always come up with projects. It is 
funding them that is the frustration, because I know from my 
years in the State Legislature, we worked to provide the State 
matching for them, whether it be an urban area like Houston, or 
with some of our rural water systems, who provide it.
    And again in light of the big picture, where we are having 
drought in so much of the Western United States, and maybe even 
up in this area from what I understand, our Safe Drinking Water 
is even more important.
    And I want to make sure that we get a number for 
authorization that fits in with whether these other funds are 
available, but also that we are not seeing such a substantial 
shortfall in projects, as compared to what can actually be 
funded through the revolving fund on the State level.
    But let me in my time, Mr. Chairman, ask a question that I 
haven't heard, but one of the other issues that have come up 
since September 11 is our--like my colleague from New Jersey 
mentioned, the response to terrorism against our water supply.
    And I know again from our local experiences in the Houston 
area that we have redoubled efforts to make sure that our 
surface water supply has more security, and that there has been 
more vigilance.
    But I would just be interested whether it is in response to 
the letter, and anything that you can share with us today on 
what impact that may have on our need for additional funding, 
or additional authorization for safe drinking water.
    Is that something that we can build into it, and would that 
increase the authorization need?
    Mr. Grumbles. Well, in response to that, I know that some 
of the measures through enhanced security of drinking water 
facilities, a great number of the measures are currently 
eligible under the drinking water State revolving funds.
    And I could only assume that for each State, in terms of 
their needs when they are looking at implementing their plans 
as a result of their vulnerability assessments, that could lead 
to increased costs and a greater need within that State.
    That certainly is one of the issues, and one of the 
measures that EPA is taking very seriously, is using the funds 
that the Congress has appropriated to get the vulnerability 
assessments done, and also engage aggressively in training 
sessions, and work shops, disseminating information in a secure 
way to those who need the information to take measures to 
strengthen security at their facilities.
    Mr. Green. And our concern is making sure that we have a 
number for the authorization, and we will go back and see if we 
can find the money every year like we do.
    But just so we have all of this included in the need for 
authorization, and particularly including the other available 
funds that these nine agencies have so we can get a somewhat 
reasonable picture for an accurate authorization. Thank you, 
Mr. Chairman.
    Mr. Gillmor. Thank you. The gentlelady from New Mexico, 
Mrs. Wilson.
    Mrs. Wilson. Thank you, Mr. Chairman. Mr. Grumbles, I have 
several questions relating to the arsenic standard and its 
impact on our availability of safe drinking water, and I am 
sure that this is something that you expected and are prepared 
for.
    If not, I am going to ask that you get me answers to these 
questions in writing. The State of New Mexico has 2 million 
people, and the implementation of this standard with using 
current technologies is going to be between $400 million and 
$500 million in capital costs alone.
    So set aside the operating costs. That is just the up front 
costs. What kinds of reductions in depth does the EPA predict 
in New Mexico with the implementation of this standard? How 
many lives are you going to save?
    Mr. Grumbles. I am going to have to defer and provide that 
in writing to you, Congresswoman. I don't know the numbers for 
that.
    Mrs. Wilson. That is interesting that you don't. That is a 
pretty big chunk of change to be asking New Mexico to pay 
without knowing the answer. I have actually figured it out 
based on your own reports to us, and it has received very wide 
publication in New Mexico.
    The answer is two deaths over a period of 7 years, and you 
are asking us to raise our water bills $90 a month in small 
towns, and about $40 a month in Albuquerque, in larger towns. 
Two deaths over 7 years, $500 million.
    If you were a county commissioner in Bermiel County, New 
Mexico, and I said you have $500 million to spend to improve 
public health in New Mexico, would that be your priority?
    Mr. Grumbles. Well, I understand the question, but I don't 
know what my priorities would be if I were in that position, 
but clearly your point about cost effectiveness, I understand 
the point.
    Mrs. Wilson. The University of New Mexico just completed a 
study that looks at, and it will be published in Risk Analysis, 
which is an epidemiological journal, this month, and the EPA 
has been asked to comment on it and so far has declined to do 
so.
    If you would look at risk factors and epidemiology because 
of the increased trucks that are going to have to be trucking 
chemicals around and removing arsenic and so forth, the 
estimate is that we are going to actually lose more people from 
traffic accidents than we will gain from reductions in bladder 
cancer over the same period.
    So in fact you are going to have a net increase in depths 
because the public health impact is so small. Doesn't the EPA 
believe that all the water systems impacted by this rule will 
be able to meet the standard by the current compliance date of 
2006?
    Mr. Grumbles. Congresswoman, I think what the EPA believes, 
and we have heard very clearly from you and from other members 
who are taking a leadership role on this issue of affordability 
and balancing risk, while maintaining a national standard of 
protectiveness under the Safe Drinking Water Act, I think that 
the course that we have charted out has several components to 
it.
    One of them is to aggressively pursue the statute's 
provisions with respect to affordability and variance 
technologies.
    And on that front, what we are doing is that we are 
actively engaged in discussions with OMB and hopefully with SAB 
to get the Science Advisory Board working on flushing out 
exactly what criteria should be used for the affordability 
determination, which is integral to the opportunity for 
variances and variance technologies.
    And on the exemptions or extensions of time, I think our 
belief is that using the existing regulations, and also having 
workshops with rural and small communities that are adversely 
impacted, they feel very concerned about the arsenic standard, 
is walking through with them the procedures and streamlining 
the procedures so that if extensions or exemptions, or 
variances, are applicable, they will be able to avail 
themselves of those.
    Mrs. Wilson. With respect to treatment technologies, have 
there been any large scale demonstrations of the treatment 
technologies that the EPA currently--that are currently 
available, and what large scale demonstration projects do you 
have for innovative new technologies on your R&D plan?
    Mr. Grumbles. I want to be able to respond to you, and I 
also want to say at the outset that I am not really sure how 
you define large scale, and so what I would welcome is the 
opportunity to work with you, and to provide to the committee 
some more specific details where we have various assumptions as 
to how you define large scale.
    I do know that one of the specific components of the plan 
that we are pursuing on R&D affordable technologies is to have 
$8 million specifically devoted to demonstration projects so 
that it is not just something left to discussions or paper 
research, and that we are actually out there funding 
demonstrations as quickly as we can, cost effective and 
affordable technologies.
    Mrs. Wilson. Does the EPA have an R&D road map for what are 
the most promising technologies for reducing the costs of 
arsenic removal?
    Mr. Grumbles. After this hearing, I certainly will contact 
the Office of Research and Development, which is not within the 
Office of Water that I am in. But we are both working on this 
overall important issue of research and technologies.
    But I believe they have a road map but I need to confirm 
that with them, and I guess they definitely have a plan, but I 
just don't know how detailed it is in terms of constituting 
your definition of road map.
    But I do know that it is a high priority that the 
administrator has, and not just those within the Office of 
Research and Development, and the Office of Water, is using the 
$20 million for the R&D Program over this year and next year, 
is to come up with specific technologies, and to also 
disseminate the more research so that these technologies can be 
applied.
    I mean, I guess that constitutes a road map, but it is one 
aspect of the arsenic debate that we are taking very seriously. 
And I would welcome the opportunity to provide more detailed 
information, step-by-step, as to where we go from here on the 
technologies.
    Mrs. Wilson. I would welcome the information. Thank you, 
Mr. Chairman.
    Mr. Gillmor. The gentlelady from Missouri.
    Ms. McCarthy. Thank you, Mr. Chairman. Gentlemen, in my 
district in Kansas City, Missouri, the water services there, 
they received a 2001 gold award for competitiveness achievement 
from the Association of Metropolitan Water Agencies.
    They won this because of their exceptional management 
practices and their high performance. They don't qualify, my 
community of Kansas City, they don't qualify for any of the 
funds at the State level to help them.
    So the message that I think that is being sent is that 
there is no reward for being good, and I wonder as you 
restructure and think about ways in which we need to change 
these revolving funds, and how we get the money out to the 
States to help communities, if in fact you are giving 
consideration to communities that have done a good job, and are 
models for the Nation.
    And how to help them, because there are still many unmet 
needs. The State of Missouri years ago, the citizens actually 
passed a tax on themselves to improve the storm water systems.
    So once again we are out there ahead of the curve and we 
still have a lot of unmet needs, but we are not getting all the 
assistance that we should, and that is just one thought. I just 
would like some reaction on what your thinking is for the 
future of this program.
    And my other thought is that people are buying more and 
more water in bottles these days, and I am one of them, and I 
think it speaks two things. One, that they don't have a lot of 
faith in the system, and so they are going about with the 
bottled water syndrome.
    And they are willing to pay $2 or even more at an airport 
for that. But they do complain about their sewer fees and their 
water fees on their monthly bill, even though I think if you 
did the math, it is hard to understand that.
    So I would like your thoughts on restoring confidence in 
the public on the water systems, but also this question of just 
how do you get acceptance for the truth cost of water delivery 
is.
    I think for a long time, because of the way that it was 
subsidized or otherwise, in budgets that people weren't really 
paying the true costs of water. Now we have some very 
legitimate needs to meet that are quite understandable, but 
there is a resistance to pay for those. So I would love your 
thoughts on that as well.
    Mr. Grumbles. I can start and then the other panelists may 
have some ideas or comments as well. First, on the 
eligibilities and the first aspect of your question. Do you 
know why in that particular instance why that community was not 
eligible?
    Ms. McCarthy. No, I don't, and I am curious about that 
myself. I am going to look into that.
    Mr. Grumbles. And as you point out, that is a threshold 
issue obviously, and how we determine the eligibilities. 
Basically, the EPA is in the role of implementing what Congress 
spelled out, and they spelled out some pretty specific 
requirements and details on eligibility for the State Revolving 
Fund, and then EPA subsequently issued regulations to further 
implement the eligibility provisions of the State Revolving 
Fund.
    And I think one of the key components of our regulations, 
and certainly our current philosophy is,to provide deference to 
the States. They are the managers of the State revolving funds, 
and so as long as there is some basic net that were spelled out 
in the statute, a lot of it is left up to the States to 
determine how they channel their funding and determine their 
eligibility question.
    On the second one, and a very important one that you raised 
about confidence in the water systems, the public water 
systems, and not simply just increasing reliance on bottled 
water, I think there are a lot of measures that can be taken.
    It is really not a leading role for the Federal 
Environmental Protection Agency, as much as it is for those 
that are in the firing line or in the battle lines, however you 
want to use the metaphor, but the ones who are actually the 
utilities who are on a daily basis proving the value of their 
product.
    And how they take their job seriously, and provide that 
water, and in terms of the EPA, we are committed to the 
principle of the importance of having community water systems.
    That is, it is cost effective, and it is also 
environmentally protective to rely on community water systems, 
and so in some small way perhaps, but in an important way, part 
of our job is to remind the American public of what the figures 
are, the facts and figures about the continued safety of their 
drinking water supplies, but it is really--a lot of the burden 
or opportunity falls on the shoulders of those at the 
utilities, who are the ones who are actually there in their 
communities providing the product.
    Ms. McCarthy. Anyone else want to talk about that or the 
true cost of water?
    Mr. Beider. I certainly agree in general that in many 
systems across the country, ratepayers are unaccustomed to 
paying the full cost of the water that is delivered to them. I 
am not an educational psychologist or a sociologist, and so I 
am not going to hazard an expert opinion as to how we can get 
people used to it.
    But I will say that in general, it sounds like an education 
problem, and it is probably an adjustment problem. The first 
time you see a water bill that is 20 percent higher, that is 
probably a shock. But if the utility adequately prepares people 
for why it is necessary, that 20 percent, if it is off a small 
enough base, may not be a real problem other than just an 
adjustment problem.
    Ms. McCarthy. Thank you, Mr. Chairman.
    Mr. Gillmor. The gentleman from Kentucky, Mr. Fletcher.
    Mr. Fletcher. Thank you, Mr. Chairman, and certainly it is 
a pleasure to serve on your committee as the newest member, and 
thank you very much for the opportunity. Let me just say as we 
start, that in a former life just a few weeks ago, we served on 
the budget committee, and I want to thank the administration 
for the commitment they have had in certainly supporting the 
Clean Water Act.
    When we look, as the ranking member mentioned, certainly a 
greater commitment could be made there. But when we look at the 
options, it was either a tax increase, increasing the debt, 
taking the money from national or homeland security, or 
education.
    There really were not a lot of other areas that the money 
could come from unless we increased our debt or increased 
taxes. So I think we have made a very appropriate commitment 
here. Maybe not as much as a lot of us would like, but given 
the financial circumstances of the country, I think it is a 
very appropriate commitment.
    Let me ask you. Some people feel there is a gap, and Mr. 
Grumbles is from the EPA, but in our district, or in my 
district, we have a lot of multiple systems, and as they are 
trying to upgrade to meet the new standards, it becomes very 
costly.
    So we have encouraged and actually are getting funding for 
a regional study to try to do substantial consolidations. What 
kind of efforts has EPA made in encouraging the consolidations 
to make sure that we don't have duplicated systems that may be 
inefficient because of the duplication?
    And also the other question I have is concerning that we 
also have concerns about testing that is both done on the State 
and Federal levels that requires duplicate testing and 
increased operating costs.
    And if you could comment on that, Mr. Grumbles, and maybe 
the GAO and CBO could talk about their estimates, and do they 
take into account or how much consolidation do they take into 
account in their estimates? Thank you.
    Mr. Grumbles. Congressman, in terms of the consolidation 
issue, it is one of the--it is embedded in one of the 
fundamental principles that we have in the testimony on fiscal 
sustainability.
    And I think we agree with the vision of this committee, and 
the Congress in 1996, when unlike the Clean Water SRF language 
with the new drinking water SRF, the authorization language 
specifically includes an explicit contemplation of 
opportunities for consolidation, as well as looking in general 
at the fiscal, managerial, and capacity of these systems as 
they get financial assistance.
    So we encourage a very thorough analysis and review by the 
State and local entities about opportunities for consolidating 
systems, regionalization, to me the economies of scale, and to 
have them more cost effect and a more environmentally 
protective approach.
    And I am sure that without having any direct knowledge of 
it that over the years, in terms of EPA efforts to implement 
the Act, I am quite confident that we have helped in terms of 
having workshops, and discussions with those who implemented 
the Safe Drinking Water Act to take advantage of, and to 
fully--at least to try to fully utilize that new concept in the 
1996 Act about encouraging regionalization and consolidation of 
facilities.
    In terms of avoiding duplication of testing, I don't know. 
I would ask for your permission to provide you something more 
explicit and detailed for the record. I know that our 
objectives are to minimize and avoid the duplication costs, and 
the testing costs.
    And we recognize that when it comes to the Safe Drinking 
Water Act implementation costs, often times the infrastructure 
is a huge cost, but there is also the very substantial costs of 
monitoring and also testing.
    And we recognize the need to minimize the duplication and 
avoid those costs. But if I could, I would like to provide a 
more direct and detailed response to your question for the 
record.
    Mr. Fletcher. Thank you. We appreciate that. And I didn't 
know if the other two gentlemen had comments on their estimates 
and some of the differences in the gap and consolidation 
considerations of their estimates.
    Mr. Beider. In our estimates of future investment costs for 
drinking water systems, we assumed in our low-cost case that 
investment costs could be reduced 15 percent by various forms 
of improved efficiency; in our high-cost case, we assumed a 5 
percent savings. The WIN analysis that has received so much 
publicity did not make a comparable assumption.
    One of the many forms of improved efficiency that we had in 
mind in picking those numbers was, indeed, consolidation of 
systems, and the others included things like asset management, 
which Mr. Grumbles has talked about; demand management, meaning 
pricing closer to actual costs to reduce inefficient use; 
innovative contracting; and, of course, better materials and 
technologies. We don't have a breakout of how much of the 5 
percent or the 15 percent we could attribute to each one of 
those factors, but we think those are certainly reasonable 
ballpark estimates.
    Mr. Wood. I would just add that GAO has not done its own 
estimate of needs out there, but I think--and Ben can correct 
me if I am wrong--it is important to put into context. You 
raised the issue, and CBO also alluded to this, that needs are 
not really static. They are constantly changing.
    And the EPA's needs assessment was simply or essentially a 
snapshot in time of the needs of systems as they exist now, and 
to the extent that there is consolidation, or mergers, and so 
forth in the future, obviously that is going to affect how much 
is needed, in terms of construction investment. So it puts that 
into context.
    Mr. Fletcher. Thank you, Mr. Chairman.
    Mr. Gillmor. Thank you. That concludes our questions, with 
one exception. Mr. Pallone, our ranking member, does have 
another question.
    Mr. Pallone. Thank you, Mr. Chairman. I just wanted to ask 
Mr. Beider. Obviously I favor a higher authorization level than 
what we currently have at the $1 billion level, and if you take 
the midpoint of the CBO analysis, which is $4 billion per year 
of additional spending to address infrastructure needs, it 
comes to $20 billion over 5 years.
    I just wanted to ask you, and if Mr. Grumbles and the 
others want to say--you could just say yes or no very briefly, 
whether you would support a $20 billion increase in the 
drinking water State revolving loan fund authorization over 5 
years.
    Or what kind of increase you would support over what we 
have?
    Mr. Beider. That is an easy question for me. CBO doesn't 
make policy recommendations.
    Mr. Pallone. Okay. Mr. Grumbles and Mr. Wood, would you 
like to take a quick answer?
    Mr. Wood. I would concur and say that GAO doesn't make 
those kind of recommendations either.
    Mr. Pallone. Okay. And EPA?
    Mr. Grumbles. Do you catch the trend that----
    Mr. Pallone. But you are a policy guy.
    Mr. Grumbles. I am, but I certainly am not able to 
pontificate on my own. That is something that the 
administration is working on that would be part of an 
administration position.
    Mr. Pallone. Okay. Thank you. Thank you, Mr. Chairman.
    Mr. Gillmor. Thank you, and I want to thank our panelists 
again for your time, and also for your expert testimony. And, 
gentlemen, if it is okay with you, I would like to ask your 
availability to respond in writing to any further questions 
from the members.
    And with that, I would dismiss panel one, and call up panel 
two.
    Mr. Shimkus [presiding]. We would like to welcome the 
second panel, and we look forward to hearing your testimony 
before we go to you, I want to make a special welcome to Mr. 
Terry Gloriod, who is from Illinois, and that's why I got the 
benefit of getting into the big chair as you noticed.
    Terry is the President of the Illinois-American, Iowa-
American Water Companies, and Illinois-American is located in 
Belleville, Illinois, and serves Clinton and Bond Counties, 
which are in my Congressional District.
    Prior to joining the American system, Mr. Gloriod was vice 
president of operations for Continental Water Companies, with 
responsibilities for the St. Louis County Water, Northern 
Illinois, Northwest Indiana, and Long Island Water Companies.
    Mr. Gloriod has over 30 years of experience in the water 
industry. Terry has been active in the water associations, 
including the American Water Works Association, and the 
National Association of Water Companies.
    He is currently on the Water Utility Council and the 
American Water Works Association Research Foundation Board, and 
he chairs the government relations committee. Mr. Gloriod is a 
licensed water operator and professional engineer, and a 
diplomate in the Academy of Environmental Engineers.
    Terry holds a B.S. in civil engineering from Washington 
University, a renowned university in St. Louis, Missouri, and 
we are glad to have you here, and thanks for coming all this 
way.
    We want to welcome the rest of you, too, but not as 
flowery, and I apologize, but here in order we have Mr. Jay 
Rutherford, Director, Water Supply Division, of the Vermont 
Department of Environmental Conservation. Welcome.
    We go to Mr. Joseph Bella, Executive Director of the 
Passaic Valley Water Commission; Mr. Elmer Ronnebaum, General 
Manager of the Kansas Rural Water Association; and I will be 
interested in your comments.
    Mr. Paul Schwartz, President of the Clean Water Action; and 
Mr. Howard Neukrug, Director, Office of Watersheds, 
Philadelphia Water Department, and then of course, Mr. Terry L. 
Gloriod. Oh, and I missed Mr. Joseph A. Moore, who is an 
Alderman on behalf of The National League of Cities.
    I know that you were all in attendance for the first panel, 
and I am sure that you have got a lot of things turning around 
in your minds, and so we will recognize you for 5 minutes for 
your opening statements, and we will be a little bit generous, 
but we have got a large panel, and some of you probably have 
flights or trains to catch to get back.
    And with that I would like to recognize Mr. Rutherford for 
5 minutes. And your whole statement is already submitted into 
the record, and so if you can summarize, that would be helpful.

    STATEMENTS OF JAY L. RUTHERFORD, DIRECTOR, WATER SUPPLY 
DIVISION, VERMONT DEPARTMENT OF ENVIRONMENTAL CONSERVATION, ON 
      BEHALF OF THE ASSOCIATION FOR STATE DRINKING WATER 
 ADMINISTRATORS; JOSEPH A. BELLA, EXECUTIVE DIRECTOR, PASSAIC 
   VALLEY WATER COMMISSION, ON BEHALF OF THE ASSOCIATION OF 
  METROPOLITAN WATER AGENCIES; JOSEPH A. MOORE, ALDERMAN, ON 
   BEHALF OF THE NATIONAL LEAGUE OF CITIES; HOWARD NEUKRUG, 
  DIRECTOR, OFFICE OF WATERSHEDS, ON BEHALF OF AMERICAN WATER 
  WORKS ASSOCIATION; ELMER RONNEBAUM, GENERAL MANAGER, KANSAS 
  RURAL WATER ASSOCIATION, ON BEHALF OF NATIONAL RURAL WATER 
  ASSOCIATION; TERRY L. GLORIOD, PRESIDENT, ILLINOIS-AMERICAN 
 WATER COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF WATER 
   COMPANIES; PAUL D. SCHWARTZ, PRESIDENT, CLEAN WATER ACTION

    Mr. Rutherford. Mr. Chairman and committee members, good 
morning. My name is Jay Rutherford, and I am the drinking water 
administrator for Vermont. I am speaking to you today on behalf 
of the Association of State Drinking Water Administrators, 
which represents the States, the territories, and the District 
of Columbia, in their efforts to provide safe drinking water to 
over 250 million consumers.
    Today I am going to focus on two related needs. First, for 
those in our communities for help in maintaining safe drinking 
water, and also on the challenges that the States are facing in 
an increasing complex program.
    As you heard from Mr. Grumbles earlier, EPA has identified 
drinking water infrastructure needs of $150.9 billion over the 
next 20 years, with $1.2 billion of that needed immediately.
    The majority of this need is for transmission and 
distribution replacements, but many small systems also have 
regulation driven needs that are simply overwhelming on a per 
household cost basis.
    In addition to decaying infrastructure, the Nation's water 
systems are also facing a juggernaut of at least 11 new Federal 
drinking water regulations from the 1996 amendments to the Safe 
Drinking Water Act.
    Each of these regulations--arsenic, for example, can 
involve substantial capital needs as you have heard for systems 
to remain in compliance. The 1996 amendments also provided for 
the drinking water State revolving fund, or DWSRF, a 
partnership of Federal and State government funding.
    Funding was authorized for 2003 at approximately $1 billion 
per year, but appropriations thus far have been only 61 percent 
of the authorized amounts. In spite of the funding gaps, the 
DWF program has been highly successful to date.
    Through last July the States have provided over $3.7 
billion in assistance for nearly eighteen hundred drinking 
water projects in the country. This program has been well 
received and well used by our public water systems.
    To begin to address these gaps, we recommend that Congress 
appropriate the amounts that were not done in the earlier years 
to meet the full authorization. Second, we request that the 
current SRF funding be extended through 2010, to appropriate at 
least $3 billion annually to meet the need.
    Third, is to extend the ability of States to transfer funds 
between the Clean Water and Drinking Water SRFs. And, fourth, 
to authorize specifically the use of the fund for needed 
security enhancements.
    On the State implementation side, the acting vision was 
that States would implement Federal drinking water regulations, 
and 49 of the 50 States do just that. We regulate 169,000 
public water systems nationwide, and a huge majority of these 
are small and require substantial technical assistance, 
training, compliance assistance, and oversight.
    The 1996 amendments have dramatically changed the world of 
small water systems and the oversight programs. New, highly 
complex, regulations are coming out at a pace that has 
staggered the States' abilities to provide the assistance and 
oversight that these small systems need.
    These new regulations include arsenic, radionuclides, 
microbial disinfection byproducts, unregulated contaminants, 
consumer confidence reports, capacity development, operator 
certification, source water assessments and delineations, and 
the Drinking Water State Revolving Fund.
    In addition to all of this, the States are also maintaining 
core program activities, such as compliance monitoring, 
training, and enforcement, for the currently regulated 
contaminants.
    And most recently States are also finding themselves deeply 
involved in water system security issues, as well as the 
drought. The Act authorizes the EPA to provide 75 percent of 
the States' program costs, but historically we have only 
received 35 percent of the costs.
    In spite of the new workloads, Congress has not increased 
the State implementation grant since fiscal year 1997. The 
drinking water loan fund did authorize a 10 percent set aside 
from each capitalization grant to help States with the new 
programs.
    But as the GAO noted in their 2000 report on the subject, 
many States have major impediments to using this set aside, 
thus limiting its usefulness. For example, this set aside 
requires a 100 percent State match to use it.
    This winter, EPA and my association sponsored a national 
gap analysis, which showed that the gap this year is $220 
million, with a staffing shortfall of nearly 2,500 full-time 
equivalents.
    In just 3 years, this gap will grow to $300 million and 
3,500 FTEs. This is a blue print for a public health crisis. 
the goal of both the Federal and the State programs is to 
protect public health.
    On a more personal level, it is about knowing that whenever 
you brush your teeth, bathe your child, or have a glass of 
water, that that water has been monitored and treated as 
needed, and that the operator has been properly trained and 
certified, and that the water system itself has the 
capabilities to reliably provide that water.
    With these goals in mind, we recommend the following. 
First, that Congress extend the safe implementation grant to 
2010 and appropriate $250 million per year for State 
activities.
    And, second, that Congress should significantly reduce or 
delete the 100 percent match required for States to access the 
program management set aside. Mr. Chairman, thank you for 
inviting me to testify and I would be pleased to answer any 
questions that you or the committee members may have.
    [The prepared statement of Jay L. Rutherford follows:]
    Prepared Statement of Jay L. Rutherford, Director, Water Supply 
Division, Vermont Department of Environmental Conservation on Behalf of 
         The Association of State Drinking Water Administrators
                              introduction
    The Association of State Drinking Water Administrators (ASDWA) is 
pleased to provide testimony before the House Committee on Energy and 
Commerce Subcommittee on Environment and Hazardous Materials regarding 
drinking water needs and infrastructure. ASDWA represents the drinking 
water programs in each of the fifty states, territories, and the 
District of Columbia in their efforts to ensure the provision of safe, 
potable drinking water to over 250 million consumers nationwide. 
ASDWA's primary mission is the protection of public health through the 
effective management of state drinking water programs that implement 
the Safe Drinking Water Act (SDWA).
                          water infrastructure
Water Infrastructure Needs
    Providing a supply of safe, potable drinking water is critical to 
protecting public health and ensuring current as well as long-term 
economic growth of this Nation. In February 2001 the United States 
Environmental Protection Agency (EPA) released a report entitled 1999 
Drinking Water Infrastructure Needs Survey that indicated that drinking 
water systems infrastructure needs totaled $150.9 billion over the next 
20 years and that $102.5 billion was needed immediately to ensure the 
provision of safe drinking water. The bulk of this need, $83.2 billion, 
is for transmission and distribution projects followed by treatment 
($38.0 billion), storage ($18.4 billion), source ($9.6 billion), and 
other needs ($1.9 billion). These needs are documented for the 54,000 
community water systems and 21,400 not-for-profit noncommunity water 
systems nationwide. These estimates, however, do not include funds 
needed for compliance with the new arsenic rule or security upgrades 
for water system protection.
Why is there an Infrastructure Need?
    Water utilities must continue to upgrade and improve their 
infrastructure to meet new SDWA regulatory mandates and to replace 
aging and failing distribution system pipes and appurtenances. Much has 
been learned over the last decade about specific health problems 
associated with distribution system problems such as leaking pipes, 
cross connections, and backflow. Many of these concerns are likely to 
be addressed specifically in the future as EPA proposes developing a 
distribution system rule. Since September 11, this need has expanded to 
include security-related upgrades for treatment plants as well as 
distribution systems.
    The 1996 Amendments to the SDWA require that EPA develop 
regulations to address microbial contamination, disinfection by-
products, radon, radionuclides, arsenic, ground water protection, and 
filter backwash. EPA must also continue to evaluate potential 
contaminants for regulation well into the future. As a result, 
infrastructure funding needs will continue to escalate as more 
contaminants are promulgated that address new contaminants in drinking 
water, and as current regulatory levels are driven lower to meet 
improved analytical methods to bring standards closer to the maximum 
contaminant level goal. In addition, new treatment technologies such as 
membranes, ozone, and UV irradiation will become more commonplace in 
water treatment. Some of these technologies are capital intensive to 
install and operate, while others will require significant retrofitting 
of current treatment plants and upgrades to distribution systems. Many 
drinking water systems will also be required to comply with the new 
arsenic standard over the next several years. In many small systems, 
the installation of treatment for arsenic will likely result in the 
need for additional system upgrades.
    In addition to meeting infrastructure needs associated with 
compliance with the SDWA, water systems also face the challenge of 
replacing miles of distribution pipes as materials age and begin to 
fail. The demographics of distribution pipe installation indicate that 
over the course of the next 20 years, many of the miles of pipes that 
have been put in the ground over the last 100 years will reach the end 
of their useful life and need replacement. Additional security upgrades 
will also be needed at water systems.
Current Funding Availability
    Funding of water system infrastructure needs involves a partnership 
at the Federal, state, and local level. At the Federal level, funding 
is available through the Drinking Water State Revolving Loan Fund 
(DWSRF) that was established under the 1996 SDWA Amendments. In the 
SDWA, Congress authorized $9.6 billion between FY-94 and FY-03 for 
states to provide loans and ``grant equivalents'' to water systems in 
need. An important note is that although $8.6 billion was authorized 
through FY-02, only $5.27 billion has been appropriated leaving a 
funding gap of $3.33 billion that the states and water systems were 
expecting to be available to meet infrastructure needs and compliance 
requirements of the SDWA.
    States also must match the DWSRF with 20 percent state funding as a 
way to further capitalize this program. Through June 30, 2001 states 
had contributed over $773 million additional funds for the program. To 
the extent that the full Federal amount has not been appropriated; 
however, revenue is also lost due to the loss of state matching funds. 
A number of states also leverage the funds to create additional dollars 
for infrastructure improvements. Through June 30, 2001, states had 
leveraged almost $1.5 billion in bonds to provide additional project 
funding. A number of states have also established their own grant and 
loan programs that are used to supplement DWSRF funding.
    The DWSRF has proven to be very successful. Through July 2001, 
states have provided over $3.7 billion in SRF assistance for 1,776 
drinking water projects. Twenty percent of the funds have gone to 
systems serving over 100,000 people, 40 percent have gone to systems 
serving between 10,000 and 100,000 people, and 40 percent have gone to 
systems serving fewer than 10,000 people.
    Additional Federal funding also comes through the Rural Utility 
Service Water and Waste Loan and Grant Program under the U.S. 
Department of Agriculture's Rural Development office. These funds 
assist eligible applicants in rural areas and cities and towns serving 
up to 10,000 people. The Federal Housing and Urban Development (HUD) 
Agency also provides block grants to states under its Community 
Development Block Grant (CDBG) program to provide assistance to small 
local governments that generally serve less than 50,000 people and 
counties with a population of less than 200,000 people. Water and 
wastewater projects are eligible activities under the CDBG program. 
Many states use these funds along with USDA and DWSRF funding to 
package the appropriate mix of grants and/or loans to meet a 
community's specific financing needs.
    At the local level, a primary source of funding for infrastructure 
improvements comes through rates charged by utilities to consumers for 
water use. In many cases, however, rates have been kept artificially 
low and long-term maintenance costs deferred. This has the potential to 
contribute to ``rate shock'' should customers have to bear the full 
cost of projected infrastructure replacement needs. Municipalities can 
also borrow money from the private sector such as banks or go to the 
bond market although many smaller water systems and non-municipal 
systems find it more difficult to access these types of funding.
Is There a Funding Gap?
    While it is possible, through instruments such as EPA's drinking 
water needs survey, to project drinking water infrastructure needs over 
the next 20 years, it is much more problematic to define how large an 
infrastructure funding gap exits. To calculate this accurately, one 
needs to have a solid understanding of the current and long term 
funding needs and then have a fairly accurate assessment of the total 
sources of revenue at the Federal, state, and local level that can be 
brought together to meet these infrastructure funding needs. The delta 
(or difference) between these two numbers represents the funding gap or 
need but only at the gross national level. The ``gap'' can vary 
significantly on a water system-by-water system basis depending on 
system size, contaminants of concern, the system's current rate 
structure, access to available capital, and the age of the system, 
among many factors.
Conclusion
    Drinking water system infrastructure needs will continue to 
increase due to new SDWA regulatory requirements as well as the need to 
replace aging and failing pipes in distribution systems, and implement 
new security upgrades. A continued partnership among Federal, state, 
and local funding sources will be essential to ensure the long-term 
provision of safe, potable drinking water to consumers nationwide. 
Numerous needs surveys, including EPA's recent analysis, have concluded 
that nationally, water systems face a daunting task in continuing to 
ensure safe drinking water. The highly successful DWSRF should be 
continued as a viable mechanism for meeting current and future water 
system funding needs.
Recommendations
 Congress should reduce the current drinking water funding gap 
        by appropriating the full authorization of the DWSRF and the 
        backlog of unappropriated funds.
 Congress should extend the current DWSRF authorization through 
        FY 2010.
 Congress should appropriate at least $3 billion each year for 
        FY 2003-2010.
 Congress should extend the ability to transfer funds between 
        the DWSRF and CWSF.
 Congress should include security upgrades as eligible projects 
        under the DWSRF.
                          state infrastructure
State Implementation Responsibilities
    State drinking water programs also need adequate funding to ensure 
the effectiveness of their own ``infrastructure'' to carry out the 
myriad responsibilities of the SDWA. Since the SDWA Amendments of 1996, 
state program responsibilities have dramatically expanded to move 
beyond compliance at the tap to delineating and assessing the sources 
of all waters used for public water supplies, ensuring qualified 
operators at all water systems, defining and implementing water system 
capacity programs, creating a new DWSRF funding mechanism, and 
providing significantly more information and outreach to the public. 
These efforts are in addition to implementing Federal as well as state-
specific drinking water regulations addressing specific contaminants. 
Since September 11th, significant new security responsibilities have 
fallen to states for training, communication, and in some instances 
conducting vulnerability assessments for water systems. In addition, 
almost half the states are currently experiencing drought conditions 
that are significantly taxing state staff and resources.
    Forty-nine of the 50 states currently have ``primacy'' or 
enforcement authority for the Federal SDWA. To achieve and maintain 
primacy, states must adopt rules that are no less stringent than the 
Federal requirements and have the ability to enforce these regulations. 
Although some states have requirements that are more stringent; for the 
most part, state drinking water programs are implementing and enforcing 
Federal requirements.
    Collectively, state programs provide oversight, implementation 
assistance, and enforcement for approximately 169,000 public water 
systems nationwide. These systems range from large metropolitan 
municipalities to mobile home parks and schools. The vast majority 
(over 95 percent) of these systems are small, serving less than 3,300 
people. Many of these systems require extensive technical assistance, 
training, and oversight.
    Today, the regulatory landscape is significantly more complex than 
ever before. Since FY-97, state Public Water Supply Supervision (PWSS) 
dollars have had to stretch to cover development, implementation, and 
enforcement of numerous new regulations and programs such as those to 
address arsenic, radionuclides, the microbial/disinfection byproducts 
rule cluster, unregulated contaminant monitoring, consumer confidence 
reports, capacity development, expanded operator certification 
requirements, source water assessment and delineation, and the DWSRF. 
States anticipate new regulations to be put in place this year to 
address radon and groundwater. States are also expected to implement 
revisions to the surface water treatment and lead and copper rules, 
public notification, and variance and exemption requirements. These 
requirements are in addition to the state program responsibilities for 
core activities such as compliance monitoring, data management, 
training, and enforcement for 88 currently regulated contaminants. 
States also are responsible for ensuring that public health is 
protected through preventive measures such as disease surveillance, 
risk communication, sanitary surveys, laboratory certification, 
permitting, and emergency response. States expect that their 
responsibilities will continue to expand as EPA promulgates additional 
regulations and reviews current regulations for modification. This 
overwhelming new workload has added to the historical strain on state 
program resources and staff.
State Funding
    The SDWA authorizes EPA to fund up to 75 percent of the costs to 
states to implement the drinking water program. Historically, however, 
states have contributed 65 percent of the funding while EPA has only 
contributed 35 percent. While this gap has closed in recent years due 
to the advent of set-asides from the DWSRF, many states still 
substantially over match the Federal contribution. Given current state 
fiscal constraints, it is questionable whether states will be able to 
keep pace with these funding levels in the future.
    The current Federal PWSS grant provides $87.3 million for states to 
implement their programs (the remainder of the $93 million currently 
appropriated by Congress is directed to Indian Tribes). This level has 
not increased for states over the last five years (since FY-97), even 
though many of the new initiatives under the 1996 Amendments became 
effective almost immediately. The level funding of $87.3 million 
actually means that states have lost funding due to inflation and 
rising personnel costs. A recent state survey, conducted by ASDWA and 
EPA, indicates that the current state funding gap is $220 million 
climbing to $300 million by FY-05.
    Congress recognized the need to fund state program activities and 
in the 1996 Amendments allowed states to take up to a 10 percent set-
aside from the drinking water SRF for program implementation. EPA, 
however, has never requested the full $1 billion per year authorization 
and states have only been able to access 4 percent of the set-aside 
funds. To the extent that SRF funds are also used to provide resources 
for new programs such as operator certification training reimbursement 
and unregulated contaminant monitoring the corpus of the funds 
available for state use is further reduced. Many states have also 
encountered significant barriers to fully accessing these funds 
including:

 the inability to obtain the needed one-to-one state match with 
        new state revenue (for program implementation activities)
 the inability to shift resources directed to water system 
        infrastructure improvements to state program implementation
 the unstable nature of the annual SRF funding allocation which 
        is based on water system needs and is affected by the states' 
        annual intended use plan for projects and set-asides
 the threat of up to 40 percent withholding for failure to 
        implement certain program requirements such as capacity 
        development and operator certification
 the unwillingness of state legislatures to approve new hires 
        using ``temporary'' funding (the drinking water SRF is only 
        authorized until 2003)
    To supplement insufficient Federal funding, many states have turned 
to state general revenues and fees to maintain an adequate core 
program. These additional funds; however, have not be adequate to fully 
meet state program implementation costs.
    ASDWA and EPA conducted a national resource gap analysis in 2001 to 
estimate state resources needed to implement the drinking water program 
between 1999 and 2010. The analysis showed that in FY-02, the funding 
gap for states to implement the SDWA equaled $220 million and staffing 
needs fell short by 2,478 full time equivalents (FTEs). By FY-05, the 
gap will widen to $300 million and 3,533 FTEs.
    Even the U.S. General Accounting Office (GAO) has raised state 
funding concerns. In August 2000, GAO released a report to Congress 
entitled, Drinking Water: Spending Constraints Could Affect States' 
Ability to Implement Increasing Program Requirements. An extrapolation 
of their findings indicate that even if all states had been able to 
access the maximum 31 percent of DWSRF set-asides for program 
implementation and related activities, there would still be a funding 
gap beginning in FY-02. Since few states are able to access the full 
set-aside amounts, the funding gap is much greater than GAO's 
``optimum'' estimate, and in fact, a gap already exists. The Report 
further notes that even those states that felt they were managing to 
keep up with the pace of implementing and enforcing the new statutory 
program requirements, at least for the short term, were only able to do 
so by ``. . . scaling back their drinking water programs, doing the 
minimum necessary to meet requirements, and setting formal or informal 
priorities among their responsibilities.'' This is a blueprint for a 
public health crisis.
Conclusion
    Adequate infrastructure funding needs for state SDWA program 
implementation is just as critical as adequate funding for water system 
infrastructure improvements. States are responsible for ensuring water 
system security and compliance and providing ``infrastructure'' for 
source water assessments, certified and trained water system operators, 
water system financial, technical, and managerial competency, public 
outreach and communication, and working directly with water systems to 
obtain and maintain compliance. As Congress moves forward to evaluate 
and find solutions for the water infrastructure funding gap attention 
must also be directed to the state program funding gap.
    The goal of both of these efforts is protecting public health. It 
is about knowing that whenever you brush your teeth, bathe your child, 
or prepare your food, the water has been monitored and tested for 
contaminants; that the responsible operator has been trained and 
certified; and that the drinking water system has demonstrated that it 
is technically, financially, and managerially capable of providing safe 
drinking water. In order to meet Congressional expectations and Federal 
regulations to successfully implement the SDWA, states and water 
systems both need increased funding to ensure a safe and dependable 
supply of drinking water today and for future generations.
Recommendations
 Congress should extend the PWSS authorization through 2010 and 
        authorize and appropriate $250 million per year for state 
        drinking water implementation activities.
 Congress should significantly reduce or delete the one-to-one 
        DWSRF match required by states to access DWSRF funds for 
        program implementation.

    Mr. Shimkus. Thank you very much. We have been called for 
votes, and we are going to try to get to two more opening 
testimonies, and then we will have to break.
    And so I would like to recognize Mr. Bella for 5 minutes.

                  STATEMENT OF JOSEPH A. BELLA

    Mr. Bella. Good morning, Mr. Chairman, Congressman Pallone, 
and members of the subcommittee. My name is Joseph Bella, and I 
am the executive director of the Passaic Valley Water 
Commission in New Jersey.
    I am testifying on behalf of the Association of 
Metropolitan Water Agencies, which is an organization of the 
largest publicly owned drinking water suppliers. The Passaic 
Valley Water Commission serves drinking water to 750,000 people 
in Passaic, Bergen, Nudson, Essex and Morris Counties, in 
Northeastern New Jersey.
    The commission also provides water on a wholesale basis to 
municipal water agencies and private companies, including the 
New Jersey-American Water Company and United Water-New Jersey 
Water Company.
    AMWA is a founding member of the Water Infrastructure 
Network, or WIN, which consists of 46 organizations, many of 
which you know, representing publicly and privately owned water 
systems, urban and rural water systems, mayors, city council 
members, county officials, labor, environmentalists, consumers, 
engineers, manufacturers, and builders.
    WIN has estimated that drinking water utilities across the 
Nation collectively need to spend about $24 billion per year 
for the next 20 years on infrastructure, for a total of $480 
billion.
    Other estimates by the American Water Works Association and 
the EPA show significant needs as well. All these estimates 
demonstrate that safe investments or investments for safe clean 
water and fire protection will be massive.
    According to a recent survey, just 32 metropolitan water 
systems reported that they must spend $27 billion over the next 
5 years on drinking water and waste water infrastructures.
    At the Passaic Valley Water Commission, we anticipate 
spending $160 million over the next 10 years on capital 
improvements. Compounding these financial burdens are security 
related costs. Our utility anticipates spending as much as $2 
million over the next 2 years.
    Water infrastructure in many American cities is 80 to 100 
years old, and the cities that are served by metropolitan water 
utilities are economic engines of their State and of the 
Nation.
    A significant Federal investment in these large publicly 
owned agencies will translate into stronger water systems, 
better fire protection, and thousands of new jobs. Yet, 31 
States provide no assistance to metropolitan water agencies in 
fiscal year 2001.
    What is needed is to help close the drinking water 
infrastructure gap is an investment program that helps both 
large and small water suppliers, and a strong grants component 
with a 15 percent set aside for metropolitan drinking water 
agencies to make certain that the States address their needs.
    Recently introduced legislation proposes to invest more 
funds in water infrastructure and establish new procedures and 
requirements to apply for and receive SRF assistance. These 
bills also address water rates, asset management programs or 
plans, community planning, and contracting.
    These practices embody those commonly used in metropolitan 
water agencies today. For instance, the Passaic Valley Water 
Commission has raised rates on average of 3 percent per year, 
but had the commission not received SRF assistance, we would 
have had to raise rates an additional 3 percent per year to 
cover over $14 million in additional debt that would have 
accompanied private capital.
    What we are concerned about is that States and the EPA 
might be authorized to develop new and cumbersome requirements 
for water systems applying for funds, even though many State, 
city, and county governments and some State agencies have 
already addressed these issues adequately.
    That is not to discard what responsible water agencies have 
already accomplished and create new layers of bureaucracy. The 
bill also requires SRF fund applicants to consider public-
private partnerships, a form of privatization.
    And whether a water agency considers a public-private 
partnership, it should remain at the discretion of local 
government, because local factors will dictate whether their 
partnership is in the best interests of the consumers.
    Privatization often sells itself as faster, better, and 
cheaper than public operation, but what the water industry has 
learned in the last several years is that public water 
utilities can operate just as efficiently as private water 
companies.
    At the Passaic Valley Water Commission, by analyzing our 
competitiveness and reengineering our operations, we have been 
able to save nearly $7 million per year and increase revenues 
by $33 million.
    Dozens of other public systems have produced similar 
results, upending the faster, better, cheaper method. 
Therefore, if it makes sense to require public recipients to 
consider privatization, then it makes sense to require private 
SRF recipients to consider becoming public entities.
    AMWA appreciates this opportunity to discuss the 
infrastructure needs of drinking water agencies, particularly 
those serving metropolitan areas. We look forward to working 
with the subcommittee on proposals to help large and small 
water agencies continue to provide safe and affordable drinking 
water. Thank you very much.
    [The prepared statement of Joseph A. Bella follows:]
  Prepared Statement of Joseph A. Bella, Executive Director, Passaic 
 Valley Water Commission on Behalf of the Association of Metropolitan 
                             Water Agencies
                              introduction
    Good morning, Mr. Chairman. My name is Joseph Bella. I'm the 
Executive Director of the Passaic Valley Water Commission, 
headquartered in Clifton, New Jersey.
    I'm testifying on behalf of the Association of Metropolitan Water 
Agencies, which is an organization of the nation's largest publicly 
owned water agencies. Together, AMWA members serve clean, safe drinking 
water to over 110 million Americans.
    The Passaic Valley Water Commission was established in 1927 and 
serves drinking water to 750,000 people in Passaic, Bergen, Hudson, 
Essex and Morris Counties in northeast New Jersey. The commission also 
provides water on a wholesale basis to municipal water agencies and 
private companies, including the New Jersey-American Water Company and 
United Water-New Jersey.
    AMWA is a founding member of the Water Infrastructure Network 
(WIN), which consists of 46 organizations representing publicly and 
privately owned water systems, urban and rural water systems, mayors, 
city council members, county officials, labor, environmentalists, 
consumers, engineers, manufacturers and builders.
    Here is a list of WIN members. Committee members are probably 
familiar with many of them. American Coal Ash Association (ACAA); 
American Concrete Pipe Association (ACPA); American Concrete Pressure 
Pipe Association (ACPPA); American Council of Engineering Companies 
(ACEC); American Public Works Association (APWA); American Society of 
Civil Engineers (ASCE); American Water Works Association (AWWA); 
Associated General Contractors of America (AGC); Associated Equipment 
Distributors (AED); Association of California Water Agencies (ACWA); 
Association of Metropolitan Sewerage Agencies (AMSA); Association of 
Metropolitan Water Agencies (AMWA); American Portland Cement Alliance 
(APCA); Construction Management Association of America (CMAA); 
California Rebuild America Coalition (CalRAC); Clean Water Action 
(CWA); Construction Industry Manufacturers Association (CIMA); Design-
Build Institute of America (DBIA); Environmental and Energy Study 
Institute (EESI); Laborers' International Union of North America 
(LIUNA); International Association of Bridge, Structural, Ornamental 
and Reinforcing Iron Workers; International Union of Bricklayers and 
Allied Craftworkers (BAC); International Union of Operating Engineers, 
AFL-CIO (IUOE); National Association of Counties (NACO); National 
Association of Flood and Stormwater Management Agencies (NAFSMA); 
National Association of Regional Councils (NARC); National Association 
of Sewer Service Companies (NAASCO); National Association of Towns and 
Townships (NATAT); National Heavy & Highway Alliance; National League 
of Cities (NLC); National Ready Mixed Concrete Association (NRMCA); 
National Rural Water Association (NRWA); National Society of 
Professional Engineers (NSPE); National Urban Agriculture Council 
(NUAC); Operative Plasters' and Cement Masons' International 
Association of the United States and Canada (O&CMIA); Pipe 
Rehabilitation Council (PRC); Plastics Pipe Institute, Inc. (PPI); 
Prestressed/Precast Concrete Institute (PCI); Rural Community 
Assistance Program, Inc. (RCAP); Uni-Bell PVC Pipe Association (Uni-
Bell); The Vinyl Institute ; United Brotherhood of Carpenters and 
Joiners of America (UBC); Water Environment Federation (WEF); WateReuse 
Association (WateReuse); and Western Coalition of Arid States 
(WESTCAS).
                  infrastructure funding need and gap
    The Water Infrastructure Network's (WIN) report Clean & Safe Water 
for the 21st Century and its follow up, Water Infrastructure Now: 
Recommendations for Clean and Safe Water in the 21st Century, estimate 
that drinking water utilities across the nation collectively need to 
spend about $24 billion per year for the next 20 years on 
infrastructure, for a total of $480 billion. WIN's analysis also 
concluded that drinking water systems currently spend $13 billion per 
year on infrastructure, leaving an $11 billion annual gap between 
current spending and overall need. There are similar figures for 
wastewater systems. 
[GRAPHIC] [TIFF OMITTED] 79463.002

    Other estimates show large long term needs as well. The American 
Water Works Association's Dawn of the Replacement Era estimates a $250 
billion need over the next 30 years, based on a survey of 20 utilities. 
And EPA's drinking water needs survey indicates a $150.9 billion need 
for the next 20 years, although it only focuses on needs related to 
compliance with the Safe Drinking Water Act.
    WIN's estimate was developed by expert economists who are familiar 
with the water industry, its resources and how it manages and builds 
infrastructure. We be- lieve it is comprehensive and accurate. 
Nevertheless, all of the estimates dem- onstrate that investments for 
safe, clean water and fire protection will be massive.
    According to a recent survey, just 32 metropolitan systems reported 
that they must spend $27 billion over the next five years on drinking 
water and wastewater infrastructure 1. For instance, 
Cleveland, Ohio must spend up to $700 million over the next five years; 
Columbus, Ohio, $253 million; New Orleans, $1.2 billion; Kan- sas City, 
Mo., over $500 million; Denver, $363 million; Chicago, $600 million; 
Aus- tin, $568 million; Phoenix, $1.28 billion; Omaha, Nebraska, $355 
million. In Detroit, ongoing and new capital expenditures for drinking 
water projects are $1.4 billion over the next five years and $2.9 
billion for wastewater projects.
---------------------------------------------------------------------------
    \1\ Waterworld, December 2001
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    At the Passaic Valley Water Commission, we anticipate spending $160 
million over the next ten years on capital improvements.
                        increased security costs
    Compounding these financial burdens are the looming investments 
local drinking water agencies will be forced to make to help protect 
their facil- ities and consumers from potential terrorist attacks. The 
Passaic Valley Water Commission anticipates spending as much as $2 
million over the next two years.
    Near-term security improvements at water systems include fencing 
around facilities and reservoirs, security doors and locks, intruder 
alert systems, better lighting, surveillance cameras to monitor entry 
ways and sensitive facilities, access control and barricades around key 
facilities. Some systems already have some or all of these measures in 
place, while others are in the process of installing them. The American 
Water Works Association estimates that these costs could total $1.6 
billion for the 54,000 public drinking water systems in the U.S. The 
average cost per utility ranges from $8,000 for water systems serving 
only a few thousand people to $700,000 for systems serving more than 
100,000 people. Those serving more than one million people expect to 
spend much more.
    Capital projects may be needed to. Water systems are now in the 
process of as- sessing their vulnerabilities to terrorism. When these 
assessments are complete, water systems will know what they need to 
accomplish to become more safe and secure. Only then will we know 
accurately what capital construction projects are going to be needed.
                    past and present federal funding
    The needs of small water systems are substantial, and the lack of 
infrastructure dollars available to them could have public health 
impacts. However, metropolitan water agencies--those serving 100,000 or 
more people--are facing monumental in- frastructure replacement costs. 
AMWA urges the committee to consider mechanisms to address the needs of 
both small and large systems.
    Historically, the federal government has invested billions of 
dollars in smaller drinking water systems. Over a 12 year period, the 
Rural Utility Service (RUS) and

EPA have poured over $8 billion in loans and grants into small systems 
and $932 million into systems serving between 10,000 and 100,000 
people. During this same time period, metropolitan water systems have 
received drinking water SRF loans amounting to only $547 million.
    This difference of nearly $8.5 billion illustrates the need for 
state and federal policy makers to consider the problems of the 
nation's urban areas and the critical nature of these systems to the 
economic wellbeing of the country.
    The water infrastructure in many American cities is 80 to 100 years 
old. Although some states make loans to large water systems to ensure 
the funds revolve, especially where small systems are not prepared to 
apply for assistance, most states do not help large systems. In fact, 
31 states provided no assistance to metropolitan water agencies in 
fiscal year 2001. Yet the cities that are served by metropolitan water 
utilities are the economic engines of their states and the nation, and 
a significant federal investment in these large publicly owned agencies 
will translate into stronger water delivery systems, better fire 
protection and thousands of new jobs. Along with banking and finance, 
telecommunications, transportation and oil and gas production, water 
infrastructure is among the nation's most critical infrastructures. 
Uninterrupted water service is necessary to local, state and national 
economies; strong infrastructure provides fire protection; and safe 
drinking water protects our families and consumers from water-borne 
diseases and pollution from farm and urban runoff and other types of 
contamination.
                              water rates
    WIN estimates that household water bills must double or triple in 
most communities, on average, if utilities are forced to absorb the 
entire infrastructure bill. This scenario is complicated by rate 
inelasticity. A household's water bill often covers drinking water 
supply, sewer and storm-water control. Raising rates to cover one, 
diminishes the ability to pay for the other two. Unfortunately, all 
three sectors are facing massive infrastructure challenges. The impact 
on American families is even harsher when you consider the other 
utility expenses, such as phone, gas and electricity.
    Members of Congress who served at the local level know this debate 
all too well. In communities large and small across the nation, utility 
managers face rate inelasticity each time they propose a rate increase 
to cover infrastructure costs.
                              demographics
    Further compounding this issue is demographics. Large investments 
are a major source of financial vulnerability for water utilities due 
to the very fixed nature of the pipes and plants and the very mobile 
nature of the customers. When populations grow, the infrastructure is 
expanded, but when people move away, the pipe and the liability for 
repair and replacement remain behind, creating a financial burden on 
the remaining customers. This is true in small towns facing economic 
hardship, as well as cities, where the more affluent leave the less 
affluent to cover the water infrastructure maintenance and replacement 
costs. This problem, known as ``stranded capacity,'' adds considerably 
to the challenge of funding infrastructure replacement in our 
communities.
                         legislative approaches
    What is needed to help close the drinking water infrastructure gap 
is an investment program that not only helps small systems achieve and 
ensure regulatory compliance, but also recognizes the challenges facing 
large water systems. AMWA and our WIN partners have asked Congress to 
authorize and appropriate $57 billion over a five year period for both 
drinking water and wastewater infrastructure ($28.5 billion for 
drinking water). This amount is only half of the infrastructure funding 
gap for those years. This investment program should include a strong 
grants component to help systems that are disadvantaged, yet have the 
capacity to return to self-sustainability. We recommend it also include 
a 15-percent set-aside for metropolitan drinking water agencies, to 
make certain that states address their needs. Under this proposal, 
small systems would continue to get the help they need to comply with 
the Safe Drinking Water Act, and metropolitan water agencies could 
invest in replacing aging infrastructure. In states where there are few 
metropolitan systems or where the systems do not need assistance, the 
funds set aside could be used for small systems.
    Legislation was recently introduced by leaders of the Senate 
Environment and Public Works Committee and the House Transportation and 
Infrastructure Committee to invest more funds in water infrastructure 
and to establish new procedures and requirements to apply for and 
receive SRF assistance.
    Although the needs of drinking water agencies over the next five 
years are nearly $60 billion, the Senate bill, if enacted, would 
authorizes $15 billion over five years and fund hundreds of projects to 
ensure safe drinking water for many years to come.
    These bills also attempt to address the areas of water rates, asset 
management plans, community planning and contracting. These practices 
embody those commonly used in metropolitan water agencies today. For 
instance, the Passaic Valley Water Commission has raised rates on 
average three percent per year. This allows us to keep up with 
inflation, invest roughly $3 million to $4 million in infrastructure 
placement annually and cover other expenditures. But had the commission 
not received SRF assistance, we would have had to raise rates an 
additional three percent to cover the $14 million in debt service that 
would have accompanied the private capital. What we are concerned about 
is that states and the EPA might be authorized or even directed to 
develop new and cumbersome requirements for water systems applying for 
funds, even though many city and county governments and some state 
agencies already address these issues adequately.
    AMWA encourages the subcommittee to maintain these practices as 
ideals and provide the opportunity for utilities that have not yet 
adopted them to do so. The subcommittee should avoid a situation in 
which the states or EPA enter the domain of local government and 
attempt to reinvent the wheel. Instead, industry organizations have 
many years of experience in this area and could be relied upon to 
provide technical and educational service to those utilities that have 
not adopted the practices.
    Let's not discard what responsible water agencies have already 
accomplished and create a layer of bureaucracy that could make applying 
for SRF assistance too cumbersome. This would reduce access to the 
program, potentially leaving many water systems with compounding needs 
and unresolved compliance problems.
    The bills also emphasize the importance of creative approaches to 
managing a water utility by encouraging consolidation, partnerships, 
and adoption of nonstructural alternatives. Many water systems are 
already considering various approaches to regional water management and 
it is important that these types of arrangements be evaluated and 
supported. For instance, the Passaic Valley Water Commission has 
partnered with private water companies to buy and sell water to satisfy 
local supply demands, and we have absorbed water systems around us, 
improving water service to consumers. Under one partnership 
arrangement, the Passaic Valley Water Commission, the city of Newark 
and other communities partnered to form the North Jersey District Water 
Supply Commission, to share the costs of developing new sources of 
water. Other utilities are engaged in a variety of voluntary 
cooperative partnerships, ranging from providing less costly water 
supplies to cooperation in obtaining new supplies and developing needed 
infrastructure.
    Rather than require consideration of alternative approaches as part 
of a loan application process, the SRF should provide financial 
incentives in the form of grants, loan forgiveness or lower interest 
rates for those drinking water systems that develop alternative 
arrangements that provide more effective and efficient management of 
local resources. In particular, financial incentives should be provided 
to those drinking water systems that agree to partner with small 
systems facing compliance problems.
    Among the partnerships water systems would be required to consider 
under the Senate bill are public-private partnerships, a form of 
privatization. AMWA is not here today to oppose private-public 
partnerships, but whether a water agency considers a public-private 
partnership should remain at the discretion of local government, 
because local factors will dictate whether the partnership is in the 
interest of the consumers. Therefore, the association urges the 
subcommittee to avoid endorsing public-private partnerships. 
Privatization is a very contentious issue in most communities.
    Privatization often sells itself as ``faster, better, cheaper'' 
than public operation. But what the water industry has learned in the 
last several years is that public water utilities can operate just as 
efficiently as private water companies, or more so. In New Orleans, the 
public employees participated in a competitive bid process against two 
international private contractors, and the public employees 
demonstrated they could operate the city's water systems even more 
efficiently than the private firms. At the Passaic Valley Water 
Commission, by analyzing our competitiveness and reengineering our 
operations, we have been able to save nearly $7 million per year and 
increase revenues by $3 million. Dozens of other public systems have 
produced similar results, upending the ``faster, better, cheaper'' 
myth.
    Privatization experts have identified some of the issues that need 
further exploration. Among them are those surrounding accountability 
and the blurring of roles and responsibilities. For example, who is 
responsible for complying with environmental regulations, resolving 
service complaints and planning to meet future needs? 2 Who 
pays if the private partner fails? If the private partner takes on more 
liability than it can afford, who's responsible when something goes 
wrong?
---------------------------------------------------------------------------
    \2\ Dr. Janice Beecher, Beecher Policy Research, Public Works 
Financing, November 2000.
---------------------------------------------------------------------------
    Another issue that has recently emerged is a concern about the 
implications of international trade agreements on domestic 
privatization since four of the major companies involved in the U.S. 
water market are located in other countries. For example, once a 
municipality contracts with a foreign provider, can that municipality 
withdraw from the agreement? What impact could the General Agreement on 
Trade in Services (GATS) and the authority of the World Trade 
Organization (WTO) have on future contracts? Will GATS or WTO prevent 
publicly owned U.S. water systems from providing water or services to 
neighboring water agencies.
    The Senate bill also proposes procurement provisions that were 
abandoned in the Clean Water Act when the Clean Water SRF program was 
adopted. The requirements were abandoned because they encumbered both 
state agencies and local government, overrode state and local 
procurement laws and created many disputes. The same would hold true 
today, and AMWA urges the subcommittee to avoid such provisions in its 
own legislation.
                               conclusion
    AMWA appreciates this opportunity to discuss the infrastructure 
needs of drinking water agencies, particularly those serving 
metropolitan areas. We look forward to working with the subcommittee on 
proposals to help large and small water agencies continue to provide 
safe and affordable drinking water.

    Mr. Shimkus. Thank you. You did a great job. Welcome. Mr. 
Moore, and from the great city of Chicago, Illinois, I should 
have given you due recognition in my opening comments. I do so 
now, thank you, and you are recognized for 5 minutes, after 
which we will then recess the committee and then go to the 
floor for a vote.

                  STATEMENT OF JOSEPH A. MOORE

    Mr. Moore. Thank you very much, Mr. Chairman. I do bring 
you greetings from that part of Illinois north of I-80. I am an 
Alderman as you indicated from the city of Chicago, and I am 
also chair of the National League of Cities Energy, Environment 
and Natural Resources Committee.
    I am here to testify on behalf of the National League of 
Cities, and the 18,000 cities we represent across the United 
States on the need for an expanded Federal investment in the 
Nation's drinking water and waste water infrastructure.
    And I think what we have heard today for the most part is a 
consensus that we face an unprecedented financial problem. 
There is a huge financial gap between what cities are able to 
invest and what is actually needed to protect the public 
health, the environment, and our economy.
    Now, we can differ over exactly how much that gap is, but 
there is no question that the gap is very, very significant. 
What I would like to do just very briefly is address four 
matters.
    First of all, why we have this funding gap, and second, 
what local governments have been doing to address this issue. 
Third, why the Federal Government should help us out; and 
finally, how the Federal Government should help.
    First of all, why the funding gap. Well, our infrastructure 
is crumbling all at once. Different materials, with 
increasingly shorter shelf lives, are used over the years, 
leaving us with where we have got a hundred years worth of 
infrastructure being exhausted all at once.
    So that the iron pipes that were made and installed back a 
hundred years ago, and the concrete pipes that were installed 
in World War I, and the plastic pipes that have been installed 
since World War II, are essentially all falling apart at the 
same time.
    Furthermore, we have had a great amount of population 
growth in our urban areas, and as the infrastructure aged, our 
population grew, and so we have a situation now where systems 
that were designed and built for a population at the time of 
construction are now serving 2 to 3 times as many people as 
their designed capacity.
    Finally, cities have been faced by Federal mandates under 
the Clean Water Act and the Safe Drinking Water Act, and those 
mandates have drove up the costs, and have depleted local 
resources dedicated to infrastructure repair.
    And until the 1996 amendments to the Safe Drinking Water 
Act, there was absolutely no Federal commitment at all, and 
local rate payers bear the entire costs. And I would argue that 
even with those amendments, cities like Chicago, like Kansas 
City, and others, have not really been able to benefit from any 
or have benefited only very minimally from any Federal 
assistance.
    So what are our local governments doing to address the 
issue? We are investing $60 billion annually, and Chicago alone 
is planning to spend over a $100 million a year over the next 5 
years on water infrastructure.
    We have the world's two largest water treatment plants, two 
Quib complexes, 12 pumping stations, and hundreds of miles of 
pipe, and they all require large capital investment.
    This amount does not include security related 
infrastructure improvements, which have become a much more 
pressing issue following September 11.
    And we currently in Chicago estimate that the cost of these 
security related infrastructure improvements will be at least 
$14 million, and that estimate is actually likely to increase 
as our vulnerability assessment nears completion.
    Local systems are raising water and sewer rates to cover 
the additional costs. We are raising our water and sewer rates 
at the rate of 4 percent a year over the next 4 years. Some 
cities are raising their rates even higher.
    So local governments are doing their part, and they are 
managing their assets in a more of a business-like manner, and 
Chicago has worked hard to achieve cost efficiencies, and we 
have outsourced our engineering program management functions, 
and portions of our billing and collection systems.
    And we outsourced a portion of our water pipe construction 
program, and so the fact of the matter is that we don't need 
the Federal Government to encourage us to institute--as we are 
doping that already.
    Finally, why should the Federal Government help? Well, a 
sound water and sewer infrastructure is the basis of a sound 
economy. A sound infrastructure is essential to the protection 
of public health.
    Federal assistance as demonstrated by the Clean Water Act 
is a catalyst that ensures public health protection and 
environmental progress, and it is needed to enhance the 
security of our drinking and waste water systems, systems that 
were designed with little thought given to the kind of 
terrorist activities that we witnessed on September 11, need to 
be upgraded.
    The bottom line is that clean and safe water is no less a 
national priority than national defense, or the interstate 
highway system, or aviation systems, and all of those enjoy 
significant, long term, Federal assistance and Federal grant 
programs.
    And water and waste water infrastructure deserve no less. 
How can the Federal Government help? We need to have a 
financial partnership for water infrastructure. We need to have 
a system that provides more flexibility versus grants, as 
opposed to loans.
    And we need to have a standard funding for research and 
technology to assist local governments in providing clean and 
safe water more efficiently and effectively. And we need to 
establish a mechanism to develop a long term and secure 
financial partnership for water infrastructure needs, and 
provide assistance as I said to enhance security of water 
systems.
    And finally as you work on new proposals, I would just 
caution you to not put into place new Federal requirements, 
particularly Federal requirements for establishing public-
private partnerships.
    The fact of the matter is that these decisions should be 
made at the local level. I do have and I would like to include 
in the record a letter from my colleague in Atlanta, who has 
outlined some of the serious problems that they face when they 
privatize their system.
    All I ask is that you give our local entities the 
flexibility to address the privatization issue on a case-by-
case basis, and I appreciate your attention.
    [The prepared statement of Joseph A. Moore follows:]
 Prepared Statement of Joseph A. Moore, Alderman, Chicago, Illinois on 
                Behalf of The National League of Cities
    Mr. Chairman, members of the Committee: I am Joseph Moore, Alderman 
from the city of Chicago, and chair of the National League of Cities' 
Energy, Environment and Natural Resources Committee. I am here today to 
testify on behalf of NLC and the 18,000 cities we represent across the 
United States on the need for an expanded federal investment in the 
nation's drinking water infrastructure. We appreciate the opportunity 
to present the views of our members as well as those of the Water 
Infrastructure Network 1.
---------------------------------------------------------------------------
    \1\ The Water Infrastructure Network is a coalition of state, 
local, environmental, professional, and labor organizations comprised 
of 29 diverse groups including: American Coal Ash Association; American 
Concrete Pressure Pipe Association; American Consulting Engineers 
Council; American Public Works Association; American Society of Civil 
Engineers; American Water Works Association; Associated General 
Contractors; Association of California Water Agencies; Association of 
Metropolitan Sewerage Agencies; Association of Metropolitan Water 
Agencies; California Rebuild America Coalition; Clean Water Action; 
Environmental and Energy Study Institute; Environmental Business Action 
Coalition; International Union of Operating Engineers, AFL-CIO; 
National Association of Counties; National Association of Flood and 
Stormwater Management Agencies; National Association of Towns and 
Townships; National League of Cities; National Rural Water Association; 
National Society of Professional Engineers; National Urban Agriculture 
Council; Prestressed/Precast Concrete Institute; Rural Community 
Assistance Program, Inc.; Water Environment Federation; WateReuse 
Association; and Western Coalition of Arid States.
---------------------------------------------------------------------------
    I would like to discuss the Water Infrastructure Network (WIN) 
Report--Water Infrastructure NOW--which recommends a major new and 
revitalized federal commitment to the nation's drinking water and 
wastewater infrastructure. It outlines the parameters of a potential 
federal response to the $1 trillion funding gap between the amount 
cities are currently investing in our drinking water and wastewater 
infrastructure and the additional dollars needed to assure protection 
of public health, the environment and our economy over the next 
generation.
    Before examining the details of the Report, however, it is 
necessary to address some fundamental questions:

(1) Why do we have a funding gap of such enormous magnitude?
(2) What have local governments been doing to address the issue?
(3) Why should the federal government help? and,
(4) How should the federal government help?
          1. why is there a water infrastructure funding gap?
    A number of factors contribute to the water infrastructure funding 
gap facing municipalities:

 the simultaneous expiration of the useful life of water 
        infrastructure installed at different times;
 population growth; and
 implementation of new, more costly, and more complex federal 
        mandates which, in effect, substitute federal priorities for 
        local priorities.
    The nation's drinking water infrastructure represents more than a 
century of investment, funded almost entirely by local ratepayers. A 
significant part of the nation's water infrastructure dates from the 
late 19th century. More recent expansions of these systems took place 
following the two world wars. All of which means the newest systems are 
over 50 years old. What is more, the newer the infrastructure, the more 
likely it is to be deteriorating. Different materials, with 
increasingly shorter useful lives, were used over time, thus leaving us 
in the position where 100 year's worth of infrastructure is being 
exhausted all at once. As a consequence, municipalities now face a 
confluence of deterioration of their underground pipes, and, in some 
cases, their treatment facilities, that process the nation's drinking 
water and sewerage.
    Until passage of the 1996 Safe Drinking Water Act Amendments, the 
federal government made no financial commitment to the nation's 
drinking water systems. The fact that drinking water in the United 
States is among the safest in the world is a significant tribute to the 
local ratepayers and their leadership that have financed these 
treatment facilities.
    Another factor contributing to the current funding gap is that 
urban populations grew significantly as local water infrastructure 
aged. Systems designed and built for the population at the time of 
their construction are now serving two to three times as many people as 
their design capacity.
    While Congress recognized the need to provide financial assistance 
to municipal drinking water utilities when it passed the Safe Drinking 
Water Act Amendments of 1996, this funding is limited in its use for 
infrastructure repair. For the most part, it is available only as 
loans, and is substantially targeted to addressing the non-compliance 
problems of the nation's smaller drinking water systems.
    Finally, federal mandates have also played a role in diverting 
local resources away from local needs and priorities and retargeting 
them to federal priorities. When cities do manage to set aside funds to 
address a critical local water infrastructure need, more often than 
not, a new unfunded--and usually costly--federal mandate depletes local 
resources that would have been dedicated to infrastructure replacement.
     2. what have local governments been doing to help themselves?
 local governments--or rather local tax and ratepayers--invest 
        $60 billion annually in our drinking water and wastewater 
        systems. A recent asset management study in 20 cities estimated 
        the average per capita replacement value of their systems to be 
        $2,400 per person.
 local systems are raising water and sewer rates to accommodate 
        the increasing costs (which EPA indicates are 6 percent a year 
        above the inflation rate) of operating and maintaining their 
        systems.
 local governments are managing their infrastructure assets in 
        a more businesslike manner, spurred in part by new federal 
        requirements developed by the Government Accounting Standards 
        Board--on which local government bond ratings are based.
 local governments are applying new management tools to assess 
        and operate their systems more effectively and efficiently.
    Until recently, our drinking water infrastructure was funded 
entirely by local ratepayers. And the deteriorating water 
infrastructure that must be replaced because it has maximized its 
useful life over the past 50 to 100 years was constructed entirely at 
local expense.
    In addition, municipal local rate structures generate the $60 
billion annually we invest in maintaining and operating our drinking 
water and wastewater systems and cover 90 percent of all costs, 
including construction costs. In meeting the enormous needs of the 
future, cities also expect to finance--again through local ratepayers--
$1 trillion of the needs for repair, rehabilitation and replacement of 
the aging and crumbling water infrastructure over the next 20 years.
    Municipalities have also been raising their water and sewer rates 
to accommodate increases in their operating and maintenance costs, 
which, according to EPA, are rising at six percent above inflation 
annually. Many cities require developers, and subsequently homeowners, 
to finance the cost of new connections to municipal systems.
    In addition, cities are improving their management practices. Local 
governments will soon be required to comply with new rules promulgated 
by the Government Accounting Standards Board in Statement 34 (GASB 34). 
These rules will require municipalities to report their long-term 
financial position, quantifying resources and obligations more 
comprehensively. The information cities will be required to provide 
will include an evaluation of the condition of local infrastructure. 
Bond rating services and others will be able to evaluate whether cities 
are ``acquiring assets to benefit future fiscal years or if these 
assets are being used but not replaced.'' 2 The GASB 34 rule 
will, at a minimum, encourage local governments, who have not done so 
already, to evaluate their infrastructure in a more systematic manner.
---------------------------------------------------------------------------
    \2\ ``GASB 34: What Implementation Means to the Rating Process,'' 
Hyman C. Grossman and LaVerne Thomas, Public Finance, p. 2, Sept. 20, 
1999, Standard and Poor's.
---------------------------------------------------------------------------
    Other asset management tools, such as the ``Nessie Study'' are also 
being implemented by cities to help identify when pipes and treatment 
plants were built, how long they can be expected to last, when they 
will need to be replaced, and the likely cost for such replacement. 
More efficient operations are also among the tools used to provide more 
cost effective operations at the municipal level. And some local 
governments are subjecting their system operations to competitive 
bidding to affect cost savings and generate new and better 
efficiencies.
               3. why should the federal government help?
 a sound infrastructure is the foundation of a sound economy;
 a sound infrastructure is essential to the protection of 
        public health;
 federal assistance, as demonstrated by the success of the 
        Clean Water Act, is the catalyst that ensures public health 
        protection and environmental progress; and,
 federal assistance is essential to enhance the security of our 
        drinking water systems.
    The Water Infrastructure NOW report makes an eloquent case for a 
renewed federal financial partnership in water infrastructure. It says:
        The case for federal investment is compelling. Needs are large 
        and unprecedented; in many locations, local sources cannot be 
        expected to meet this challenge alone; and because waters are 
        shared across local and state boundaries, the benefits of 
        federal help will accrue to the entire nation. Clean and safe 
        water is no less a national priority than are national defense, 
        an adequate system of interstate highways, or a safe and 
        efficient aviation system. These latter infrastructure programs 
        enjoy sustainable, long-term federal grant programs; under 
        current policy, water and wastewater infrastructure do not.
    With respect to the need for enhanced security, it should be 
remembered that our drinking water facilities were constructed with 
little, if any thought given to the potential for the unprecedented 
terrorist activities of the type witnessed on September 11th. The 
security mechanisms built into these systems were not designed for 
anything of that magnitude. We believe federal assistance to enhance 
drinking water security needs--especially those involving capital 
investments--is both necessary and a legitimate use of these funds.
    In light of the staggering costs of maintaining, operating, 
rehabilitating, and replacing our drinking water system infrastructure 
to serve our citizens, a partnership similar to that in the Clean Water 
Act of the 1970-80's must be established. Since virtually all of us 
live downstream from someone else, it is in the national interest for 
all levels of government to participate in assuring that our drinking 
water infrastructure is sound, reliable, protective of human health, 
and affordable.
                4. how can the federal government help?
  establish a financial partnership for drinking water 
        infrastructure;
 provide more flexibility in the types of assistance available 
        to municipalities to include grants as well as loans;
 expand investments in research and technology development;
 establish a mechanism to develop a long-term and secure 
        financial partnership for water infrastructure needs; and
 provide assistance to ensure implementation of new and 
        heightened security needs of drinking water systems.
    The Water Infrastructure Network has developed and agreed on the 
outlines of a legislative proposal to enhance the federal financial 
commitment to drinking water infrastructure needs. The proposal 
recommends a five-year, $57 billion authorization beginning in fiscal 
2003 for loans, grants, loan subsidies and credit assistance for basic 
drinking water and wastewater infrastructure needs. These funds would 
be allocated to states to capitalize state-administered grant and loan 
programs.
    Half the funds would be targeted to wastewater and half to drinking 
water needs, States would have the flexibility, however, to shift up to 
an additional 15 percent from one purpose to the other, an innovation 
incorporated in the 1996 amendments to the SDWA. This flexibility would 
be available so long as such a transfer did not adversely affect any 
project on the state's priority list that was ``ready to go.''
    WIN recommends, and NLC supports, that Congress require the States 
to provide 25 to 50 percent of each year's allocation as grants that 
would fund up to 55 percent of project costs. Up to 75 percent of 
project costs would be eligible for grant funding in economically 
distressed communities. Loans and loan subsidies would include interest 
rate discounts, zero interest rate loans, principal forgiveness and 
negative interest rate loans.
    The report proposes an additional $4 billion in resources for State 
governments to help them meet their drinking water and wastewater 
responsibilities. WIN also recommends funding for development of 
innovative technology and management techniques to assist local 
governments in providing clean and safe water more effectively and 
efficiently in the future.
    And finally, the WIN report recommends that Congress ``establish a 
formal process to evaluate alternatives for, and recommend the 
structure of, a longer-term and sustainable financing approach to meet 
America's water and wastewater infrastructure needs.''
    As the committee is well aware, both the House Transportation and 
Infrastructure Committee and the Senate Environment and Public Works 
Committee are moving forward with legislation that would significantly 
enhance resources available to the Clean Water and--in the case of the 
Senate--the Drinking Water SRFs. As these proposals have moved through 
the legislative process, NLC and others have raised concerns about 
potential new federal requirements to establish public/private 
partnerships in providing drinking water and wastewater services. We 
consider such recommendations sufficiently important, to raise the 
issue before you develop legislation.
    First, NLC believes such relationships are solely the province of 
local governments. There are many examples at the local level where 
public/private partnerships--particularly in drinking water--are 
working well and redound to the benefit of local ratepayers, the 
municipality and the private entity operating the local system. 
Simultaneously, other examples indicate such relationships can leave 
much to be desired.
    Second, while not claiming expertise in this area, NLC also has 
concerns about the impact of international trade agreements on the 
privatization of local services and the relationship of such agreements 
to the maintenance of local control and autonomy. As the committee 
undoubtedly knows, the majority of the large private water companies 
operating in the United States are foreign owned. At the local level, 
we have concerns that contracting with these foreign-owned companies 
may--because of the terms and conditions of international agreements--
adversely affect the ability of a local government to make many 
critical determinations about the utility once it is under contract 
with such a private partner. We would be happy to provide expert 
resources and additional information to the committee on this issue and 
ask only that there be a full understanding of the ramifications of 
public/private partnerships in the water business before requiring or 
encouraging such activities in federal law.
    Mr. Chairman, members of the Committee, thank you for the 
opportunity to testify for the 158,000 local elected officials who 
comprise the National League of Cities on the critical needs facing 
local governments in financing drinking water infrastructure needs over 
the next generation.

    Mr. Shimkus. Thank you very much. In this report that I 
talked about in my opening statement, you left out the State's 
contribution in your list, which was over this same report 
period, $1.4 billion. And I ask for unanimous consent, and of 
course I agree and you can submit that letter.
    And I am going to run and vote, and we will recess until 
12:15.
    [Brief recess.]
    Mr. Shimkus. I would like to call the hearing back to 
order, and I want to make an announcement. There is another 
committee that has the room at 1, and so we are going to try 
and finish up our opening statements and then open ourselves up 
for questions and additional comments.
    So I would like to thank you all for you all being very 
punctual, and I would like to thank my ranking member for 
getting back here rapidly also. And now we will go to Mr. 
Neukrug, Director of Office of Watersheds of the Philadelphia 
Water Department. Welcome and your full statement is into the 
record, and if you can summarize for 5 minutes.
    Mr. Neukrug. Thank you, Mr. Chairman, and you did much 
better with my name the first time.
    Mr. Shimkus. All right. I will take that back.

                   STATEMENT OF HOWARD NEUKRUG

    Mr. Neukrug. Good morning, Mr. Chair, and Mr. Pallone. I am 
Howard Neukrug and I am the Director of the Office of 
Watersheds for the city of Philadelphia Water Department, and I 
am really honored by this opportunity to express the views of 
the American Water Works Association on these critical 
infrastructure issues.
    AWWA is the world's largest association for the drinking 
water profession. Our 57,000 members include over 4,300 
utilities, which represent 80 percent of the drinking water 
supplied to our Nation.
    We thank you for holding this hearing, and look forward to 
continuing to work with you and your offices, and your staffs, 
as we move forward with the bill. I took the last half-hour 
break to get rid of most of my notes and just give you my key 
points.
    And we have three key points for you. Number 1, there are 
significant capital needs for water and waste water 
infrastructure needs in the United States today, and it will 
continue at least through the next 20 years, if not longer.
    The second point is that the Drinking Water State Revolving 
Fund has been a very valuable tool to the industry, and we 
consider it to be one of the tools, one of the financing tools, 
that we hope will remain into the future.
    The third point is that to survive as a viable tool in the 
21st Century, some changes are going to need to be made, and 
this State Revolving Fund really needs to be reinvigorated. It 
needs to be reinvigorated with dollars, and it needs to be 
flexible, and as uncumbersome as possible for utilities to go 
out and seek that money as part of the solution to their 
infrastructure needs.
    In the written testimony, we quote a number of $28.5 
billion over 5 years, and we hope that you would consider that 
number. I just would like to bring up from the earlier 
testimony from Mr. Beider, who complimented the 20 city study 
that was done by the American Water Works Association, called 
the Dawn of the Replacement Era.
    I think there is one key point here that needs to be made 
to clear the record a little bit, and that is that was really 
done with a broad brush approach, looking over the entire 
Nation, and the infrastructure needs of the entire Nation.
    The reality, and one of the benefits of an SRF, is its 
flexibility and its ability to use and to go site specific 
locations. And what our 20 city survey found was that there are 
humps, because development didn't occur gradually over time.
    It occurred in the 1890's, and it occurred in the 1920's, 
and again in the 1950's. And it just so happens that because of 
the type of pipe that was used at that time, we are now coming 
to a critical point in time where all those pipes for many 
utilities are coming due for replacement at the same time.
    So when you look at it broadly, and you look at it 
nationwide, you may not be able to accept the numbers that Mr. 
Beider presented. But when you look at it on a city by city 
basis throughout the country, you are going to find that there 
are real financial needs coming up for many utilities over the 
next 20 years.
    And in conclusion, and going back to my written statement 
here, while various studies and analyses have arrived at very 
different figures for the magnitude of the drinking water 
infrastructure replacement need, AWWA does not believe that 
these differences are a major issue.
    All of the conclusions, regardless of the methodologies and 
assumptions used, points to a very large infrastructure funding 
need over the next 20 or 30 years, and a viable State revolving 
fund is a critical component to the solution.
    And we call upon Congress for a new partnership for 
investing in drinking water infrastructure, in which utilities, 
States, and the Federal Government all have important roles.
    We urge the subcommittee to introduce a bill as quickly as 
possible, and we pledge to work with Congress to develop a 
responsible and fair solution to our Nation's drinking water 
infrastructure challenge, and I thank you for your time and 
your consideration of our views. Thank you.
    [The prepared statement of Howard Neukrug follows:]
 Prepared Statement of Howard Neukrug, Director, Office of Watersheds, 
  Philadelphia Water Department on Behalf of the American Water Works 
                              Association
                              introduction
    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 and am 
here today on behalf of AWWA. AWWA appreciates the opportunity to 
present its views on drinking water needs and infrastructure.
    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 4,3000 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 is also a member of the Water Infrastructure Network (WIN)--a 
broad-based coalition of drinking water, wastewater, municipal and 
state government, engineering and environmental groups, dedicated to 
preserving and protecting the hard-won public health, environmental and 
economic gains that America's water and wastewater infrastructure 
provides.
    AWWA and its members commend you for holding this hearing 
concerning the infrastructure needs of the Nation's public water 
systems. AWWA looks forward to working with the subcommittee in its 
efforts to address the growing infrastructure costs facing public water 
systems and consumers.
   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. Although, the jurisdiction of this Subcommittee does not 
include wastewater, the funding issues of drinking water and wastewater 
utilities are inextricably intertwined. 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 these costs of repair and replacement of aging pipes, 
appurtenances, and other infrastructure 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.
                 the drinking water infrastructure need
    The importance of safe drinking water to public health and the 
nation's economic welfare is undisputed. However, as we enter the 21st 
Century, water utilities face significant economic challenges. For the 
first time, in many of these utilities a significant amount of buried 
infrastructure--the underground pipes that make safe water available at 
the turn of a tap--is at or very near the end of its expected life 
span. The pipes laid down at different times in our history have 
different life expectancies, and thousands of miles of pipes that were 
buried over a 100 or more years ago will need to be replaced in the 
next 30 years. Most utilities have not faced the need to replace huge 
amounts of this infrastructure because it was too young. Today a new 
age has arrived. We stand at the dawn of the replacement era.
    Recognizing that we are at the doorstep of a new era in the 
economics of water supply, the replacement era, AWWA has undertaken an 
analysis of 20 utilities throughout the nation to understand the nature 
and scope of the emerging infrastructure challenge. The project 
involved correlating the estimated life of pipes with actual operations 
experience in the sample of 20 utilities. Projecting future investment 
needs for pipe replacement in those utilities yields a forecast of the 
annual replacement needs for a particular utility, based on the age of 
the pipes and how long they are expected to last in that utility. By 
modeling the demographic pattern of installation and knowing the life 
expectancy of the pipes, we can estimate the timing and magnitude of 
that obligation. This analysis graphically portrays the nature of the 
challenge ahead of us. In the AWWA statement submitted to the 
Subcommittee for the hearing on Drinking Water and Infrastructure, 
March 28, 2001, we summarized the highlights of the analysis and 
subsequently provided a copy of our report entitled, Dawn of the 
Replacement Era: Reinvesting in Drinking Water Infrastructure, to all 
members of the Subcommittee.
    Extrapolating from our analysis of 20 utilities, we project that 
expenditures on the order of $250 billion over 30 years might be 
required nationwide for the replacement of worn out drinking water 
pipes and associated structures (valves, fittings, etc). This figure 
does not include wastewater infrastructure or the cost of new drinking 
water standards. Moreover, the requirement hits different utilities at 
different times and many utilities will need to accelerate their 
investment. Some will see rapidly escalating infrastructure expenditure 
needs in the next 10-20 years. Others will find their investment 
decisions subject to a variety of factors that cause replacement to 
occur sooner or at greater expense, such as urban redevelopment, 
modernization, coordination with other city construction, increasing 
pipe size, and other factors.
    Overall, the findings confirm that replacement needs are large and 
on the way. There will be a growing conflict between the need to 
replace worn-out infrastructure and the need to invest in compliance 
with new regulatory standards under the Safe Drinking Water Act. In 
addition, as pointed out earlier, the concurrent demands for investment 
in wastewater infrastructure and compliance with new Clean Water Act 
regulations, including huge needs for meeting combined sewer overflow 
(CSO) and storm water requirements, will compete for revenue on the 
same household bill.
    Ultimately, the rate-paying public will have to finance the 
replacement of the nation's drinking water infrastructure either 
through rates or taxes. AWWA expects local funds to cover the great 
majority of the nation's water infrastructure needs, and remains 
committed to the principle of full cost recovery through rates. 
However, many utilities may face needs that are large and unevenly 
distributed over time. They must manage a difficult transition between 
today's level of investment and the higher level of investment that is 
required over the long term. Facing an inexorable rise in 
infrastructure replacement needs driven by demographic forces that were 
at work as much as a 100 years ago, compounded by the negative effects 
of changing demographics on per-capita costs in center cities, many 
utilities face a significant challenge in keeping water affordable for 
all the people they serve.
    Affordability, poverty and infrastructure abandonment seem to go 
hand-in-hand. In Philadelphia, where 40 percent of the population lives 
in poverty, a rise in water bills will remain a significant socio-
economic issue well into the foreseeable future. In the March 27, 2001, 
issue of the Philadelphia Inquirer, it was reported that almost one-
third of the 28,000 residential blocks in Philadelphia have abandoned 
homes. We estimate that there are three or more abandoned houses on 
each of 4,600 residential blocks in our city. At ten city blocks per 
mile, these inner-city neighborhoods contain a total of 460 miles each 
of water and sewerage pipes. At a replacement cost of $1 million per 
mile for water pipe and $1.5 million per mile for sewer pipe, these 
4,600 blocks represents over $1 billion in pipe infrastructure 
replacement costs--the burden of which is falling on fewer and fewer 
households and, typically, poorer and poorer families. An analysis of 
U.S. Census data shows that for over the hundred years from 1850 to 
1950, the population of Philadelphia grew from 100.000 to 2 million 
people. But from 1950 to the end of the century, Philadelphia lost 25 
percent of its population, dropping to 1,500,000 people. In the 
forthcoming AWWA report, the average per-capita value of water main 
assets in place today across the sample of 20 utilities is estimated to 
be three times the amount that was present in 1930. In Philadelphia, 
however, that ratio is almost eight times the value in 1930 due to 
population declines since about 1950. Demographic change, then, places 
financial strain on all public water systems and has a direct impact on 
affordability of the investment required.
    While various studies and analysis have arrived at differing 
figures for the magnitude of the drinking water infrastructure 
replacement need, AWWA does not believe that differences in the figures 
should be the major issue. All of the conclusions, regardless of the 
methodologies and assumptions used, point to a very large 
infrastructure funding need over the next twenty to thirty years. To 
meet this challenge, AWWA has called for a new partnership for 
investing in drinking water infrastructure in which utilities, states, 
and the federal government all have important roles.
                   public water system security needs
    The events of September 11, 2001, have added a new dimension to the 
protection of drinking water and drinking water infrastructure needs. 
In addition to protecting drinking water from contamination, America's 
homeland security requires a secure water supply. Public health, fire 
protection, and sanitation depend on it. The role of public water 
systems for first responders is a critical, and is often overlooked in 
discussions concerning homeland security funding priorities. The al 
Qaeda terrorist network and others are known to have conducted research 
on public water systems in the United States. If the intent is to 
create terror in our society, water systems are targets of opportunity 
for terrorists, not only to contaminate the water supply, but also to 
deny first responders water for fire protection in a coordinated 
terrorist attack.
    Drinking water suppliers have a long history of security 
preparedness prior to September 11, 2001. However, the post-September 
11 world has added a new understanding of security and has added an 
unprecedented financial burden on public water systems for immediate 
steps needed to protect the people of the United States. AWWA research 
has estimated the cost of immediate capital improvements to ensure 
security of access to critical public water system assets through 
barriers, detection devices and cyber security systems to be 
approximately $1.6 billion. This cost will provide initial security 
improvements for about 53,000 water systems serving more than 264 
million people. It does not include future capital costs of upgrades to 
address vulnerabilities identified in vulnerability assessments such as 
hardening pumping stations, chemical storage buildings, transmission 
mains, add redundant infrastructure or relocate facilities and 
pipelines. These new security concerns added to the cost of replacing 
aging drinking water infrastructure and the capital cost of compliance 
with federally mandated regulations, drives the need to greatly 
increase the level of federal investment in drinking water 
infrastructure now.
                the drinking water state revolving fund
    In our report entitled Dawn of the Replacement Era: Reinvesting in 
Drinking Water Infrastructure, AWWA recommended changing and expanding 
the existing Drinking Water State Revolving Fund (DWSRF) to 
significantly increase federal funding for projects to repair, replace, 
or rehabilitate drinking water infrastructure to include the aging 
distribution pipes. Subsequent to September 11, AWWA has further 
recommended that drinking water capital security upgrades should 
specifically be identified in the SDWA as eligible projects.
    In many ways, the DWSRF program has been very successful. Loans are 
reaching communities of all sizes and income levels, average costs of 
capital are well below market rates, many states have been highly 
creative in leveraging their original federal capitalization grants, 
and funds are generally in demand among local borrowers. Yet, clearly, 
these programs can be improved to address a range of remaining problems 
that impede enhanced equity, efficiency, and effectiveness.
    AWWA believes that the DWSRF could serve as a model for funding 
drinking water infrastructure with the following changes:

 Significantly increased federal funding.
 Clear eligibility of projects to repair, replace, or 
        rehabilitate drinking water infrastructure.
 Clear eligibility for capital security upgrades.
 Universal eligibility of all water systems, both public and 
        investor owned, regardless of size.
 Ability to make grants or loans in any combination and to use 
        other financing tools to leverage public and private capital.
 Reasonable terms and conditions such as demonstration of 
        system viability and ability to repay a loan.
 Streamlined procedures for those accessing the funds.
    AWWA urges the Subcommittee to introduce a bill as quickly as 
possible to amend the SDWA to address drinking water infrastructure 
needs in the DWSRF so that a bill can be enacted before the end of this 
Congress. In the remainder of this statement, we will summarize 
suggested improvements to the DWSRF to address the growing drinking 
water infrastructure and security needs.
                          dwsrf authorizations
    AWWA recommends that the DWSRF authorization should be 
significantly increased to provide at least half of the $57 billion 
($28.5 billion) recommended by WIN over the next five years drinking 
water. We believe that this authorization would mark 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.
    We must note that the recommended authorization level is a very 
small fraction of the $250 billion in infrastructure replacement needs 
over the next thirty years identified by AWWA. AWWA does not expect 
that federal funds will be available for 100 percent of the increase in 
infrastructure needs facing the nation's water utilities. AWWA remains 
committed to the principle that utility operations should be fully 
supported by 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, many utilities 
are going to face a period of adjustment in adapting to the new reality 
of the replacement era described in the AWWA report. Many utilities and 
their customers will need additional assistance in working through 
extraordinary replacement needs in the next 20 years in the form of 
principal forgiveness or other direct financial assistance measures.
    The difference between drinking water utilities' current 
expenditures for infrastructure replacement and the needed level of 
expenditure is estimated by WIN to be about $11 billion per year over 
the next 20 years. If the federal government were to provide half the 
cost of this gap, the federal share of total utility spending would 
still amount to under 12 percent of total utility spending for twenty 
years. For comparison, the federal share of investment in roads, 
bridges, and airports is 80 percent.
    It is clear that, even with federal assistance, the burden of 
paying for public water system improvements will remain overwhelmingly 
with utilities and their rate-paying customers. In recognition of this, 
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. We look forward to working with the 
Subcommittee to ensure that authorization levels will be adequate to 
address the needs of older cities with economically disadvantaged 
populations and meet the security needs of public water systems.
                           eligible projects
Aging Infrastructure.
    It is important to note that support of drinking water 
infrastructure is not the primary purpose of the Environmental 
Protection Agency (EPA) programs. The eligibility requirements of the 
DWSRF created by the SDWA Amendments of 1996 address the compliance 
needs of public water systems. The very large and growing need to 
replace aging drinking water infrastructure is a challenge that is not 
specifically addressed by the DWSRF as currently structured and funded.
    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. This, we believe should 
be the major purpose of the increased DWSRF authorizations. EPA has 
interpreted the current provisions of the 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. 
That statute should make Congress's intent clear that repair and 
replacement of aging infrastructure is an important priority and not 
rely on an EPA or State interpretation that is subject to change.
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 concerns.
    EPA has interpreted the current provisions of the SDWA to authorize 
the use of DWSRF funding for capital 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 
state Congress's intent that capital projects to address security 
concerns should be priority projects for DWSRF funding. AWWA strongly 
recommends that bill make explicit the DWSRF eligibility of capital 
projects to address security
                       large public water systems
    AWWA does not believe that the DWSRF adequately addresses the 
infrastructure challenges presented by large urban public water systems 
and particularly those with declining and economically disadvantaged 
populations. 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.
    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.
    AWWA is not convinced that an overall increased authorization for 
the DWSRF alone will provide states the ability to provide more 
assistance to large public water systems than was possible previously 
as some believe. 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 
public water systems with major infrastructure replacement needs and 
disadvantaged consumers can participate in the DWSRF program in all 
States.
                dwsrf loan requirements and restrictions
    AWWA has recommended streamlining many of the requirements and 
procedures for obtaining loans from the DWRSF. We believe careful 
attention is required to strike an appropriate balance between 
Congress's desire to encourage certain behaviors at utilities, and the 
need to keep the DWSRF as unencumbered as possible by unproductive red 
tape. Congress or EPA should exempt certain types of projects or 
projects below a certain size threshold from DWSRF red tape 
requirements that don't make sense. Similarly, capital investments to 
improve the security of the Nation's drinking water should be exempt 
from red tape to the maximum extent possible. We urge the Congress to 
resist adding requirements for DWSRF loans that can lead to an 
inappropriate federal micro-management of drinking water rate 
structures, assessment management, utility ownership and management 
options or local planning decisions. If a public water system is 
otherwise financially sound, can repay the loan, and can comply with 
applicable drinking water regulations, the addition of irrelevant 
requirements creates a burden to obtaining a loan.
    Congress also needs to provide incentives for States to reform 
their existing programs to make them more effective. For example, some 
states have not allowed larger systems to access the existing state 
revolving fund, or have excluded investor owned systems. Some states 
encumber their revolving funds with nonproductive red tape, charge high 
loan origination and other fees, or charge loan rates that are 
equivalent to market rates. Some states preclude the use of alternate 
procurement methods that minimize infrastructure procurement costs. For 
example, the ``design/build'' process for infrastructure procurement 
has been documented to save 20-40% of construction costs for new 
treatment plants in some cases. Public procurement laws in many states, 
while not explicitly banning design/build, mandate a process that 
prevents its use where local authorities have determined it would be 
advantageous. The result is that, in many states, revolving loan funds 
have not proved to be useful or attractive even to drinking water 
utilities desperately in need of capital.
    To improve the efficiency, effectiveness and flexibility of the 
DWSRF, Congress should authorize the use of DWSRF funds to purchase or 
refinance outstanding debt obligations of a drinking water system; 
guarantee, or purchase of insurance for, and obligation of a drinking 
water system; secure the payment or directly repay principal or 
interest on general obligation bonds issued by the State if proceeds of 
the bonds will be deposited in the DWSRF; and deposit into a capital 
reserve for a debt instrument of a drinking water system. Since 
drinking water infrastructure projects have a design-life much longer 
than twenty years, AWWA recommends that the DWSRF loan repayment period 
by extended to thirty years for all utilities. This is an accepted loan 
repayment period in the financial market. These measures will greatly 
reduce the cost of financing drinking water infrastructure and allow 
communities increased flexibility.
                               conclusion
    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 SDWA and 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.
    In our testimony we have made recommendations that we believe will 
improve the DWSRF to address the increasing drinking water 
infrastructure financing needs. We believe that increasing the DWSRF 
authorization to at least $28.5 billion over the next five years is 
critical. AWWA urges the Subcommittee to introduce a bill as quickly as 
possible to amend the SDWA to address drinking water infrastructure 
needs in the DWSRF so that a bill can be enacted before the end of this 
Congress. AWWA pledges to work with Congress to develop a responsible 
and fair solution to Nation's drinking water infrastructure challenge. 
We thank you for your consideration of our views.
    This concludes the AWWA statement on drinking water needs and 
infrastructure. I would be pleased to answer any questions or provide 
additional material for the committee.

    Mr. Shimkus. Thank you very much.
    And now Mr. Elmer Ronnebaum, the General Manager of Kansas 
Rural Water Association, and again your full statement is into 
the record, and you have 5 minutes, and welcome.

                  STATEMENT OF ELMER RONNEBAUM

    Mr. Ronnebaum. Thank you, Mr. Chairman, and Mr. Pallone. My 
name is Elmer Ronnebaum, and I am from the Kansas Rural Water 
Association, and I am the General Manager. We have about 750 
member, small community and medium-sized community members.
    We are an affiliate of the National Rural Water 
Association, which represents some 22,000 small water and waste 
water systems nationally, and it is my honor to speak on their 
behalf today.
    As we have heard this morning, we agree that the principal 
dynamics of small communities need to be recognized in 
discussing funding issues. They are that small communities make 
up the largest percentage of drinking water systems, over 90 
percent.
    Two, that due to a lack of economies of scale, costs, where 
small consumers often pay a higher water and sewer bill, and 
water rates of $75 are not uncommon in rural areas where I am 
from.
    Three, small systems have limited technical and 
administrative abilities, and any increase in compliance or 
additional burdens on the revolving loan fund that cause them 
to further difficulty to navigate through the funding program 
will make that less attractive to them.
    Four, there are suggestions that consolidation and 
privatization are solutions to problems of small systems.
    Consolidation can work in some cases and in many cases it 
can't because of geography and a number of other aspects.
    Consolidation should be a local decision. The 1996 
amendments to the Safe Drinking Water Act provided all sorts of 
discretion and funding to States to meet local priorities.
    Rural water's message here today is that the Drinking Water 
State Revolving Loan, and the flexibility that came with it 
were a monumental decision, and it was a step in the right 
direction.
    The flexibility has made the State SRFs responsible to 
nearly every stakeholder. In Kansas, the Drinking Water State 
Revolving Loan Fund has received approximately $50 million in 
EPA cap grants, and it is the most highly leveraged program in 
the United States, at 1 to 4.
    They have turned that loan program into $210 million in 
loans. They have made 75 loans for $150 million, and 52 of 
those went to small communities for $67 million. So the point 
is that Congress has made the resources and the flexibility 
available to the States, and it is up to the States to make 
sure that that happens.
    But even with their successful implementation in Kansas, 
the loan demands through applications received exceeds the 
funding availability by 100 percent. Why such demand for 
funding? New regulations drive demand.
    For example, the city of Atwood, and we heard about arsenic 
this morning, Atwood, Kansas, is looking at 12 parts per 
billion. They are looking at a treatment plant improvement 
between $1.3 and $2 million to remove two-parts per billion.
    That translates to a $30 per month increase per customer 
for Atwood's 700 connections; a $30 per month increase, in 
addition to which Atwood has just finished a new sewer 
treatment process and needs basic infrastructure improvement.
    Infrastructure improvements are needed because they are 
obsolete and some are in a deteriorated state as previous 
panelists have commented that technology has improved the 
components that go into those systems.
    There are three key concerns that Rural Water has in the 
drinking water SRF. First, ensure that communities with the 
greatest need in the area of public health and economic need 
receive prioritization in the funding programs.
    Provide for both loans and grants, and also make sure that 
a minimum of those funds go to small communities. What is not 
needed are new funding priorities, set asides for various-sized 
systems, or changes in the disadvantaged community 
determination.
    We do not believe that corporate water supply systems 
should receive or be eligible for State Revolved Funding. 
Taxpayer subsidies should be prohibited from profit generating 
companies, or companies paying profits for shareholders and 
investors.
    Do not add new requirements for environmental or land use 
planning, the actual cost of water, common industry practices. 
Again, if Congress increases the demands on the applicants, 
most systems will find the program less attractive.
    We believe also that guidance should be given to ensure 
that all purchases, including professional services, are 
competitive. Rural Water supports those provisions similar to 
USDA's programs. Thank you, Mr. Chairman, for the opportunity 
to speak as you evaluate this funding program.
    [The prepared statement of Elmer Ronnebaum follows:]
 Prepared Statement of Elmer Ronnebaum, General Manager, Kansas Rural 
  Water Association, on Behalf of the National Rural Water Association
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to be here today to discuss small communities and their 
water funding concerns.
    My name is Elmer Ronnebaum. I am General Manager of the Kansas 
Rural Water Association. Kansas Rural Water has more than 750 small 
community members that operate water utilities and most operate 
wastewater utilities. The Association is governed by the local 
communities. The mission of the Association is to improve and protect 
water quality through grassroots technical assistance of utility 
operation and maintenance and training. Kansas Rural Water Association 
is an affiliate of the National Rural Water Association which 
represents over 22,000 small and medium sized community water and 
wastewater utilities. Every community wants to provide the best 
possible water quality to their consumers. Rural Water provides the 
resources and training to achieve this objective in a common sense, 
hands-on manner systems can utilize. I am honored to speak on their 
behalf today.
    On behalf of all small and rural communities, I would like to thank 
the Committee for your efforts to assist small communities with 
compliance with the federal Safe Drinking Water Act. Rural Water looks 
forward to working with you as you consider the Safe Drinking Water Act 
and the State Revolving Loan Funds.
    Recently, EPA announced they would provide direct grants to large 
communities to conduct vulnerability assessment for security. EPA has 
not provide any of the over $90 million appropriated by Congress for 
small communities. However, small communities are just as, if not more 
so, as risk than large communities. Also, the cost of security plans in 
small communities will be greater per household than in large 
communities. Many small communities believe that they need to make 
security improvements immediately. This is another concern of small 
communities that is not being addressed in federal funding programs.
    This hearing is considering funding needs of water supply systems 
and how to improve the State Revolving Loan Fund. What water suppliers 
think their ``needs'' are, is different than what the EPA or state 
regulators might think the ``needs'' of the water suppliers are. If 
water suppliers are to include, in their ``needs'', compliance costs 
with all the existing regulations and upcoming regulations, then the 
water suppliers ``needs'' must include more grant funds and loan funds 
to comply with EPA regulations. Compliance with EPA regulations is much 
more expensive (as measured as price per gallon or cost per meter) for 
small suppliers due to the small suppliers' lack of ``economy-of-
scale''
    The compliance with upcoming Maximum Contaminant Levels (MCL's) of 
total trihalomethanes (TTHMs) and haloacetic acids for surface water 
treatment systems serving less that 10,000 persons is an example of 
small systems' compliance costs. The ``cost of compliance'' includes 
monitoring costs, recordkeeping costs, reporting costs, engineering 
costs, capital improvements costs, and operation and maintenance costs. 
This is shown by the fact that there have been regulations for 
trihalomethanes on systems serving more that 10,000 persons--but not 
for the systems serving less than 10,000, for more than 15 years. Why 
did EPA not have the same TTHM regulations on small systems? It might 
be that it is due to the high unit cost that was judged to be 
``politically'' unacceptable. Otherwise, why should citizens served by 
systems serving populations greater than 10,000 receive drinking water 
with much lower risks? Aren't people in small towns just as important?
    The actual costs on any one supplier are not yet known. But when 
those costs are known, that water utility will surely note that the 
costs are considerable. What benefits and costs are realized by 
compliance with each regulation are unknown and debatable. The nation 
has said through the EPA regulations that the nation wants a much, much 
lower risk level from drinking water than many, many other things in 
our society. And as with many things, the costs of the ever-reducing 
the risks in drinking water results in ever-increasing costs, 
especially to the small systems.
    The five principle dynamics of small communities that we believe 
need to be recognized in discussing funding policies are:

 One, that small communities make up the overwhelming 
        percentage of water and wastewater utilities--over ninety 
        percent of regulated communities.
 Two, that due to a lack of economies of scale, small town 
        consumers often pay high water and sewer rates. Water bills of 
        more than $50 for 5000 gallons of water are not uncommon in 
        rural areas. This dynamic often results in very high compliance 
        costs per household in rural systems. Simultaneously, the rural 
        areas have a greater percentage of the poor households and a 
        lower median household income. This results in very high 
        compliance cost per household in rural systems coupled with a 
        lesser ability to pay.
 Three, small systems often have limited technical and 
        administrative resources to deal with compliance and navigate 
        through funding programs. In the smallest systems, one person 
        may run both the water and sewer system and in some cases 
        communities can only afford a part-time or volunteer operator. 
        The more complicated we make funding programs the more likely 
        the small communities will not be able to participate. This 
        dynamic is counter productive the objective of the SRF because 
        small communities are usually the entities which most need the 
        funds. The lack of resources also makes small systems a 
        challenge for state agencies--it takes less state agency 
        resources to deal with large town versus a smaller one who 
        needs more ``help'' getting through the process.
 Four, small community water systems have been the historical 
        solution to rural families living without water. Small water 
        systems were ONLY started to improve the public health. The 
        result is dramatic improvements in public health by providing 
        an alternative for families from gathering their drinking water 
        from untreated streams, shallow and contaminated wells, roof 
        collection and cisterns. In 2001, there are hundreds of 
        thousands of rural families that still don't have piped water 
        in their homes. Millions of rural families still have water 
        delivered to their homes. According to the USDA at least 2.2 
        million rural Americans live with critical quality and 
        accessibility problems with their drinking water, including an 
        estimated 730,000 people who have no running water in their 
        homes. About five million more rural residents are affected by 
        less critical, but still significant, water problems.
 Five, consolidation and privatization are limited solutions 
        for small systems. Consolidation can work in some situations, 
        but only for a small portion of small systems and only when the 
        systems are in close proximity and the economics make sense. 
        Rural Water is the lead proponent of consolidation when it 
        makes sense (when it results in better service for the 
        consumer) and we have consolidated numerous communities in all 
        the states. Consolidation and regionalization that is in the 
        consumers' best interest will happen naturally at the local 
        level regardless of federal policy on issue. Federal policy 
        that favors consolidation over the locally preferred solution 
        is a step in the wrong direction for consumers (i.e. 42 U.S.C. 
        Sec. 300g-3(h) Consolidation Incentive). Privatization is 
        rarely a less costly solution for very small communities. In 
        the very small communities it is, perhaps, more common to see 
        private systems being transferred to public bodies so they can 
        obtain better financing and local governmental control. The 
        missions of private water and rural water systems are 
        fundamentally different, the reason being the lack of 
        profitability in sparse rural populations.
    In 1996, this Committee lead by Congressmen Bliley and Dingell, 
made a significant policy change in the Safe Drinking Water Act. At 
every opportunity, they ameliorated the Act by including as much 
flexibility as possible. Nowhere is this more apparent than in the 
state revolving fund section. Under this approach states were given all 
sorts of discretion on how to spend the money to meet their local 
priorities. For example, a state can make grants, can fund set-asides, 
expand technical assistance efforts, create new prevention programs, 
increase state staff, or choose to do none of these and retain the 
traditional low interest loan focus.
    Small communities' message here today is that this was a monumental 
step in the right direction. This flexibility has made state SRFs 
better and more responsive to nearly every stakeholder. Small systems 
have seen a level of inclusion and benefits from the drinking water SRF 
that we could not imagine based on our experience with the wastewater 
SRF that does not include these flexible provisions.
    Some state rural water associations have not been impressed with 
the way their state has chosen to utilize their discretion. Some states 
have steered funds to larger systems with less urgent needs, in their 
opinion, to make fund administration easy and keep bond ratings high. 
However, this is not a complaint that is appropriate for this 
committee. Those concerns are best handled in the states and each year 
locals have a better chance to improve their own state's program.
    Kansas is an exemplary case for success in Drinking Water SRF 
implementation. Many of our small systems are receiving large funding 
packages from the Drinking Water Loan Fund. The state has made small 
system funding a priority in Kansas and Kansas has expanded technical 
assistance to small systems. Assistance is also provided to help small 
systems through the funding process. The Kansas application for 
drinking water funding is streamlined and simple enough for a small 
system operator (with too little time and too much to do) to complete. 
Kansas has received $50 million in EPA capitalization grants from 1997 
to 2001. Rural Water in Kansas worked for legislative support to add $5 
million in state funds to the new program. Kansas has the highest 
leveraged program in the nation at 1:4 thereby creating a loan fund of 
nearly $212 million. The technical assistance set-aside of 2% have 
provided $1,129,000 towards small system technical assistance of which 
about $500,000 has been utilized. The EPA grants have also provided 
approximately $2.4 million towards Capacity Development which is now 
beginning to be implemented. The EPA grant has also provided $2.6 
million in state program administration. From 1997 to the present time, 
the Kansas Dept. of Health & Environment has made a total of 75 loans 
totaling $150,131,845. Fifty-one of these loans, or $67,252,924, were 
made to systems serving less than 5000 population. The interest rate 
for the Kansas Drinking Water Loan Fund is set at 80% of the 3 month 
average of the 20 Bond Buyer for both large, taxing entities and the 
non-rated rural water district participants. Loan demand through 
applications received, exceeds available funding by 100%. Why such 
demand for funding? First, new regulations drive demand for funding and 
second, infrastructure of the systems in many cases is obsolete and in 
a deteriorated state because the materials used 40, 50 or 80 years ago 
did not have the life expectancy of materials often used today. There 
is also demand for additional capacity. Again though, while bricks and 
mortar, pumps and pipes are important, the set-asides are also there to 
provide assistance, particularly to small systems. The Kansas drinking 
water administration has exploited the provisions in the SRF to invent 
one of the best local-state partnerships in government.
    In Kansas, our state's drinking water administration has exploited 
the provisions in the SRF to invent one of the best local-state 
partnerships in all of government. As any new legislation may be 
considered, small and rural communities urge you to include a few key 
provisions dealing with flexibility and targeting of funding that have 
made the drinking water program more responsive to small systems. The 
Kansas application for drinking water funding is streamlined and simple 
enough for a small system operator (with too little time and too much 
to do) to complete.
    Mr. Chairman, I would like to summarize the key elements for small 
and rural communities in considering any modifications to the drinking 
water SRFs as follows:

 We urge you to retain the three legislative provisions that 
        ensure communities in the greatest public health and economic 
        need receive prioritization in funding programs. One, the 
        communities exhibiting the greatest need should receive funding 
        first. Second, programs should not be limited to making loans 
        because in many situations, small communities will not have the 
        ability to pay back a loan--even with very low interest rates. 
        Third, a minimum portion of the funds should be set-aside for 
        small systems. This ensures that a state must set up a process 
        for dealing with small communities. Once established, local 
        pressures and priorities will determine the actual portion 
        directed to small systems, which we expect will often be 
        greater than the minimum prescribed. All of these provisions 
        were included in some manner in the drinking water SRF--
        balancing the federal priorities with the state's flexibility 
        to tailor individual programs and discretion on implementation 
        of each these programs.
 We urge you to review proposals for changes in the SRF with 
        caution. There has been no credible finding that the current 
        SRF is not meeting its mission of efficiently providing 
        resources to the communities with the greatest public health 
        and economic needs. Why would we entertain changes to the SRF 
        when it is not broken?
 We have been told that large system groups believe too high a 
        percentage of the present drinking water SRF funding is going 
        to small communities. However, a significant portion of the 
        funding should flow toward small systems because, generally, 
        they need it more. Rates are often much higher per household in 
        small communities--often from compliance requirements. EPA 
        rules on the horizon will likely triple water rates in rural 
        systems. Also, rural communities often have lower median 
        household incomes. The SDWA axiom in rural areas is: much 
        higher cost per household with much lower income. No large 
        system is facing cost increases on a per household basis 
        comparable to what is facing small systems. It only makes sense 
        that federally subsidized funding would flow toward the 
        communities with the greatest need--that is to small systems.
 There is no need to include additional requirements for 
        applicants including: environmental, land use planning, 
        capacity, actual cost of water, common industry practices, etc. 
        We urge you to exercise caution for increasing demands on 
        applicants as each new demand makes the process too complicated 
        for small systems and therefore less attractive. We believe 
        that the current review process is fully adequate to ensure 
        repayment of loans, progressive environmental planning, and 
        long-term capacity of applicants. Nationalizing policy industry 
        practices and determining actual cost of water could lead to 
        gold plating of water utility practices which is not in the 
        best interests of consumers.
 We urge the Committee to limit the ability of any portion of a 
        water system to be eligible for disadvantage type subsidies or 
        other special treatment. To assist any portion of a system 
        moves the effort from an environmental-public health program to 
        a social program. If particular low-income consumers are having 
        problems paying their water bills, we don't think the SRF 
        should be used as the solution. That may be an issue for 
        agencies other than the EPA. It is important to note that a 
        state can determine a large system disadvantaged as well as a 
        small system. Funding a portion of a system seems to be a way 
        to skirt the current process which is working so well at 
        prioritizing systems most in need. Also, this moves the SRF in 
        a direction contrary to the SDWA's regulatory structure which 
        only applies on a system-by-system scope.
 We urge the Committee to consider including provisions guiding 
        the percent of a project that can be used for engineering/
        consulting services on projects. USDA has such a provision 
        [PART 1780--WATER AND WASTE LOANS AND GRANTS, Sec. 1780.39(b) 
        Professional services and contracts related to the facility]. 
        In Kansas, our research shows that engineering fees are 
        sometimes charged at twice as much in programs that don't have 
        such guidance on engineering fees.
 We urge the Committee to consider allowing states the 
        discretion to extend loan durations to 40 years loans to small 
        communities or regional systems. Due to scarcity of population 
        in regional systems this additional loan time can be the 
        determining factoring in making water affordable in regional 
        projects. Also, this will make the fund consistent with the 
        USDA grant and loan program which includes such authority.
 A change that may improve the SRF ability to meet its mission 
        would be to limit corporate water systems' eligibility for 
        state revolving funding. Taxpayer subsidies should be 
        prohibited from profit generating companies or companies paying 
        profits for shareholders/investors. Private companies argue 
        that they have to comply with the same regulations. However, 
        they voluntarily chose to get into this ``business'' and 
        compliance is not the over-riding principle that should be 
        considered in this discussion. We believe that the distinction 
        in mission between public and private is the core principal 
        that should be considered. Private systems are in the business 
        to maximize profit. Public water utilities were and are created 
        to provide for public welfare (the reason why public water 
        continues to expand to underserved and non-profitable 
        populations). This is a significant difference. And while we 
        believe that maximizing profit is a noble virtue and as 
        American as safe water, we do not think that taxpayers should 
        help the cause of privately owned systems. In addition, the 
        needs of less affluent public water systems and families with 
        no piped water dwarf the current SRF allocations. The state of 
        Florida has a novel compromise to this issue. Florida limits 
        SRF funds to private water systems less than 1,500 people--
        ensuring funds are limited to the class of private water 
        systems that did not get into the business as a corporate 
        enterprise. Also, this group of private systems could be 
        included in the state's needs assessment which determines 
        allocations under the bill.
    How much money is needed? That is completely dependent to Congress' 
answer to the question: What are the new EPA rules and what are the 
standards going to be? For example, the coming arsenic rule will 
increase the number of small systems facing funding challenges. Dozens 
of small systems in Kansas (thousands across all the states) will need 
funding to comply with the arsenic regulation.
    One municipality in Kansas that will be greatly affected by Arsenic 
Rule, established at 10 ppb, is the City of Atwood (population of 
1,300) surrounded by farmland and an agricultural economy.
    Past arsenic water quality results for the City of Atwood has shown 
a range of 12 to 18 ppb in the three currently used municipal wells. 
The proposed arsenic MCL of 10 ppb allows the City two general feasible 
options to attain the MCL. The community has an option to develop new 
well fields in the Ogallala formation located several miles from the 
community. However, while Ogallala formation generally provides better 
water quality and perhaps an arsenic concentration below the 10 ppb, it 
is a much more cemented and finer formation. This fine formation 
decreases production of wells. Thus to develop a sufficient municipal 
water supply, more area for wells is required since they must be a 
greater distance apart. The estimated cost of this option would be 
$2,200,000 based on a five-mile transmission main with four wells to 
meet daily water demand. A second option available is treatment of the 
existing water supply sources.
    The city presently does not have a single point of entry into the 
distribution system. Each well is directly connected into the 
distribution system. All wells are located in separate areas of the 
existing system. Over 3,000 feet of distance exist between the two 
farthest wells. In order to implement a point of use treatment plant, a 
new dedicated transmission main would have to be constructed between 
the wells. Land and easements would have to be procured to build a 
treatment facility. Atwood's sulfate concentrations in the range of 90 
to 309 mg/L will affect treatment efficiencies in an ion exchange 
process requiring frequent regeneration. This creates higher operation 
and maintenance cost (O&M). The estimated treatment facility cost would 
range from $1,300,000 to $2,100,000 depending on the Best Available 
Technologies (BAT) selected. Atwood could experience a budget increase 
of $50,000 to $75,000 per year with the incorporation of a treatment 
plant. These budget increases are due to operation and personnel 
requirements. Special by-product disposal requirements could require 
more operation costs.
    In order to provide funding for capital construction and O&M 
assuming a 5% interest rate and 20-year loan period that corresponds 
with the life of a treatment facility with 700 connections, the monthly 
water rate would have to increase by $18 to $29 per connection. Again, 
please keep in mind this does not include the current water rate and 
upgrades currently necessary to keep the system in compliance. This 
analysis has been made by the city's consultant, Miller & Associates 
Consulting Engineers, P.C., McCook , NE.
    This is a conservative estimate and does factor in all the costs 
for compliance. Rate increases on this type of a community could be 
devastating.
    However, Mr. Chairman, while no system will be in greater need for 
federal assistance than Atwood, KS the challenge is how to craft a 
funding program that will work for those most in need. Cost estimates 
of the funding needed to sustain a healthy U.S. water supply are 
staggering. The Water Infrastructure Network, of which Rural Water is a 
member, estimates an $11 billion annual funding gap over the next 20 
years. This estimate is over 4 times the current combined federal 
contribution in the USDA, EPA Drinking Water, and EPA Wastewater 
programs. While it is not essential for all systems to obtain financing 
through a federal or state program, the fact is that much of the 
funding needs are caused by ever stringent regulations. The question 
for Atwood, KS is what is the benefit of reducing naturally occurring 
arsenic by 2 parts per billion?
    Rural Water is not the type of organization that can present an 
accurate cost figure on the future need for funding. However, we can 
acknowledge the extreme shortfall in both EPA SRF and the USDA water 
programs, as indicators that the current needs are not being met. The 
USDA program, which is the core-funding program for small water and 
wastewater projects, is currently experiencing a $3.2 billion backlog. 
We believe this is the most accurate indicator of need because all of 
the systems in USDA's backlog have applied for funding. They have met 
the requirements of USDA's strict needs requirement (including lack of 
commercial funding availability and high ratios of median household 
income to water rates).
    As stated earlier, in addition to this current need, EPA is 
proposing more regulations. Many of the regulations will force small 
towns to come up with millions in financing--many systems will be 
stressed to comply. I think it is significant to observe a new dynamic 
in EPA regulations: the regulation of naturally occurring contaminants 
and the regulations of operations and maintenance in utilities. The 
result of this new effort by EPA will be to greatly expand the number 
of systems forced into costly compliance with EPA rules. For example, 
very few systems were required to treat for EPA's previous rules on 
organic contaminants, many with anthropogenic origins. However, the 
forthcoming arsenic rule could capture as many as 4,000 communities; 
this will greatly drive the demand for additional funding resources. 
Upcoming EPA rules that may be expensive in thousands of rural 
communities include: standards for certification of operators, filter 
backwash, radon, surface water treatment rules, arsenic, disinfection 
byproducts, ground water disinfection, and others.
    The State Revolving Loan Funds are working. Rural Water encourages 
Congress to consider that whatever changes are considered, please make 
sure, first, that these Loan Funds target those most in need; second, 
that the SRFs do not provide tax-payer supported loans to large 
corporate systems; third, encourage guidelines to keep professional 
services competitive as in other federal funding programs and last and 
possibly most important, recognize that new regulations will place more 
and more demand for further funding just for systems to maintain 
compliance.

    Mr. Shimkus. Thank you. I think we are finding the hearing 
very beneficial, and you are all bringing up a lot of important 
points.
    Now I would like to recognize again Mr. Terry Gloriod. 
Again, your full statement is in the record, and you have 5 
minutes to summarize.

                  STATEMENT OF TERRY L. GLORIOD

    Mr. Gloriod. Thank you, Mr. Chairman, and thank you for 
your kind introduction earlier. I am here today representing 
the National Association of Water Companies, NAWC. NAWC's 200 
member private and investor-owned companies in 39 States 
provide water service to more than 20 million Americans.
    Let me begin by commending this subcommittee for conducting 
this hearing on the important topic of infrastructure. My 
general purpose is to comment on the needs posed by 
infrastructure replacement, and highlight the solutions to that 
funding that are favored by NAWC and its partners in the H2O 
Coalition.
    NAWC has much in common with our sister water 
organizations, including the AWWA, and we share the goal of 
safe, sufficient, and affordable water for all Americans. NAWC, 
however, does not believe that the primary funding solution 
should be Federal grants.
    We believe that the only permanent solution to the ongoing 
costs of infrastructure replacement is self-sufficient water 
utilities, with appropriate subsidies available for systems in 
economically disadvantaged communities, and direct assistance 
to needy customers.
    Various reports have attempted to estimate the 
infrastructure replacement needs, in terms of total investment 
over the next 20 years. The estimates vary and some reach as 
high as a trillion dollars.
    The need is referred to as a gap because existing water 
service revenues do not support this level of investment. As 
others have said the basic reason for the gap is the long life 
nature of underground iron pipes.
    Today, we still receive service from pipes that were 
installed decades ago, at a fraction of the costs that would be 
required to replace those same pipes; the original costs of a 
dollar per foot, compared to replacement costs approaching a 
hundred dollars per foot, for essentially the same service.
    The prospect of wholesale replacement of this first 
generation of pipes yields the funding gap. We look first at 
private sector solutions, primarily because in our business 
investment has always been supported by water rates.
    The private sector can help to offset the magnitude of the 
gap by working toward increased efficiencies, and improved 
asset management practice, technological innovations, and 
industry consolidation.
    Similarly, public/private partnerships can bring about 
efficiencies that reduce costs. Today, water rates comprise 
less than eight-tenths percent of household income, compared to 
electricity of 2.4 percent, and telecommunications of 2.1 
percent.
    We believe that water is affordable for the vast majority 
of Americans, and that current rates lag behind the true value 
of water. There is a role for the Federal Government.
    The establishment of uniform standards of water quality is 
one example. Another is the ability of the Federal Government 
to sponsor water research, including research that would help 
support the use of innovative practices in infrastructure 
replacement.
    So while we ultimately rely on the ability of water rates 
to support investment needs, including infrastructure 
replacement, we ask you to consider the following 
recommendations.
    First, improve the Drinking Water Revolving Loan Fund. 
Within the Drinking Water SRF, Congress should support creative 
non-governmental solutions to the infrastructure financing 
challenge by explicitly tieing Drinking Water SRF assistance to 
the utility consideration of consolidating ownership and/or 
management functions with other facilities, and forming public-
private partnerships, or other cooperative partnerships.
    Also, Congress should require utilities receiving drinking 
water SRF assistance to have in place or have plans for a rate 
structure that reflects the actual cost of service, taking into 
account capital replacement funds, and a sound asset management 
plan conforming to generally accepted industry practices, and 
including a schedule of investments to meet and sustain 
performance objectives.
    Second, a removal of the cap on private activity bonds. The 
volume cap on tax exempt debt is arbitrary. Removal of the cap 
for water and waste water infrastructure projects may be one of 
the most important modifications that Congress can make to give 
water suppliers the tools they need to meet the investment 
requirements posed by infrastructure replacement.
    We would seek the endorsement of this committee for that 
concept. And, third, provide Federal assistance to the needy. 
While we are opposed to wholesale direct Federal grants to 
water utilities, we support programs that would give a helping 
hand to economically challenged communities that simply cannot 
afford a hike in water rates that might be needed to cover the 
costs of infrastructure replacement.
    In addition, the Low Income Home Energy Assistance Program 
that provides assistance to disadvantaged Americans in paying 
utility bills may serve as a model for similar water bill 
assistance programs.
    In conclusion, let me again commend you for the hearing and 
restate our basic premise that we favor sustainable rates, and 
I encourage you to review the details contained in our written 
testimony and we are available for questions. Thank you very 
much.
    [The prepared statement of Terry L. Gloriod follows:]
Prepared Statement of Terry Gloriod, President, Illinois-American Water 
   Company, on Behalf of The National Association of Water Companies
    Good Morning Mr. Chairman and Members of the Subcommittee, my name 
is Terry Gloriod and I am the President of the Illinois-American Water 
Company. Illinois American serves nearly a million people in 124 
communities in Illinois.
    I am also the Chairman of the National Association of Water 
Companies' Government Relations Committee. 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 member companies in 39 States--which provide 
safe reliable drinking water to more than 20 million Americans 
everyday.
    Privately owned water companies, like all other public water 
systems, comply with all EPA regulations. However, privately owned 
utilities also comply with the orders of State Public Utility 
Commissions, which include setting rates. In addition, our companies 
pay taxes--not just income taxes, but state and local property taxes--
thus contributing to the welfare of the country and their communities 
in more ways than one.
    Mr. Chairman, NAWC commends you and this Subcommittee for 
conducting this hearing on drinking water infrastructure financing. Due 
to our concern about this issue and our commitment to finding sound 
solutions, last year NAWC joined with other organizations to form the 
H2O Coalition 1. This coalition was formed solely 
to work on the infrastructure replacement challenge facing the water 
industry. It is a group of organizations committed to the long-term 
self-sustainability of our nation's water utilities and to addressing 
our nation's looming water infrastructure challenge through a 
combination of creative asset management, local responsibility and 
decision making, and limited, targeted federal government involvement.
---------------------------------------------------------------------------
    \1\ The H2O Coalition is made up of the National 
Association of Water Companies, the Water and Wastewater Equipment 
Manufacturers Association, and the National Council on Public-Private 
Partnerships.
---------------------------------------------------------------------------
                            general comments
    In the last two years or so there has been a great deal of 
discussion regarding the water infrastructure financing gap. This 
``gap'' is simply the difference between the estimated dollars needed 
to replace failing water infrastructure and the dollars currently being 
spent. There are many estimates of the total need, and some of those 
are as high as a staggering trillion dollars. The ``gap'' some have 
said is perhaps half a trillion dollars. It has been argued that this 
constitutes a crisis, which the federal government and the federal 
government alone must address today.
    We have several problems with this argument. First, any 20-year 
needs estimate is at best imperfect. The detailed data on our nation's 
water and wastewater industry required to make reliable, long range 
estimates simply don't exist. The $1 trillion number is likely a worst 
case high-end estimate. Other estimates, made by credible sources, have 
put the number much lower. For example, the American Water Works 
Association has estimated the drinking water needs at $250 billion.
    Second, the advertised ``gap'' of one-half trillion dollars is also 
a worst-case scenario. It assumes that utilities do nothing on their 
own to fill it, which of course is a difficult assumption to justify. 
There are many things utilities can, should, and are doing on their own 
to close the investment gap, including reducing costs through increased 
efficiencies, improved asset management practices, innovative rate 
structures, technological innovation, industry restructuring including 
consolidation, and various revenue enhancement strategies.
    Third, the cost of water service in this country is very small in 
relation to the typical household income. Water and sewer services 
account for a relatively small share of the average household utility 
budget (less than 0.8%), particularly in comparison to electricity 
(2.4%) and telecommunications (2.1%). In many respects, water services 
are a bargain to average households. As such, one of our most precious 
resources remains very affordable for almost all of the nation's 
citizens. Therefore, before Congress considers a massive infusion of 
cash for the water industry, it should consider that the cost of 
providing this needed service is not a burden on most households, and 
that in most cases users, not taxpayers, can and should pay for 
infrastructure maintenance and improvements.
    Fourth, options and solutions provided by partnerships with the 
private sector can and should be explored to a greater degree by 
municipalities. While such partnerships are not right for everyone, 
there is ample evidence that such arrangements can be hugely beneficial 
for all involved. Furthermore, they can be sized and formatted to meet 
specific needs, addressing only those areas municipalities need or wish 
to be addressed. The most obvious benefit to the customer is cost 
savings, which range up to 40%. At least part of the water 
infrastructure replacement challenge we are facing can and should be 
addressed not by the government, but instead by the private sector.
    Fifth, consolidation where possible must be a focus for our 
industry. There are currently about 55,000 separate drinking water 
systems in the U.S., some serving millions, but most serving few. 
According to the EPA fully 85% of all water systems serve less than 
3,300 people, and a mere 2% of systems serve more than 50,000. Where 
possible, consolidation of these many small systems could result in 
significant savings to the customers. Therefore, for those systems 
experiencing infrastructure replacement, financial and/or compliance 
problems, consolidation should be considered before any public monies 
are sought.
    Finally, it is worth considering exactly what the appropriate 
federal government role is. Water infrastructure has traditionally been 
a local or regional function. Geography and different treatment needs 
dictate this. There is no national water ``grid''. The federal 
government, on the other hand, has stepped in where there is a national 
interest in a national infrastructure. To think of water infrastructure 
as integrated on a national level is simply inaccurate. It is in fact 
many thousands of separate infrastructures across the country, with 
vastly different histories and needs.
    This is not to say that the federal government does not have a role 
at all. There are areas in which federal activity is necessary and 
appropriate. Clearly, federal water quality regulations as promulgated 
under the Safe Drinking Water Act are a proper and necessary federal 
government activity. Research funding is also a role for the federal 
government. There are emerging technologies that if proven effective, 
could reduce the price tag of infrastructure replacement for all water 
utilities. Without such field research to prove the viability of 
innovation, utilities may be unwilling to ``gamble'' capital on new 
techniques.
                            recommendations
    The Drinking Water State Revolving Loan Fund (DW-SRF) is a 
successful government program and it should remain the conduit for 
government assistance to utilities. Projects have been prioritized for 
funding based largely on public health-related criteria and funding has 
been provided predominantly in the form of low interest loans. We 
believe that with relatively minor reforms, the SRF process will remain 
the best mechanism for assisting water systems in financing capital 
improvements related to regulatory compliance and infrastructure 
replacement.
    Some organizations have called on Congress to establish new 
financing authorities to take the place of the SRFs as a means to 
address the infrastructure financing challenge. NAWC does not support 
such proposals. Though there are some improvements that Congress can 
make to the DW-SRF such as including incentives to move utilities 
toward self-sustainability, the DW-SRF has proven its ability to help 
meet our infrastructure financing challenges in an efficient and 
sustainable manner.
                         reforms to the dw-srf
    Within the DW-SRF Congress should support creative non-governmental 
solutions to the infrastructure financing challenge by explicitly tying 
DW-SRF assistance to utility consideration of:

 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.
 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.
    Congress should avoid some past mistakes of government assistance 
programs by requiring utilities receiving DW-SRF assistance to have in 
place, or have a plan to achieve within a reasonable period of time:

 A rate structure that reflects the actual cost of service, 
        taking into account capital replacement funds 2, and
---------------------------------------------------------------------------
    \2\ NAWC agrees with the long-standing policy of the American Water 
Works Association that ``Water utilities should receive sufficient 
revenues from water service, user charges, and capital charges, such as 
water development charges, to enable them to finance all operating, and 
maintenance expenses and all capital costs (i.e. debt service 
payments).''
---------------------------------------------------------------------------
 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. 
These 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 the DW-SRF is administered through the States and 
includes some state matching money, the vast majority of the DW-SRF 
corpus is made up of federal money coming from the American taxpayer. 
Therefore, the federal government has a responsibility to American 
taxpayers to be sure their money is distributed and used in an 
efficient and accountable manner.
    To address affordability issues, we encourage Congress to consider 
assistance directed to individual ratepayers rather than just to 
utilities. A federal water bill assistance program for low-income 
families would use federal dollars very efficiently, because assistance 
would be targeted only to the needy. We believe a water bill assistance 
program is an appropriate form of long-term assistance, especially to 
larger utilities, where only some of its customers are likely to be 
impoverished.
    There is some precedence for such a program. The Low Income Home 
Energy Assistance Program (LIHEAP) provides assistance disadvantaged 
Americans in paying the heating bills. Such a disadvantaged customer 
assistance program could be fashioned to work as part of the DW-SRF. A 
new federal program and new federal funding need not be created.
                  private utility access to the dw-srf
    Though we support the DW-SRF as indicated above, we are concerned 
that treatment of private utilities on the State level has been uneven 
and often disappointing. This is a problem that Congress should 
revisit.
    First, currently 13 States have declared privately owned drinking 
water systems to be ineligible for DW-SRF assistance. This unfortunate 
consequence is a clear, and in many cases deliberate, violation of 
Congressional intent that SRF loans should benefit customers of all 
public water systems, regardless of ownership.
    There is a simple way Congress can encourage States to implement 
the DW-SRF as this Committee intended when it authorized the DW-SRF. 
Congress should require states that include private company needs in 
their needs survey to ensure that private companies are eligible for 
SRF funding. This would be a fair solution for all systems and their 
customers and would avoid rewarding those state that have ignored 
Congressional intent.
    Another disappointing reality of the DW-SRF is that many states 
(other than the 13 discussed above) are not making loans to private 
utilities even though such loans are lawful and allowed in those 
States. In fact, as of December 2000, in 20 States where private 
utilities are eligible for assistance no such assistance has been 
extended to private utilities since the DW-SRF was created. To be fair, 
some of these states have made few loans to any systems, and/or have 
few private utilities. Also, generally, privately owned utilities are 
well managed and maintained and thus are often not the most needy under 
the current criteria. However, when private utilities comprise about 
30% of all community water systems nationwide and serve about 15% of 
Americans, but receive a mere 3.5% of all DW-SRF assistance, it is 
clear that some states need to reassess their programs.
    Some have argued that privately owned companies, even those serving 
the public, should not receive federal assistance--not even loans. 
Congress and this Committee considered that argument in 1996, and 
concluded that regulation by state public utility commissions would 
assure that the interest savings from SRF loans would benefit 
customers--not company shareholders. In fact the National Association 
of Regulatory Utility Commissioners (NARUC) has joined us in 
criticizing the failure of some states to comply with Congressional 
intent.
                    remove private activity bond cap
    One of the easiest and cheapest incentives Congress can provide to 
address the infrastructure issue in a sound and efficient manner is to 
remove the existing volume caps on Private Activity Bonds for water and 
wastewater infrastructure improvement. This simple change will make 
capital both easier to obtain and less expensive for partnerships 
between the public and private sector, thus making such partnerships 
much more economically attractive to all concerned.
    We 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 municipalities 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, yet 
leverage huge sums of private capital.
    We believe this proposal is far superior to federal grants because 
it:

(1) Is far cheaper for the federal government;
(2) Increases capital available to address infrastructure;
(3) Does not require massive reliance on scarce federal funds;
(4) Doesn't subsidize utilities but instead gives them the tools to 
        handle their problems themselves;
(5) Will not subject long term projects to the uncertainties of the 
        annual appropriations process;
(6) Is a far more efficient use of resources which will result in fewer 
        dollars coming from the ratepayer and/or taxpayer;
(7) Is far less likely to lead to over-built and wasteful projects 
        often seen in projects heavily reliant on government grants.
    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 
also has far ranging support. Bi-partisan legislation in the House has 
been introduced which would make these changes. Also, the U.S. 
Conference of Mayors, National Association of Counties, and the Water 
Infrastructure Network (WIN) have endorsed this proposal.
                      limit direct federal grants
    As I've said, there have been calls to establish a new large 
federal grant program like the old Construction Grants Program of 1970s 
and 1980s to address our nation's looming infrastructure financing 
challenge. NAWC and our partners in the H2O Coalition oppose 
this plan and urge Congress to work within the existing DW-SRF 
mechanisms, including the current 30% limit on grants and grant-like 
assistance.
    Experience teaches us that grants are a very inefficient method of 
providing assistance to utilities. They send the wrong economic and 
conservation signals to consumers, encourage--even reward--bad 
management practices, choke-off innovation, discourage public-private 
partnerships and other creative business models, send American dollars 
and business overseas, and ultimately cost the public more than other 
more creative solutions. In Congressional testimony last year, the 
Congressional Budget Office said ``if the federal government issued 
blank checks for infrastructure, local drinking water and wastewater 
systems would lose any incentive to keep capital costs down.'' CBO also 
said ``high federal cost shares in the original construction grants 
program--raised capital costs by more than 30 percent.'' 3 
The following specific problems hobbled the old Construction Grants 
Program and would likely plague any revival of such programs:
---------------------------------------------------------------------------
    \3\  Congressional Budget Office Testimony before the House 
Committee on Transportation and Infrastructure, Subcommittee on Water 
Resources and Environment, March 28, 2001

 Procurement regulations discounted quality for the sake of 
        lowest price. Owners were forced to purchase and install 
        equipment that fell short of desirable standards for 
        performance, reliability and overall costs of operations. The 
        objective was not value, merely price.
 The unpredictable nature of the annual appropriations process 
        resulted in an artificial rapid ramping up of business activity 
        when grants were available, followed by a rapid downturn in 
        activity in lean appropriating years. These surges and declines 
        forced out of business many American companies long in the 
        construction and/or manufacturing business.
 Sudden infusions of cash in the form of federal grants, rather 
        than the usual steady and predictable ramping observed in a 
        ``normal'' economy and market, forced customers to go offshore 
        for materials and services, harming the U.S. industry.
 The EPA construction grants program did not adequately require 
        recipients to establish a capital replacement account to ensure 
        that funds existed to replace the plant when it exceeds its 
        life cycle (which could be contributing to the current funding 
        problem).
 Grant recipients had little ``ownership'' of their projects 
        resulting in overbuilt systems and wasted tax dollars.
 Due to the federal procurement regulations accompanying 
        grants, innovation nearly came to a halt in the U.S. Much of 
        the innovation the industry has seen over the last 20 years has 
        come from offshore. This phenomenon is directly attributable to 
        the construction grant program.
    NAWC acknowledges that in some cases grants are the only viable 
option or at least the option that makes the most sense. For example 
grants, or forgiveness of loans, may be appropriate for systems in 
economically disadvantaged communities. NAWC also supports targeted 
assistance for individuals based on economic need. However, we oppose 
subsides for entire systems that benefit customers who can afford 
higher rates in addition to the needy who cannot.
                               conclusion
    Mr. Chairman, we appreciate the leadership role that you and this 
Subcommittee have taken to address drinking water infrastructure 
problems. These are long-term challenges, and we look forward to 
working with this Committee to achieve long-term solutions that will 
allow the drinking water industry to stand on its own two feet.
    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.

    Mr. Shimkus. Thank you.
    And then last, but definitely not least, Mr. Paul Schwartz, 
President of the Clean Water Action. Welcome, and you are 
recognized for 5 minutes.

                  STATEMENT OF PAUL D. SCHWARTZ

    Mr. Schwartz. Good afternoon, Mr. Chairman, and ranking 
member Pallone. I really appreciate the opportunity to be here 
and if I am not going to be fast, I hope I can be provocative.
    Clean Water Action, who I work for--I have been given a 
promotion. I am actually the National Policy Coordinator, and 
not the President--is in 15 States, including in New Jersey as 
the New Jersey Environmental Federation. And we have 700,000 
members.
    I also come here today as the co-chair of the thousand 
member Clean Water Network, and I am on the Steering Committee 
of the Campaign for Safe and Affordable Drinking Water 
Coalition, and that includes consumer-vulnerable population 
groups, public health providers, and traditional environmental 
and conservation organizations.
    I just have a few additional comments. First of all, my 
members are all rate payers of these gentlemen's fine 
organizations, and associations, and they drink the water, and 
pay the public health consequences, and pay the rate bills and 
the local, State, and Federal taxes that come back to deal with 
issues that are caused by pollution that they don't create in 
the first place.
    We would like this committee to produce a bill that 
significantly increases the Federal share going to our 
communities, and we put a price tag of $25 billion over 5 
years.
    We would like to see that money focused not only on core 
infrastructure needs that we traditionally think about, but 
also on cost effective and integrated pollution prevention, 
non-structural, and green infrastructure approaches that will 
over the long run reduce the costs of our infrastructure needs, 
and provide quality of life improvements in our communities and 
neighborhoods.
    In 1996, the Safe Drinking Water Act amendments gave the 
States the right to take 15 percent of their funding and set it 
aside for drinking water source protection. When we think about 
protection from water, we often think about the Clean Water Act 
in that other committee.
    But the States are given that choice to do that, and what 
we found is that over the years EPA data shows that the States 
have spent only 2 percent of their funds on these source water 
protection activities.
    That type of short-sightedness on the part of our States in 
figuring out how to work with our communities and to give them 
the flexibility to put in these cost-effective approaches needs 
to change.
    And we would like to work with the committee to figure out 
how we can help move from a voluntary perspective to mandating 
some changes that will extend the scarce SRF dollars to create 
the most public health protections in water quality 
improvements.
    In addition, we would like to see, in addition to seeing 
the funds increased to the $5 billion per year mark, we would 
note that in conversations across the House and the Senate that 
there is an almost unwritten assumption that the funding will 
stop after 5 years.
    We would like to see this committee take an approach that 
commits money for 10 years, and we would like to see this 
committee look at an approach that would establish a national 
clean and safe water trust fund.
    And that that trust fund would get money from a number of 
sources, including on the clean water side taking settlements 
that the government makes that goes to the Treasury and putting 
them into that fund, and looking at polluter pay solutions that 
get polluters who are creating the monitoring and the treatment 
infiltration needs in the first place to put some money into 
long term solutions so that these gentlemen can mitigate the 
problems and stop the pollutants from getting to our 
population.
    Security and terrorism was mentioned, and we want to talk a 
little bit about maintaining the integrity of the SRF fund in 
relation to security. We think that there is an appropriate 
role as EPA has acknowledged in their guidance for SRF money to 
be used for security purposes.
    But we think that those SRF dollars take a long time to 
trickle down into the systems, and that the need that we are 
looking at, in terms of securing the water supply, is a more 
immediate need, and that the money from the SRF is not 
sufficient.
    That we need to take a look at things like Title IV in the 
bioterrorism bill and other appropriations to fit the bill.
    And last, there is concerns that we have that the dollars 
that we are using are not neutral dollars. Just as in the Clean 
Water SRF, the new pots of money that are being brought to bear 
on drinking water can go either to do good or ill for the 
environment.
    One of the areas that we would like to see closed, or a 
loophole that we would like to see tightened by this committee 
is that currently the drinking water SRF directs dollars to go 
toward existing ends, which is important.
    But EPA allows the States to determine their own definition 
for reasonable growth, and there is a very wide spectrum of 
definitions, and so what we see is that in a number of States 
dollars that should be going into existing public health and 
environmental needs are going to make sprawl happen.
    And so we would like to work with the committee to look at 
the guidance that EPA has prepared and to look at the statutory 
language around growth to make sure that these scarce dollars 
aren't going to fuel something that will be causing more water 
quality problems.
    I thank you for the invitation to speak with you today, and 
I look forward to working through the myriad of opinions and 
perspectives that you have in front of you to come up with a 
workable bill that will put an injection of badly needed 
dollars into our communities. Thank you.
    [The prepared statement of Paul D. Schwartz follows:]
 Prepared Statement of Paul D. Schwartz, National Policy Coordinator, 
                           Clean Water Action
    Good day, Mr. Chairman and other distinguished members of the 
Committee. I am Paul Schwartz, National Policy Coordinator of Clean 
Water Action, a national environmental organization working for clean, 
safe and affordable water; prevention of health-threatening pollution; 
creation of environmentally-safe jobs and businesses; and empowerment 
of people to make democracy work. Clean Water Action works in 15 states 
and has 700,000 members across the nation. Additionally, I serve as co-
chair of the Clean Water Network's Wet Weather and Funding Workgroup 
and am on the Steering Committee of the Campaign for Safe and 
Affordable Drinking Water.
    Mr. Chairman, thank you for holding this hearing today on 
``Drinking Water Needs and Infrastructure.'' The Committee's sustained 
focus on drinking water needs and infrastructure is timely and of vital 
importance to the nation's environment, economy and public health. This 
hearing is a crucial next step toward strengthening drinking water 
protections. Clean Water Action believes that the public's health and 
welfare will best be served if this Committee chooses to:

 Reinvest in American Communities--Dramatically increase the 
        federal dollars going to the Drinking Water State Revolving 
        Fund (DWSRF) available for our aging and inadequate core 
        drinking water infrastructure;
 Integrate traditional core drinking water infrastructure 
        approaches with drinking water source protection strategies;
 Protect our drinking water sources and infrastructure from 
        potential security breaches;
 Create a new source of available federal funds outside of the 
        DWSRF by setting up a ``National Clean and Safe Water Trust 
        Fund'' that is funded at least in part by a polluter pays 
        component;
 Require meaningful accountability, transparency and public 
        participation.
  reinvest in american communities--dramatically increase the dollars 
      available for our aging and inadequate core drinking water 
                             infrastructure
    The creation in 1996 of the Drinking Water State Revolving Loan 
Fund (DWSRF) was a necessary first step in moving our nation's old and 
outdated drinking water infrastructure into this century. Modeled on 
the successful Clean Water State Revolving Loan Fund (CWSRF), the DWSRF 
has already made billions of dollars available to communities across 
the U.S. to protect the public health. We note, however, despite this 
increased flow of federal dollars over the past six years, that many 
drinking water providers do not have the necessary resources to take 
care of critical drinking water infrastructure needs.
    A large chuck of our nation's drinking water treatment works and 
distribution systems are old and near or past the end of their useful 
life. This physical deterioration of the nation's drinking water 
infrastructure imposes an increasing cost burden every year fixes and 
replacement is delayed.
    Our treatment techniques are, for the most part, old and inadequate 
to meet the requirements of the job in the 21st century. Sand 
filtration and chlorination were at one time state of the art, but not 
any more. USGS has recently documented all manner of once exotic 
contaminants such as pharmaceuticals in our nation's drinking water 
sources. New and emerging microbes, such as cryptosporidium and giardia 
are slipping through sand filtration and getting past chlorine 
disinfection into our finished water supply.
    Polluted rivers, lakes, streams, and aquifers (underground water 
sources) carry fifty years of chemicals such as pesticides that are not 
even regulated under the Safe Drinking Water Act (SDWA). Not one of the 
top ten pesticides used (by volume) on New Jersey lawns, golf courses, 
and farms are regulated under SDWA. Yet these chemicals are combining 
with chlorine used for disinfection to create even more potent 
carcinogens and may be one of the largest contributors to birth defects 
and stillborn births in the nation.
    Out of control sprawl development, large animal feeding operations, 
naturally occurring contaminants such as arsenic, nuclear weapons 
production and storage facilities, the list of sources of drinking 
water contamination goes on and on. Yet our commitment to funding the 
prevention and cleanup of these problems is going backwards in real 
terms and the gap between what is needed and what we are raising and 
spending at all levels of government is growing wider and wider.
    It has been well established by the USEPA, the Water Infrastructure 
Network (WIN) and others that there is a gap between all available 
sources of revenue and the water infrastructure needs in our 
communities. WIN estimates that we have needs of $1 trillion dollars 
and projects that $23 billion must be invested annually over the next 
20 years to begin to close the gap.
    Clean Water Action calls on Congress to authorize and appropriate a 
much-needed immediate injection of $57 billion spread over the next 
five fiscal years. This is a small price to pay to live up to the 
promise of clean, safe and affordable water. The Energy and Commerce 
Committee should produce a bill that significantly increases the 
federal share going to the DWSRF to $25 billion over five years.
    The $25 billion should be used primarily to address core drinking 
water quality problems by being targeted: (1) to fix, modernize and 
maintain our antiquated and dilapidated drinking water treatment and 
distribution systems and (2) to assist in prevention of pollution of 
the sources of our drinking water.
  integrate traditional core drinking water infrastructure approaches 
            with drinking water source protection strategies
    Drinking water spending cannot just be targeted to the traditional 
modes and methods of end-of-the-pipe engineering solutions. Though the 
1996 Amendments to the Safe Drinking Water Act (SDWA) acknowledged this 
by creating a voluntary set-aside for drinking water source protection, 
this program has not been well used.
    In 1996 Amendments to SDWA gave states the option to use up to 15% 
their DWSRF funds for source water protection projects. This was based 
on the widespread understanding that source water protection was 
substantially cheaper and more reliable than the dominant end-of-the-
pipe solution once water quality has been degraded. And yet, recent EPA 
data show that states have only spent 2% of funds on source water 
protection activities.
    According to EPA, some states have attempted to direct more funds 
to source water protection--but have been stymied by the requirement 
that the funds had to go through ``public water supply systems.'' 
Though EPA has issued guidance that three-party partnerships are 
acceptable, i.e., a landowner, a public water supply system, and a 
group such as the Clean Water Action, American Rivers or the Nature 
Conservancy. Nevertheless, there have been few applicants for the 
source water protection dollars.
    This suggests that the ``voluntary'', ``statement of intent'' of 
the Congress to shift resources away from treatment and toward 
pollution prevention has been a major failure. Clean Water Action calls 
on Congress to make two corrections. First, the eligibility for source 
water protection projects needs to be greatly expanded--to include 
funding of nonprofit entities directly, and through such programs as 
linked deposit bank programs or loans to county health departments. 
Loans could be provided to homeowners and farmers, without the direct 
involvement of the local municipal water supply system. The reason is 
that most homeowners are resistant to the involvement of the local 
utility in their backyard. Most farmers will not turn over ownership of 
a stream buffer to the local utility, or allow that utility to attach 
an easement to their deed.
    Second, history shows that mandatory (vs. voluntary) financial 
incentives are required. Congress said in 1996 that it wanted funds 
spent on source water protection--and that has not happened. If 
Congress is serious, then ``may'' should be changed to ``must.'' 
Congress should create a separate pool of funds that states may apply 
for, but take the money back (to be reallocated to states that wish to 
do more source water protection) after a couple of years if they have 
not spent it on source water protection. This approach would 
necessitate States needing to change their own eligibility requirements 
(sometimes through the legislature), but a ``must'' approach appears to 
be necessary to get them to do that.
    Clean Water Action is concerned that many DWSRF dollars are going 
towards promotion of sprawl development. While sprawl may be 
inevitable, scarce DWSRF dollars should not be going to promote this 
water polluting use. Core water infrastructure systems, most of which 
were built using taxpayer funds, are now in need of rehabilitation, 
replacement and repair. Though the 1996 Amendments to SDWA restrict SRF 
dollars to be used for existing needs, EPA has left it up to the States 
to determine what constitutes ``reasonable growth.'' We would be happy 
to work with the Committee to suggest changes to this provision that 
will keep DWSRF dollars focused on solving water quality problems not 
creating them.
 protect our drinking water sources and infrastructure from potential 
                           security breaches
    After September 11th security issues around drinking water 
protection understandably moved to the fore. Concerned about potential 
breaches of our drinking water system, EPA, drinking water providers, 
Congress and environmental, consumer and public health groups all got 
behind efforts to assess vulnerabilities and to eliminate and reduce 
threats and risks of all types.
    EPA recognized in guidance to the states that DWSRF dollars could 
be used in some limited ways to address security issues. EPA carefully 
laid out the ground rules for whether individual security fixes could 
take advantage of core DWSRF dollars and/or dollars from the State SRF 
set-aside accounts. Though Clean Water Action supports the use of SRF 
dollars in this manner we would note that the dollar flow to correct 
real and present dangers would be at a very slow pace if we just rely 
on the current SRF accounts. Also, we note that the costs for securing 
our drinking water infrastructure far outstrip the capacity of our 
current DWSRF structure. If the DWSRF dollars will help our utilities 
eliminate hazards, or reduce them then these dollars certainly should 
be eligible. If these dollars help our drinking water providers meet 
other public health protection needs or help them come into compliance 
in other ways or anticipate future rulemakings that are far along in 
the pipeline then we see little problem in the dollars being spent for 
these purposes.
    However, the DWSRF is not sufficient to meet the needs of securing 
our drinking water supply, and it should not be used in such a way that 
would funnel scarce dollars away from existing public health needs 
thereby exacerbating them. Congress in passing Title IV of the Bio-
terrorism bill saw the wisdom of creating an additional pot of money 
that should be the primary source of revenue for securing the nation's 
water supply. If Title IV is insufficient, Congress should come up with 
additional appropriations not raid the under funded DWSRF to meet this 
critical need.
          establish a national clean and safe water trust fund
    The two bills drafted by the Senate Environment and Public Works 
Committee, S. 1961 and the House Transportation and Infrastructure 
Committee, H.R. 3930 reauthorize the Drinking Water and Clean Water SRF 
accounts for a five-year period, but are silent about the long-term 
federal interest in funding clean and safe water. Water infrastructure 
issues, just as our airport and highway infrastructure needs are 
continuous. Any final bill must provide an ongoing, dedicated revenue 
stream from sources other than the ratepayers and taxpayers. The 
Commerce Committee has an opportunity to play a leadership role in 
establishing the longer term nature of the federal interest by 
reauthorizing the DWSRF for a ten year period and by establishing a 
long-term stable funding source--The National Clean And Safe Water 
Trust Fund.
    Clean Water Action believes that a National Clean And Safe Water 
Trust Fund will help needy communities meet critical water 
infrastructure needs. The National Clean and Safe Water Trust Fund 
should in part be funded by a polluter pays mechanism that imposes a 
small fee on those vested interests whose polluting behavior creates 
the need for water clean up and public health protection in the first 
place. In addition Clean Water Action supports turning over Clean Water 
Act enforcement settlements that currently go to the general treasury, 
to the National Clean And Safe Water Trust Fund.
    Increased water infrastructure funding is essential if we are to 
curb a trend toward a two-tiered water infrastructure. Many cities have 
lost much of their rate base while their infrastructure deteriorates. 
Small water systems lack the scale to spread out costs of installing or 
maintaining new technologies. Not only are millions of people's health 
on the line, but the basic economies of many cities and whole regions 
of the country are put at risk.
      require meaningful accountability, transparency, and public 
                             participation
    Congress needs to require more accountability as it invests in SRF 
programs. Any reauthorization of the Drinking Water SRF must 
incorporate mechanisms that ensure open information and public 
involvement. Many small and medium sized communities don't know how to 
access the SRF accounts; all too often it is the politically connected 
that are able to get funding, not those with the most pressing needs. 
Meaningful public participation in the decision making process about 
which projects get funded is usually absent.
    Currently there is little meaningful oversight by EPA and little to 
no real public involvement in the creation of intended use plans 
(IUP's) and the identification of priorities. Even if no new dollars 
were appropriated, the States will be spending over $200 billion over 
the next twenty years in their combined infrastructure accounts with 
very little independent verification of whether or not those dollars 
are going for environmental and public health good or harm and whether 
or not these scarce dollars are going to meet our most pressing needs.
    In addition environmentally sound principles for project design and 
siting should be observed. In many cases state NEPA (National 
Environmental Policy Act)--like procedures are not followed or do not 
include any real review by the public. With little oversight by EPA and 
almost no public involvement in the intended use plans (IUPs), there is 
little indication whether or not federal dollars are supporting real 
public health, compliance or environmental needs. Effective public 
participation is the best way to ensure that environmental and fiscally 
sound choices are made. Ensuring such participation is the best way for 
Congress to protect and build support for its water investment.
                               conclusion
    Congress needs to use investment in drinking water infrastructure 
to insure water infrastructure equity, affordability and sustainability 
while meeting the goals of preserving the environment, enhancing the 
public's health and helping to lay a new foundation for broad economic 
prosperity. This process should not be used as a way to revisit 
important but contentious Safe Drinking Water Act reauthorization 
issues. Clean Water Action's approach, and we hope your approach, is to 
stick to the issues before us--to identify needs and to decide how best 
to structure a new water infrastructure funding program.
    The Clean Water Network and the Campaign for Safe and Affordable 
Drinking Water are united in demanding that any final water 
infrastructure legislation:
1. Substantially increases funding for state clean and safe drinking 
        water funding projects.
2. Provides significant incentives to states to direct more Clean Water 
        SRF funds to nonpoint pollution, drinking water source 
        protection and non-structural approaches, ensuring that (1) 
        today's greatest source of water pollution (nonpoint runoff) is 
        addressed; and (2) that cost-effective ``green infrastructure'' 
        solutions are used to repair and improve existing wastewater 
        and drinking water systems.
3. Ensures that SRF funds are not used to subsidize new sprawl 
        development, but instead are used to repair and improve 
        existing wastewater and drinking water systems.
4. Funds SRF projects based on the states' priority system ranking 
        after meaningful public input, by closing the loophole (in the 
        Clean Water SRF) that allows states to fund projects not on 
        their own priority list. Also, tighten-up and make consistent 
        the ``reasonable growth'' loophole in the Drinking Water SRF.
    Thank you for the opportunity to comment. I look forward to working 
with the Committee in developing any new proposals to address drinking 
water needs and infrastructure. I would be happy to entertain any 
questions. My phone number is (202) 895-0420 ex 105 and my e-mail is 
[email protected]

    Mr. Shimkus. Thank you, Mr. Schwartz. I will recognize 
myself for 5 minutes, and I will take the prerogative of the 
Chair, like Chairman Tauzin and Chairman Barton of other 
committees, will always recognize people from his district who 
happen to ramble into the hearing.
    And I would like to recognize back in the corner the 
Professional Insurance Agents of Illinois. We are supposed to 
be meeting right now, but of course you can see all the support 
I have on the Republican side, and all the support that Frank 
has on the Democratic side.
    So, we are it, and thank you for coming, and hopefully my 
staff is attending to all of your needs. We appreciate you 
coming.
    And I have great respect for my colleague from Missouri, 
Karen McCarthy, but as you can see, we have got tap water 
poured all around here, and I think the whole bottle of water 
versus tap water is one about convenience and another one about 
marketing.
    And that is an issue that we also need to remember. That it 
is not always as simple as it seems, and that I think that the 
bottled water industry is just very good at marketing something 
to make a point.
    Who here as a provider of water, either to rural areas or 
to municipalities, is providing unsafe drinking water to their 
constituents at this time?
    Mr. Shimkus. No one is volunteering. So you all think that 
you are providing safe drinking water to our consumers?
    Mr. Neukrug. It is the safest in the world at any time in 
history.
    Mr. Shimkus. Great. It is always an important point to make 
though. I mean, we all want to get better, and we all want to 
improve. But the sky is not falling, and the water is safe for 
drinking and use, and a simplistic point to be made, but I 
think an important one.
    You all are meeting great standards right now, and we can 
provide partnerships to help, but I just throw that on the 
table for discussion. And I have one question, and then I will 
turn the seat back over to the full committee chairman.
    Mr. Bella, in your testimony, you state that your 
organization is committed to the principle of full cost 
recovery through rates; is that correct?
    Mr. Bella. That's correct.
    Mr. Shimkus. Would you then be opposed to having water 
companies commit to this principle in the long run before 
receiving loans through the SRF?
    Mr. Bella. I think there is a combination here. The problem 
didn't develop by future rate payers. It was developed by past 
or shouldered, or passed on by past generations.
    That is where the SRF would come in here to help the future 
rate payers pay something that they really did not cause to 
happen. So the answer is yes, and it is no also.
    Mr. Shimkus. And that is why we asked the question. There 
is going to be a transition, I believe, in the local providers, 
as I talked to you before the hearing, and you all are doing a 
great job, and we need to be partners.
    There is a State role to refining that and working through 
this authorization is going to be important, and we need all 
your inputs, and we appreciate your testimony. And now I will 
yield to the ranking member for 5 minutes.
    Mr. Pallone. Thank you. I asked the same question of the 
last panel, but I didn't get a response. So hopefully I will 
get a response from some of you. If you look at the CBO 
analysis that was done that was mentioned earlier, and you take 
the mid-point, which is $4 billion per year of additional 
spending to address infrastructure needs, it comes to $20 
billion over 5 years.
    And I know that we have heard different things. Mr. 
Schwartz said 25 and others said different, but I just want 
each of the panelists to indicate whether they would support a 
$20 billion increase in the Drinking Water State Revolving Loan 
Fund authorization.
    In other words, if it was $20 billion over 5 years, would 
you support that, and I will start from the left. You can just 
say yes or no, or maybe.
    Mr. Rutherford. Yes, I would support that. We suggested $3 
billion, and we would be very happy with four.
    Mr. Pallone. Thank you.
    Mr. Bella. I would also support that.
    Mr. Pallone. Thank you.
    Mr. Moore. That would be the bare minimum that I think is 
necessary. Actually, I think the water systems need more than 
that.
    Mr. Pallone. Thank you.
    Mr. Neukrug. We have done a very detailed analysis and came 
to a need of $28.5 billion, and so we are a little bit on the 
low side and would be looking more at the $5 billion per year, 
and we would appreciate any support you could give us.
    Mr. Pallone. Thank you.
    Mr. Ronnebaum. I am not sure that Rural Water has done an 
analysis other than in Kansas, and the need is being met and we 
have a hundred percent excess of applications to the fund from 
what is presently available.
    What is going to drive the need is continuing reduced 
standards on regulations.
    Mr. Pallone. Do you want to express an opinion on the 
figure that I gave though, the $20 billion over 5 years?
    Mr. Ronnebaum. I think Rural Water would support that, but 
I am not qualified to make that--we have not done any studies 
to know that.
    Mr. Pallone. That's all right. We don't require 
qualifications. You essentially said yes. Thank you. Mr. 
Gloriod.
    Mr. Gloriod. I think the difficulty that I have is that all 
the numbers that are out there have resulted from sort of macro 
kinds of studies, looking at a broad brush type approach, and I 
think we all realize that you don't really know what the need 
is until you start to investigate individual systems and sort 
of build that up from the bottom.
    And I guess as a basic principle, where that kind of a need 
assessment lands will dictate what kind of funding gap really 
is there, and I guess I just am not ready to just take an easy 
way out and strike an average.
    Mr. Pallone. So what do you think though? Do you think it 
is in the ball park, the figure that I gave?
    Mr. Gloriod. I think the number is probably higher than the 
$1 billion funding level now, but whether it is four times 
higher, I don't know. It may be twice as high, but I don't know 
that it goes four times as high.
    Mr. Pallone. All right. Thank you. Mr. Schwartz. Well, you 
gave us a higher figure.
    Mr. Schwartz. I just want to note that on some level people 
at the table have been accused of looking for money in search 
of a problem, and I think that when you look at New Jersey, the 
top 10 pesticides used by volume on our lawns, which is our 
biggest crop, golf courses, and farms, are not regulated under 
the Safe Drinking Water Act.
    And when you think about out of control sprawl development, 
large animal feeding operations, and we heard a lot about 
arsenic today, and nuclear weapons production and storage, and 
on, and on, and on, there are large numbers of contaminants 
that are prevalent in our sources of drinking water that we are 
not even talking about under the Safe Drinking Water Act.
    Mr. Pallone. So you definitely would support the $20 
billion because you indicated that you would like a larger 
amount?
    Mr. Schwartz. Yes, and the needs that we are talking about, 
the type of need surveys that are done by the EPA, are not 
looking at things like pollution prevention, and really 
factoring those in.
    So we think that there is a real problem and that we really 
need to begin to address the problem or what we are going to 
hear is unfunded mandates and flexibility to the cows come 
home. We need accountability and water quality, and we need the 
money by the Federal Government to back that up.
    Mr. Pallone. All right. I appreciate that, but the answer 
is yes to the $20 billion?
    Mr. Schwartz. Yes.
    Mr. Pallone. And let me just ask this, and again I don't 
know that we can get through everybody in 5 minutes, but I had 
said to the first panel my concern that if we don't have a 
significant increase in the level of authorization, as well as 
appropriations, what is that going to mean in terms of safe 
drinking water.
    Will it be safe and whether or not companies, utilities, 
will be able to meet these infrastructure needs. Some of them 
may be able to raise rates significantly, and others may not.
    So I don't know if anybody would like to express whether it 
is going--because, you know, it kind of goes to the suggestion 
that right now that drinking water is safe, but can we be sure 
that it isn't if we don't have a significant increase.
    Can these utilities afford to impose the extra burden on 
the rate payers? You are a city councilman, and so you are 
probably in the best position. Go ahead.
    Mr. Moore. Well, Congressman, your colleague, Congressman 
Shimkus, asked us if we were providing safe water, and of 
course all of us responded that indeed we were.
    The reason that we are here today is that we would like to 
continue to provide safe drinking water in the years to come, 
and we see a scenario where because of these pressing 
infrastructure needs that down the road that might become much 
more difficult for us to do. So we are trying to head off a 
crisis and we are trying to plan ahead, and we are here to ask 
for your help.
    Mr. Pallone. Mr. Bella.
    Mr. Bella. One of the--we provide basically two products. 
One is the physical water, and the second product is the 
reliability of the supply of that water. That is the way that 
we look at that.
    And the reliability is another aspect that will be--that 
SRF and this kind of funding addresses. Whereas, the water and 
the quality of the water, now we have been doing that pretty 
much on our own, but the reliability going forward is going to 
be the most important thing that we do, the reliability of 
bringing that product to the consumer is what this is really 
all about in my estimation.
    And until you have stood out by a ditch on December 24th, 
and it is 10 degrees out, and there is two men in a hole and 
the bonnet of a 110 year old valve blows off, and they are in 
freezing water, and all the models and everything just go away. 
And that is what we have to deal with and that's why I 
appreciate your offer to express that here.
    Mr. Pallone. Not everybody has to respond, but is there 
anybody--well, you want to, I guess.
    Mr. Neukrug. Yes. I think the drinking water industry is 
made up of real professionals, and I think the safety and 
reliability of drinking water in the United States will remain, 
irrespective of what Congress does.
    The issue though is competitiveness, and when I am talking 
about this, I am talking about competing needs for funds. 
Obviously the reliability and safety of drinking water is the 
utmost need for reliability.
    What do you lose? Increased deferment of infrastructure 
replacement, and perhaps a delay in CSO programs, and perhaps 
you don't get the environmental benefits that Paul Schwartz is 
looking for.
    There is something within the municipality and utility that 
we will have to give up, and I pray for all of us that it is 
not the quality or reliability of the drinking water.
    Mr. Pallone. Thank you.
    Mr. Gillmor. Thank you. I want to thank John Shimkus for 
all of his help today, and Mr. Pallone as well, and 
particularly I appreciate the witnesses today, your help and 
your testimony, and your expertise.
    We are going to have to adjourn now so that the Oversight 
and Investigations Subcommittee can learn about nuclear safety, 
and we will have I think, however, some questions that we may 
submit to you and hopefully you can send us your answers in 
writing. So thank you very much and we stand adjourned.
    [Whereupon, at 12:52 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                               Atlanta City Council
                                           Atlanta, Georgia
                                                      April 9, 2002
The Honorable Paul E. Gillmor, Chair
The Honorable Frank Pallone, Jr. Ranking Member
Environment and Hazardous Materials Subcommittee
Energy and Commerce Committee
U.S. House of Representatives
Washington. D.C. 20015
    Dear Representatives Gillmor and Pallone: I am Clair Muller, a 
Councilmember from Atlanta, Georgia and a member of the Energy, 
Environment and Natural Resources (EENR) Steering Committee of the 
National League of Cities (NLC) for many years.
    I have concerns about language in S. 1961, the Water Investment Act 
of 2002, a proposal being considered in the Senate, which states, that 
in order to access new money local governments should bill for the full 
cost of service, certify that our assets are managed, consider 
consolidation of services and explore public/private partnerships. I 
would strongly urge you not to include similar language in any proposal 
you develop to provide enhanced federal financial assistance for 
municipal drinking water infrastructure repair, rehabilitation and 
replacement.
    While I am sure other cities have varied experiences, I must speak 
today for Atlanta.
    In 1995 Atlanta was sued for violation of the Clean Water Act and 
we are currently under a strict Consent Decree with EPA and our state 
EPD with deadlines set at 2003, 2005, 2007 and beyond at an estimated 
cost of $4 billion.
    We have raised our water/sewer rates every year for the past 6 
years to the point that we now have an ``affordability'' issue with 
EPA.
    We are complying with a City asset review now.
    As City Utilities Chair for the City of Atlanta, I have advocated 
for many years consolidating our drinking water system with our 
county--which owns, with Atlanta, half of a much smaller system than 
Atlanta's system. That city/county system is totally privatized and 
very successful. The contracts are short (3-4 years) to maximize the 
benefits to the governments and the ratepayers Every time a contract is 
re-negotiated, savings are found for the utility and the ratepayers
    By contrast, the City of Atlanta (under a former Administration) 
privatized the operation and management of our water system, a system 
serving a population of 800,000, for 20 years. The customer service has 
been a disaster and the requests for more dollars due to extra projects 
are constants
    Please do not assume that privatization is a silver bullet. If a 
city is operating appropriately, there is no way a private for-profit 
company can do a better job than a municipality. Yes, privatization can 
work, as it does with our city/county system, but local governments 
must have the flexibility to make these good moves or bad mistakes on 
their own. Do not impose upon us day-to-day operations.
            Sincerely,
  Clair Muller, Atlanta City Councilmember,                
                    City Utilities Committee Chair,                
                    NLC EENR Steering Committee Member,            
                 Georgia Municipal Association Boardmember,        
                       Atlanta Regional Commission Boardmember,    
               Atlanta/Fulton Water Resources Commission Vice Chair
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