[Senate Hearing 107-569]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 107-569

                     WATER INFRASTRUCTURE FINANCING

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FISHERIES, WILDLIFE, 
                               AND WATER

                                 OF THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

               INNOVATIVE FINANCING TECHNIQUES FOR WATER 
                      INFRASTRUCTURE IMPROVEMENTS

                               __________

                            OCTOBER 31, 2001


                               __________

  Printed for the use of the Committee on Environment and Public Works


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                            WASHINGTON : 2003
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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                      one hundred seventh congress
                             first session
                  JAMES M. JEFFORDS, Vermont, Chairman
           BOB SMITH, New Hampshire, Ranking Minority Member
MAX BAUCUS, Montana                  JOHN W. WARNER, Virginia
HARRY REID, Nevada                   JAMES M. INHOFE, Oklahoma
BOB GRAHAM, Florida                  CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     GEORGE V. VOINOVICH, Ohio
BARBARA BOXER, California            MICHAEL D. CRAPO, Idaho
RON WYDEN, Oregon                    LINCOLN CHAFEE, Rhode Island
THOMAS R. CARPER, Delaware           ARLEN SPECTER, Pennsylvania
HILLARY RODHAM CLINTON, New York     BEN NIGHTHORSE CAMPBELL, Colorado
JON S. CORZINE, New Jersey
                 Ken Connolly, Majority Staff Director
                 Dave Conover, Minority Staff Director
                                 ------                                

             Subcommittee on Fisheries, Wildlife, and Water

                     BOB GRAHAM, Florida, Chairman

MAX BAUCUS, Montana                  MICHAEL D. CRAPO, Idaho
HARRY REID, Nevada                   CHRISTOPHER S. BOND, Missouri
RON WYDEN, Oregon                    JOHN W. WARNER, Virginia
HILLARY RODHAM CLINTON, New York     LINCOLN CHAFEE, Rhode Island
JON S. CORZINE, New Jersey           BEN NIGHTHORSE CAMPBELL, Colorado

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page

                            OCTOBER 31, 2001
                           OPENING STATEMENTS

Bond, Hon. Christopher S., U.S. Senator from the State of 
  Missouri.......................................................     3
Chafee, Hon. Lincoln, U.S. Senator from the State of Rhode Island     6
Corzine, Hon. Jon S., U.S. Senator from the State of New Jersey..    14
Crapo, Hon. Michael D., U.S. Senator from the State of Idaho.....     2
Graham, Hon. Bob, U.S. Senator from the State of Florida.........     1
Jeffords, James M., U.S. Senator from the State of Vermont.......    15

                               WITNESSES

Cook, Peter L., executive director, National Association of Water 
  Companies, Washington, DC......................................    26
    Prepared statement...........................................    48
    Responses to additional questions from:
        Senator Graham...........................................    55
        Senator Jeffords.........................................    54
Farrell, Rick, executive director, State of Wisconsin, Department 
  of Administration, on behalf of the Council of Infrastructure 
  Financing Authorities, Washington, DC..........................    18
    Prepared statement...........................................    46
Gorman, Harold J., executive director, New Orleans Sewerage and 
  Water Board, New Orleans, LA, on behalf of the Association of 
  Metropolitan Water Agencies....................................    28
    Prepared statement...........................................    57
Howard, Stephen E., senior vice president, Lehman Brothers, New 
  York, NY.......................................................    16
    Prepared statement...........................................    43
Mehan, Tracy, Assistant Administrator, Environmental Protection 
  Agency, Washington, DC.........................................     7
    Charts:
        Chart 1, Savings Provided by SRF Loans...................    39
        Chart 2, CWSRF Assistance Provided.......................    40
        Chart 3, Drinking Water Needs (1999).....................    41
        Chart 4, Clean Water Needs (1996)........................    42
    Prepared statement...........................................    34
Pinault, Paul, executive director, Narrangansett Bay Commission, 
  Providence, RI, on behalf of the Association of Metropolitan 
  Sewerage Agencies..............................................    30
    Prepared statement...........................................    61
    Responses to additional questions from:
        Senator Graham...........................................    67
        Senator Jeffords.........................................    66

                          ADDITIONAL MATERIAL

American Society of Civil Engineers..............................    68
Clean Water Action, National Citizens' Environmental Organization    70
Public Citizen's Critical Mass Energy and Environment Program, 
  Washington, DC, Special Report, Water Privatization: A Broken 
  Promise........................................................    70

 
                     WATER INFRASTRUCTURE FINANCING

                              ----------                              


                      WEDNESDAY, OCTOBER 31, 2001

                                       U.S. Senate,
               Committee on Environment and Public Works,  
             Subcommittee on Fisheries, Wildlife and Water,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:38 a.m. in 
room 406, Senate Dirksen Building, Hon. Bob Graham (chairman of 
the subcommittee) presiding.
    Present: Senators Graham, Corzine, Crapo, Bond, Chafee, and 
Jeffords [ex officio].

  OPENING STATEMENT OF HON. BOB GRAHAM, U.S. SENATOR FROM THE 
                        STATE OF FLORIDA

    Senator Graham. I will call the hearing of the Subcommittee 
on Fisheries, Wildlife and Water of the Committee on 
Environment and Public Works to order. I extend a good morning. 
I understand that we have already had our instructions as to 
how to evacuate this committee room if necessary. That is just 
one of the several new aspects of our life here in the U.S. 
Congress.
    One of the other aspects is that our committee schedules 
have been disrupted by recent events. This meeting that we are 
holding today has been scheduled twice before but has had to be 
delayed because of unexpected developments.
    I want to extend my appreciation that the members of the 
committee and particular to the witnesses who have been so 
flexible and patient awaiting the time that we could hear your 
very valuable comments.
    Over the last 2 years there has been much discussion about 
water and wastewater infrastructure and the need to modernize 
our current system. This subcommittee has held three hearings, 
largely under the leadership of Senator Crapo, focusing on the 
need for infrastructure investment, the types of problems 
facing local communities and the effectiveness of our Federal 
aid programs.
    There is no question that our infrastructure needs are 
great. In each of the States represented here today we could 
cite a long list of special needs. The Federal Government has a 
role in water and wastewater infrastructure with its annual 
capitalization of the Safe Drinking Water and the Clean Water 
State Revolving funds.
    It is likely that the Federal Government will continue to 
provide assistance to States as they seek to maintain the 
superior service that our water system provides to our 
citizens. However, I also believe that there are still 
questions to be answered as to exactly how and in what 
situations the Federal Government may choose to provide that 
assistance.
    Today, the subcommittee will seek to answer some of the 
questions by hearing recommendations and suggestions by our 
witnesses on two main issues. First, we will discuss what the 
Federal Government can do to facilitate some of the innovative 
financing techniques that are either already in use by local 
communities and water utilities or in use in other areas of 
infrastructure such as transportation.
    Second, we will discuss ways that the Federal Government 
may encourage the use of new financing techniques that may 
stretch Federal dollars applied to water and wastewater 
infrastructure. I recognize that some of the most effective 
approaches may relate to tax policy. As modifications to the 
tax code are under the jurisdiction of the Finance Committee, 
we will not be focusing on these items in detail today.
    However, with several other members of the Environment and 
Public Works Committee, I serve as a member of the Finance 
Committee and we will be glad to share any ideas that take the 
form of tax code changes with our fellow members of the Finance 
Committee.
    In closing, I want to assure everyone that this issue is a 
priority of this subcommittee. We intend to hold one or two 
additional hearings this fall if time permits, and to develop 
legislation over the next several months.
    I encourage anyone who has concerns or suggestions on these 
issues to contact the subcommittee over the next few weeks. If 
you have written testimony you would like to submit for the 
record, the record will remain open for 1 week.
    With our Ranking Member, Senator Crapo and Senator Bond and 
the other members of this subcommittee, we are committed to 
making significant progress on this issue and to do so early in 
2002.
    Thank you very much.
    Senator Crapo.

          OPENING STATEMENT OF HON. MICHAEL D. CRAPO, 
              U.S. SENATOR FROM THE STATE OF IDAHO

    Senator Crapo. Thank you very much, Mr. Chairman. I 
appreciate your rescheduling this twice-postponed hearing. I 
guess three times really is the charm in this case. But the 
issue is of such critical importance that I think everyone in 
America appreciates your commitment to make sure that we 
continue our focus on the issue.
    I also appreciate our witnesses joining us here today to 
examine the EPA financing support programs for infrastructure 
projects. I have said a number of times that in my opinion the 
issue of our clean water and particularly the infrastructure 
needs that we face in it as a nation right now are one of the 
highest, if not the highest, environmental issues that we face 
in this country.
    One of the most significant environmental issues that we 
face and what this committee's work will generate will be one 
of the most important improvements to our environment or 
efforts to improve our environment that we can take here in 
Congress. That is the importance I place on this issue.
    This is the fourth in a series of hearings that this 
subcommittee has held, as the Chairman has already indicated. 
We have been looking at the myriad of issues surrounding the 
water infrastructure needs of our country surrounding the water 
infrastructure needs of our country to make sure that this 
committee is prepared to do the important work that is 
necessary to assure clean water in our Nation.
    In our initial hearing we examined the magnitude of the 
water and wastewater needs projected over the next 20 years. 
Although the estimates varied considerably, all witnesses 
acknowledged that the problem is extremely large.
    While there is disagreement on the scope and who the 
contributors to the problem are, it is evident that all sides 
are looking to Congress for providing assistance in safe and 
cost-effective water and wastewater programs for the public.
    We have also looked at how those resources are being made 
available by the Federal Government, focusing on the EPA. In 
addition to financing State loan programs, the agency has 
provided direct grants to communities, research on pollution 
and contamination prevention and technology, operator training 
and certification and technical assistance.
    With our current budget restraints and so many competing 
needs, we all recognize that there are going to be limits on 
what Congress can do. Therefore, we need to be sure that we 
maximize the available resources that we have.
    A number of stakeholder reports have outlined a series of 
recommendations, everything from improvements in administering 
funds to new programs that encourage innovation to promoting 
public-private partnerships to better asset management.
    I look forward to hearing the success of those ideas in the 
past and all of your recommendations for future steps that we 
can take.
    In addition, knowing what hindrances exist that prevent 
innovative uses of resources will help this committee better 
understand the limitations on utilities and administrators to 
providing the best and most effective services possible.
    I also want to take a moment to welcome Tracy Mehan here 
today. Although we had a chance to visit with you earlier 
during the confirmation process, this is the first opportunity 
that I have had to work with you to focus more closely on your 
observations and expertise on our water and wastewater 
infrastructure issues.
    With the magnitude of the challenge before us, it is 
important that we begin a real dialog on how to best utilize 
the resources available to the EPA, to the States and to the 
communities.
    With that, I want to thank you again, Mr. Chairman, for 
holding the hearing and all of our witnesses for not only 
appearing here today, but for the significant amount of effort 
that you have put into this issue already.
    Senator Graham. Thank you, Senator.
    Senator Bond.

        OPENING STATEMENT OF HON. CHRISTOPHER S. BOND, 
            U.S. SENATOR FROM THE STATE OF MISSOURI

    Senator Bond. Thank you, Mr. Chairman, I am not sure 
whether we feel more reassured that the leader in the 
Intelligence Committee is chairing this committee, knowing how 
we ought to be intelligent about the threats or whether we 
ought to consider ourselves more of a target. One way or 
another, we appreciate your having the hearing.
    I am delighted to welcome my old friend, Tracy Mehan from 
Missouri. He has an outstanding record. He has done a great 
job. Tracy, don't blow it.
    I asked to be able to make a statement because the water 
infrastructure financing is something that is very important to 
me and with another hat that I wear.
    Yesterday I introduced a Concurrent Resolution with 
Sherwood Boehlert in the House to commemorate the 30th 
anniversary of the Clean Water Act, which will occur on October 
18, 2002. I would hope that we could set as a goal to pass a 
new water funding bill by the 30th anniversary next October.
    There is no question but that we have tremendous, 
increasing needs for additional resources for water spending, 
improving the wastewater infrastructure, providing clean and 
safe water for our families. We need to assess the 
vulnerability of our drinking water systems, provide protection 
from terrorists, all of this must be done and it isn't going to 
be cheap.
    Recent surveys from the EPA and outside groups say that we 
need to spend at least $300 billion over 20 years to maintain 
our water systems.
    In another committee, I have in the past served as chairman 
of the Appropriations Subcommittee for VA-HUD which includes 
the funding for EPA. Every year that I chaired that committee 
the administration came in with cuts to SRF. They had wonderful 
boutique programs they wanted to fund instead of the State 
revolving funds, which is the only way of getting the money out 
to make it continue to evolve and eventually to buildup to meet 
the needs. And we restored it.
    This is the year the Administration, using the same OMB 
from the past, came in with an idea to rob the SRF for combined 
sewer overflow funding. Senator Mikulski, with my strong 
support is going to restore it. We put a measly $1.35 billion 
in for clean water and $850 million in for safe drinking water.
    Mr. Chairman and members of the committee, we are not going 
to get there unless we find some other creative ways of 
financing or get the Administration and OMB, with the pushing 
of EPA, to make a significantly higher recommendation and work 
with our colleagues on the Budget Committee to get us the money 
and the appropriations leaders to give us a bigger allocation 
because we are fighting against veterans medical care, housing 
needs for the poor, and there are a lot of other places that 
compete for these dollars. We don't have the dollars.
    We also know as we look down the road, the regulatory 
requirements. We have got bills for expensive concentrated 
animal feedlot operations, total maximum daily load, and 
sanitary sewer overflow. Right now we are debating how we are 
going to ratchet down the limit on arsenic in water, and what 
we do for small communities.
    These are all going to cost a heck of a lot of money, and 
we don't have it. I would say just one community, maybe Tracy 
has been there, Pickering, MO in Nodaway County in northwest 
Missouri, don't blink because you will miss it if you go 
through. In the 2000 census they lost 15 people. They are now 
down to 156. It is on Highway 148 out of Maryville. It is an 
old railroad town. The train doesn't stop there any more. They 
pulled up the rails. There are two churches and one elementary 
school. Most of the workers there are on a minimum wage. The 
major business is a junkyard. The total city budget is $25,000 
a year with no paid city workers.
    They have no sewer system. The houses have a septic system 
and the gray water from tubs and sinks goes into the ditch at 
the road. The waste leeches out of the septic tanks into the 
ditch. The storm water becomes dirty storm water. You know, 
they can't afford $1 million for a sewer system. They want to 
do the right thing. They want to meet the Clean Water Act 
standard. They want to meet the EPA regulations. No one in 
Pickering wants to drink arsenic in their water. But they just 
don't have the means of funding it.
    We need to look at communities like that. We have the 
community of Lebanon in southwest Missouri with 10,000 
residents. They face millions of dollars in sanitary sewer 
overflow costs. Then we go to the large cities like St. Louis 
where it's water system is aging.
    Everybody in our State needs to clean up the wastewater and 
have safe drinking water. There just is not enough money in the 
budget now. I hope this committee under your leadership, Mr. 
Chairman, can put us on the path of figuring out how we get the 
resources that are vitally needed in what I think is one of the 
most pressing environmental problems we have in our country 
today.
    I appreciate the time. I wanted to share this with you 
because I believe it is of greatest concern.
    [The prepared statement of Senator Bond follows:]

     Statement of Hon. Christopher S. Bond, U.S. Senator from the 
                           State of Missouri

    Mr. Chairman, thank you for holding this hearing on improving the 
utilization of available water and wastewater infrastructure funding. 
The cost of providing clean and safe waters for our families is 
overwhelming local communities large and small. Therefore, we must 
explore all creative and flexible financing options to fund drinkable 
and fishable waters.
    Yesterday, I introduced a Concurrent Resolution with Sherry 
Boehlert in the House to commemorate the 30th anniversary of the Clean 
Water Act on October 18, 2002. 1 believe it would be a wonderful goal 
for us to set to pass a new water funding bill by that 30th anniversary 
next October.
    We certainly have the need for an increased authorization for water 
spending. Recent surveys from EPA and outside groups say we need to 
spend at least $300 billion over 20 years to maintain our water 
systems.
    To traditional infrastructure maintenance and improvement we can 
now add infrastructure protection. Assessing the vulnerability of our 
drinking water systems and providing protection from terrorists will 
not be cheap, but it must be done. These numbers are only for water 
infrastructure. There are a host of additional regulatory requirements 
coming down the pipe as well. We also have bills for expensive 
Concentrated Animal Feedlot Operations, Total Maximum Daily Load, and 
Sanitary Sewer Overflow proposals. We are currently debating placing 
new burdens on localities for additional Arsenic controls. All of these 
proposals are well intentioned, but they also have very high real 
costs.
    Let me put a Missouri face on the challenges communities face. You 
all have communities like these in your States, but it's good to remind 
ourselves of our local problems as we debate these arcane financial 
methods.
    The town of Pickering is in Nodaway County in northwest Missouri. 
According to the 2000 census, they lost 15 people and are now down to 
156 residents. If you drive up Highway 148 out of Maryville, you will 
see Pickering on the left side of the road.
    Pickering is an old railroad town, but the train doesn't stop there 
anymore. It couldn't anyway, because they pulled up the rails and ties 
years ago.
    There are two churches and one elementary school in town. Pickering 
residents are hard workers, but most make barely over minimum wage. 
Pickering has exactly one business--a junkyard. Thus, almost all city 
tax revenues are from property taxes. The total city budget is $25,000 
per year. There is no police department, no fire department, no 
library. There are no paid city workers.
    The reason I bring this up is because Pickering has no sewer 
system. Houses have septic systems. Gray water from tubs and sinks goes 
into the ditch at the road. But many septic tanks don't have proper 
drainage, and their waste leaches into the ditch. Storm water becomes 
dirty storm water.
    As the financial experts can imagine, a town with 150 residents and 
an annual budget of $25,000 can't afford $1 million for a sewer system. 
A town with no city employees is hard pressed to fill out reams of 
paperwork for loan programs. A town that size can't afford matching 
requirements. Tripling water rates still won't be enough to pay for the 
water system they need.
    Pickering wants to do the right thing. Pickering wants to meet 
Clean Water Act standards. Pickering wants to meet EPA regulations. I'm 
sure no one in Pickering wants to drink Arsenic in their water.
    Pickering wants to provide clean and safe water for its residents. 
Pickering is willing to pay more for clean water, but sometimes good 
intentions and desire just aren't enough. We have to keep Pickering in 
mind when we talk about how to finance water improvements. We also have 
to remember mid-sized communities such as the 10,000 residents of 
Lebanon in southwest Missouri. They face millions of dollars in 
sanitary sewer overflow costs. We also can't forget the aging system 
that more than a million residents in St. Louis depend upon for every 
drink of water they take.
    All of these Missouri families and all the families in your States 
deserve clean and safe water, but they need our help. These people are 
depending upon us for a new water spending authorization to meet their 
needs.
    I urge my colleagues to come together to help meet these water 
needs. Mr. Chairman, thank you for hosting this hearing and I look 
forward to further Committee action on paying for clean and safe water.

    Senator Graham. Well, thank you, Senator. I appreciate your 
long commitment, your experience and your passion for this 
issue. We will try to work together to achieve your very lofty 
goals and to do so within that timeframe of the 30th 
anniversary of the Clean Water Act.
    Senator Chafee, do you have an opening statement? I also 
understand that you wish to introduce one of our witnesses.

           OPENING STATEMENT OF HON. LINCOLN CHAFEE, 
          U.S. SENATOR FROM THE STATE OF RHODE ISLAND

    Senator Chafee. Yes, thank you, Senator Graham. I agree 
with my colleagues on the importance of this issue. Certainly 
wastewater and water treatment and innovative financing is 
important. Of all the priorities, as Senator Bond said, that 
confront us, certainly that is one of the highest priorities.
    I, myself, think it is an area that we can export to 
developing countries once we get good at it ourselves, that are 
wrestling under the same challenges we have.
    Yes, I am pleased to introduce Paul Pinault, who is 
executive director of the Narragansett Bay Commission, which is 
faced with combined sewer overflow problems in Providence. We 
have an aging sewer system--old brick sewers. When we have a 
rain event, of course, you have a discharge of completely 
untreated wastewater into our beautiful Narragansett Bay. It is 
very, very expensive in terms of trying to remedy that, of 
course.
    Paul has worked for the Narragansett Bay Commission since 
1982 and is the Commission's executive director since 1991. He 
was recently appointed the American Metropolitan Sewerage 
Agency's vice president.
    Welcome, Paul. I'm glad you are here.
    Senator Graham. Thank you, Senator Chafee.
    Our first witness today will be Mr. Tracy Mehan. Mr. Mehan, 
if you would please take a seat at the table? Mr. Mehan is the 
Assistant Administrator for Water at the Environmental 
Protection Agency. This will be his first, albeit twice 
delayed, appearance before the subcommittee.
    We welcome you. Congratulations on the responsibilities 
which you have assumed. We look forward to hearing your 
comments.
    Mr. Mehan, for each of the witnesses, I'm going to ask if 
you could limit your oral presentation to 5 minutes. If you 
have further detail that you would like to submit, it will be 
reported fully in the record. Then, at the conclusion of your 
remarks, members of the committee will ask questions.

      STATEMENT OF TRACY MEHAN, ASSISTANT ADMINISTRATOR, 
        ENVIRONMENTAL PROTECTION AGENCY, WASHINGTON, DC

    Mr. Mehan. Certainly. Thank you, Mr. Chairman, members of 
the subcommittee. I have submitted written comments at length 
that go over this very well-trodden path, I know, long before 
my arrival on the scene and deals with the very daunting 
challenge of the infrastructure needs of this country in the 
area of wastewater and drinking water.
    Basically, I would like to share just a few thoughts 
generally with you. If the committee has any interest, I would 
be happy to address any security issues, although I understand 
that is the subject of a hearing tomorrow, too.
    Basically, Mr. Chairman, our success in improving drinking 
water and surface water quality is the result of many programs 
and a partnership by local, State and Federal Governments in 
partnership also with the private sector. But our cooperative 
investment in water infrastructure and pipes and treatment 
plants and the like has, more than any other single effort, 
paid dramatic dividends for water quality and public health 
these last 30 years.
    EPA has decided to undertake a broader review of needs and 
spending for water and wastewater infrastructure, as I am sure 
you know, including estimating whether there is a quantifiable 
gap between future needs and current spending.
    This analysis, which is known to everyone as the ``gap 
analysis'' has actually gone out for independent peer review. 
Those peer reviews have been completed by several external 
experts. We are reviewing those now and we hope to finalize the 
analysis and have it ready for public release later this year.
    We think that will be a significant contribution to the 
public dialog on this very pressing issue.
    We recognize at EPA that effective decisionmaking 
concerning water infrastructure financing can benefit from a 
better understanding of the broader context of this effort. We 
believe that key components in the broader context of water 
infrastructure need to be more fully evaluated and include the 
following, and these aren't going to be a surprise to those of 
you, such as yourself, Mr. Chairman, who have been interested 
in this issue.
    Just the growth of our population, of course, steady growth 
and shifts in population create substantial pressure on local 
governments to provide expanding drinking water and sewer 
services. That is a fairly obvious point.
    The aging of the infrastructure, again, is something known 
to everyone on this committee. Many sewerage and drinking water 
pipes were installed between 50 and 100 years ago and these 
pipes are nearing the end of their useful lives.
    That current treatment may not be sufficient is another 
point to be made. In 1998, States, tribes and interstate 
commissions assessed water quality and 44 percent of the 
Nation's estuaries and 35 percent of the rivers and streams 
assessed areas to be impaired.
    Wastewater treatment facilities and combined sewer 
overflows were two of the leading causes of impairment. 
Wastewater treatment efficiencies may be leveling off which, 
when combined with population and economic growth, could have 
the effect of reversing hard-won water quality.
    A June 2000 EPA report, Progress in Water Quality, as it 
was titled, estimates that by 2016 pollution levels could be 
similar to levels observed in the mid-1970's if there is no 
increase in treatment efficiency. Again, that is a worst case 
scenario, but nonetheless a sobering prospect to be 
contemplated.
    We are facing, of course, the issue of declining research 
and development. Innovation, research and development are 
essential elements of promoting the use of more effective, 
efficient and affordable technologies in water and wastewater 
treatment.
    A recent EPA report on private/public R&D expenditures, 
associated with water pollution abatement showed that 
expenditures decreased by half from the early 1970's to the 
1990's.
    Of course, we have increasing operation and maintenance 
costs. As the size and complexity of water and sewer systems 
increase and facilities get older, the cost of operations and 
maintenance tend to increase, although there is maybe a silver 
lining here.
    As I had mentioned during my confirmation hearings, the 
staff and myself are very taken with the possibilities of asset 
management, a concept, for instance, that has been pushed in 
countries such as Australia that are showing some 20 percent 
reduction in cost if there is an effective asset management in 
place over time. We are going to have a handbook put out on it. 
We are planning four seminars and workshops. There are two 
sides of that coin.
    Finally, the whole issue of affordability. Senator Bond, of 
course, mentioned the case of Nodaway County. Although water 
has historically been underpriced, some systems may find it 
difficult to replace or update aging water and sewer systems 
and keep household user charges at affordable levels, 
especially for low-income households and communities.
    Clearly, if I have learned anything during the arsenic 
discussions I have been privy to the last few months, this 
issue of affordability is one we are probably going to need to 
revisit over time, and sooner rather than later.
    A number of stakeholders groups, of course, have called for 
a significant increase in Federal investment in wastewater and 
in drinking water infrastructure. Certainly there will be a 
continuing role for the Federal Government in helping to meet 
the challenge of extensive infrastructure investment need. But 
it cannot be the only solution.
    The solutions will have to be multifaceted with Federal, 
State, local, public and private investment of time, energy, 
money, research and perhaps most needed, innovative thinking 
and bold actions.
    We must encourage States and local governments to think 
strategically as they plan for forthcoming rules and program 
requirements, infrastructure repair and replacement and overall 
protection of the water that sustains their communities.
    We are working with Administrator Whitman to develop 
principles for engaging in this dialog and some other thoughts 
that we hope to roll out in the near future. One of these 
principles that I had mentioned in my confirmation hearing and 
which I just want to reaffirm is the centrality, if you will, 
or the importance of maintaining the integrity of the State 
revolving loan funds.
    Referring to Senator Bond's comments, as a former State 
official for 13 years, this builds on the best of good 
efficiency as well as good federalism. It is a process that has 
worked. The SRF loan study that we have done indicates that we 
get four times the purchasing power versus grants. That is not 
to say there is not a role for target grants or loan principal 
forgiveness and other enhancements such as that.
    But again, the SRF works. It has worked and we very much 
believe that is a core value that needs to be maintained 
throughout the debate and the dialog to come.
    I would be happy to deal with any other questions you might 
like on this or the security matter, Mr. Chairman.
    Senator Graham. I would like to ask some questions about 
the current authority of EPA to create incentives for 
innovative financing without the requirement of change in law, 
what actions would the EPA take to energize State and local 
governments to use new forms of financing for their water and 
sewer infrastructure?
    Mr. Mehan. As you indicated, there are limitations and 
whether we are dealing under the current regime or some 
different statutory regime makes a big difference. We need to 
be engaged in sort of a quality exercise, a continuous 
improvement exercise with all the stakeholders.
    One example that comes to mind that I think we can look for 
flexibilities we have not had in the past in the SRF is the 
Ohio's link deposit program where the State purchases a 
certificate of deposit at a favorable rate from a bank and then 
makes loans directly to the farmers. This allows the farmers to 
deal with the local bank at the same time the bank assumes 
responsibility for loan repayment and further protects the SRF 
assets.
    It gets into a whole area that we think is very cost 
effective, which is best management practices for nonpoint 
sources. It quite frankly can get much more bang for the buck 
than an end-of-the-pipe control. Those sorts of things we need 
to keep trolling for and engaging with stakeholders to 
experiment with.
    A key issue--it is not a financing issue, but it relates to 
it on the drinking water side--is the whole issue of the 
multiplicity of drinking water, community systems. I think we 
have 3,000 gas utilities, 3,000 electric utilities and 54,000 
community drinking water systems in this country.
    Now, a lot of people like having a small system close by, 
but it is at least an option to be considered as to whether 
some consolidation of systems within proximity to each other 
might better allow a single system to bear costs and amortize 
those costs over time.
    So, again, I don't know if there is any one silver bullet, 
but I think we need to be in a robust engagement on these 
topics and explore whatever efficiencies and innovations that 
we can. I just had a conference yesterday sponsored by the 
administrator's Office on Innovation in Government. It is as 
much a process as it is discreet work products. I am certainly 
pledged to do that.
    There are certainly things we can do, I think, changing the 
rules of the game under the SRF that would improve it, but 
working within the current rules is a challenge and we will 
continue to do what we can.
    Senator Graham. A comment on one aspect of what you just 
said in your reference to the fact that there will be a hearing 
on security tomorrow.
    There have been some suggestions that in terms of 
infrastructure such as water, electricity, gas supplies, that 
we might be moving into an era where we would begin to 
emphasize smaller units of generation or distribution from a 
physical standpoint, not speaking of an organizational 
standpoint so that you would not put, for instance, a whole 
city at risk because it was dependent on a single water 
treatment plant.
    I think that is an issue that we are going to have to 
factor into all of our considerations, including the impact 
that that might have on financing facilities in the future.
    In the minute and 33 seconds that I have left for 
questions, could we move beyond what the EPA can do within its 
existing authority to what would be any of EPA's 
recommendations, let us say your two or three first priorities 
for changes in existing law that we had increase the efficiency 
with which Federal funds were used for water and sewer 
infrastructure.
    Mr. Mehan. Well, again, focusing on the SRF, which is sort 
of the core value, as I articulated, there are a number of 
things. There is a lot of discussion between the clean water 
and the drinking water SRFs. We think that authority ought to 
be made permanent. I think that is an efficiency that would 
give States flexibility to put the money where they need it and 
consistent with their overall needs, again, utilizing the best 
of efficiencies under a federalism context.
    We also think that similar to the drinking SRF, the clean 
water SRF ought to have authority to forgive a portion of loan 
principal for disadvantaged communities. Again, this 
affordability issue is crucial.
    When you look at, again, the debate over arsenic, it is not 
the larger systems, although they have concerns, but the real 
crunch is with the smaller systems. While we like the revolving 
loan concept of the SRF, we understand there are unique 
circumstances involving extremely small and disadvantaged 
communities where consistency has to yield to reality. We 
understand that. We think that makes sense there.
    We think also the idea of drinking water SRF loans for 
disadvantaged communities that go to 30 years over the 20 years 
would be a practical specific thing that could be considered 
and would present some relief where it is needed.
    We also think that wastewater treatment works that are 
privately owned, but which treat municipal wastewater are 
currently not eligible under the clean water SRF. We think they 
should be eligible. We need to look at privatization. We need 
to look at those other options, whether it is consolidation or 
privatization, and those are not the tools in every case. 
Sometimes they fit. Sometimes they don't, but we ought to at 
least utilize that technique where it is appropriate.
    Finally, we would suggest expanding eligibility, the clean 
water SRF to include more water conservation activities which, 
again, is not just good environmental, but it is good economic 
practice and over time you can get two birds with one stone.
    So, those would be just some ideas. I don't mean to say 
that that is exhaustive. But again, focusing on a core area for 
us, the SRF, those would be sort of concrete specific things we 
would recommend.
    Senator Graham. Thank you very much. On your last point 
about relationship of conservation to financing of 
infrastructure, I would note that Senator Harkin has indicated 
that in the farm bill which is now being developed there will 
be a substantial emphasis on conservation. I would think it 
would be worthwhile for EPA to look at that proposal from the 
perspective of how it might serve to assist with some of our 
water-related issues, particularly the nonsource pollution 
questions.
    The order of questions will be Senator Crapo and then 
Senator Chafee.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman, I 
appreciated your reference just now to the conservation title 
of the farm bill. I have a proposed conservation title that I 
am working with Senator Harkin on and I agree with you that 
those are going to be very critical elements that we deal with 
in that context as we work on the infrastructure needs of our 
clean water needs in this country.
    Mr. Mehan, the Environmental Financial Advisory Board has 
indicated recently in a letter to Administrator Whitman that a 
20 percent reduction in infrastructure costs is attainable by 
applying a more cost-effective management strategy and 
technique. The EFAB has gone on to recommend that the revisions 
to State and municipal procurement practices for planning, 
designing, building and operating water and wastewater 
facilities could be used to achieve a significant portion of 
these cost reductions.
    Are you familiar with that letter?
    Mr. Mehan. I am generally. I am planning a meeting with the 
EFAB. I am very interested in their proposals. As to the 20 
percent reduction, I think that gets back to the Australian 
experience we talked about in terms of asset management. I am 
very much looking forward to an engagement with that board. One 
of my old colleagues and friends who I have total respect for, 
Steve Moffut, who is director of the Missouri Department of 
Natural Resources sits on that board and a few other folks that 
I have very high regard for.
    So, I think all those are very legitimate recommendations 
that we need to consider very, very seriously.
    Senator Crapo. If I understand you correctly, the EPA does 
support the idea that design build or design built operating 
procurement standards or procurement practices could reduce the 
cost for environmental compliance.
    Mr. Mehan. That is right. Administrator Whitman, Governor 
Whitman, has, I know cited those kinds of examples often in her 
own comments on this issue.
    Senator Crapo. Did you see a role for the EPA under your 
existing authorities or do we need to address this question 
statutorily to allow the EPA to encourage States to consider 
alternative procurement practices such as these we are talking 
about?
    Mr. Mehan. I don't have a firm view on it. I think they 
should have that authority, whether they need laws or not. That 
would be the only question I would want to explore. But 
certainly as an end point or a State to be desired, I would 
certainly agree with that and would agree that we need to do 
whatever it takes to get that flexibility.
    Senator Crapo. Thank you. Shifting to another issue now, 
you had mentioned, I think both in your original comments as 
well as in your response to Senator Graham's question, the 
issue of grants or loan forgiveness versus the full operational 
loan program.
    In my evaluation of this, depending on what kind of 
financing structure that we end up with, assuming that we still 
have some form of a revolving loan system, well, I guess even 
if we go to some of the other proposals or some other 
approaches, the question still arises as to how we deal with 
the small communities.
    One of the other aspects of the farm bill that I have 
introduced is a program called Project Search to help small 
communities such as that described by Senator Bond to get 
access to grant moneys. These are communities that have failed 
to qualify, even for the other programs but have persistent 
needs, mandates, and enforcement procedures without the 
financial resources or economies of scale to deal with the 
issues.
    So, I have concluded that we do need to have some type of a 
program to help those small communities that simply can't make 
a go of it, even under a loan program.
    I understand your testimony to indicate that you tend to 
agree with that. Could you elaborate? Have you or the EPA 
analyzed the extent of this problem and made any determinations 
as to what nature or size of effort will need to be undertaken 
with regard to these small communities?
    Mr. Mehan. Not with the degree of specificity that I could 
give you some programmatic thoughts. Again, when I talk about 
the SRF I want to be clear, I deal in presumptions based on 
principle and experience. The SRF loans, the revolving nature 
of the SRF is where we start as a presumption.
    We understand that this affordability issue is crucial. The 
cumulative impacts of regulations and higher expectations in 
terms of environmental performance takes its toll. Whether some 
sort of targeted grant program through the SRF or whether it is 
loan forgiveness or other things are certainly fair items or 
items for discussion, for legitimate discussion and debate.
    We know it is a problem. We need to define it more. We need 
to give it some focus and walk through the very alternatives. 
Again, our concern is we don't want to throw the baby out with 
the bath water. We have a tremendous program here that has 
worked, has a proven track record and we wouldn't want to do 
violence to it in trying to deal with another legitimate 
problem or concern.
    Senator Crapo. I see my time has expired.
    Senator Graham. Thank you, Senator.
    We have been joined by our Chairman, Senator Jeffords, and 
by Senator Corzine. The next questioner in order of appearance 
is Senator Chafee.
    Senator Chafee. Thank you, Senator Graham.
    I would just like to follow up also on the smaller 
communities. In Rhode Island we have a rural community of about 
2,000 users that have their water affected by MTBE. Of course, 
they are having trouble dealing with that, the same as Senator 
Bond talked about, the difficult of getting into the 
bureaucracy by a small community where I think they have three 
employees or something in applying for the SRF and the like.
    Is there any effort by the EPA to encourage these small 
communities to merge with larger ones and profit from economy 
of scale? Is there any initiative in that area?
    Mr. Mehan. We very much believe it is a crucial direction. 
In fact, I just met with the board of directors of ASDWA, the 
Association of State Drinking Water Administrators. It is 
funny, we were talking about variances and affordability and 
exemptions and they pretty well thought those things were 
pretty much at the margin. They said the single biggest thing 
that could be done is consolidation. They saw that as the 
biggest issue, although there are a lot of countervailing 
arguments, local control and you know, sort of like the home 
rule arguments you can get into.
    So, we encourage that. We don't feel that it is our 
position to be prescriptive or to be heavy-handed. We just 
think it is a fact. You know, these 54,000 community water 
systems are a fact and if somebody wants to look at options, 
State and local governments want to look at options, that is an 
option that ought to be considered.
    Whether we go from 54,000 to 3,000 or 54,000 to 30,000, I 
have no idea what the right mix is, but it is certainly 
something we would consider. Quite frankly, the government, and 
by that I mean both the legislative and executive branch, by 
continuing to demand higher environmental performance on a 
national basis, as we do in the Safe Drinking Water Act, sort 
of sends an implicit message that you ought to be looking at 
this option as you buildup these cumulative costs and 
expectations.
    We want to pursue that. We want to encourage the economic 
research that would maybe elucidate that point better and again 
we don't see ourselves absolutely mandating it or imposing it, 
but it is certainly an option we want people to look at.
    Senator Chafee. I am sure you are right that there is 
always the inclination to keep control of your own area. As you 
said, home rule, but I am sure if there were some incentives it 
would help relinquish that control.
    Mr. Mehan. Absolutely, Senator.
    Senator Graham. Thank you, Senator.
    Senator Corzine.
    Senator Corzine. Thank you, Mr. Chairman. I appreciate your 
holding this hearing.

OPENING STATEMENT OF HON. JON S. CORZINE, U.S. SENATOR FROM THE 
                      STATE OF NEW JERSEY

    Senator Corzine. Thank you. I would start out by saying 
that the State of New Jersey and the folks within the State 
government think this is one of the most effective programs. We 
have had enormous success.
    We have some of the same kinds of problems that I think 
others do with small communities and there needs to be this 
consolidation effort. I think we have 569 communities in New 
Jersey, from very large ones to very small ones. It seems to me 
that there must be some means for us to think about how we can 
consolidate some of the same power of leverage that is 
occurring in these revolving funds and still maintaining the 
loan arrangements which, I think, brings discipline to the 
process, or at least our people feel that it does.
    I certainly encourage as much thought and would love to be 
a party to some of that process where we may be able to bring 
some regionalization, if you will, which doesn't deprive the 
local communities of their ability to express themselves, but 
have access at these funds.
    Then I would put in a plug that in a world where we are 
looking for stimulus to be laid down, this is certainly one of 
those areas where a lot of projects are on the table and could 
be in the ground very quickly. I certainly hope that we will 
consider that.
    I wonder if you feel like these SRF funds are being 
utilized uniformly across the country. Are people in other 
States, do they feel consistently positive about it drawing 
down this? That is the first question I have. If they are not, 
are there things that we ought to do to the program that would 
make that happen?
    I presume this flexibility issue is primary. Maybe some of 
these questions were asked ahead of time. I would certainly 
like to hear your comments on it. Maybe we need to give you 
more flexibility on that.
    Mr. Mehan. Senator, I did, in fact, go through four or five 
examples of improvements or enhancements to the SRF that would 
be useful.
    Senator Corzine. I can check the record.
    Mr. Mehan. Yes. But going back to your original point, what 
is the universal feeling, again, I am speaking now as a former 
State official. I worked in Missouri and Michigan and my 
conversations with State officials throughout the country, 
States such as New Jersey, I think uniformly they view the SRF 
as a winner. It is the gun that won the West for the last 30 
years, so to speak, in terms of water quality improvement.
    It is also showing great strides on the drinking water side 
in more recent years. So, that is where you start. As I 
described, maybe before you came in the room, my presumption is 
that is where we want to protect the integrity of the SRF 
revolving loan concept.
    Now, that is only a presumption. There are, obviously, 
unique needs of the smaller, disadvantaged communities that 
require us to maybe sharpen our pencils and scratch our heads a 
bit and see what we can do, whether it is principal loan 
forgiveness or whether it is some targeted disciplined grant 
program, I couldn't rule any of those out.
    Senator Corzine. Have any of the States used any 
regionalization or consolidation efforts that are not unlike 
the question that Senator Chafee was asking?
    Mr. Mehan. I can't speak. I am not sure, for instance, what 
States might be doing in areas through their public service 
commissions and things like that. I can tell you that recent 
conversations just as of last week in Baltimore with State 
drinking water, they all view consolidation as the way to go, 
even more useful in the long run than variances and exemptions, 
although I think there is more we can do under the Safe 
Drinking Water Act with exemptions if we look at this 
affordability issue.
    But I don't think they have really perfected the way how 
you tee this up. There are countervailing arguments here in 
terms of local control and people wanting to keep some control 
of their destiny at the local level.
    So, it is an education process. It is a persuasion process. 
It is at least making clear to people that we do have an 
extensive system there that may be some modicum of 
streamlining.
    Senator Corzine. Thank you.
    Senator Graham. Thank you, Senator.
    Senator Jeffords, our committee chair has joined us. He has 
a statement and also questions.

         OPENING STATEMENT OF HON. JAMES M. JEFFORDS, 
             U.S. SENATOR FROM THE STATE OF VERMONT

    Senator Jeffords. Thank you very much, Mr. Chairman. I am 
very pleased to be with you. Mr. Mehan, thank you for being 
with us also. I want to echo the comments of many of our 
colleagues by saying that the water and wastewater 
infrastructure is a critical issue facing our communities, with 
estimates of the potential gap between the need for 
infrastructure replacement funding and available funding 
ranging from $300 billion over the next 20 years to $1 trillion 
over the same period.
    It is clear that the Nation's water system will face many 
changes and challenges in the coming decades. My State of 
Vermont is one of the most rural areas in the country, an area 
of small towns and cities surrounded by an open and working 
landscape.
    Vermonters wish to maintain this pattern. Most of our towns 
have less than 5,000 people and lack the administrative and 
budgetary capacity to undertake water and sewer infrastructure 
projects on their own. Our cities are some of the oldest in the 
country, as you know.
    My question to you is relative to small systems. Can you 
expand on your previous comments related to small systems? Do 
you see any need to differentiate between rural and urban 
systems and their unique needs?
    Mr. Mehan. Well, urban or rural--if they are disadvantaged, 
they are pushing the limits of affordability, or if the 
technical requirements of the accumulated laws and regulations 
are outstripping their capacity to sustain an adequate 
program--they are going to need help. I think for the most part 
we are talking about smaller rural communities.
    We are looking at these issues from many perspectives. We 
are watching to see where Congress is going with this. We are 
looking at this affordability issue which, as I say, I think we 
are going to be revisiting that over time because that plugs in 
not just to the general policy questions on the wastewater 
side, but also specific statutory exemptions that may or may 
not be available under the Drinking Water law.
    So, any and all things, whether it is some rejiggering of 
the SRF, principal forgiveness, targeted grants, I could 
research on low-cost or efficient technologies, say in the case 
of arsenic. Whatever it is, we are open for business in that 
area. Again, the arsenic thing has brought this to the fore, 
certainly for me, but it has been an ongoing problem since I 
have been working on drinking water issues since 1989.
    So, yes, it would be a shame for us to disregard these 
small communities which ends up then delegitimizing, in 
political terms, if you will, what is a wonderful national 
program under the Safe Drinking Water law and for that matter 
the Clean Water Act.
    Senator Jeffords. Thank you. Thank you, Mr. Chairman.
    Senator Graham. Thank you, Mr. Chairman.
    Mr. Mehan, we thank you very much for your testimony today 
and your ideas. We look forward to a close partnership with you 
and EPA as we proceed to develop the reauthorization bill for 
the Clean Water Act.
    Mr. Mehan. As do I, Senator. Thank you.
    Senator Graham. Thank you very much.
    If the second panel would please come forward. Mr. Stephen 
E. Howard is the senior vice president of Lehman Brothers. Mr. 
Rick Farrell is the executive director for the State of 
Wisconsin, Department of Administration. He is presenting 
testimony in his capacity as the executive director, Council of 
Infrastructure Financing Authorities. These are the entities 
that administer State revolving fund programs.
    We are most appreciative that each of you could join us 
today.
    Mr. Howard, we look forward to your remarks.

 STATEMENT OF STEPHEN E. HOWARD, SENIOR VICE PRESIDENT, LEHMAN 
                     BROTHERS, NEW YORK, NY

    Mr. Howard. My name is Steve Howard. I am a senior vice 
president with Lehman Brothers in New York. I have spent the 
last 20 years of my career at Lehman working with a variety of 
local, State and regional governments and private companies 
financing the development of infrastructure projects, including 
environmental projects, water, solid waste and clean water as 
well as drinking water, transportation facilities and other 
public facilities such as jails and schools.
    The primary function that we provide in the process is to 
maximize and leverage to the maximum extent possible cash-flows 
that are available to pay for these assets and bring capital 
markets' discipline to the process of developing this 
infrastructure.
    Most of the projects that we finance involve partnerships 
between the public sector and the private sector where the 
private sector would come in and enter into short-, medium- or 
long-term contracts to design, build and on the these assets.
    I will not be addressing the issue of State revolving 
funds. That is not an area of expertise for me personally. I 
have colleagues in my office who can address that in future 
hearings. I am here just to discuss the concept of financing 
public-private partnerships, which I think is of interest to 
the committee.
    At one end of the spectrum you have structures that utilize 
traditional governmental purpose bonds--primarily general 
obligation bonds of local governments to finance these assets. 
Under the current tax laws, generally speaking, local 
governments can enter into short- and medium-term contracts 
with private companies to design, build and run these 
facilities.
    At the other end of the spectrum you have private companies 
such as water utilities under some form of State regulation 
that finance water infrastructure projects in particular on 
their own balance sheet, in some cases utilizing taxes and 
bonds and in some cases utilizing their own equity or taxable 
debt.
    So, those are really the bookends of the options for 
financing water infrastructure. In the middle between these 
bookends are a variety of approaches that are employed to 
finance infrastructure projects. In some cases the financing of 
projects, particularly in the area of solid waste and 
transportation, is significantly facilitated by the 
availability of private activity bonds for those 
infrastructures.
    The key issue in this sort of middle category of financings 
is that the tax provisions allowing for the use of private 
activity bonds allows for a significant transfer of operating 
and technology risks to the private sector, where the private 
sector can come in and optimize labor and capital and really 
enter into a long-term arrangement where it can manage the 
asset over a long period of time, in the course of what was 
referred to earlier.
    We have more limitations in the water sector because of the 
limited availability of private activity bond use for this 
sector. So, we don't have the ability to leverage in the water 
sector to the extent we do in solid waste and transportation.
    As I mentioned earlier, we have the bookends on the right-
hand side. We would have the use of pure private financing, in 
some cases taxable and in some cases equity with pre-tax 
returns in the 15 to 20 percent range.
    On the other end of the spectrum we have pure public 
financing in the 5.5 to 6 percent range for tax exempt debt and 
even lower with the use of State revolving funds and grants and 
loans. It is the middle category that we are trying to 
optimize, as I mentioned before.
    What is that?
    Senator Graham. That is the floor bell that we are hearing. 
What I think we are hearing is----
    Mr. Howard. I thought that was my buzzer. That is not my 5-
minute limit?
    Senator Graham. That is the floor. It signals that there is 
a quorum call, which is the essence of a time out for the 
Senate.
    We will allow you another minute.
    Mr. Howard. OK. Let me just then wrap up very quickly.
    In this middle category of financing options the true 
benefit for the use of private activity bonds involving private 
companies is primarily for small- and medium-sized communities 
and in some cases for large communities as well.
    These types of approaches are not, again, applicable in all 
situations, but we have seen a tremendous preponderance of use 
of short-term operating agreements between private companies 
and local small- and medium-sized communities in the last 5 to 
10 years.
    In the area of infrastructure generally, as I mentioned, we 
have the use of private activity bonds for solid waste, 
airports and ports, but not for water and wastewater. 
Specifically by that I mean we do not have the availability of 
the use of these bonds without the use of what we call private 
activity bond cap that, as most of you are probably familiar, 
is a limitation on the use of taxes and financing by private 
companies that have entered into long-term contracts or have 
ownership of the assets.
    Using solid waste as an example, in the mid-1980's it was 
viewed to be a serious disposal crisis similar to what we are 
faced with today in the water infrastructure with the huge 
financing needs. What was done back then was to pull solid 
waste facilities out from under the tax exempt bond cap for 
private company involvement in the financing and development of 
these assets.
    As a consequence we saw in that sector very easily over the 
next 10 years $20 billion of investment in state-of-the-art 
assets to properly manage that particular waste stream. We feel 
that the same approach, if it were applied to the water sector, 
would significantly facilitate the development of this 
wastewater infrastructure, particularly for small- and medium-
sized communities that can really benefit from entering into 
partnerships with the private sector.
    Senator Graham. Thank you, Mr. Howard.
    We will hear from Mr. Farrell and then open for questions. 
I would like to take my prerogative to say that Mr. Farrell has 
had a long experience with the Congress, working closely with 
our former colleague, Lawton Chiles, and then following him in 
his administration as Governor of Florida.
    I have very high regard for his dedication and intellect 
and I am pleased that he is now serving the State of Wisconsin 
and the Association of SRF agencies. I am pleased that he is 
going to be sharing his insights with us today.

    STATEMENT OF RICK FARRELL, EXECUTIVE DIRECTOR, STATE OF 
   WISCONSIN, DEPARTMENT OF ADMINISTRATION, ON BEHALF OF THE 
COUNCIL OF INFRASTRUCTURE FINANCING AUTHORITIES, WASHINGTON, DC

    Mr. Farrell. Thank you, Mr. Chairman. I haven't left my 
Florida roots. The president of our association is in 
Wisconsin. I am still here.
    My name is Rick Farrell. I am here today in my capacity as 
executive director of the Council of Infrastructure Financing 
Authorities. CIFA is a national organization made up primarily 
of State and local officials engaged in the development and 
financing of water and wastewater pollution control projects 
and the operation of State revolving funds for infrastructure 
financing.
    Our organization numbers among its members 44 States and 
other municipal and private-sector participants in 
environmental finance. An important part of CIFA's mission is 
to foster innovation and encourage the exchange of information 
concerning best practices in infrastructure financing among the 
States, between the States, the national government and the 
private sector.
    The State revolving funds are arguably the most successful 
environmental program ever. Their proven track record argues 
strongly in favor of the SRFs as the primary mechanism for 
delivery of environmental infrastructure construction 
subsidies.
    The Federal-State partnership and the successes it has 
created would be undermined by the onset of separately 
delivered programs or other alternative funding mechanisms. 
Separate grant programs complicate the funding process at the 
local level and can serve to delay project initiation as 
communities hold out for the prospect of a grant.
    Programmatically, it makes the most sense to provide all 
infrastructure construction subsidies, be they in the form of 
subsidized loans, grants or grant equivalents such as principal 
forgiveness through the SRF structure which is already 
established and has been successfully functioning in all the 
States since 1989.
    This saves overhead costs and reduces the confusion in 
communities trying to access a multitude of programs. Using the 
SRF to target subsidies, perhaps with grants as well as with 
loans, extends valuable infrastructure dollars, a key goal.
    Efficiency gains achieved by the SRF programs translate 
into more and more efficient infrastructure construction than 
can be achieved by comparable grant programs. The success story 
of the SRF is clearly a model that should be built upon.
    Indicative of the vitality of the SRF program to facilitate 
financial innovation is the capacity it affords to leverage the 
funds. Leveraging in the SRF context means that States have the 
ability to use the Federal capital grants as well as their 
matching share as collateral to borrow in the public bond 
market for purposes of increasing the pool of available funds 
for project lending. This option allows the States to use the 
funds as security or a source of revenue for the payment of 
principal and interest on bonds so long as the bond proceeds 
are deposited back into the SRF.
    The use of the assets of the SRF to generate new moneys 
which can be used immediately to fund more projects underscores 
the true financial strength of the SRF model. Leveraging the 
SRF can dramatically increase the funds available for lending. 
Close to $9 billion has been added to the loan pool by the 24 
States that have leveraged their funds.
    This compares with $18.3 billion in Federal capital grants 
thus far. The successful leveraging occurring with the SRFs has 
allowed us to address serious problems much more quickly than 
anyone had anticipated by delivering substantially I could 
amounts of affordable capital sooner to meet critical 
infrastructure needs.
    There are examples of leveraging that demonstrate a 
multiple effect of project financing levels at two to four 
times the original investment.
    An example of the utility of flexibility is illustrated by 
the fact that among all the States and territories operating 
revolving funds, no two are structured precisely alike. Yet all 
share the same water quality objectives. The SRFs are 
successful because their underlying concept is based on program 
management and service delivery at the State and local level 
with broad accountability at the Federal level.
    I believe a useful question for the subcommittee to examine 
is why leveraging is not an option for more States and to 
examine the underlying issues and concerns of the States in 
this regard.
    Taking in note the chairman's comments at the beginning of 
the hearing that the jurisdiction doesn't extend to tax law, we 
do want to point out that any comprehensive review of means 
available to maximize water infrastructure funding should 
include consideration of the arbitrage rebate rules as they 
affect the leveraged SRF programs.
    The States that operate leveraged SRF programs are 
compelled by the arbitrage rules to either limit the rate at 
which funds can be invested or rebate to the Treasury the net 
earnings on those proceeds of the SRF funds that are considered 
under these rules to be bond proceeds. This greatly reduces the 
resources available to fulfill the fund's purpose of providing 
below-market financial assistance to help communities meet 
Federal standards for their water programs.
    CIFA estimates that in the absence of these restrictions, 
the affected States could earn an additional $100 to $200 
million annually on their SRF capitalization funds which, when 
leveraged, would permit an additional $200 to $400 million 
annual investment in needed water projects.
    Concluding, I want to point out that our position is that 
any congressional initiatives targeting water and wastewater 
infrastructure funding affecting current SRF operations or 
expanding the mission of the SRFs should be developed with the 
recognition that innovative methods of addressing water and 
wastewater needs are more likely to originate at the State 
rather than the Federal level. The States are closer to the 
problems that need to be addressed and the States are capable 
of tailoring their approach to best meet their unique needs.
    The best hope for discovering and realizing innovative 
financing approaches is to give the States wide latitude within 
the constructs of appropriate accountability in designing and 
implementing their locally-tailored solutions.
    Thank you.
    Senator Graham. Thank you, Mr. Farrell.
    Mr. Howard, you talked about private activity bonds and the 
role that they had played in other areas of infrastructure such 
as transportation. Could you suggest how you think private 
activity bonds might be part of the package of innovative 
financing for water and sewer infrastructure?
    Mr. Howard. In transportation, solid waste facilities and 
port facilities there is a specific exemption for the use of 
private activity bonds to finance those projects without having 
to require the use of what is a fairly limited resources at the 
State level and that is private activity tax exempt bond cap 
allocation.
    I am sure most of you are familiar with that. There are per 
capita limits at the State level for the use of private 
activity bonds. It so happens in the water sector privatized 
water projects that use of private activity bonds are subject 
to this rather limited resource at the State level. They have 
to compete against other infrastructure asset categories.
    Just to give you a sense, in 1999 there was a total private 
activity bond cap availability nationwide of $15 billion and 
only $1.5 billion was used for the exempt category that 
qualifies for water facilities. But that is total across all 
private use. So, water was even a subset of the $1.5 billion.
    So, it is a tremendous limiting factor in the use of that 
financing vehicle for water infrastructure.
    Senator Graham. Recently, the Congress extended private 
activity bonds for school construction and created a separate 
educational category. It was only 10 cents per resident of the 
State, so it is not a large program but it is the beginning of 
what could be a larger program.
    Would you suggest that we should have a separate private 
activity bond category for water and sewer as we do now for 
schools?
    Mr. Howard. Well, I would suggest that it be added to the 
current category under which solid waste, ports and 
transportation facilities qualify. It is really a very simple 
change to the code to just insert water facilities, privatized 
water facilities.
    The school category is a slightly different exemption. It 
doesn't directly apply to the same approach that is used in 
water, solid waste and port sectors.
    Senator Graham. From your experience in other areas such as 
transportation, are there any other ideas that you think this 
committee should consider to use proven innovative financing 
techniques that might be valuable for water and sewer?
    Mr. Howard. Using transportation as one example, some of 
you may be familiar with several programs that have been put 
together. One of them that comes to mind is the TIFIA program 
which was put together several years ago for the purpose of 
providing subordinated Federal loans to buttress financing a 
variety of unique projects to investment grade level so that 
you could enter the capital markets.
    That program has met with varying degrees of success. It is 
a highly specialized program that is very tailored to given 
projects around the country. I think with a broader use of that 
type of financing technique, where we leverage off of 
subordinated Federal loans in a capital structure for any given 
project in the water sector, where the projects are more 
typical than unique, I think would be a tremendous asset.
    Senator Graham. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Mr. Farrell, in your testimony you talked about the issue 
of Federal oversight and the question that I have, if I 
understand it right, you have a concern that excessive 
oversight or one-size-fits-all Federal regulatory regimes can 
be counterproductive in terms of cost effectiveness.
    Could you expand on that a little bit and also indicate 
what type of reforms we might consider here at the 
congressional level?
    Mr. Farrell. The interesting thing, the States organized 
around the State revolving fund almost uniquely to each State. 
Every State has set up their own structure. So, one-size-fits-
all is a problem right to begin with because States have 
approached this where there are bond banks, there is financing 
authority, some States do this within their environmental 
departments. They regard the State revolving funds essentially 
as a State program in which the Federal funds flow into that 
and then it is supposed to revolve.
    There had been some concerns by my organization during this 
time that EPA was moving to set standards and requirements that 
seemed to go beyond accountability. In the last couple of years 
I think a lot of progress has been made in that regard. Our 
member States feel that EPA is responding to the fact that 
these programs are more mature and that the States are doing a 
good job.
    But there are some areas where we could see continued 
progress, in areas like self-certification and others where we 
would like to work with EPA to make sure that the appropriate 
accountability is there but at the same time that the States 
have the flexibility to, for instance like moving funds back 
and forth between the programs, moving the administrative 
funds, those types of issues that when you add them all up 
gives the States a lot more flexibility than they currently 
have.
    But I do want to emphasize that we think the situation has 
improved a great deal in the last 2 years from where it was 3 
or 4 years ago.
    Senator Crapo. So, in the context of whether there needs to 
be any activity at the congressional level, I am hearing you 
say that it can pretty much be solved and is being solved by 
the EPA in terms of its management, with the exception of some 
of the reforms we have already talked about to the fund itself.
    Mr. Farrell. Right. We would not have any specific 
legislative recommendations at this point, as long as we 
continue to make the kind of progress that we think we are 
making with EPA.
    Senator Crapo. All right. Thank you.
    Mr. Howard, I recognize, as has already been indicated, 
that tax policy is not within the jurisdiction of this 
committee, although we do have some who can have influence on 
tax policy on other committees on which they sit.
    We have frequently heard that infrastructure financing can 
be improved by things such as Mr. Farrell mentioned, the 
changes in the arbitrage rules. I believe you talked about the 
adjustments to the tax exempt volume caps for private activity 
bonds and so forth.
    First of all, do you agree with Mr. Farrell on the 
arbitrage issue and second, are there any things other than the 
arbitrage and the caps issue that we should consider?
    Mr. Howard. I do agree on the arbitrage issue. It is a 
foregone opportunity for certain programs like the revolving 
funds where we are basically putting several hundred million 
dollars, we are pulling that away from the assets that are 
generated at the local level.
    Another area that doesn't necessarily involve legislative 
change is the facilitation of the transfer of these assets from 
the public sector to the private sector. That was codified to a 
certain extent in Executive Order 12803. It really deals with 
the handling of assets that were funded either in whole or in 
part with grants, Federal grants, particularly relevant in the 
wastewater sector where we had a tremendous amount of asset 
investment in the 1960's and 1970's. It was funded in part by 
Federal grants.
    It is those assets, particularly with small- or medium-
sized communities, that are currently in need of updating 
modernization, have not been properly maintained, that would be 
in some cases better suited to shifting over to private 
management in one form or another.
    The problem is that if you enter into long-term contracts 
or you shift the control of those assets under some sort of 
long-term lease or sale to the private sector, you run amuck of 
repayment obligations potentially under it has Federal grant 
program.
    There is a process that is set up by EPA and with OMB to 
deal with this. But it has been somewhat cumbersome for 
communities to sort of weed their way through. It has been very 
time consuming. That is not to say it is impossible to get 
through it. It can be a major hurdle.
    Senator Crapo. Thank you. My time has expired, but before I 
relinquish, I wanted to indicate to Mr. Howard that the first 
time I ever testify before Congress that buzzer went off also. 
Only you handled it better than I did because I just quit.
    Mr. Howard. Thank you, Senator.
    Senator Graham. Mr. Chafee and then Senator Corzine.
    Senator Chafee. Thank you, Mr. Chairman.
    Mr. Farrell, you said in your testimony, ``I believe a 
useful question for the subcommittee to look at is why 
leveraging is not an option for more States and to examine the 
underlying issues and concerns of the States in this regard.''
    I know you expanded on it a little bit in your statement, 
but I guess what you are saying is what we could do on the 
Federal level more and maybe just expand on that now.
    Mr. Farrell. Yes, Senator. Keeping in mind that obviously 
the decision to leverage is a State decision and the State 
Legislature has to decide. In other words, there may be State 
issues revolving here about how they view leveraging or about 
how they view going to the bond market. I think that has to be 
put out there first, that you wouldn't want to require the 
States to go this way.
    But the 24 States that do leverage have had very promising 
results. More money has been put out into projects. I think the 
issue that I was suggesting, and we would love to work with the 
committee on this, is: What are the impediments for the States; 
and whether there are some issues relating to EPA oversight in 
a statute that may be preventing some States from 
participating.
    Senator Chafee. What comes to mind quickly as the 
impediments?
    Mr. Farrell. Well, a lot of it has to do with the 
sophistication of the States and whether they need some 
assistance in that regard. You will find leveraging is more 
common to the larger States that are in the bond market more 
regularly. So, there may be some need for some assistance in 
that regard.
    There was some feeling earlier on in this process that 
there was a bias against leveraging on the part of EPA. I think 
that is totally turned around but some States may feel that 
this is not an area that they want to go in.
    But we have not done--and it may be useful to do it--sort 
of done a survey of the States to sort of raise that question 
of what do they think the problems are that might move them 
more to leveraging.
    Senator Chafee. I am glad you volunteered to work with us 
in the subcommittee and I look forward to doing that. Thank 
you.
    Senator Graham. Senator Corzine.
    Senator Corzine. Thank you.
    Mr. Howard, being an enterprising investment banker, you 
have probably had people say no to these leveraging concepts. I 
will ask you the same series of questions that Senator Chafee 
had. Why are only 24 States taking advantage of this?
    Are there bond cap limits or debt limits?
    Mr. Howard. You are referring to the State revolving fund?
    Senator Corzine. Yes.
    Mr. Howard. Again, I am not an expert in that particular 
area. I would, I think, echo what Mr. Farrell said, that 
communities and States each have their own financing philosophy 
and my experience working with a variety of different 
communities across the State is that each community has a 
different view on leverage.
    Some communities are much more comfortable with issuing 
bonds and some communities are much less comfortable. I think 
the unique thing about the program is that it is a great match 
of Federal local partnership in using this financing structure. 
I don't think it is reasonable to expect that all 50 States 
would take advantage of it given the different approaches that 
each State takes to financing its infrastructure.
    Senator Corzine. Could one of the blockers be the same 
thing that we were talking about in another area, this great 
dispersion of size? You said the size of States. But again, 
smaller communities are not getting the same kind of exposure 
and expertise to the leveraging concepts. Are there programs 
again that we ought to get back to some kind of consolidating.
    Mr. Howard. I would refer you back to my very limited 
expertise in how State revolving fund programs work. I do have 
some limited experience working with small communities that 
just simply couldn't meet the requirements of the State 
revolving fund program, so it just wasn't an option for them. 
The requirements vary from State to State.
    Senator Corzine. It sounds like we have a program that 
works but needs to be adjusted pretty significantly with regard 
to this particular area. It would be great if we could all sit 
down and figure out ways that might be flexible enough to allow 
others to take advantage of this, these smaller communities 
that have these problems. It ought to be a serviceable issue.
    Senator Graham. Thank you, Senator.
    I just would like to ask a final question of Mr. Farrell 
and Mr. Howard, if you would like to comment.
    When the original idea of revolving funds for 
infrastructure were developed, they were frequently developed 
at the State level. Florida had a State-administered revolving 
fund to assist local governments with water and sewer, even 
before the Federal Clean Water Act was enacted.
    At the time the feeling was that the principle financing 
need of local governments was during the period of planning and 
construction of the plant; that once the plant was in operation 
and had a revenue stream that it could be financed on a 
permanent basis through more conventional sources.
    It seems to me that in recent years an increasing amount of 
the revolving fund is being used for permanent financing. The 
first witness, Mr. Mehan, suggested that the length of the loan 
authorized be expanded to 30 years.
    I guess maybe I am old fashioned in that I think the 
principal challenge that most local governments have is getting 
that financing during the period where the plant is not 
producing any revenue.
    What is your feeling about whether we should extend the 
length of time that loans can be made and therefore make it 
more likely that the loans will be used as a source of 
permanent financing as opposed to focusing on what I thought 
was the primary purpose which was the development and 
construction period financing?
    Mr. Farrell. Well, Mr. Chairman, I think you are correct in 
the primary purpose. I think what you are seeing is that as 
perhaps needs like smaller communities, disadvantaged 
communities and so forth become apparent and there are some 
questions as to whether the SRF is meeting those needs, then I 
think the question becomes are there other strategies within 
the context of the SRF that could meet those problems.
    An extension of a 30-year loan might be amenable for a 
smaller community that has a different set of needs, also for 
things like principal forgiveness. In other words, keeping the 
SRF model, but looking at sort of alterations of it to meet 
particular things where perhaps it is not producing what you 
need to produce. I think the primary goal is as you stated it.
    Senator Graham. Mr. Howard.
    Mr. Howard. I would just add that we have seen a shift in 
capital markets financing toward 30-year financing away from 20 
years for basic infrastructure projects. I would say that any 
liberalization of the program to extend the term of the loans, 
particularly for these types of assets, because they are 40- 
and 50-year assets, they are not 20-year assets, I think makes 
a lot of sense.
    Senator Graham. Are there any other questions? Thank you 
very much, Mr. Howard, Mr. Farrell. We appreciate your 
contributions. As we move toward more specific legislative 
proposals we would look forward to the opportunity to continue 
to take advantage of your expertise. Thank you.
    I'm glad, Mr. Farrell. I'm sorry for Wisconsin, but glad 
for the Nation that you are fully focused on this.
    Our third panel is Mr. Peter L. Cook who is the executive 
director of the National Association of Water Companies, Mr. 
Harold Gorman, the executive director of the New Orleans 
Sewerage and Water Board and he is appearing on behalf of the 
Association of Metropolitan Water Agencies, and Mr. Paul 
Pinault, who was introduced earlier by Senator Chafee, who is 
the executive director of the Narragansett Bay Commission. He 
is speaking on behalf of the Association of Metropolitan 
Sewerage Agencies.
    Mr. Cook.

   STATEMENT OF PETER L. COOK, EXECUTIVE DIRECTOR, NATIONAL 
         ASSOCIATION OF WATER COMPANIES, WASHINGTON, DC

    Mr. Cook. Thank you, Mr. Chairman. My name is Peter Cook 
and I am the executive director of the National Association of 
Water Companies. NAWC is a nonprofit trade association that 
exclusively represents private- and investor-owned water 
utilities in the United States. I am offering testimony on 
behalf of the NAWC membership. There are 200 members in 41 
States that provide safe, reliable drinking water to more than 
20 million people in America every day.
    Thank you very much for the opportunity to present NAWC's 
views on innovative financing techniques that could be used to 
address the infrastructure replacement challenge that the water 
industry faces. These views are also shared by the 
H2O Coalition.
    A number of suggestions are described in detail in our 
written testimony which we have submitted. However, before 
summarizing our suggestions, I must explain the context within 
which our suggestions are made.
    We believe the only sound, long-term strategy for financing 
the repair, replacement and upgrading of water infrastructure 
is to have the utility customer pay for these capital needs in 
their water bills. We believe water utilities like gas, 
electric and telephone utilities should be self-sustaining by 
charging their customers the full cost of services that they 
are providing.
    Since the Federal Government doesn't pay for gas, electric 
or telephone infrastructure, why should it pay for water 
infrastructure? The failure of the utilities to charge for full 
cost of service will most likely lead to an open-ended direct 
Federal subsidy of water services in this country with grave 
consequences to the U.S. Treasury over the long term.
    Now, where full cost of service rates are not affordable to 
some customers, and this is very true in the small systems as 
our previous panelists have said, we support a water bill 
payment assistance program like the LIHEAP program for home 
energy bills that has been used very successfully in this 
country for many years.
    Such a program would subsidize only those who have a true 
financial need. Now, where we have entire communities that are 
disadvantaged like many of the small water systems in this 
country, forgiveness of principal and interest on SRF loans may 
be appropriate in grants in some cases.
    So, we definitely may need to have a separate program for 
the small systems and I am talking primarily about the larger 
systems with economies of scale when I say they need to be 
charging full cost of service.
    Those who are persuaded that government should assume a 
major role in financing infrastructure have argued for a 
massive grant program to utilities. We think this is about as 
far from innovation as you can get. One need only review the 
history of the wastewater construction grant program in the 
1970's to see that grants breed dependence and subsidize 
everybody's water rates, including those who can afford to pay 
the full cost of service rates.
    This is neither an efficient use of Federal resources nor 
one that is likely to have an end. Revolving loans which do not 
have these negative characteristics make a lot more sense to 
us. We support their continued use to help utilities meet the 
infrastructure challenge.
    In addition to revolving loans, there are other financing 
techniques that are available to utilities, all of which will 
help utilities keep their rates as low as possible. The private 
sector offers many innovative financing techniques, often 
through partnerships with the municipal sector.
    We recently published a report on the role of the private 
sector in the drinking water industry and that report studies 
various forms that the private sector involvement in the water 
business can take from outright ownership of an asset to 
various long- and short-term contracts.
    The report found that when a municipality pursues 
partnerships with the private sector operating costs can be 
reduced by 10 to 40 percent. It is obvious that cost savings of 
this magnitude can make a very big difference in rates.
    Also this report showed that costs could be cut while 
actually improving drinking water safety. Of the 41 percent of 
the facilities that were out of compliance in the study before 
privatization, 100 percent were in compliance after 
privatization.
    If the full power of the private sector is unleashed to 
help this coming infrastructure challenge, we will all be 
winners. However, to help unleash the power of the private 
sector, there is an issue that should be dealt with, though 
unfortunately it is not under the jurisdiction of this 
committee.
    That is to remove the existing volume caps on private 
activity bonds for water and wastewater improvements. These 
caps limit the use of tax-exempt financing by private entities 
working for the public good. 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. This proposal has the support of the Conference of 
Mayors, among others.
    I understand that this being a tax issue is outside the 
jurisdiction of this committee. It is, however, one of the most 
important modifications Congress can make to give 
municipalities the tools that they need to meet the coming 
infrastructure challenge.
    Preliminary modeling indicates that this minor alteration 
in the tax code could cost the Federal Government very little, 
yet leverage huge sums of private capital. This proposal has 
precedent. Congress has exempted other environmental facilities 
as we have heard before, certain solid waste facilities from 
the State volume caps because of perceived public need.
    I know some of you, including you, Mr. Chairman, also sit 
on the Finance Committee. I encourage you to consider this 
change in the tax code as soon as possible.
    In conclusion, Mr. Chairman, thank you very much for the 
opportunity to present our views. I would be happy to respond 
to any questions at the appropriate time.
    Senator Graham. Thank you very much, Mr. Cook.
    Mr. Gorman.

STATEMENT OF HAROLD J. GORMAN, EXECUTIVE DIRECTOR, NEW ORLEANS 
  SEWERAGE AND WATER BOARD, NEW ORLEANS, LA, ON BEHALF OF THE 
           ASSOCIATION OF METROPOLITAN WATER AGENCIES

    Mr. Gorman. Good morning, Chairman Graham, Senator Crapo 
and members of the subcommittee. My name is Harold Gorman and I 
am the executive director of the Sewerage and Water Board of 
New Orleans and a Board member of the Association of 
Metropolitan Water Agencies, which is one of 40 national 
organizations that make up the water infrastructure network.
    We would like to thank you for hosting this important 
hearing and thank you for advocating $5 billion in grants for 
water and wastewater systems as part of the Economic Stimulus 
Package. We estimate that these funds could be absorbed in the 
economy next year alone and create 200,000 jobs.
    We would also like to thank the committee and subcommittee 
leaders for calling on President Bush to include in the 
administration's budget for emergency supplemental 
appropriations, the estimated $155 million needed to help 
drinking water agencies conduct vulnerability assessments and 
develop emergency response plans as soon as possible.
    The urgency and high degree of sophistication required the 
security assessments and emergency response in this new 
environment we all work in warrant Federal assistance.
    I would also like to thank Senator Jeffords for introducing 
legislation to authorize funding for research on security 
matters. The foresight of Senator Jeffords will provide water 
suppliers with cutting edge technology to better protect 
consumers.
    Dating back to 1899, the Sewerage and Water Board of New 
Orleans provides water, sewerage and drainage service to a half 
a million consumers. The board is structured as a freestanding 
business. There are no generally government subsidies and no 
commingling of funds among our drinking water, wastewater and 
drainage system. Each system must pay its own way.
    Unfortunately, to meet the needs of our $1.2 billion 
capital infrastructure program without Federal grants the Board 
will have to raise drinking water rates over the next 5 years 
by nearly 50 percent and sewer rates by 90 percent.
    But New Orleans is one of the poorest cities in the Nation 
and our customer's utility bills already exceed the EPA 
recommended ratio of utility cost to household income. Twenty-
eight percent of the city's residents live below the national 
poverty level. This is second only to the Bronx.
    High rate increases will only push working families in New 
Orleans and many other cities into a deeper financial hole. 
Currently, the primary Federal funding program is a drinking 
water SRF. But it was not created to address infrastructure 
repair, replacement and refurbishment. The intent was mainly to 
provide a means to help small systems better comply with the 
Safe Drinking Water Act and correct threats to public health.
    Many large system projects do not qualify for the SRF 
because when a 100-year-old water pipe burst in downtown New 
Orleans, there is no violation of the Safe Drinking Water Act 
and usually no public health threat. It is just another pipe 
that needs to be replaced.
    Unfortunately, there are thousands of miles of old pipes 
throughout our Nation's cities. What is needed is an investment 
program that not only helps small systems but also recognizes 
the challenges facing large systems.
    AMWA and our WIN partners have asked Congress to authorize 
and appropriate $57 billion over a 5-year period for both 
drinking water and wastewater infrastructure. This investment 
program should include a strong grants component and ample 
opportunity for large systems to participate in innovative 
programs such as principal forgiveness, credit guarantees and 
refinancing of high interest debt.
    Another proposal to solve the gap is privatization, ranging 
from asset sales to outsourcing. At the Sewerage and Water 
Board we have outsourced almost 40 percent of our business. The 
U.S. privatization scene is dominated by a handful of foreign-
owned firms, namely two French multinationals, Vivendi and 
Suez, two British firms, Thames Water and the Kelda Group and 
RWE, a German utility firm that expects to complete its 
purchase of the American Waterworks Company next year.
    The American players are OMI, a CH2M Hill company and a 
handful of smaller firms. There does not appear to be either a 
strong or a weak record of success related to privatization, 
but one of the differences between public and private operation 
is that investor-owner utilities are ensured the opportunity to 
earn a profitable rate of return. Public water agencies instead 
reinvest their revenues into their systems.
    Whether a municipal system privatizes should always be a 
decision for local-elected officials. The Sewerage and Water 
Board is a good example. We are now undergoing a managed 
competition process under which the Board's employees will bid 
alongside private firms to operate the system.
    Reengineering and increased efficiency of water systems has 
also helped to stretch available dollars through reengineering, 
reorganization, reducing staff and installing state-of-the-art 
technology, public water systems have saved millions of dollars 
and still satisfy customer expectations and EPA regulations.
    But in spite of new heights of efficiency, the savings 
generated will not resolve the infrastructure funding crisis 
facing New Orleans and other American cities.
    One of the most innovative ways to stretch local, State and 
Federal dollars would be to encourage voluntary regional 
partnerships among water systems. A partnership could include 
physical infrastructure connections among utilities of various 
sizes near each other or it could involve a financial, 
managerial or technical support connection among utilities 
regardless of distance from one another or it could involve a 
combination of both.
    Another means of helping to stretch available dollars is 
research into more efficient and effective means of 
infrastructure improvement and repair.
    With the American Water Works Association, we recommend 
Congress consider identifying a small portion of water 
infrastructure funds for such research. In some ways the 
challenge we face today is not much different than faced by our 
predecessors 100 years ago.
    Funding of the major urban water systems in 1900 was 
accomplished almost exclusively with local dollars. But funding 
projects today must reflect the tax structure of 2001. The 
Federal Government must join with the urban centers of this 
country to help upgrade our water infrastructure. As the U.S. 
Conference of Mayors president and New Orleans mayor, Marc 
Morial said in testimony earlier this year, ``Local 
infrastructure needs are no longer simply a local concern. 
These needs are of national significance, of national economic 
importance and of substantial cost exceeding local capital 
resources.''
    AMWR believes the recommendations outlined here will help 
resolve the $11 billion per year drinking water infrastructure 
gap and keep American infrastructure strong and secure.
    We look forward to discussing these future ideas with you. 
Thank you.
    Senator Graham. Thank you very much, Mr. Gorman.
    Mr. Pinault.

 STATEMENT OF PAUL PINAULT, EXECUTIVE DIRECTOR, NARRANGANSETT 
BAY COMMISSION, PROVIDENCE, RI, ON BEHALF OF THE ASSOCIATION OF 
                 METROPOLITAN SEWERAGE AGENCIES

    Mr. Pinault. Good morning Chairman Graham and Senator 
Chafee. It is a pleasure to be here this morning to provide 
comments to your subcommittee. As Senator Chafee noted, I am 
also the vice president of AMSA. AMSA represents the interests 
of more than 260 publicly-owned wastewater treatment facilities 
across the country which provide service to the majority of the 
United States sewered population.
    At the outset, I would like to thank the members of this 
subcommittee for their hard work in making water infrastructure 
a national priority and for the continued commitment to meeting 
the Nation's clean and safe water needs as we confront the 
funding challenge together.
    I would like to thank Senator Jeffords and the supporters 
of the bill introduced yesterday that provides much needed 
research and development funding for drinking water and 
wastewater infrastructure security. I and AMSA sincerely hope 
this measure passes swiftly with the full bipartisan support it 
merits.
    While infrastructure security demands require local 
governments to stretch limited dollars even further, it becomes 
increasingly clear that adequate financial resources to 
communities like mine are the most essential elements to 
maintaining our Nation's water and wastewater infrastructure.
    Yet, since 1980, according to studies by both the U.S. EPA 
and the private sector, Federal contributions for water and 
wastewater infrastructure projects have declined by an 
astounding 75 percent. Despite this funding drop, I assure you 
that the wastewater utilities are being extremely innovative in 
order to get the most out of the limited dollars available.
    My commission has had a positive experience with the State 
revolving fund, borrowing approximately $72 million to date. 
This has enabled us to fund a significant portion of our sewer 
system projects.
    The commission's debt service as a percentage of total 
operating budget is currently 22 percent this fiscal year. By 
2006 it will be 54 percent as a result of $350 million in 
planned capital projects over the next 5 years. It will cost 
about $750 million to complete those projects.
    It is daunting to think that the 54 cents of every dollar 
the commission receives will go to debt service rather than 
operations.
    However, without the SRF the number would be much higher if 
we had to borrow at full market rates.
    Capital funding needs are driven by the dual forces of 
aging infrastructure and increasingly stringent environmental 
regulations, not operational costs.
    The commission and its fellow AMSA members around the 
country have a 6-year documented record of reducing operational 
costs. However, no amount of operational streamlining or belt 
tightening can offset the cost of replacing critical clean 
water infrastructure.
    Absent serious reform and increased funding to the SRF, the 
commission will be forced to borrow at market rates. This will 
make it extremely difficult to fund meaningful wastewater 
infrastructure projects. The commission's ratepayers have been 
paying their fair share of the cost of service provided, but it 
is increasingly clear that they cannot sustain additional 
substantial rate increases. Twenty-two percent of the 
households in our district fall below the Federal poverty line.
    In January of this year the commission raised rates 25 
percent, primarily to pay for a portion of the first phase of 
our combined sewer overflow project which we initiated this 
summer. We will have to apply again within the next 6 months 
for additional rate increases to meet growing debt capacity 
needs.
    For our demographic group, these increases represent 
substantial financial hardship. Many communities simply cannot 
afford to pay back SRF loans. These communities should be 
afforded a full range of funding options including grants to 
meet their infrastructure needs.
    Simply put, the SRF Program is not and will not be adequate 
to ensure continued compliance with our Nation's water quality 
laws, regulations and goals. On a national level public 
utilities are putting key innovations to work, such as pooled 
borrowing and the restructuring of debt.
    Environmental management systems and asset management are 
becoming essential tools to ensure wastewater utility 
competitiveness nationwide.
    AMSA, in cooperation with EPA and the Water Environment 
Federation is currently engaged in a joint project to develop a 
comprehensive EMS guidance for wastewater utilities that will 
provide a key tool to ensure a more integrated cost-effective 
management approach for utilities in the near future.
    At the same time AMSA is also collaborating with EPA on 
developing a nationwide asset management program for wastewater 
utilities which is scheduled to be implemented at the beginning 
of next year.
    Despite these key innovations, available funding options 
have been narrowed to loans only. AMSA supports the 
recommendations contained in the recent water infrastructure 
WIN Now report calling for a next generation SRF. By creating 
one centralized financing program States can eliminate 
duplication, streamline government and save money.
    AMSA and the 40 organizations in the WIN effort support the 
inclusion of $5 billion in grants for ready to go 
infrastructure projects in the Economic Stimulus Package. We 
also support a 5-year, $57 billion funding plan to capitalize 
State-administered grant and loan programs for water and 
wastewater infrastructure.
    While understanding the need to consider other potential 
long-term options beyond the 5-year period.
    Mr. Chairman, Senator Chafee, we look forward to working 
with you to resolve these problems. We are available to answer 
any of your questions.
    Senator Graham. Thank you very much, Mr. Pinault.
    Mr. Cook, in your written testimony you talked about the 
gap between infrastructure needs and available funding and then 
suggested that one of the ways to reduce that gap would be 
through a series of actions such as innovative rate structure 
and use of new technologies.
    Could you give me what you think is the best example of a 
community in America that has used those techniques and has 
effectively reduced the gap between need and available 
resources?
    Mr. Cook. Yes, Mr. Chairman. The State of Connecticut 
Public Utility Commission has a very active program to identify 
marginal small water systems and to consolidate them with 
larger water systems. Typically these are investor-owned 
drinking water systems that are members of my association.
    The Public Utility Commission has a legal authority to ask 
a private water company under their jurisdiction to take over a 
small system and to make the necessary investments to bring 
that small system up to the standards that the EPA regulations 
and State regulations require.
    For its trouble, the Public Utility Commission will often 
offer the private company that takes this burden on a slightly 
higher rate of return on the money that they invest and 
essentially also allow them to set up a uniform rate structure 
so that the cost of providing this fully competent service in 
the small system is covered on the backs of all of the 
customers of the water utility, a much larger group of people 
than just the small community. So, universal rates are a very 
effective way of doing this.
    Of course, there are precedents in the telephone business 
where rural telephone service was provided through various add-
ons to everybody else's telephone bill. So, there are 
precedents for this and that happens to be a very effective way 
of solving these kinds of problems.
    Senator Graham. What has been the effect in the State of 
Connecticut of this program? How many of these smaller firms 
have merged now with the larger ones?
    Mr. Cook. I believe we are talking now about a dozen cases, 
but we will be happy to provide for the record more specific 
information from our member in Connecticut with the names and 
the numbers for you.
    Senator Graham. Very good. Thank you.
    Mr. Gorman, in your written testimony you raise some 
concerns about the manner in which individual States are 
operating their State revolving fund. You mentioned a concern 
that some States discourage large systems from participating 
and that some State's formulas do not adequately take into 
account the cost-of-living differentials.
    Your comments are somewhat in contrast to several of our 
previous witnesses who were urging greater flexibility at the 
State level and less Federal direction as to how the State 
revolving funds were operated. Are you advocating that there 
should be some additional Federal constraints or parameters on 
the States as they administer their SRF programs and if so, 
what do you think those parameters should be?
    Mr. Gorman. No, sir, we don't believe that we should ask 
the States to follow some rigid Federal guideline. I think each 
State knows its needs best. I think our concern is that the 
SRFs tend to be a very small pool of money and rightly so, the 
States are going to deal with the smaller systems who have the 
greatest critical needs. That is our situation in Louisiana 
where we have attempted in the past to use SRF funds, but our 
requests have been so huge that it dwarfed the entire budget 
available to the State.
    Senator Graham. That last comment somewhat gets back to the 
issue that I raised at the end of the last panel. That is that 
the original concept of the State revolving fund, at least I 
know this was the case when the State of Florida established 
its fund, was to use it for the period of financing that was 
most difficult for local governments and that was while the 
plant was still under planning, design and construction. Once 
the plan became operational and was generating income, it would 
then be shifted to a permanent source of financing and those 
initial funds during the preoperational period would be 
returned to the State revolving fund and be available for other 
communities.
    As an increasing number of communities are now using the 
State revolving fund for essentially permanent financing 
instead of having the money roll over in maybe a 3- or 4-year 
period, it is now 20 years and there are even suggestions that 
it be longer than 20 years.
    Has that been a factor in the fact that Louisiana has not 
had funds to deal with the needs of the larger systems?
    Mr. Gorman. I think that is the case. I think the needs of 
the small towns are so enormous that what few funds are 
available are being judiciously allocated to the small 
communities in greatest need.
    Senator Graham. Mr. Pinault, in your comments you 
recommended the creation of long term sustainable and reliable 
sources of Federal funding for clean and safe water. What would 
be some of your ideas as to what the sources of that permanent 
financing might be?
    Mr. Pinault. Through the Water Infrastructure Network they 
have discussed and evaluated a number of options but they do 
not have a specific recommendation at this time. But we do know 
that without Federal contributes the local governments cannot 
do it alone. As I said, the WIN effort has recommended the $5 
billion in support of that for the Economic Stimulus Package 
and the $57 billion over 5 years.
    Exactly where the source of funds will come from, they are 
still discussing that with the 40 members in their group. They 
will be glad to share their ideas and thoughts as soon as they 
develop them.
    Senator Graham. Thank you, we look forward to receiving 
that further suggestion.
    Senator Chafee.
    Senator Chafee. I would just like to thank the chairman and 
the panelists. It was compelling testimony. Mr. Gorman and Mr. 
Pinault, you are on the front lines of trying to balance the 
needs of your ratepayers. Thank you.
    Senator Graham. Thank you very much, Senator. I also wish 
to thank each of you for your contributions to the communities 
that you serve as well as your contribution to our 
understanding of these issues today. I hope that we can take 
the opportunity to call on you over the next few months as we 
begin to move these various suggestions into specific 
legislation.
    If there is no further business to come before the 
subcommittee, I thank all of the witnesses who have educated us 
today. The meeting is adjourned.
    [Whereupon, at 11:25 a.m. the subcommittee was adjourned, 
to reconvene at the call of the chair.]
    [Additional statements submitted for the record follow:]

    Statement of G. Tracy Mehan, Assistant Administrator for Water, 
                  U.S. Environmental Protection Agency

                              INTRODUCTION

    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
Tracy Mehan, Assistant Administrator for Water at the U.S. 
Environmental Protection Agency. I welcome this opportunity to discuss 
the Nation's investment in drinking water and wastewater treatment 
facilities to protect human health and the environment.
    As a Nation, we have made great progress over the past quarter 
century in reducing water pollution and assuring the safety of drinking 
water. The Clean Water Act and the Safe Drinking Water Act have served 
us well and provide the solid foundation we need to make sure that all 
Americans will continue to enjoy safe drinking water and clean river, 
lakes, and coastal waters.
    Our success in improving drinking water and surface water quality 
is the result of many programs and projects by local, State and Federal 
Governments in partnership with the private sector. But our cooperative 
investment in water infrastructure--in pipes and treatment plants--has, 
more than any other single effort, paid dramatic dividends for water 
quality and public health.
    I would like to take a moment to recognize the events of September 
11. This hearing was originally scheduled for the thirteenth of 
September and, as such, this testimony was developed prior to the 
tragic events of September 11. Reviewing the testimony again after 1 
month, I was struck by how much the world, even the somewhat 
circumscribed world of the water industry, has changed. As you know, 
EPA has established a Water Protection Task Force to accelerate work 
that had been ongoing on critical infrastructure protection. For the 
last month, my staff has been working diligently with other Federal 
agencies, States, and water industry representatives to ensure that 
measures are in place to protect our population from security threats 
that could endanger our drinking water supplies or pollute our Nation's 
waterways.
    But this morning I want to move forward with our original testimony 
and give you a brief overview of the progress we have made in improving 
water quality and challenges we still face. I will summarize what EPA 
knows about the need for future investment in clean water and drinking 
water facilities.
Clean and Safe Water--Accomplishments and Challenges
    Most Americans would agree that the quality of both surface waters 
and drinking water has improved dramatically over the past quarter 
century.
    Thirty years ago, the Nation's waters were in crisis--the Potomac 
River was too dirty for swimming, Lake Erie was dying, and the Cuyahoga 
River had burst into flames. Many of the Nation's rivers and beaches 
were little more than open sewers.
    The 1972 Clean Water Act has dramatically increased the number of 
waterways that are once again safe for fishing and swimming. The Act 
launched an all-out assault on water pollution, including new controls 
over industrial dischargers, support for State efforts to reduce 
polluted runoff, and a major investment by the Federal Government to 
help communities build sewage treatment plants.
    The Federal Government has provided over $80 billion in wastewater 
assistance since passage of the Clean Water Act, which has dramatically 
increased the number of Americans enjoying better water quality. The 
economic and social benefits of improved water quality are readily 
evident all across the country. Some of the most dramatic improvements 
are seen in urban areas such as Boston, Cleveland, St. Petersburg and 
Baltimore, where the efforts to restore the health and vitality of our 
waters has also led to economically vibrant, water-focused urban 
environments.
    The dramatic progress made in improving the quality of wastewater 
treatment since the 1970's is a national success. In 1968, only 86 
million people were served by secondary or advanced treatment 
facilities. Today, of the 190 million people served by wastewater 
treatment facilities, about 165 million people are served by secondary 
or better treatment.
    We have also made dramatic 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, 
growing concern for the presence of contaminants in drinking water 
around the country prompted Congress to pass the Safe Drinking Water 
Act. 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 place as of 1994. In 
the past decade, the number of people served by public water systems 
meeting Federal health standards in place as of 1994 has increased by 
more than 23 million.
    Despite past progress in reducing water pollution, almost 40 
percent of the Nation's waters assessed by States still do not meet 
water quality goals established by States under the Clean Water Act. On 
a national scale, States report that the leading sources of pollution 
include agriculture, municipal point sources, and urban runoff and 
storm sewers. Other sources, ranging from factories to forestry 
operations, cause water pollution problems on a site-specific basis. 
Point-source pollution has been so greatly reduced that now non-point 
sources (i.e., diffuse runoff) are the leading cause of water 
pollution.

Clean Water and Drinking Water State Revolving Loan Funds
    The primary mechanism that EPA uses to help local communities 
finance water infrastructure projects is the State Revolving Fund (SRF) 
established in the Clean Water Act and the Safe Drinking Water Act. The 
SRFs were 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 programs, EPA makes grants to States to capitalize 
their SRFs. States provide a 20 percent match to the Federal 
capitalization payment. Local governments get loans for up to 100 
percent 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, funds invested in the 
SRFs provide about four times the purchasing power over 20 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 2.6 percent (the average rate 
during the year 2000) saves communities 25 percent compared to using 
commercial financing at an average of 5.8 percent (see Chart 1).
    The Federal Government has provided more than $18 billion in 
capitalization grants to States for their Clean Water SRFs through 
FY2001. With the addition of the State match, bond proceeds, and loan 
repayments, the cumulative funds available for loans from the Clean 
Water SRFs were more than $34 billion of which $3.4 billion was still 
available as of June 30, 2000.
    Since 1988, States have made over 9,500 individual loans for a 
total of $30.4 billion. In 2000, the Clean Water SRFs issued a record 
total of 1,300 individual loans with a value of $4.3 billion (see Chart 
2). The Clean Water SRFs have provided about $3 billion in loans each 
year for several years and are widely considered a tremendous success 
story.
    In 1996, Congress enacted comprehensive amendments to the Safe 
Drinking Water Act which created an SRF program for financing of 
drinking water projects. The Drinking Water SRF was modeled after the 
Clean Water SRF, but States were given broader authority to use 
Drinking Water SRFs to help disadvantaged communities and support 
drinking water program implementation.
    Through fiscal year 2001, Congress has appropriated $4.4 billion 
for the Drinking Water SRF program. EPA has reserved $83 million for 
monitoring of unregulated contaminants and operator certification 
reimbursement grants. Through June 30, 2001, States have received $3.65 
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 
have made close to 1,800 loans totaling $3.7 billion. Approximately 74 
percent of the loans (39 percent 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 
$575 million of SRF capitalization grants for other activities that 
enhance the management of water systems, protect sources of drinking 
water, and support the drinking water program. Although the Drinking 
Water SRF is considerably newer than the Clean Water SRF, it is showing 
the same promise as an infrastructure financing success story.
    Congress should consider adding some of the flexibilities of the 
Drinking Water SRF program to the Clean Water SRF program and should 
extend the provision which allows States to transfer funds between 
their Clean Water and Drinking Water SRFs in order to allow States the 
flexibility to better direct funds toward priority needs.

Water Infrastructure--Future Needs
    The Clean Water Act Sec. 516 (b)(1) and the Safe Drinking Water Act 
Sec. 1452 both require that EPA periodically develop a ``needs survey'' 
to identify needed water infrastructure investments.
    In February of this year, EPA released its second report on 
drinking water infrastructure needs showing that $150.9 billion is 
needed over the next 20 years to ensure the continued provision of safe 
drinking water to consumers.
    The survey found that water systems need to invest $102.5 billion, 
approximately 68 percent of the total need, in what the report calls 
``current needs.'' In most cases, current needs would involve 
installing, upgrading, or replacing infrastructure within the next few 
years to enable a water system 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 the plant's filters may require replacement due to their age 
and declining effectiveness, if the plant is to continue to provide 
safe water. Future needs account for the remaining $48.4 billion in 
needs; for example, 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.
    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, or to ensure continued 
compliance with specific Safe Drinking Water Act regulations (see Chart 
3). Transmission and distribution costs are the largest category, at 56 
percent of the total need, or $83.1 billion. Treatment projects make up 
the second largest category of needs (i.e., 25 percent) and have a 
significant benefit for public health.
    Approximately 21 percent, or $31.2 billion, is needed for 
compliance with current and proposed regulations under the Act. Nearly 
80 percent of the regulatory need is to comply with rules which protect 
consumers from harmful surface water microbial contaminants, such as 
Giardia and E. coli. Most of the total needs derive 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.
    EPA's most recent survey of clean water infrastructure needs was 
released in 1996, and we plan on releasing a new clean water needs 
survey in 2002. The 1996 clean water needs survey estimated needs of 
$140 billion, including $26.5 billion for secondary treatment projects, 
$17.5 billion for advanced treatment, and $73.4 billion for various 
types of sewage conveyance projects, including collectors, 
interceptors, combined sewers, and storm water, and $10 billion for 
nonpoint pollution control projects (see Chart 4).
    EPA is working to supplement the 1996 clean water needs survey as 
more accurate information becomes available. For example, the Agency 
has developed a model that better predicts costs associated with 
reducing sanitary sewer overflows.

           BROADER CONTEXT OF WATER INFRASTRUCTURE FINANCING

    Over the past year, several stakeholder groups including the Water 
Infrastructure Network, the Association of Metropolitan Sewerage 
Agencies, and the American Water Works Association issued reports 
estimating water infrastructure needs. These estimates were all 
substantially above those of EPA's Needs Surveys. Generally, these cost 
estimates differ from EPA's because the methodologies and definitions 
for developing them differ. For example, EPA Needs Surveys include only 
projects that are eligible for SRF funding under the Clean Water Act 
and Safe Drinking Water Act. Also, EPA requires that costs included in 
the Needs Surveys be established by planning or design documentation.
    The Agency also decided to undertake a broader review of needs and 
spending for water and wastewater infrastructure, including estimating 
whether there is a quantifiable gap between future needs and current 
spending. This analysis B known as the Gap Analysis B has just recently 
undergone independent peer review by external subject matter experts. 
We expect the final analysis will be ready for public release later 
this year.
    EPA recognizes that effective decisionmaking concerning water 
infrastructure financing benefits from a better understanding of the 
broader context of this effort. Key components in the broader context 
of water infrastructure that need to be more fully evaluated include 
the following:
     Population Growth: Steady growth and shifts in population 
put substantial pressure on local governments to provide expanded 
drinking water and sewer services. While EPA does not provide funding 
for projects related to population growth per se, this is an important 
factor for locals.
     Aging Infrastructure: Many sewage and drinking water pipes 
were installed between 50 and 100 years ago, and these pipes are 
nearing the end of their useful lives.
     Current Treatment Issues: In 1998, States, Tribes, and 
interstate commissions determined that wastewater treatment facilities 
and combined sewer overflows were two of the leading causes of 
impairment to estuaries. A June 2000 EPA report A Progress in Water 
Quality estimates that by 2016, pollution levels could be similar to 
levels observed in the mid-1970's if there is no increase in treatment 
efficiency.
     Research and Development: Innovation, research, and 
development are essential elements of promoting the use of more 
effective, efficient, and affordable technologies in water and 
wastewater treatment. A recent EPA report on public and private R&D 
expenditures associated with water pollution abatement (``A 
Retrospective Assessment of the Costs of the Clean Water Act 1972-
1997'') showed that expenditures decreased by half from the early 
1970's to the late 1990's. The Federal investment in drinking water 
research has increased substantially over the past 5 years.
     Increasing Operation and Maintenance Costs: As the size 
and complexity of water and sewer systems increase, and facilities get 
older, the costs of operations and maintenance tend to increase.
     Affordability: Although water has historically been 
underpriced, some systems may find it difficult to replace or update 
aging water and sewer systems and keep household user charges at 
affordable levels, especially for low-income households and 
communities.
    A number of stakeholder groups have called for a significant 
increase in Federal investment in water and wastewater infrastructure. 
Certainly, there will be a continuing role for the Federal Government 
in helping to meet the challenge of extensive infrastructure investment 
need, but it cannot be the only solution. The solutions will have to be 
multi-faceted with Federal, State, and local, public and private 
investment of time, energy, money, research, and, perhaps most needed, 
innovative thinking and bold actions. We must encourage States and 
local governments to think strategically as they plan for forthcoming 
rules and program requirements, infrastructure repair and replacement, 
and overall protection of the water that sustains their communities.
    Ensuring that our water infrastructure needs are addressed in a 
sustainable manner will require a shared commitment on the part of the 
Federal, State and local governments, private business, and consumers. 
Governor Whitman and I are committed to working in partnership with 
Congress, States, local governments, the private sector, and others to 
better understand the water infrastructure challenges we face and to 
play a constructive role in helping to define an effective approach to 
meeting these challenges in the future.

                               CONCLUSION

    We believe that the SRF mechanism has proven to be a powerful and 
effective tool in helping States and utilities achieve their public 
health and environmental goals. As your Committee continues to study 
water infrastructure needs, the Administration would like to encourage 
a constructive dialog on the appropriate role of the Federal Government 
in addressing these needs. Thank you, Mr. Chairman, for giving me the 
opportunity to speak with you this morning.

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[GRAPHIC] [TIFF OMITTED] T0654.002

[GRAPHIC] [TIFF OMITTED] T0654.003

[GRAPHIC] [TIFF OMITTED] T0654.004

Statement of Stephen E. Howard, Senior Vice President, Lehman Brothers, 
                              New York, NY
Overview of Infrastructure Project Financing Options for Public/Private 
                              Partnerships

          FINANCING APPROACHES FOR PUBLIC/PRIVATE PARTNERSHIPS

    There are four basic structuring approaches based on project 
ownership and operation.

----------------------------------------------------------------------------------------------------------------
                                       Ownership           Operation           Agreement             Model
----------------------------------------------------------------------------------------------------------------
I...............................  Public............  Private...........  3 to 5 years......  Operations Only
II..............................  Public............  Private...........  15 to 25 years....  Design/Build/
                                                                                               Operate
III.............................  Private...........  Private...........  25+ years.........  Build/Operate/Own/
                                                                                               Transfer
IV..............................  Private...........  Private...........  NA................  PUC/Monopoly
----------------------------------------------------------------------------------------------------------------

    Structures II and III are generally considered to be true models of 
public/private partnerships.
    The public sponsor maintains interface with service recipients and 
sets user rates.
    The public sponsor and the private partner enter into a short- or 
long-term operating agreement for a wholesale service under a 
predetermined, negotiated fixed price service fee structure.
    Under structure IV, the private company provides service with no 
direct public sponsor involvement.
[GRAPHIC] [TIFF OMITTED] T0654.005

             FINANCING OPTIONS FOR NEW PROJECTS--CONTINUED

    Ownership and Credit Structure

     Public Ownership: Pledge of system revenues/operating 
agreement
     Private Lease/Ownership: Pledge of project revenues/
operating agreements/assets

    Operating Agreement Term

     The new IRS regulations (``97-13'') have extended the 
permissible management contract term for certain publicly-owned 
infrastructure assets financed with governmental purpose bonds from 5 
years to 20 years.
     Qualifying Assets with operating agreements that do not 
comply with 97-13 and/or with terms longer than 20 years must be 
financed with private activity tax-exempt bonds.

    Capital Improvement/Expansion Responsibility

    Construction, Acceptance and Operation Risk Allocation

    Availability of Grants and Revolving Loan Funds

    Public Ownership

     100 percent governmental purpose or private activity tax-
exempt debt financing possible.
     Many publicly-sponsored projects have direct access to 
capital markets as well as grants and revolving loan funds.
     The taxable and tax-exempt municipal bond market provides 
single source of debt funding for construction and permanent financing

    Private Lease/Ownership

     80 percent to 90 percent taxable/tax-exempt private 
activity bonds, balance equity financed.
     May include some combination of construction loan and 
permanent financing.

    Tax-Exempt Project Debt
    The tax-exempt market has been an increasing source of ``off-
balance sheet'' financing for large infrastructure projects.
    Construction and operating period term financing for non-recourse 
project credits with minimal negative arbitrage is possible.
    Public ownership structure (including 63-20 and 501(c)3 
corporations) is possible to eliminate tax-exempt volume cap 
requirement for certain types of projects, but limits operating 
flexibility.
    Tax-exempt financing for privately-owned projects will be subject 
to tax-exempt volume cap.
                   tax-exempt financing availability

------------------------------------------------------------------------
                                                       Private   Private
                                        Governmental  activity  activity
              Asset class                purpose no    no bond    with
                                          bond cap     cap\1\   bond cap
------------------------------------------------------------------------
Water/Wastewater......................           X                     X
Solid waste...........................           X           X         X
Airport...............................           X           X
Surface transportation................           X
Ports.................................           X           X
Housing...............................           X                     X
Education.............................           X
Healthcare............................           X
------------------------------------------------------------------------
\1\ Public ownership
\2\ Private ownership

             TAX-EXEMPT PROJECT DEBT: INVESTOR PERSPECTIVE

    Constrained market and essential service characteristics of many 
infrastructure projects assure strong credit fundamentals.
    Strong credit fundamentals carry over to highly-structured 
nonrecourse transactions with construction and operating risks properly 
allocated among project participants.
    Demand-based essential service infrastructure project financings 
can be highly leveraged.
    Construction risks are viewed as manageable for most asset 
categories.
    Highly-regarded private companies active in the infrastructure 
market are important contract counterparties.

                               CONCLUSION

    Tested and proven financing structures exist to finance public/
private partnerships with tax-exempt bonds under existing tax laws.
    Infrastructure projects can be structured as public/private 
partnerships to optimize development, construction and long-term 
operation, as well as appropriate sharing of risks between the public 
and the private sector.
    Highly-regarded private companies active in the infrastructure 
market facilitate the structuring of long-term public/private 
partnerships for most asset classes.
    An experienced, professional project team which includes legal, 
technical and financial expertise is crucial to determine the optimal 
public/private partnership implementation plan.
                               __________
       Statement of Rick Farrell, Executive Director, Council of 
                  Infrastructure Financing Authorities

    My name is Rick Farrell and I am here today in my capacity as 
Executive Director of the Council of Infrastructure Financing 
Authorities.
    CIFA is a national organization made up primarily of State and 
local officials engaged in the development and financing of water and 
wastewater pollution control projects and the operation of State 
Revolving Funds for infrastructure financing. The organization counts 
among its members 44 States, the District of Columbia and the 
Commonwealth of Puerto Rico. The people who represent the member 
entities of CIFA are some of the most respected finance officials in 
the country, and bring countless years of experience in the public and 
private sectors to bear in their day-to-day functions.
    We appreciate the opportunity to share our views with the 
Subcommittee on the important issue of improving utilization of 
available water and wastewater infrastructure funding. With the ever-
increasing projections of need for environmental infrastructure of all 
kinds it is clear that available resources must be utilized in ways 
that maximize their effect.
    I note the particular focus on financial innovations. Our members 
have been in the forefront of creating and implementing financial 
structures that effectively stretch the available Federal and State 
dollars while operating within the limits of statute, Federal 
oversight, and fiscal responsibility. An important part of the CIFA 
mission is to foster such innovation and encourage the exchange of 
information concerning best practices in infrastructure financing among 
the States, and between the States, the national government, and the 
private sector.
    I want to first address the context in which the effort to foster 
innovation and new approaches takes place. As Congress considers the 
policy and funding questions deriving from the enormous anticipated 
capital needs for wastewater and drinking water infrastructure, it is 
our strong view that the foundation for future progress must remain the 
State Revolving Fund programs. It is vital as well as sensible that the 
SRF partnership between the Federal and State governments continue as 
the basic mechanism for water infrastructure assistance to local units 
of government throughout the country.
    The State Revolving Loan Funds are arguably the most successful 
environmental programs ever. Since 1989, the Clean Water SRF has 
provided $33.6 billion in low-interest loan funding for over 9,500 
individual projects, while the Drinking Water SRF has provided $3.2 
billion in assistance, both loans and grants, for over 1,500 projects 
in a little less than 4 years.
    The proven track record argues strongly in favor of the SRFs as the 
premier mechanism for delivery of environmental infrastructure 
construction subsidies. With congressional support and cooperation of 
the Environmental Protection Agency the SRFs are positioned to 
facilitate the next wave of initiatives and activities to assure water 
quality, and will do so in a cost-effective, efficient, and creative 
manner.
    Consistent with our strong support for the SRF model, we are 
opposed to the creation of independent grant programs operating outside 
of the State SRFs. The Federal-State partnership and the successes it 
has created would be severely threatened by the onset of separately 
delivered grant programs, earmarking, and other alternate funding 
mechanisms. Separate grant programs not only complicate the funding 
process at the local level but often also serve to delay project 
initiation because the prospect of a grant diminishes the incentive to 
pursue other assistance such as a state-revolving fund loan. These 
unintended consequences of delaying project initiation and creating 
unrealistic expectations are often exaggerated in the case of 
economically distressed communities where the needs are often most 
urgent.
    Programmatically, it clearly makes most sense to provide all 
infrastructure construction subsidies, be they in the form of 
subsidized loans, grants, or grant equivalents such as principal 
forgiveness, through the SRF structure that is already established and 
has been successfully functioning in all the States since 1989. We 
should strive for fewer, not more programs to make accessing them 
easier for potential applicants. This saves overhead costs and reduces 
the confusion to communities trying to access a multitude of programs. 
Economically, it also makes most sense to provide infrastructure 
construction subsidies to local communities through the SRF programs 
since they can provide this assistance more efficiently than can 
independent grant programs. The goal should be to provide the subsidies 
necessary to get projects completed, not to provide grants to all. 
Using the SRFs to target subsidies--perhaps with grants as well as with 
loans--extends valuable infrastructure dollars, a key goal for us all. 
Efficiency gains achieved by the SRF programs translate into more 
infrastructure construction than can be achieved by comparable grant 
programs. The success story of the SRFs is clearly a model that should 
be built upon.
    Indicative of the vitality of the SRF program to facilitate 
financial innovation is the capacity it affords to leverage the funds. 
Leveraging, in the SRF context, means that States have the ability to 
use the Federal capital grants, as well as their matching share, as 
collateral to borrow in the public bond market for purposes of 
increasing the pool of available funds for project lending. This option 
allows the States to use the funds as security or a source of revenue 
for the payment of principal and interest on bonds, so long as the bond 
proceeds are deposited back into the SRF. Security for the bonds may be 
provided by any of the SRF assets including anticipated future revenues 
from loan repayments. The use of the assets of the SRF to generate new 
moneys which can be used immediately to fund more projects underscores 
the true financial strength of the SRF model.
    Leveraging the SRF can dramatically increase the funds available 
for lending. Close to $9 billion has been added to the loan pool by the 
24 States that have leveraged their funds. This compares with $18.3 
billion in Federal capital grants thus far. The successful leveraging 
occurring with the SRFs has allowed us to address serious problems much 
more quickly than anyone had anticipated by delivering substantially 
increased amounts of affordable capital sooner to meet critical 
infrastructure needs. There are examples of leveraging that demonstrate 
a multiplier effect of project funding levels at two to four times the 
original investment.
    The Clean Water SRF program authorizing legislation establishes a 
state-operated program that utilizes Federal capitalization grants and 
State matching funds to achieve the mutually desired water quality 
goals. After more than 10 years of successful program operation it is 
clearly the experience of CIFA member States that the more latitude and 
operating flexibility the States are allowed, the greater is our 
ability to accomplish the environmental and financial goals of the 
program. An example of the utility of flexibility is illustrated by the 
fact that among all the States and territories operating revolving 
funds, no two are structured precisely alike, yet all share the same 
water quality objectives. While we recognize and acknowledge that the 
significant levels of Federal dollars involved call for considerable 
accountability on the States' part, we also assert that excessive 
oversight and ``one-size-fits-all'' administrative control by the 
Environmental Protection Agency can have the effect of stifling our 
ability to innovate and create program structures that best accomplish 
our common goals. The SRF's are successful because their underlying 
concept is based on program management and service delivery at the 
State and local level with broad accountability at the Federal level. 
This model should be protected, allowed to flourish, and emulated in 
other program areas.
    I believe a useful question for the Subcommittee to look at is why 
leveraging is not an option for more States and to examine the 
underlying issues and concerns of the States in this regard. While the 
ultimate decision with respect to leveraging is and must remain within 
the purview of the State governments, there are aspects of Federal 
policy and EPA requirements which, if modified, would likely serve to 
facilitate expanded leveraging. Lessening the administrative restraints 
and requirements of the SRF programs would also serve to make the 
programs more efficient, while remaining accountable under the precepts 
of the authorizing legislation. Examples of these limitations include 
the ability to freely transfer funds between the Clean Water and Safe 
Drinking Water SRFs, required pre-approval for certain financing 
techniques, including simple leveraging, and the various conditions 
that must be satisfied by all recipients of funds made available 
directly from Federal capitalization grants.
    While mindful that the jurisdiction of the Committee does not 
extend to tax law, I feel it is important to point out that any 
comprehensive review of means available to maximize water 
infrastructure funding should include consideration of the arbitrage 
rebate rules as they affect the leveraged SRF programs. In this 
context, arbitrage is the difference between the interest rates at 
which tax-exempt bonds are issued and the rates at which the proceeds 
are invested. The States that operate leveraged SRF programs are 
compelled by the arbitrage rules to either limit the rate at which 
funds can be invested, or rebate to the treasury the net earnings on 
those portions of the SRF funds that are considered under these rules 
to be bond proceeds.
    This greatly reduces the resources available to fulfill the funds' 
purpose of providing below-market financial assistance to help 
communities meet Federal standards for their water programs.
    CIFA estimates that in the absence of these restrictions, the 
affected States could earn an additional $100-$200 million annually on 
their SRF capitalization funds which, when leveraged, would permit an 
additional $200-$400 million annual investment in needed water 
projects.
    The arbitrage rules, which were enacted before State revolving 
funds came into existence, were intended to prevent abusive arbitrage 
practices, including ``over-issuance'' of bond indebtedness beyond the 
amount to be spent for a particular project as well as early issuance 
before bond proceeds are actually needed. Such practices are not an 
issue in the case of SRFs, whose earnings, by law, must be retained in 
the revolving funds and can only be used for the fund's purpose of 
financing water and wastewater facilities. Funds in an SRF, whether 
capitalization grants, loan repayments, or earnings on invested moneys, 
can be expended only for eligible projects listed on the State's 
current-year Intended Use Plan, and Federal moneys are made available 
only to the extent that verifiable project spending has or will occur. 
Prompt loaning out of bond proceeds and other available fund assets is 
ensured by the oversight and program audits required by the U.S. 
Environmental Protection Agency. These restrictions placed on SRFs by 
Federal law assure that exemption from arbitrage rebate requirements 
will not lead to the abuses that inspired the arbitrage rules.
    In conclusion, it is our position that any congressional 
initiatives targeting water and wastewater infrastructure funding, 
affecting current SRF operations, or expanding the mission of the SRFs, 
should be developed with the recognition that innovative methods of 
addressing water and wastewater needs are more likely to originate at 
the State, rather than the Federal, level. The States are closer to the 
problems that need to be addressed, and the States are capable of 
tailoring their approach to best meet their unique needs. The best hope 
for discovering and realizing innovative financing approaches is to 
give the States wide latitude, within the constricts of appropriate 
accountability, in designing and implementing their locally-tailored 
solutions.
                               __________
Statement of Peter L. Cook, Executive Director, National Association of 
 Water Companies for J. James Barr, President and CEO, American Water 
                             Works Company

    Good Morning Mr. Chairman and Members of the Subcommittee, I am 
here to testify for J. James Barr, President and CEO of the American 
Water Works Company.
    American is the largest regulated water utility business in the 
United States. The Company's utility subsidiaries and affiliates serve 
approximately 10 million people in 23 States. We can trace our roots 
back to 1886, though some of our subsidiaries have roots going back 
even further. Today, the Company remains committed to continued growth 
and is involved in a number of industry consolidation and privatization 
initiatives including water and wastewater system acquisition, contract 
operation and public/private partnerships.
    Mr. Barr is also Chairman of the Board of the National Association 
of Water Companies (NAWC). 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 members in 41 States--which provide safe reliable 
drinking water to more than 20 Million Americans everyday. I'm pleased 
to report that NAWC has members in nearly every State represented on 
this Subcommittee; Florida, Idaho, Montana, Missouri, Nevada, Virginia, 
New York, Rhode Island, New Jersey, and Colorado.
    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, including rate schedules. 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 these hearings on improving the utilization of available 
water and wastewater infrastructure funding. This is an important part 
of the larger water infrastructure financing issue. We also commend you 
for tackling this important larger question.
    Due to our concern about this issue and our commitment to finding 
sound solutions, earlier this year NAWC joined with other organizations 
to form the H2O Coalition\1\. This coalition was formed 
solely to work on the coming infrastructure replacement challenge 
facing the water and wastewater 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 decisionmaking, and only 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 year 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 must address today.
    We have several problems with this argument, some of which I will 
discuss in greater detail today, and others that have already been the 
subject of this Subcommittee's previous hearings.
    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 recently estimated the drinking water 
needs about \2/3\ rds lower.
    Second, the advertised ``gap'' of one-half a trillion dollars is a 
worst-case scenario. Setting aside the fact that the ``need'' upon 
which the ``gap'' is based is probably overstated (as discussed above), 
the financial ``gap'' the Federal Government is being asked to fill 
assumes that utilities do nothing on their own to fill it. This 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 .8 percent), particularly in comparison to 
electricity (2.4 percent) and telecommunications (2.1 percent). 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 massive grants for the water industry, it should consider 
that the cost of providing this needed service is not a burden on most 
households.
    Fourth, 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 percent of all water systems serve less 
than 3,300 people, and a mere 2 percent 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 these 
systems having infrastructure replacement, financial and/or compliance 
problems, consolidation should be considered before any public moneys 
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; highways and airports are good 
examples. To think of water infrastructure as integrated on a national 
level is simply inaccurate. It is in fact many thousands of separate 
infrastructure 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 limited areas in which Federal activity is 
appropriate. Clearly, Federal water quality regulations as promulgated 
under the Safe Drinking Water Act are a necessary and appropriate 
Federal Government activity.
    Some will argue that the broad water infrastructure issue 
constitutes an unfunded Federal mandate that the Federal Government has 
a responsibility to address. This is not the case. There is no Federal 
mandate regarding water infrastructure as we are talking about it 
today. There clearly are mandates represented in the Safe Drinking 
Water Act and Clean Water Act regarding health and environmental 
standards, but those are different issues and not the topic being 
discussed today.

                     THE ROLE OF THE PRIVATE SECTOR

    The private sector has long played a vital role in our Nation's 
water infrastructure and stands ready to do much more. The privately-
owned drinking water utility business traces its roots back to before 
the very existence of our Nation. However, outright private ownership 
is but one-model localities can pursue as a means of addressing their 
infrastructure challenges. Another large and growing option is contract 
operations, wherein the municipality retains ownership of the asset, in 
this case a water utility and its infrastructure, but the management 
and operations of the facility are contracted out to a private company.
    History has shown that the private sector can and does provide 
water customers efficiency and sustainability through market-based 
solutions. Privately-owned utilities have been on the cutting edge of 
technical innovation and research. Particular needs in particular 
communities can be met by the private sector through a range of public-
private partnership models. All of this can and is done while 
maintaining accountability to the public and complying with all Federal 
and State regulatory requirements.
    The National Association of Water Companies recently published a 
report on the role of the private sector in the drinking water 
industry. That report studied the various forms that private sector 
involvement in the water business can take, from out-right ownership of 
an asset to various short and long term contracts. The report found 
that when such creative solutions are pursued by a municipality, 
operating costs can be reduced by 10 to 40 percent. It is obvious that 
with such cost savings, the need to look to the Federal Government for 
assistance is greatly reduced if not eliminated. It is also worth 
noting that in those cases where the acquired company was not in 
compliance with EPA regulations, the utility was quickly brought into 
compliance.
    Other studies confirm this potential. Standard and Poors recently 
reported that the water companies rated by them--which is virtually all 
of the larger privately-owned utilities--spend on average about 40 
percent of their annual capital outlays on modernizing and expanding 
their infrastructure. My company alone has invested $6 billion since 
the early 1970's, or roughly $2,000 per customer. If more utilities 
around the country were doing this, there might not be any reason for 
us to be here today.
    Privately-owned utilities can also bring many creative solutions to 
infrastructure problems, often in partnership with States in 
municipalities. In Indiana, the Indiana Department of Environmental 
Management requested the Indiana-American Water Company, one of my 
Company's subsidiaries, to take over the troubled Prairieton Utility 
and made $500,000 in State Revolving Loan funds available to them.
    This creative solution was good for all involved: the customers are 
receiving safe, more reliable water at rates they can afford, the State 
of Indiana has addressed a potential health and environmental problem, 
and Indiana-American has increased its business. Indiana-American has a 
similar story to tell in Gary, Indiana, where about 1,000 people have 
been receiving service from potentially contaminated wells. Working 
with the State, Indiana-American Water company will extend service to 
those customers, solving problems all around.
    There are also instances where private water companies have been 
working with localities to extend service to needy areas. Another 
American subsidiary, the West Virginia-American Water Company worked 
with the Boone County Service District to extend vastly improved water 
service to approximately 30 communities. Similarly, in Fayette County 
West Virginia, West Virginia-American worked with the county to extend 
water service to approximately 1200 families that had never before had 
public water supply through the installation of over 63 miles of new 
distribution facilities.
    The industry has seen great growth in the last few years in the 
field of contract management. Unlike out-right asset ownership, under a 
management contract arrangement, the municipality retains ownership of 
the asset but contracts with a private provider for services. These 
services can be very limited and specific such as billing. However, the 
major growth has been in long-term (as long as 20 years) full service 
contracts where the private firm is responsible for all aspects of 
running the utility. These contract arrangements can take many forms 
but what they have in common is great savings to localities. A few 
years ago, United Water contracted with the city of Atlanta to manage 
their water system, saving the citizens of Atlanta $400 million or 45 
percent over the life of the contract. There are literally dozens of 
examples of such savings from contracts signed across the country 
resulting in savings to U.S. citizens of hundreds of millions of 
dollars: Milwaukee, WI, 30 percent savings; Seattle WA, 40 percent 
savings; Tampa FL, 21 percent.

                     CHALLENGES FACING THE INDUSTRY

    It is clear that the private sector can do much to help the 
Nation's utilities contend with their infrastructure issues either 
through direct ownership and operation or in partnerships with 
municipal utilities. If the full power of the private sector is 
unleashed to help this coming infrastructure challenge, we all will be 
winners:
     Americans will continue to enjoy clean and safe water for 
generations to come at reasonable and reliable rates;
     Congress and the Federal Government will have performed 
their role successfully, without the need for huge, budget-breaking 
grants; and
     Both public and private water utilities will be successful 
in meeting the various challenges facing the industry, including 
infrastructure replacement.
    However, to fully unleash the power of the private sector there a 
few issues which should be dealt with, though not all are under 
congressional jurisdiction.
Public Perception
    Probably the No. 1 hurdle facing the expansion of the private and 
investor-owned water industry is the public's attitude regarding 
private ownership and/or management of a resource as vital and basic as 
water. This is largely the private water utility's problem to contend 
with, and we do so by performing responsibly and professionally, and 
educating the public on our industry. We raise awareness of our 
industry by educating the public and key decisionmakers. When people 
learn of our long history, our generally exemplary health and 
environmental records, and our leadership within the industry working 
with EPA and Congress, their concerns about the private sector fade. As 
an example of this, many private water utilities led the way in 
consumer relations by publishing consumer confidence reports long 
before Congress mandated them. Then when Congress mandated the reports 
for the entire industry, we worked with EPA to share our knowledge and 
experience on the matter so all utilities could better contend with 
what was for some of them a new challenge, but for us was business as 
usual.
Private Activity Bonds
    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.
    I 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 
few dollars coming from the ratepayer and/or taxpayer;
    (7) Does not require the average taxpayer to pay for services he/
she does not directly enjoy; and
    (8) 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. I know some of 
you, including you Mr. Chairman, also sit on the Finance Committee and 
I encourage you to consider this change in the tax code as soon as 
possible.
    This proposal also has far ranging support. Legislation in the 
House, H.R. 2207, 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.
Water Industry Litigation
    A disturbing trend has been observed recently in many parts of the 
country, which could directly affect the ability of all utilities (both 
publicly- and privately-owned) to face the infrastructure financing 
challenges. This trend involves coordinated litigation aimed squarely 
at America's water industry, and the drinking water quality regulatory 
system under which it has operated for many years.
    Massive civil lawsuits involving hundreds of plaintiffs have been 
organized and commenced against water suppliers in several States for 
allegedly supplying contaminated water even when these utilities have 
been in full compliance with State and Federal drinking water quality 
standards. These suits have targeted both privately-owned and municipal 
water systems.
    To address this problem the entire drinking water industry has come 
together to support legislation to deter unfounded lawsuits. We are not 
interested in protecting water suppliers who are not meeting State and 
EPA health standards; we are however interested in offering some 
protection to those suppliers who are meeting all standards yet getting 
sued anyway. Therefore, we, along with five other associations 
representing public, private and rural utilities support legislation 
that would make compliance with Federal drinking water standards a 
defense in lawsuits involving contaminants covered by such standards.
    If Congress does not pass such legislation the repercussions could 
be extremely costly to our industry and the public. This at a time when 
there are other pressing needs, including infrastructure replacement, 
compliance with new standards for contaminants such as arsenic, and 
heightened security measures due to increased threats of terrorist 
attacks. Even if utilities prevail in the vast majority of the 
lawsuits, the legal defense costs will be substantial. These costs will 
eventually have to be borne by the customers of the water utilities, 
increasing their costs without providing any commensurate benefits, and 
increasing the chance water will become unaffordable, the last thing we 
need in this era of infrastructure replacement. In addition, if juries 
in 50 States decide that EPA's standards aren't safe enough, juries 
will become the de facto standard setters, thus undermining both EPA's 
standard setting process and Congress's oversight of that process. 
Finally, the public's confidence in their own drinking water supply 
could be unnecessarily and perhaps irrevocably harmed.
Procurement Practices
    The water and wastewater industries could see pronounced savings if 
creative procurement practices, common in the private sector for years, 
were more widely available and utilized by municipalities. It has been 
estimated that communities could realize savings of as much as 40 
percent, and significantly speed up the process by using these creative 
procurement practices as compared to more traditional procurement 
approaches. There are, however, some roadblocks to these practices 
which Congress and EPA can assist in eliminating.
    The traditional procurement practices separated the various phases 
of a project into distinct steps, to be managed and handled separately. 
Some of those steps were bid out to contractors and some were not. A 
fairly typical model saw a three-step process: (1) planning, (2) 
design, and (3) construction, with management and operations considered 
separately and typically performed by municipal employees.
    However, it has been shown that significant costs can be realized 
by combining two or more steps of the process and bidding them out. 
Examples of these compressed procedures include design-build, design-
build-operate, and design-build-finance-operate (yet all are often 
called integrated project delivery methods). By having the designer, 
constructor, and/or operator working together, perhaps for the same 
contractor, an efficient dynamic is created resulting in savings. For 
example:
    1. Time (and therefore money) is saved because many steps are 
compressed;
    2. Innovation is encouraged by requiring performance-based 
standards and allowing the designer to be the builder;
    3. Confusion and problems are reduced throughout the process, even 
in operations, because fewer parties are involved, perhaps as few as 
one; and
    4. Liability and responsibility is clear, thus reducing any 
possible litigation costs and complexities in the case of non-
performance.
    Many communities have benefited from these creative practices. They 
include Seattle, WA; Wilmington, DE; Jersey City, NJ; Newport, RI; 
Franklin, OH; Charlotte, NC; and Cranston, RI. However others are 
either barred or stymied from pursuing theses alternatives due to lack 
of knowledge, local and State restrictions and/or outright bans.
    To address this problem this Committee can instruct EPA to assist 
in educating communities about these alternatives, and to consider 
incentives to localities to use these creative procurement practices.
State Revolving Loan Funds
    Congress can also help with some of the problems private systems, 
including small systems are facing in a number of States. Many States 
have declared privately-owned drinking water systems to be ineligible 
for drinking water State Revolving Fund (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. Right 
now, 14 States are ignoring Congress, and denying their citizens equal 
access to the DW-SRF.
    Another disturbing fact is that many States (other than the 14 
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. 
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 percent of all community water systems nationwide and 
serve about 15 percent of Americans but receive a mere 3.5 percent of 
all DW-SRF assistance, it is clear that something is wrong.
    Some have argued that privately-owned companies, even those serving 
the public, should not receive Federal assistance--not even loans. 
Congress 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 these 
States to comply with congressional intent.
    We believe the best way to encourage States to implement the DW-SRF 
as Congress intended is to reduce the DW-SRF allocation of those States 
disallowing private utility access by the amount of ``need'' attributed 
to private utilities and to reallocate those funds to States that are 
in compliance. Unfortunately, EPA has refused to modify its SRF 
allocation process, so that congressional action may be necessary.

                               CONCLUSION

    Mr. Chairman, we appreciate the leadership role that you and this 
Subcommittee have taken to address drinking water infrastructure 
problems, and we also appreciate the concern that you have expressed 
regarding the need for cost-effective solutions. 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.
                                 ______
                                 
       Responses from Peter L. Cook to Additional Questions From 
                            Senator Jeffords

    Question 1. You made a strong case for the benefits of public 
private partnerships and you have cited several examples of municipal 
water systems that are using this approach to reduce their costs. How 
do you account for the savings associated with these examples? How 
could the Federal Government incentivize this type of arrangement?
    Response. The savings from public-private partnerships in the water 
sector can be seen in the reduction of both operating and capital 
costs. First, the private sector often can improve procurement 
practices for the major inputs of production (purchased water, 
chemicals, energy, and so on). Larger private companies can use 
purchasing power to lower unit costs. Second, the private sector often 
can deploy labor more efficiently and lower total personnel costs. The 
labor force may be reduced over time (typically through attrition, 
rather than reductions in force) although the professional and wage 
opportunities for workers usually expand. Third, the private sector 
emphasizes the efficient utilization of modern technologies for water 
treatment and distribution. The use of the appropriate and most 
efficient technology can reduce total costs, often while improving 
quality and reliability. Fourth, market-based models and associated 
partnerships can lower capital costs by introducing competitive 
practices and innovative financing methods to major construction 
projects. Fifth, larger private companies can help achieve economies of 
scale by providing managerial and operating services to multiple water 
systems, with or without physical interconnection. Finally, investor-
owned utilities can assume total responsibility for providing water 
service and therefore release the municipality from this function 
altogether. The private water company remains closely regulated by 
State drinking water agencies (as to safety and health) and the public 
utility commissions (as to rates and finances).
    The Federal Government can provide a variety of incentives to 
encourage pubic-private partnerships in the water sector. First, the 
Federal Government can more aggressively encourage all States to make 
private water companies eligible for Drinking Water SRF loans, as 
current law allows. Similarly, Congress can allow private water utility 
access to the Clean Water SRF. Second, the Federal Government, through 
the Environmental Protection Agency (EPA), could provide information 
and guidance on privatization in the water sector. Third, the Federal 
Government could support research and demonstration projects that 
provide models for privatization. Finally, the Federal Government can 
explore taxation, accounting practices, and financing policies that 
would level the playing field between private and public providers of 
water service (see discussion of private activity bonds below).
    The Federal Government should also avoid putting in place 
disincentives to public-private partnerships, such as direct grants to 
water utilities. Such grants can discourage public-private partnerships 
and creative problem solving by municipalities.
    The ``scorecard'' below, put together by Public Works Financing, 
gives the status of publicprivate partnerships in the water industry. 
The more than $1.5 billion of investment described within merely hint 
at the potential the private sector has for assisting in addressing the 
infrastructure financing challenge.

                U.S. Water Privatization Scorecard--Communities with Long-term Water Partnerships
----------------------------------------------------------------------------------------------------------------
                                                                                 Contract
           Municipality             Description (system    Plant size (mgd)        Term        Estimated Cost
                                           type)                                 (years)           Savings
----------------------------------------------------------------------------------------------------------------
Atlanta, GA......................  Water...............  201.4...............           20  $400 million (45
                                                                                             percent)
Augusta, GA......................  Wastewater..........  46..................           10  $5 million
Bessemer, AL.....................  DBO Water...........  24..................           20  NA
Boston, MA.......................  Wwtr sludge.........  125 dtpd............           15  $95 million
Brockton, MA.....................  Water/Wwtr..........  24..................           20  $20 million
Chicago, IL......................  Wwtr sludge.........  150 dtpd............           20  NA
Cranston, RI.....................  DBO Wastewater......  23..................           25  $35 million
Edmonton, ALB....................  Wastewater..........  24..................            8  Cdn $3.2 million
Evansville, IN...................  Water...............  60..................           10  $8.1 million
Farmington, N.M..................  Water/Wwtr..........  20..................            8  $4 million
Franklin, OH.....................  BOT Wastewater......  4.5.................           20  23 percent
Franklin, OH.....................  BOT Water...........  5...................           20  30 percent
Fulton Co., GA...................  Wastewater..........  24..................           10  $4 million
Hamilton, Ont....................  Water/Wwtr..........  300/5...............           10  Cdn $12 million
Indianapolis, IN.................  Wastewater..........  250.................           14  $250+ million
Milwaukee, WI....................  Wastewater..........  550.................           10  $145 million (30
                                                                                             percent)
Moncton, N.B.....................  DBO Water...........  25..................           20  Cdn $12 million
New Haven, CT....................  Wastewater..........  45..................           15  $53 million (30
                                                                                             percent)
Newport, RI......................  Wastewater..........  10..................           20  $22 million (24
                                                                                             percent)
Norwalk, CT......................  Wastewater..........  20..................           20  $10 million
Oak Ridge, TN....................  Utilities...........    ..................      10 + 10  $70 million
Plymouth, MA.....................  DBO Wastewater......  3...................           20  $7.4 million (19.7
                                                                                             percent)
Rahway, NJ.......................  Water...............  6...................           20  $32 million
Seattle, WA......................  DBO Water...........  120.................           25  $70 million (40
                                                                                             percent)
Springfield, MA..................  Wastewater..........  67..................           20  10 percent
Stonington, CT...................  Wastewater..........  3...................           20  NA
Tampa, FL........................  DBO Water...........  66..................       15 + 5  $85 million (21
                                                                                             percent)
Tampa, FL........................  BOT Desal...........  25..................           30  50 percent
Taunton, MA......................  Wastewater..........  8.3.................           20  $62 million
Washington Boro, NJ..............  DBO Wastewater......  1.2.................       15 + 5  $2.2 million (11
                                                                                             percent)
West Haven, CT...................  Wastewater..........  12.5................           15  $12 million
Wilmington, DE...................  Wastewater..........  105.................           20  $60 million
Woonsocket, RI...................  DBO Wastewater......  16..................           20  $45 million
----------------------------------------------------------------------------------------------------------------


    Question 2. In your written testimony, you advocate for 
consolidation where possible before infrastructure investments are 
made. Can you elaborate on how you believe the Federal Government could 
best provide incentives for consolidation?
    Response. The Federal Government can build on the current framework 
of the Safe Drinking Water Act and the Drinking Water State Revolving 
Fund (SRF) to encourage cost-effective consolidation of the water 
industry. First, the States should be encouraged to use the 
enforcement, variance, and exemption.tools under the Act to encourage 
noncompliant systems to consolidate with another water system. Second, 
the States should be encouraged to fully incorporate restructuring and 
consolidation in their programs for ensuring that new systems have 
adequate technical, financial, and managerial capacity and for 
developing the capacity of existing water systems. The Federal and 
State capacity development programs can provide guidance and technical 
assistance for consolidation as part of the capacity development 
effort. Third, the States should be encouraged to provide State-level 
incentives for restructuring from the various regulatory agencies 
involved in drinking water. Fourth, projects that involve consolidation 
of systems (for example, pipelines for physical interconnection or 
improvements to prepare a system for acquisition) should be given 
priority in Federal funding programs, particularly the SRF. Finally, 
tax and other broad incentives for newly consolidated systems should be 
considered. For example, tax incentives might be provided to investor-
owned water systems that assume responsibility for a troubled small 
water system.
    Finally, it is worth noting that unless Federal assistance programs 
are carefully constructed incorporating the suggestions made above, 
consolidations may actually be discouraged. Without careful planning, 
Federal assistance could be used unproductively to prop up failing 
systems that otherwise would be ripe for consolidation.
                                 ______
                                 
       Responses From Peter L. Cook to Additional Questions from 
                             Senator Graham

    Question 1. In your written testimony, you discuss the advertised 
``gap'' between infrastructure needs and available funding. You 
indicate that this gap is based on a scenario where utilities do 
nothing to fill this gap, and list a series of actions including 
innovative rate structures, reducing cost through increased 
technologies, and others that could be taken. Can you give me your best 
example or case study of a utility where some of these actions have 
been taken and the gap has been reduced?
    Response. The so-called ``gap'' between funding needs and funding 
levels is based on a static, aggregate analysis that includes 
assumptions that may not be well supported at the system level, as this 
question rightly recognizes. Several water utilities, private and 
public, are successfully meeting the infrastructure challenge by 
keeping pace with investment needs. Costs can be lowered through better 
planning, improved efficiency in water production and consumption, and 
the use of innovative technologies on both the capital and operating 
sides. For many water systems, the actual cost of service--even when 
accounting for substantial investment needs--can be recovered through 
rates charged to water customers. Cost-based rates have the distinct 
advantage of sending appropriate price signals to customers and 
encouraging efficient water use. Cost impacts can be managed through 
innovative rate structures that mitigate adverse effects in terms of 
equity and affordability.
    For the most part, the larger investor-owned water utilities have 
tried to keep pace with the investment needs of their systems. Indeed, 
private companies have positive incentives to make prudent capital 
investments in a timely manner, subject to review by the State public 
utility commissions. Also, private utilities generally do not have 
opportunities to subsidize the cost of operations through reduced cost 
loans, grants, or intergovernmental transfers. Assuming that most 
companies are investing appropriately to maintain the value of their 
systems, a funding gap will emerge for private companies only if they 
do not receive timely recognition of prudent costs from the State 
public utility commissions. The many systems owned and operated by the 
American Water Works Company provide numerous examples of how investor-
owned water companies are meeting the water infrastructure challenge.
    The Philadelphia Suburban Water System provides another excellent 
example of a water company that is keeping pace with investment needs 
and deploying financing and rate mechanisms (the Distribution System 
Improve Charge) to ensure that costs are recovered.
    The evidence that many municipal water utilities are also 
successfully meeting the infrastructure funding challenge undermines 
the case for massive subsidization of the water. The Louisville Water 
System, a wholly-owned municipal corporation, is a case in point. Many 
other publicly-owned water systems, however, are reluctant to both make 
the necessary investment in their systems or raise rates accordingly.
    We would be pleased to arrange for executives from these companies 
to come to Washington to discuss these issues at your convenience.

    Question 2. Can you describe the process that utilities use to 
incorporate capital replacement costs into their rate structure? Do 
public utilities use this same procedure?
    Publicly- and privately-owned water utilities differ in that the 
former tend to follow the ``cash needs'' basis for determining revenue 
requirements (what they must recover through rates), while the latter 
follow the ``utility basis,'' summarized as follows:


------------------------------------------------------------------------
                                            Method of Recovery
                                 ---------------------------------------
                                      Cash Needs
                                       Approach          Utility Basis
------------------------------------------------------------------------
Type of system:
  Capital-related costs.........  Many publicly-      Most privately-
                                   owned systems.      owned systems
Component of total revenue
 requirements:
  Capital-related costs.........  Capital             Depreciation
                                   expenditures
                                   (major and
                                   recurring).
                                  Debt service on     Return on assets
                                   bonds.              (debt and equity)
  Taxes.........................  Payment in lieu of  Taxes
                                   taxes.
  Operation and maintenance.....  Same..............  Same
------------------------------------------------------------------------


    The key difference between these methods is in the recovery of 
capital costs. A publicly-owned system following the cash-needs 
approach will use a ``pay-as-you-go'' method for some capital 
improvements, and use bonds for long-term financing. Pay-as-you go 
(advocated by some) can lower total costs, but tends to add to revenue 
and rate instability. A major drawback is that it can create an 
intergenerational inequity by forcing today's customers to bear a 
disproportionate burden for financing facilities that will benefit 
future generations of customers (an intergenerational subsidy). 
Financing large capital projects using debt instruments over a 
reasonable period of time helps address this concern.
    An investor-owned system makes a capital investment and seeks 
recovery both of that investment (depreciation) and on that investment 
(overall return). The overall return is used to pay for debt service 
and for equity (the return to shareholders). The private company will 
use a combination of debt and equity to pay for improvements.
    Depreciation simply repays investors for ``using'' up the value of 
an asset. Narrowly, it does not obligate further investment in the 
system. (Other aspects of the regulatory compact require the regulated 
utility to meet service obligations.) In practice, for most private 
utilities, the depreciation expense and an associated reserve account 
provides an important source of cash-flow for reinvestment. Some 
publicly-owned systems also follow the utility basis for ratemaking and 
charge a depreciation expense. Under the new Government Accounting 
Standards Rule 34 (GASB), more municipalities may be contemplating 
their depreciation and reinvestment practices.
    The impact of rising costs on rates depends on several factors, 
making it hard to generalize. The impact is mitigated if (1) the system 
has been properly investing in and maintaining its system, (2) costs 
have been consistently reflected in rates, (3) measures are taken to 
lower costs as much as practical, (4) financing tools are properly used 
to spread costs over time and recover costs from customers benefiting 
from the associated investment, and (5) rate structures are designed to 
minimize deleterious effects.
    The perceived water infrastructure funding gap that has received so 
much attention recently is at least in part a function of assumptions 
about rates and affordability that may not be reasonable.

    Question 3. In your discussion of increasing the existing volume 
caps of Private Activity Bonds, you indicate that preliminary modeling 
indicates that this change would, ``cost the government very little, 
yet leverage huge sums of private capital.'' Can you give the 
Subcommittee some more specific numbers here?
    Response. Recently the U.S. Conference of Mayors, as part of their 
project to remove water out from under the PAB volume caps, had some 
tax modeling done on this very question. They found that removing water 
and wastewater out from under the cap will cost the Federal Government 
a mere $566 million over 10 years, yet bring about as much as $20 
billion or more in increased investment in water infrastructure 
nationwide.
    It makes far more sense for the Federal Government to ``spend'' one 
half a billion dollars and thus leverage $20 billion in investment than 
simply grant the billions to utilities with all of the related 
inequities and inefficiencies of a massive grant program.
                               __________
      Statement of Harold J. Gorman, Board Member, Association of 
Metropolitan Water Agencies and Executive Director, Sewerage and Water 
                          Board of New Orleans

    Good morning, Chairman Graham, Sen. Crapo and members of the 
subcommittee. On behalf of the Nation's largest municipal, county and 
regional drinking water agencies, serving at least half of all the 
United States, thank you for hosting this important hearing. My name is 
Harold Gorman, and I'm the executive director of the Sewerage and Water 
Board of New Orleans and a board member of the Association of 
Metropolitan Water Agencies, or AMWA, on whose behalf I am testifying 
today. AMWA is one of the 40 national organizations representing water 
systems, local elected officials, labor, environmental advocates, and 
engineering and construction companies that comprise the Water 
Infrastructure Network.
    I would like to take a moment to thank Chairman Graham, Sen. Crapo, 
Sen. Jeffords and Sen. Smith, who have been instrumental in helping to 
protect drinking water systems and their customers from terrorist 
attacks. We especially appreciate your signing a letter on October 11 
to urge President Bush to provide the estimated $155 million needed to 
help drinking water agencies conduct vulnerability assessments and 
develop emergency response plans as soon as possible. This is the first 
step in protecting drinking water and the facilities that produce and 
distribute it.
    The drinking water industry also wishes to thank the nine members 
of the committee and subcommittee who have advocated $5 billion in 
grants for water and wastewater systems as part of the economic 
stimulus package. Based a brief survey, the water industry estimates 
this amount and more could be absorbed in the economy next year alone 
and create 200,000 jobs. Rather than for new facilities, the grants 
would be used to expand existing projects, such as pipe replacement and 
plant rehabilitation, and possibly even projects to help protect 
against or respond to terrorist attacks. We hope this new, temporary 
measure will recognize that some cities, such as New Orleans, would 
have a difficult time coming up with large matches in order to qualify 
for the grants, depending on the size of the grants offered.
    We look forward to working with you to protect consumers and get 
the economy moving again.
    New Orleans is one of our country's older cities, founded in 1718 
as a French colony. It has a few other distinctions that set it apart 
from other cities. It is almost totally surrounded by water; it's 
protected by over 300 miles of levees and floodwalls and its midtown 
elevation is six feet below sea level. Our only source of water is the 
muddy Mississippi River. It is an abundant source but we face the 
greatest water purification challenge of any city in the world. Our 
watershed consists of 32 States and three Canadian provinces that are 
located between the Appalachians and Rocky Mountains.
    The current water system in New Orleans dates back to 1899 when a 
women's suffrage group successfully petitioned the State legislature to 
create the Sewerage and Water Board of New Orleans. Today we provide 
water, sewerage and, most importantly, drainage services to a half-
million consumers, plus the hundreds of thousands more who commute to 
the city for work and who come to the city as tourists. We also operate 
our own electric power plant to provide us the reliability needed to 
weather floods, rainstorms and hurricanes, which constantly threaten 
the city.
    The Sewerage and Water Board, like many other water utilities 
throughout the Nation, is structured as a freestanding business. The 
Board operates three separate businesses--water, sewer and drainage. 
There are no general government subsides and there is no co-mingling of 
funds allowed among the three systems. Each system must pay its own 
way. The Board charges user fees for water delivered and sewerage 
collected through its metered system. Drainage is funded by dedicated 
millages. The City Council of New Orleans determines the rate 
structure.
    All operations, maintenance and capital funding must be provided 
through our dedicated revenues. Capital projects are funded by a 
combination of cash generated from earnings and through revenue bonds, 
which are sold in the open market based upon our historic and projected 
revenue stream. We have very conservative debt coverage ratios to 
protect bondholders, and we are very prudent in managing our funds. All 
financial reports follow the guidelines established by the Government 
Accounting Standards Board (GASB). Our annual financial audit is 
submitted and approved by the Louisiana State Legislature Auditor. 
Success in meeting our financial responsibilities has been recognized 
by the Government Finance Officers Association (GFOA), which has 
honored the Sewerage and Water Board with an award for outstanding 
financial reporting for the past 15 years.
    As we look forward, we project massive programs of infrastructure 
replacement. The current book value of our assets is just over $1 
billion, and the Board has adopted a 5-year capital improvement program 
worth $1.2 billion, doubling our asset base. Almost half of this 
program is dedicated to complying with a court ordered EPA sewer system 
consent decree, which the Board entered in 1998. Our projected program 
cost will probably increase substantially, going forward, as we obtain 
better survey and evaluation data. And in spite of trends in 
outsourcing and privatization and new heights of reengineering and 
efficiency, the savings generated will not resolve the infrastructure 
funding crisis facing New Orleans and other American cities.
    To meet the needs of our capital infrastructure program without 
Federal grants, the Board would have to raise drinking water rates over 
the next 5 years by nearly 50 percent and sewer rates by 90 percent. 
This type of increase threatens the economic stability of our consumers 
and the city. Just as the members of this committee want to avoid 
raising taxes, the New Orleans City Council hopes to avoid increasing 
water rates. Our typical residential customer currently pays about $30 
per month for sewer and water services, which is near the national 
average. The projected rate increases will push those rates to almost 
$50 per month, amounting to nearly $600 per year. That may not sound 
like a lot of money in some communities, but in New Orleans it's a 
substantial sum. In fact, it's double the average expenditure for water 
services, according to the Bureau of Labor Statistics. New Orleans is 
one of the poorest cities in the Nation. Our customers' utility bills 
now exceed the EPA recommended ratio of utility cost/household income. 
According to the 2000 Census, 28 percent of the city's residents live 
below the national poverty level. This is second only to New York 
City's Bronx Borough, with 30 percent of its residents below the 
national poverty level. Rate increases of 50-90 percent will only push 
working families in New Orleans into a deeper financial hole.
    Other cities have similar numbers. Miami-Dade: 21 percent of 
residents below the poverty level and facing an infrastructure bill of 
$5 billion. Los Angeles: 20 percent, with more than $2 billion needed 
for infrastructure. Washington, DC.: 19 percent in poverty, facing over 
$1 billion in wastewater and stormwater improvements; Detroit: 18 
percent in poverty and needing $2.6 billion in the next 5 years for 
infrastructure improvement.
    The Drinking Water State Revolving Fund (SRF), established by the 
1996 amendments to the Safe Drinking Water Act, was not created to 
address infrastructure repair, replacement and refurbishment. It is not 
an infrastructure rehabilitation and replacement fund. Instead it is a 
fund predominantly focused on solving small system compliance problems. 
EPA, through guidance, and the States, through project prioritization, 
have adhered to the requirements of the statute by giving a higher 
priority to those systems that have violated the Safe Drinking Water 
Act and communities threatened with acute health threats. Much of the 
estimated annual $11 billion gap between current spending and overall 
need involves pipe replacement. In many cases, such projects would not 
qualify for the SRF. When a 100-year-old water pipe bursts in downtown 
New Orleans, there is no violation of the Safe Drinking Water Act and 
usually no public health threat. It's just another pipe that needs to 
be replaced. Unfortunately, there are thousands of miles of these old 
pipes throughout our Nation's cities.
    The Safe Drinking Water Act requires States to use a minimum of 15 
percent of its SRF for small systems serving fewer than 10,000 people, 
and States may reserve as much as 30 percent for disadvantaged 
communities--again primarily directed at smaller systems. An additional 
2 percent of the funds allotted to the States may be used to provide 
technical assistance to public water systems serving 10,000 people or 
fewer. Add to that an additional 10 percent for a number of programs 
including development and implementation of a capacity development 
strategy and operator certification program. Both of these support 
small system sustainability.
    Many States actively discourage large systems from participating in 
the SRF program. Some State formulas that determine affordability 
deduct points from systems with very large service populations. Other 
State formulas only consider household income and the water bill, 
ignoring the higher cost of living in large cities. Needless to say, 
the current funding level of the SRF program is in itself a 
discouragement to participation. Most large city infrastructure needs 
are many times larger than the entire State allocation.
    What is needed 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 5-
year period for both drinking water and wastewater infrastructure. This 
amount is only half of the infrastructure funding gap for those years. 
The gap is the difference between what drinking water and wastewater 
systems have historically spent from their own budgets and the overall 
need. This investment program should include a strong grants component, 
with matches ranging from 75 percent for the most hard-pressed systems 
to 55 percent, to help systems that are disadvantaged, yet have the 
capacity to return to self-sustainability. The only current alternative 
to funding the $1.2 billion needed by the Sewerage and Water Board is 
to borrow on the open market. But even no-interest loans would require 
unaffordable rate increases for 28 percent of the residents living 
below the poverty level. This program should also include ample 
opportunity for large systems to participate in innovative programs 
such as principal forgiveness loans, credit guarantees and insurance, 
and refinancing of high-interest debt obtained on the open market.
    Another proposal to resolve the gap is privatization, ranging from 
a full asset sale to contracting out a single treatment facility. It is 
often seen as a panacea for resolving infrastructure funding gaps. But 
consumers objected strongly to the concept of losing control of their 
water resources. Indeed, a number of cities have sought to buy back 
their utilities. Indianapolis, for instance, expects to complete its 
repurchase sometime next year. The more recent trend has been to 
outsource various services. At the New Orleans Water and Sewerage 
Board, we have outsourced almost 40 percent of our business.
    Most of privately-owned water systems in the U.S. are very small 
utilities, such as neighborhood associations or mobile home parks. But 
the U.S. privatization scene is dominated by a handful of foreign-owned 
firms. The largest is the French multinational Vivendi, which owns 
contract operator U.S. Filter, among many other businesses, including 
entertainment. One of its rivals is another French multinational, Suez. 
Its American subsidiary is United Water. And the Nation's largest 
investor-owned drinking water provider is the American Water Works 
Company, which just entered into an agreement to be purchased by the 
German utility conglomerate, RWE. The international engineering and 
construction firm CH2M Hill owns a major provider of contract services, 
OMI, or Operations Management International. Two British firms are 
involved in privatization, too. The most active is Thames Water, a 
British firm owned by RWE. The other is the Kelda Group, which operates 
in five U.S. States. There are a few relatively small American 
companies that have contract operations mainly on the West Coast.
    Though there have been some interesting events surrounding 
privatization, especially in New Orleans, there does not appear to be 
either a strong or weak record of success related to privatization. But 
one of the differences between public and private operation is that 
State utility commission regulations provide for investor-owned 
utilities to ensure a profitable rate-of-return. Municipal, county and 
regional water systems, of course, are public services that do not seek 
to earn a profit. Instead, revenues are reinvested into the utilities.
    Whether a publicly-owned water system privatizes should always be a 
decision for those who are accountable to the voters: local elected 
officials. The Sewerage and Water Board offers a good example. We are 
now undergoing a managed competition process, which could potentially 
outsource our entire water and sewerage system. The managed 
competition, a variant of privatization, involves a potential 20-year 
operations and maintenance procurement worth $1 billion. Under the 
competition, the Board's employees will bid alongside private firms to 
operate the system.
    If a city is considering privatization, this is probably the most 
equitable approach. It offers public employees the opportunity to show 
they can operate a utility just as efficiently as a private firm. In 
cities large and small, managers and employees are very proud of their 
ability to compete against their peers, public or private. To recognize 
their efforts, the Association of Metropolitan Water Agencies 
inaugurated early this year an award program honoring competitiveness 
achievement. Among the 44 winners this year are the water agencies 
serving Tampa and Broward, Palm Beach and Orange Counties in Florida; 
Kansas City, Missouri; Las Vegas; and Akron, Columbus and Cincinnati. 
These cities have reengineered, reorganized, reduced staff and 
installed state-of-the-art technology to save millions of dollars and 
still satisfy customer expectations and EPA regulations. Another 
competitiveness tool employed by water systems is asset management. 
Asset management techniques can help water utilities in planning and 
budgeting for maintaining existing infrastructure while meeting future 
needs for growth and regulatory requirements, making decisions on 
rehabilitation or replacement, providing justification for funds for 
capital renewal, and integrating information systems such as geographic 
information systems (GIS), maintenance management systems, and 
financial recording and reporting systems.
    The achievements of the New Orleans Sewerage and Water Board are no 
less. The Board has become more competitive, leaner and more efficient 
by reducing staffing levels by 25 percent in the past 3 years and 
adopting new technologies, such as slip lining of pipes, global 
positioning satellite (GPS) surveying and GIS tracking to manage 
maintenance and customer service calls, and Supervisory Control and 
Data Acquisition, or SCADA, to remotely monitor and operate plants and 
pumps. And reengineering the Board's field operations has improved 
productivity by 30 percent.
    The most innovative ways to stretch local and Federal dollars would 
be to ``incentivize'' voluntary regional partnerships among water 
systems, a concept that offers much promise for improving and enhancing 
water systems across the country. We have fine water service providers 
throughout the Nation, and each one does its best to provide the 
highest levels of service to their customers. But it is also true that 
there are a wide variety of capabilities among the systems. Many water 
providers face constraints in many different areas, including 
financial, technical, operational and managerial limits unique to each 
provider. For example, financial constraints force some systems to 
minimize expenditures for needed work. This can contribute to long-term 
declines in service and even weaker public health protection. Non-
compliant systems increase the regulatory burden on Federal and State 
agencies to ensure that public health standards are met.
    The inherent potential in voluntary partnerships is why a few water 
utilities have begun to work cooperatively with others in their areas 
to gain access to, or share with others, the capabilities needed. A 
partnership could include physical infrastructure connection among 
utilities of various sizes near each other. Or it could involve a 
financial, managerial or technical support connection among utilities 
regardless of distance from one another. Or it could involve a 
combination of both. For example, the Contra Costa Water District, 
which serves 450,000 people in the area around Concord, California, is 
working with four other local water entities in a variety of 
partnerships, ranging from simply providing less costly water supplies 
to cooperation in obtaining new supplies and developing needed 
infrastructure. One partnership being developed will save more than 
$10,000,000 for local agencies involved. Another successful 
partnership, involving three agencies, provided an alternative water 
supply at a cost that will save the local agencies as much as 
$13,000,000. In a third instance 10 water and sanitation agencies came 
together to conduct a water supply and infrastructure study that 
focused on the region, rather than the boundaries of each agency, 
thereby providing a more beneficial plan for the region as a whole.
    We believe that an incentive-based program to encourage voluntary 
partnerships among water utilities could benefit all parties and, most 
important of all, could provide excellent benefit to the customers of 
those systems. Everyone could benefit from partnerships between water 
systems with substantial technical, managerial and financial resources, 
known as capacity, and those without. The receiving entities would gain 
needed capacity more efficiently and cost-effectively than if they had 
to obtain it on their own, and the providing entity would recover all 
of its costs.
    Partnership authorization should provide maximum flexibility, so 
that local providers can find the best solution for their own unique 
needs. Potential forms of partnerships include: operating agreements, 
engineering and construction contracts, long-term contracts, 
consolidation, asset transfers, or even formation of new entities, such 
as the Central Arkansas Regional Water Authority, formed out of the 
water systems of Little Rock, North Little Rock and other smaller 
systems. The key point is that Congress should encourage partnerships 
and provide local agencies with maximum flexibility to establish the 
structure of that partnership to meet local conditions, within the 
overall goals of the Safe Drinking Water Act.
    Congress can encourage these partnerships by offering loans, 
grants, loan subsidies, refinancing and credit guarantees with more 
favorable conditions to partnerships. Assistance with basic conditions 
would still be available to systems that do not seek partnerships. Only 
where systems do not seek to improve their compliance records or 
managerial, technical and financial capacities could States or the EPA 
compel them to enter partnership, where available.
    Another possibility for helping to stretch available dollars is 
research into more efficient and effective means of infrastructure 
improvement and repair. With the American Water Works Association, we 
recommend Congress consider identifying a very small portion of water 
infrastructure funds for such research, matched by drinking water and 
wastewater systems on a one-to-one basis, and managed by a consortium 
of water research organizations to fund development of a comprehensive 
infrastructure research plan and to provide funding for critical 
infrastructure research projects. It would be a worthy investment, as 
research into infrastructure management will make for more efficient 
use of Federal money in the long term as well as better protection of 
public health.
    In some ways the challenge we face today is not much different than 
that faced by our predecessors 100 years ago when these systems were 
first being built. We must replace and upgrade the massive systems 
built by our predecessors but it must be done without disrupting the 
normal social and business activities of our cities and without causing 
financial disruption or ruin. Funding of the major urban water systems 
in 1900 was accomplished almost exclusively with local dollars. The 
replacement of these systems today cannot be funded exclusively with 
local funds. In the 1900's most taxation was local in nature. There was 
no Federal income tax. Funding of water infrastructure today must 
reflect the tax structure in 2001, not the structure of 1901. The 
Federal Government must join with the urban centers of this country and 
help upgrade our water infrastructure. As the U.S. Conference of Mayors 
President and New Orleans Mayor Marc Morial said earlier this year, 
testifying before the Senate Subcommittee on Transportation, 
Infrastructure and Nuclear Safety on behalf of the Mayors, ``Local 
infrastructure needs are no longer simply a local concern. These needs 
are of national significance, of national economic importance and of 
substantial cost, exceeding local capital resources.''
    AMWA believes the recommendations outlined here will help resolve 
the $11 billion per year drinking water infrastructure gap and keep 
American infrastructure strong and secure. We look forward to 
discussing them further with you.
                               __________
    Statement of Paul Pinault, Executive Director, Narragansett Bay 
   Commission on behalf of the Association of Metropolitan Sewerage 
                                Agencies

                              INTRODUCTION

    Good morning Chairman Graham, Senator Crapo and members of the 
Subcommittee, my name is Paul Pinault. I am Executive Director of the 
Narragansett Bay Commission (``the Commission'') in Providence, Rhode 
Island and Vice President of the Association of Metropolitan Sewerage 
Agencies (AMSA). AMSA represents the interests of more than 260 
publicly-owned treatment works (POTWs) across the country. AMSA's 
members treat 18 billion gallons of wastewater every day and provide 
service to the majority of the United States' sewered population. On 
behalf of AMSA and the Commission, I thank you for this opportunity to 
address your Subcommittee.
    Adequate financial resources to States, cities, and communities 
like mine are the most essential element to maintaining our Nation's 
water and wastewater infrastructure. The Clean Water Act (CWA) 
amendments of 1987 created a new phase of clean water funding by 
replacing the Federal Construction Grants Program with the Clean Water 
State Revolving Fund Loan Programs (SRF). Since 1980, according to 
studies by both the U.S. Environmental Protection Agency (EPA) and the 
private sector, Federal contributions have declined by 75 percent in 
real terms and today represent only about 10 percent of total capital 
outlays for water and wastewater infrastructure and less than 5 percent 
of total water and wastewater outlays. Local governments currently 
assume more than 90 percent of water infrastructure construction costs 
in the form of expensive bond issuances--municipal debt--and increased 
water and sewer bills.
    This hearing addresses what wastewater utilities, and State and 
local governments are doing to maximize limited Federal funding for 
water and wastewater infrastructure improvements and what role the 
Federal Government should play in ensuring the Nation's infrastructure. 
I assure you that wastewater utilities must be, and are being, 
extremely innovative in order to get the most out of the limited 
dollars available. This testimony will address both what the Commission 
is doing, what AMSA and wastewater utilities are doing nationwide, and 
what the Federal Government can do to ensure that funding levels are 
sufficient to meet infrastructure needs.

              THE NARRAGANSETT BAY COMMISSION'S EXPERIENCE

    The Narragansett Bay Commission has had a positive experience with 
its State loan program and has made significant use of the monies 
Congress has appropriated to the SRF. The Commission owns the two 
largest wastewater treatment facilities in Rhode Island. Field's Point 
was originally built in 1901, and Bucklin Point in 1952. The Commission 
assumed ownership and operations of both facilities by order of the 
Rhode Island General Assembly in 1982 and 1992 respectively.
    The Commission has borrowed approximately $72.3 million from the 
SRF since the Commission's inception in 1980, enabling us to fund a 
significant portion of our sewer system projects. The Commission is the 
largest borrower from the Rhode Island Clean Water Finance Agency, 
which administers the SRF. Field's Point required over $100 million in 
upgrades, a majority of which was funded by statewide general 
obligation bonds.
    In 1986, the Commission's debt service as a percentage of total 
operating budget was 19 percent; in 2002, it will be 22 percent, and in 
2006, it is projected to be 54 percent as a result of $350 million in 
planned capital projects over the next 5 years, including construction 
startup costs on the first phase of our three-phase federally mandated 
combined sewer overflow (CSO) project. Phase I is estimated at $250 
million and the total project budgeted at $550 million over next 20 
years. While it is daunting to think that 54 cents of every dollar the 
Commission receives will go for debt service rather than operations, 
without the SRF, that number would be much higher.
    The Commission has used the SRF to partially fund projects 
including septage receiving facilities, pump station rehabilitation and 
repairs, facilities planning, and solids handling facilities. Future 
projects that will require Federal funds include a $60 million upgrade 
at the Bucklin Point Wastewater Treatment Facility to improve 
capability for nutrient removal/reduction and the $250 million Phase I 
for CSO controls.
    I should fully clarify that these capital funding needs are driven 
by the dual forces of aging infrastructure and increasingly stringent 
environmental regulations, not operational costs. The Commission and 
its fellow AMSA members around the country have a 6-year documented 
record of reducing operational costs. However, no amount of operational 
streamlining or belt-tightening can offset the cost of replacing 
critical clean water infrastructure.
    As we plan for the future, we believe that the Rhode Island Clean 
Water Finance Agency will need more money and a greater array of 
financing mechanisms to meet the Commission's needs, as well as the 
needs of the other 17 wastewater treatment facilities in the State--the 
three largest of which face very expensive nutrient removal projects--
and the State's drinking water projects. If the SRF is underfunded and 
unreformed, the Commission will be forced to borrow at daunting market 
rates to accomplish these important projects.
    An important part of the funding equation is the cost that users 
pay for services. I want to stress to the Committee that The 
Commission's ratepayers have been paying their fair share of the cost 
of the services provided. However, it is becoming increasingly clear 
that our ratepayers cannot sustain additional, substantial rate 
increases. Twenty-two percent of households in the Commission service 
area fall under the Federal poverty line; 15 percent of the 
Commission's service area population are over 65 years of age and, most 
likely, on a fixed income; and 65 percent of children at or below the 
poverty line in Rhode Island live our service area.
    In January of this year, the Commission raised its rates by 25 
percent. This rate increase was driven primarily by the Commission's 
need to increase its debt capacity to pay for the CSO project. We will 
have to apply to the Rhode Island Public Utilities Commission again 
shortly for additional rate increases to meet growing debt capacity 
needs. For our demographic group, these increases represent substantial 
financial hardship-well in excess of the 2 percent median household 
income affordability levels set by the U.S. Environmental Protection 
Agency (EPA).
    I want to reiterate that the Narragansett Bay Commission has been 
fortunate in that it has been able to access Rhode Island's State loan 
fund to help us finance our water infrastructure needs. Unfortunately, 
impediments such as cumbersome program administration requirements and 
limited leveraging of State monies to maximize the capacity of the 
program have prevented many wastewater utilities from having similar 
experiences. It is clear that based on current and future 
infrastructure needs, the SRF program is not--and will not be--adequate 
to ensure continued compliance with our Nation's water quality goals.

                        THE NATIONAL PERSPECTIVE

    Again, municipal debt comprises 90 percent of water infrastructure 
construction costs, which includes compliance with Federal regulations. 
Debt management offers a case-in-point of the innovations that 
wastewater treatment plants employ, as public officials rise to meet 
the funding challenge. To make municipal bonds as effective a source 
for generating income as possible, municipalities are increasingly 
involved in ``pooled borrowing.'' Pooled borrowing is a bond issuance 
mechanism in which several municipalities join together and, instead of 
issuing bonds individually, issue a single bond. By doing so, these 
municipalities can ensure both a slightly better interest rate and, 
more importantly, a significant reduction in issuing costs. These 
activities can result in both short-term and long-term savings.
    Additionally, many local utilities structure and restructure their 
debt to achieve low cost, low risk debt and to minimize debt service 
costs over the long-term. This often involves a delicate balancing act 
between reducing an agency's debt reduction in the near term for 
somewhat increased debt service costs in the future. This must be done 
while ensuring that ratepayers' costs remain stable and the environment 
fully protected. Some local governments have moved to longer term--30 
and 40 year--debt plans that help reduce annual payments.

Public Agency Management Innovations: Minimize Costs/Maximize 
        Performance
    Utility managers over the past decade have become better business 
operators. Publicly-owned wastewater treatment plant operators have 
worked diligently to be more competitive to meet the demands of the 
ratepayer, protect the public's investment, and meet the Nation's water 
quality goals. Environmental management systems (EMSs) and asset 
management are becoming essential tools nationwide.
    EMSs and more narrowly-targeted management programs, like asset 
management, can and should be implemented in a complementary fashion. 
EMSs can provide the overall framework for implementing these other 
management programs. AMSA, in cooperation with EPA and the Water 
Environment Federation, is currently engaged in a joint project to 
develop comprehensive EMS guidance for wastewater utilities that will 
provide a key tool to ensure a more integrated, cost-effective 
management approach for wastewater utilities in the near future. Such a 
system gives a utility the tools to identify and more efficiently 
manage its capital assets, address a full range of environmental 
impacts, focus on improving environmental performance beyond the levels 
required by regulations, and do so through an open and transparent 
process that addresses the needs of communities, regulators and other 
stakeholders.
    At the same time, AMSA is collaborating with EPA on developing a 
nationwide asset management program for wastewater utilities, scheduled 
for implementation in early 2002. Historically, capital investments in 
the form of water and wastewater infrastructure have been placed into 
service and considered candidates for rehabilitation and replacement 
only when the system faces critical levels of age or deterioration. 
Current physical, economic, social, financial, and institutional 
factors have rendered such an approach no longer viable. AMSA's view is 
that public utilities must be able to plan and optimize the maintenance 
and replacement cost cycles for their infrastructure assets in order to 
minimize costs and maximize performance.
    An added incentive for this shift to a more measured planning 
approach can be found in the June 1999 changes to financial accounting 
and reporting standards issued by the Governmental Accounting Standards 
Board for State and Local Governments (known as GASB 34). These 
sweeping changes require governments to report depreciation of assets 
or to implement an asset management system. Under the standards, any 
asset management system utilized by a government must result in an up-
to-date inventory of infrastructure assets, the undertaking of 
condition assessments of assets, the development of annual estimates of 
the funds necessary to maintain the assets and documentation that 
assets are being maintained.
    The goal of the accounting requirements of the GASB is to add value 
to decisionmakers nationwide. Advances in geographic information 
systems, combined with effective relational data base management, 
improved data collection technologies and increased analytic computer 
capacity provide a unique and challenging opportunity to improve 
management decisions and reduce cost.
    Improved asset management practices and programs at public 
wastewater utilities protect the public's investment in a vital local 
service. Sound management practices enable communities to control and 
potentially reduce the costs of assets required to meet service 
objectives. Some estimates suggest that the potential exists for a 20 
percent savings when the current capital investment approach is 
abandoned and an asset management approach is implemented.
    Local utility management teams currently explore new ways to 
stretch available funding including environmental management systems, 
asset management, bond issuances and debt management, and are 
stretching their dollars to the greatest extent possible. Publicly-
owned wastewater treatment plants have a distinct mission for which 
innovation must be complimented by critical changes to the State 
Revolving Fund (SRF) as well as increased Federal funding.
    There is ample precedent for, and clear economic principal for 
supporting, a strong Federal role in funding water infrastructure. 
Despite increasing Federal mandates for cleaner water, shifts in 
population that strand wastewater plants in urban core cities with few 
ways to pay for needed improvements, and the nearly universal need to 
replace billions of dollars in aging and failing water distribution and 
wastewater collection systems, current Federal funding policies and 
mechanisms to meet the country's water infrastructure needs are 
woefully inadequate. As is true of America's highway and airport 
infrastructure, there is a compelling need and rationale for a long-
term, sustainable, and reliable source of Federal funding for clean and 
safe water.

         EVOLVE THE SRF INTO A COMPREHENSIVE FINANCING PROGRAM

    Every day, the agencies that comprise AMSA ensure that waste is 
removed from millions of American businesses and households and that 
the environment is clean and safe. For decades, AMSA has been a partner 
with Federal, State and local stakeholders to make environmental 
progress through the improvement of municipal wastewater services. The 
importance of wastewater infrastructure was well understood in the late 
1960's as the Nation watched the quality of its waters decline 
precipitously and chose, in the 1972 Clean Water Act, to spend Federal 
tax dollars to reverse this trend. A large number of publicly-owned 
treatment works (POTWs) have built their secondary and advanced 
treatment capabilities as a result of the EPA's Construction Grants 
Program. According to EPA's 2000 report entitled Progress in Water 
Quality, a total of $61.1 billion ($96.5 billion as constant 1995 
dollars) was distributed to municipalities through construction grants 
from 1970 to 1995. State SRFs have received about $16 billion for the 
11-year period between 1988 and 1999. The wastewater treatment 
infrastructure funded with this grant and loan money is coming to the 
end of its useful life. And the SRF, as currently structured and 
funded, is becoming an out-dated financing mechanism.
    As the broad national benefits of improved water services accrue, 
the number of people served by POTWs is rising, regulatory mandates are 
skyrocketing, ratepayers' bills are continually increasing, and 
infrastructure is aging. During this same time, available funding 
options have been narrowed--to loans only--while program eligibilities 
have been greatly expanded. Local communities need a full range of 
funding options from an improved EPA water infrastructure financing 
program. The current State revolving fund program needs to modernized. 
As we increasingly approach our water quality challenges on a watershed 
basis, our financing mechanisms must be consolidated, streamlined and 
updated to accommodate the most effective and efficient approaches to 
funding environmental protection.
    Some public wastewater treatment agencies, like the Narragansett 
Bay Commission, have been able to take advantage of the funds to help 
offset the tremendous costs of upgrading, rehabilitating and replacing 
their wastewater treatment facilities. Other communities, however, 
simply cannot afford to pay back a loan. These communities should be 
afforded a full range of funding options--including grants--to meet 
their infrastructure needs. AMSA member agencies report different 
levels of success in dealing with their State-run loan programs.

                   THE NEEDS ARE GREATER THAN THE SRF

    The needs of hundreds of communities across the Nation are not 
being met by EPA's current wastewater loan program. We face financial 
challenges in the water infrastructure sector today that far exceed 
historical investment patterns. In addition, communities must plan to 
reach multiple environmental programmatic goals simultaneously. We're 
upgrading and replacing our plants, controlling sewer overflows, 
protecting wetlands, managing coastal areas, controlling stormwater, 
upgrading and replacing pipe, dealing with nonpoint sources and taking 
on the challenges represented by a whole host of other water quality 
duties. With the limited amount of funds available, we must make 
certain that our dollars are spent in the most efficient and effective 
manner possible. In short, Congress must modernize the SRF.
    AMSA supports the recommendation contained in the recent WINow 
report by the Water Infrastructure Network that calls for the next 
generation of the SRF--State water and wastewater infrastructure 
financing institutions. In order to effectively manage all of the water 
quality programs and challenges previously mentioned, communities 
should not have to deal with more than one SRF. As you are aware, this 
is not a new idea. Already, 30 States have combined their wastewater 
and drinking water SRFs. By creating one centralized financing program, 
States can eliminate duplication, streamline government, save money, 
and gain other efficiencies. By taking this common-sense approach, 
States will have more money to help fund their communities' needs. The 
expanded SRFs should have all the necessary financial tools needed by 
local governments to efficiently and effectively meet their needs. 
Federal EPA funds should be administered through flexible statewide 
water and wastewater financing institutions that would use appropriate 
combinations of grants, loans, loan subsidies and other types of 
financial assistance instruments.
    The evolution to a more modern EPA water infrastructure financing 
program would also create an opportunity for Federal and State 
government officials to streamline their funding programs. Areas of 
focus should include Federal and/or State paperwork requirements 
associated with Federal funding assistance, simplification of the 
application processes, reduction of oversight and reporting 
requirements where they no longer serve the Federal or State interests, 
and flexibility in meeting requirements that do serve Federal and State 
interests.
    AMSA's agencies know that change does not come easily, nor is it 
without some cost. For years, publicly-owned treatment works have been 
changing the way they do business. By becoming more competitive, we 
have cut costs and become more effective and more efficient. As States 
take the next step in streamlining their operations, AMSA supports 
additional funding for the States to combine and modernize their water 
infrastructure financing programs.

            SOLVING THE PROBLEM THROUGH A FISCAL PARTNERSHIP

    EPA's clean water SRF cannot satisfy our current financial and 
regulatory needs. Both our systems and our watersheds are at a critical 
juncture in their life cycles. A combination of reduced Federal 
spending and increased Federal mandates to meet treatment requirements 
is taking its toll. The collective aging of our pipes and systems 
further compounds our ability to meet the objectives of the Clean Water 
Act. Any additional deferral of the needed investments to repair and 
renew our systems will lead to greater increases in the costs 
associated with providing clean and safe water services, threats to 
public health, and environmental degradation.
    The challenge of closing the water infrastructure financing gap can 
be met, but not without a substantial and concerted effort by the 
Federal Government to join with States, local communities and consumers 
in a fiscal partnership. To bridge the investment gap, the Federal 
Government should meet localities halfway by authorizing an average of 
$11.5 billion per year in capitalization funds over the next 5 years. 
States would receive the funds and, in turn, offer grants and loans to 
local agencies. AMSA further supports the following recommendations in 
the WINow report to reform this country's water and wastewater 
infrastructure financing program:
     Create a long-term, sustainable, and reliable source of 
Federal funding for clean and safe water;
     Authorize capitalization of the next generation of State 
financing authorities to distribute funds in fiscally responsible and 
flexible ways, including grants, loans, loan subsidies, and credit 
assistance;
     Focus on critical ``core'' water and wastewater 
infrastructure needs and nonpoint source pollution;
     Streamline Federal administration of the funding program 
and encourage continuous improvement in program administration at both 
the Federal and State levels;
     Adequately finance strong State programs to implement the 
Clean Water Act and the Safe Drinking Water Act;
     Establish a new program for clean and safe water 
technology and management innovation to reduce infrastructure costs, 
prolong the life of America's water and wastewater assets, and improve 
the productivity of utility enterprises; and
     Provide expanded, targeted technical assistance to 
communities most in need.
    AMSA and other stakeholders recognize that no single solution 
addresses the full range of water and wastewater infrastructure funding 
needs. All levels of government and the private sector must share 
responsibility for effective, efficient, and fair solutions.

                               CONCLUSION

    Significant progress has been made in financing the clean up of our 
Nation's waters over the past 30 years through the Construction Grants 
Program and the SRF. However, much remains to be done. The fundamental 
challenge for Congress today is to fund a comprehensive financing 
program for the 21st century that will allow State and local 
governments to meet their water and wastewater infrastructure needs 
without putting unnecessary stresses onto the Nation's ratepayers.
    The critical role of our Nation's water infrastructure has become 
clearer as a consequence of the tragic events of September 11. 
Obviously, dollars will have to be stretched even further now not only 
to ensure that utilities are protected from internal threats such as 
aging pipes, but also from external threats. AMSA has played a leading 
role in organizing a Wastewater Infrastructure Security Task Force and 
AMSA members have already earmarked significant funds toward efforts to 
ensure that these security challenges are met.
    AMSA and the 40 organizations in the Water Infrastructure Network 
support the inclusion of water infrastructure in an economic stimulus 
package. We propose that $5 billion in grants should be made available 
to water and wastewater utilities for construction projects that are 
ready to go. This would serve both as an immediate job creation program 
and would also demonstrate a strong commitment to the long-term, 
sustainable and reliable source of funding of water and wastewater 
infrastructure upgrades and repair, and the environmental well-being 
and public health of our Nation.
    AMSA, and the Water Infrastructure Network, have supported a 5-
year, $57 billion plan for new Congressional authorizations and funding 
to capitalize State-administered grant and loan programs for water and 
wastewater infrastructure. AMSA also understands the need to consider 
other potential long-term options beyond this 5-year period, and looks 
forward to discussing this further with this Subcommittee and other 
Members of Congress.
    Chairman Graham, Senator Crapo and Members of the Committee, we 
look forward to working with you to develop the right solutions to fund 
our national water infrastructure needs. I will be happy to answer any 
questions.
                                 ______
                                 
       Responses from Paul Pinault to Additional Questions from 
                            Senator Jeffords

    Question 1a. In your written testimony, you discuss improved asset 
management practices and programs as a means of improving management of 
capital assets at water utilities.
    Is there a federal role in creating incentives for individual 
utilities to adopt these practices?
    Response. The appropriate incentives are already in place for 
individual utilities to adopt plans that optimize the maintenance and 
replacement cost cycles for infrastructure assets.
    The primary incentive for the ongoing shift to a more measured 
planning approach can be found in the June 1999 changes to financial 
accounting and reporting standards issued by the Government Accounting 
Standards Board for State and local governments (know as GASB 34). 
These sweeping changes require governments to soon begin reporting 
depreciation of their assets or to implement an asset management 
program. Under the standards, any asset management system utilized by a 
government must result in an up-to-date inventory of infrastructure 
assets, the undertaking of condition assessments of assets, the 
development of annual estimates of the funds necessary to maintain the 
assets and provide documentation that assets are being preserved.

    Question 1b. If so, is this something you would recommend Congress 
address in legislation or is this something EPA should address through 
training programs and regulations?
    Response. Asset management is most effective when developed and 
implemented at the local level and should not be addressed by Congress 
in federal legislation. The Association of Metropolitan Sewerage 
Agencies (AMSA) is committed to bringing an innovative training and 
education program to the public wastewater and water utility sector in 
the coming months.
    AMSA, in partnership with the Association of Metropolitan Water 
Agencies, the American Water Works Association and the Water 
Environment Federation, will conduct a series of dynamic regional asset 
management workshops in 2002. Managing Public Infrastructure Assets to 
Minimize Cost and Maximize Performance is designed to assist agency 
directors and engineers, and planning and financial staff to develop a 
better understanding of the concepts and benefits of asset management 
programs. Member anticipation of the workshops has been very high and 
AMSA expects these sessions to be extremely popular with public utility 
personnel.

    Question 2a. In your testimony, you mention that some communities 
cannot afford to pay back a loan which limits their ability to receive 
funds from the SRF.
    Do you believe that the tools provided by the SRFs today in terms 
of low interest or zero interest loans, etc. are inadequate?
    Response. The tools provided by today's SRFs should be expanded to 
include a full range of flexible financing options designed to satisfy 
the wide variety of needs in America's cities, counties, towns and 
communities. Federal funding should be administered through flexible 
statewide water and wastewater financing institutions. These water and 
wastewater infrastructure financing authorities would have broad 
latitude to meet needs within their States using appropriate 
combinations of grants, loans, and other financial assistance 
instruments. It is AMSA's experience that local governments can attract 
more loan funds if provided with some grant funds.

    Question 2b. What would you recommend in lieu of these options?
    Response. AMSA and the Water Infrastructure Network (WIN), 
recommend that a complete line of modern financing options be made 
available to localities through State water infrastructure financing 
institutions. Forms of assistance should include grants, loans and loan 
subsidies, including interest rate discounts, zero interest rate loans, 
principal forgiveness and negative interest rate loans. AMSA and WIN 
strongly recommend loan terms of up to 30 years, provided such terms do 
not exceed the useful lives of investments.
 Responses by Paul Pinault to Additional Questions from Senator Graham
    Question 1. In your testimony, you discuss the use of environmental 
management systems as a tool used to minimize costs and maximize 
performance. Are water utilities seeking certification with EMS 
standards such as ISO 14001 or are water utilities creating their own 
EMS based on individual needs?
    Response. Environmental Management Systems (EMS) can be developed 
and implemented by wastewater utilities either utility-wide or for 
individual processes. The National Biosolids Partnership (NBP), a 
partnership among AMSA, WEF and the EPA, is an excellent example of the 
EMS program for managing the Nation's biosolids. Now in its third year, 
the NBP is setting the industry standard for best practices, community 
involvement and the implementation of environmentally sound management 
programs. AMSA also is in the early stages of a project that would 
explore the feasibility of the implementation of utility-wide EMS for 
the Nation's wastewater utilities.
    During the past year, France proposed the creation of an ISO 
standard for the ``standardization of service activities relating to 
the supply of drinking water and to wastewater and rainwater 
sewerage.'' AMSA supported the U.S. (American National Standards 
Institute--ANSI) position on the proposal which states that the AFNOR 
proposal does not take into account other similar work underway, is a 
subject more appropriate for national and local standards, has too 
broad a scope, and only appears useful for European companies wanting 
to expand internationally but has little value for the U.S. Since it 
now appears that work on a new voluntary international standard will 
proceed, AMSA will help to ensure that it has appropriate 
representation on the technical committee and will support the work of 
the ANSI team.

    Question 2. In your discussion of evolving the SRF into what you 
term a ``comprehensive financing program'', you state in your written 
testimony that ``financing mechanisms must be consolidated, 
streamlined, and updated to accommodate the most effective and 
efficient approaches to funding environmental protection.'' Can you 
describe the specific actions you believe need to be taken by Congress 
to modify the SRF to meet these goals?
    Response. Over half of the States have combined the management of 
their clean water and drinking water State revolving loan funds. AMSA 
believes that Congress should encourage the remaining States to take 
similar steps to reduce administrative costs and to create new 
efficiencies. Combined State financing authorities have proven to be 
successful and are the next generation of today's State revolving 
funds. Local governments, including wastewater authorities, are cutting 
costs and implementing more efficient management in order to become 
more competitive. AMSA believes that States, too, could become more 
competitive by consolidating the administration of the SRFs. Joint 
administration could improve priority-setting and ensure that the most 
critical needs are addressed first. AMSA also believes that addressing 
both wastewater and drinking water needs on a watershed basis can 
ultimately save the taxpayer money.

    Question 3. You also recommend the creation of a ``long-term, 
sustainable, and reliable source of federal funding for clean and safe 
water.'' Can you describe your idea as to what this source of funds 
would be and how we can ensure that it is sustainable?
    Response. AMSA and WIN have recommended 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. While AMSA does 
not have specific recommendations on a new funding structure at this 
time, it believes that the hearings initiated by the Senate EPW 
Committee will help to further the national dialogue and identify a 
permanent funding solution to guarantee the health of our critical 
water infrastructure system.
                               __________
          Statement of The American Society of Civil Engineers

    Mr. Chairman and Members of the Subcommittee:
    The American Society of Civil Engineers (ASCE) appreciates the 
opportunity to present this statement to the Subcommittee on Fisheries, 
Wildlife, and Water for its consideration during the oversight hearing 
on innovative financing techniques for wastewater infrastructure 
improvements.
    ASCE was founded in 1852 and is the country's oldest national civil 
engineering organization.
    It represents more than 125,000 civil engineers in private 
practice, government, industry and academia who are dedicated to the 
advancement of the science and profession of civil engineering. ASCE is 
a 501(c)(3) non-profit educational and professional society.

                       I. INFRASTRUCTURE PROBLEMS

    The American people value a strong working public infrastructure. 
Unfortunately, in many cases what they see are crumbling wastewater and 
drinking-water facilities and (sometimes) contaminated water supplies.
    In March of this year ASCE released its 2001 Report Card for 
America's Infrastructure. That assessment showed the Nation's 
infrastructure to be in alarmingly bad shape. The cumulative grade, 
covering 12 infrastructure categories, including drinking-water and 
wastewater treatment plants, was a D.
    We attribute such a dismal grade to explosive growth in population 
that is outpacing the rate and impact of current investment and 
maintenance efforts and to the growing obsolescence of our Nation's 
aging water infrastructure generally.
    ASCE estimates that the United States needs to invest a staggering 
$1.3 trillion over the next five years just to meet current 
infrastructure demands. Virtually all federal spending on water 
systems, highways, and other aspects of the infrastructure is subject 
to annual congressional appropriations, and these appropriations have 
not come close to meeting funding needs in recent years.
    Infrastructure, by its very nature, is a long-term investment. The 
current federal budget process is structured for short-term investment. 
This creates major problems in the planning, design and construction 
processes for long-term investments.
    Generally, we believe that a Federal capital budget could create 
the mechanism to help reduce the constant conflict between short-term 
and long-term needs. Without long-term financial assurance, the ability 
of the Federal, State and local governments to do effective 
infrastructure investment planning is constrained severely.
    ASCE supports the establishment of a Federal multi-year capital 
budget for all public works infrastructure construction and major 
rehabilitation, similar to those used by State and local governments. 
The capital budget must be separated from non-capital Federal 
expenditures.
    Moreover, ASCE supports the creation of a ``Clean Water Trust 
Fund'' that would support clean water, drinking-water and nonpoint-
source-related infrastructure projects throughout the country. Congress 
should reauthorize the Clean Water Act to provide adequate funding 
based on construction needs and compliance schedules.
    We turn now to the matter of innovative financing methods for all 
infrastructure improvements generally, including wastewater treatment 
plants and their related facilities.

                    II. A UNIQUE SOLUTION: H.R. 1564

    Representative Dennis Kucinich (D-Ohio) and Representative Steve 
LaTourette (R-Ohio) have developed what we believe to be a unique 
funding solution to the Nation's infrastructure crisis. They have 
proposed legislation that would make money available from the Federal 
Reserve Board to invest in State and local infrastructure.
    Let us describe the Kucinich-LaTourette plan briefly.
    The bill, H.R. 1564, Rebuilding America's Infrastructure Act of 
2001, would fund capital projects undertaken by State and local 
governments. It would use existing funds to create a stable, long-term 
source. This is how it would work:
     The Federal Reserve System holds a large amount of 
Treasury securities in order to add liquidity to the monetary system. 
The Kucinich-LaTourette bill would transfer a portion of those 
securities to a new bank, the Federal Bank for Infrastructure 
Modernization, the FBIM.
     The FBIM would act as a subsidiary bank, using the 
transferred funds to issue loans. Since the mortgages would be 
integrated by the central bank's Federal Open Market Committee (FOMC), 
the Federal Reserve would be better able to maintain economic 
stability. More importantly, no congressional appropriations would be 
necessary.
     The bill would authorize FBIM loans to any State or local 
government, any Native American tribe, or any regional or multistate 
organization to fund certain types of capital infrastructure projects 
dealing with transportation, education, water, or hazardous waste.
     The FBIM would be authorize to offer approximately $50 
billion annually in loans over a period of 10 years. Thus, $500 billion 
would be lent out during the initial authorization of the FBIM.
    The Federal Reserve's FOMC would direct the issuance of the loan 
amounts each year so as to integrate the FBIM's operations with its 
own. The FOMC would be able to vary the $50 billion dispersal if it 
decided that the economy needed a boost.
    This money would have a greater effect on the economy than a 
lowering of interest rates, which does no more than create an incentive 
to invest. Loans from the FBIM would represent actual investments and 
thus would have a direct effect on the economy. The FOMC would need to 
maintain some control over these funds so that it could vary the 
amounts available each year in response to economic conditions.
    By providing zero-cost loans to States to fund infrastructure 
projects, the Kucinich-LaTourette bill would help slash the cost of 
infrastructure projects in half, making them much more affordable.
    States would also be able to make decisions about which projects 
would be eligible for funding under the bill. At least 20 percent of 
the total amount of loans would have to be invested in schools.
    Loan allocations would also be based on population. Additionally, 
the loans would have to be paid back in 10 to 30 years, and each loan 
would bear an administrative fee of 0.25 percent.
    All infrastructure projects financed under the new law would first 
have to be approved by a State certifying officer or, in the case of a 
regional project, by an officer from each of the States involved before 
the FBIM could clear a loan. In the case of Native American tribes, the 
Secretary of the Interior would have to give her approval.
    Finally, it should be noted that the funds made available through 
the FBIM would not be subject to the annual congressional budget and 
appropriations processes. The money would be paid out directly to the 
qualified agencies from the Federal Reserve, thereby having no 
consequences for federal budget surpluses or deficits.
    Mr. Chairman, that concludes our statement. Thank you again for 
your courtesy in hearing our proposals. If the Committee has any 
questions, please contact Michael Charles of our Washington Office at 
(202) 789-2200.
   Statement of Clean Water Action, National Citizens' Environmental 
                              Organization

     DISCUSSION OF INNOVATIVE FINANCING TECHNIQUES FOR WASTEWATER 
     INFRASTRUCTURE IMPROVEMENTS SHOULD PUT PUBLIC HEALTH AND THE 
                           ENVIRONMENT FIRST

    At today's Senate Subcommittee on Fisheries, Wildlife, and Water 
hearing on financing techniques for wastewater infrastructure 
improvements, Clean Water Action supported augmenting the declining 
federal clean and safe water investment and urged Congress to see that 
protection of public health and the environment guide any financing 
decisions.
    Clean Water Action noted that increasing concerns over hazard 
reduction and security, as well as overall attention to protection of 
public health and the environment, should drive decision making, not 
abstract notions of efficiency. ``Funding mechanisms that emphasize 
efficiency as the primary value, not protection of public health and 
the environment, are not a sustainable solution,'' said Clean Water 
Action National Policy Coordinator Paul Schwartz.
    Clean Water Action also asked Congress to reject emphatically the 
notion that financial burdens on public and private wastewater agencies 
justify delay or weakening of regulations intended to protect public 
health and the environment. Clean Water Action also calls on Congress 
to consider funding cost-effective innovative and alternative 
decentralized wastewater systems and pollution preventing green 
infrastructure solutions.
    Discussion of financing solutions should include contributions from 
major sources of wastewater contamination, including large-scale 
industries, corporate agriculture and large users of water resources. 
Taxing inputs such as pesticides and fertilizers should be considered 
as well. ``Taxpayers and consumers should not be footing the whole bill 
for wastewater clean-up when large polluters are creating a good 
portion of the problem,'' said Schwartz.
    Clean Water Action supports a significant increase in the Federal 
Government's contribution to drinking water and wastewater 
infrastructure. In particular, Clean Water Action supports the Water 
Infrastructure Network's call for a $57 billion increase in federal 
funding over a 5-year period. And as the economic stimulus package is 
shaped up, Clean Water Action supports a set aside of $5 billion as an 
initial downpayment that will quickly generate up to 200,000 jobs, 
increase the security of our water infrastructure and put the public's 
health and a clean environment on firmer footing now and for the 
future.
    Clean Water Action notes that the Senate Subcommittee on Fisheries, 
Wildlife, and Water should have scheduled an environmental community 
representative to testify at today's hearing. ``The absence of a voice 
for public health and the environment on this important topic is an 
oversight which we hope is not repeated again,'' said Schwartz.
                               __________
Special Report By Public Citizen's Critical Mass Energy and Environment 
                        Program, Washington, DC

 WATER PRIVATIZATION: A BROKEN PROMISE--CASE HISTORIES FROM THROUGHOUT 
                           THE UNITED STATES

    Rising rates, increased shortages, legal and legislative battles, 
source depletion and crumbling infrastructure have drawn attention to a 
resource that the United States has long taken for granted--water.
    We expect an unending flow of clean water every time we open the 
tap. We also expect this life-giving resource to be available to 
everyone at affordable prices because our health and our survival 
literally depend on it.
    Today, over 80 percent of Americans receive their water from public 
utilities. Many of these public providers, however, find themselves in 
a very difficult position. The Nation's water and wastewater 
infrastructure--with its leaky, decades-old pipes and pumps--is in 
desperate need of repair and upgrading.
    The Water Infrastructure Network estimates that an additional $23 
billion a year would have to be spent to adequately improve the 
infrastructure over a 20-year period.\1\ Without the help of the 
Federal Government, which has not placed water projects high on its 
priority list, cities and counties are in a bind.
    Coming to the rescue of local governments, or so they say, are 
private corporations. Fully aware that elected officials are averse to 
raising taxes, corporate executives are seeking to parlay public 
financing problems into profit opportunities. Corporations are 
promising local government officials the world: They'll buy or operate 
their water or wastewater systems and, in the process, save taxpayer 
money, comply with ever-enhancing environmental standards, and 
eliminate the headaches associated with operating these increasingly 
complex systems.
    Even though the historical record supplies evidence that 
privatization is not a panacea for ailing water and wastewater systems, 
more and more municipalities are beginning to consider handing over 
their systems to the private sector.
    Backers of privatization--which also goes by the names of public/
private partnerships, outsourcing, procurement, and operation and 
maintenance contracts--like to highlight their successes.
    The U.S. Conference of Mayors, for instance, champions 
privatization as an innovative solution to the country's water 
challenges. In a study of 20 local governments that privatized water/
wastewater utilities, the organization's Urban Water Council portrays 
private companies as their saviors.\2\ The study, however, carefully 
steers clear of communities that had negative experiences with 
privatization.
    The Conference of Mayors' glowing assessment of privatization comes 
as no surprise, given that the membership of its Water Development 
Advisory Board includes major private water companies American Water 
Works (the largest in the U.S.), Severn Trent, OMI, United Water, U.S. 
Filter and U.S. Water.\3\
    The Conference of Mayors had good reason to leave out the negative. 
There are more than enough cases that expose the opposite side of water 
privatization.
    No matter what form privatization takes, there is always a risk it 
could backfire.
    A government agency can hire a private company to complement or 
replace its engineering department to perform repairs or new 
construction. San Francisco, for example, last year hired a Bechtel-led 
alliance for consulting services that some argue overlaps with the 
city's management. Public officials can also decide to outsource 
management alone, as did Pittsburgh this past March.
    The contracting out of operations and maintenance (O&M), and often 
management, is becoming a very popular form of privatization. Under 
such a structure, the community retains ownership of water and sewer 
systems and continues to set the prices, but a private company 
effectively operates and manages the system for a fee. Atlanta's 
privatization is an example of such arrangement. Design-Build-Operate 
(DBO) contracts often include the operation component because public 
officials believe that they encourage private companies to construct 
high-quality infrastructure. Under this arrangement, the public 
generally retains ownership of the new facilities.
    Concession is a form of privatization that is more common abroad. 
Under such an arrangement, which usually has a duration of 20-30 years, 
a government agency concedes operations of its water systems to a 
private company for a number of years. The company becomes responsible 
for maintaining the system, performing capital improvements, providing 
customer service and setting rates. As a rule, the company also makes a 
one-time payment to the government.
    This type of privatization is more popular with communities whose 
water systems are in need of capital infusions they cannot afford. 
Concession is not a complete transfer of ownership. Once the concession 
expires, however, transferring responsibilities back to the public 
sector may prove difficult. As in the case of O&M, by the time the 
contract expires, the government would likely have lost both the 
expertise and the employees necessary to run the system.
    Finally, the sale of public water and sewer system to a private 
company is the most extreme form of privatization. This option is much 
more popular among communities that serve small populations, because 
local governments in such cases rarely have the expertise, resources or 
incentive to operate water and sewer systems. Without consolidation, 
public operation can prove rather costly. Private operators could 
reduce these costs through economies of scale. Privatization, however, 
is not the only way save money, connecting to a larger public provider 
can be a sensible alternative.
    Here, then are 13 case histories that should give any public 
official pause before handing over a public resource to a private, for-
profit corporation. Some of these experiences have made local 
governments second-guess the wisdom of privatizing.

             OPERATION AND MAINTENANCE--LEE COUNTY, FLORIDA

    In 1995, ST Environmental Services, a subsidiary of the British 
company Severn Trent, won a contract to operate and maintain the water 
and sewer systems in Lee County, Fla., after underbidding employees by 
some $6.8 million. ST promised to save money by increasing efficiency 
and cutting almost half of the workforce, from 91 people to 52.
    Some county officials questioned whether the company could operate 
the systems with so few employees. Among the doubters was the county's 
public works director, J.W. French. He did not anticipate big problems, 
however, because ``the company would have to perform at the cost it 
bid, even if it has to hire people not specified in the proposal.''\5\
    Privatization proponents celebrated the company's performance: The 
number of employees reduced dramatically, the amount of pipe inspected 
increased, and old gasguzzling vehicles were replaced with newer, more 
fuel-efficient models.\6\
    Five years after start of the contract, however, a variety of 
problems began to surface. Paul Adams, a former ST vice president in 
Lee County, told the county that the company had neglected the systems. 
In a letter to county officials, Adams wrote that ``critical facilities 
were in danger of imminent failure through lack of proper corrective 
maintenance.'' \7\ He also alleged that when a superintendent was given 
a list of more than 500 meters that needed replacement, the company's 
direction was to ``lose the list.'' \8\ ST refuted the accusations.
    ST sued Adams, claiming libel, interference with a business 
relationship and breach of contract. When he left the company, Adams 
agreed not to make comments that are derogatory or may damage the 
company in its business, or its public or private affairs.\9\
    Notwithstanding the public benefit it may have brought, the breach 
of contract may create legal problems for Adams. Libel may be difficult 
to prove, however, because auditors indeed found problems with ST's 
operations, substantiating some of Adams' claims.
    At the time ST was pursuing renewal of its contract, Azurix Inc. 
also submitted a bid. Contesting the county's intent to award the 
contract to ST, Azurix echoed some of Adams' allegations after its own 
investigation.\10\
    In October 2000, Lee County's Internal Audit Department released a 
report on ST's contract performance. The findings included:
     STs flushing program was not as effective and efficient as 
it could have been, resulting in wasted water and lower than required 
chlorine levels, necessary for proper filtering.\11\
     ST did not perform required lime softening at the Olga 
Water Treatment Plant, even though the company was being paid do to the 
work. \12\ At the same time, in its monthly reports to Lee County 
Utilities (LCU), ST claimed that all requirements that involved lime 
softening were being met. According to LCU's former director, lime 
softening is ``effective in removing heavy metals, radionuclides, 
dissolved organics, viruses and coliform.'' \13\
     The wastewater collection system was in poor to fair 
condition, and the maintenance level was inadequate to sustain the 
facilities in an acceptable operating condition.\14\
     ST was not operating one of the wastewater treatment 
plants according to Florida Department of Environmental Protection 
permit requirements, as required by the contract, for at least part of 
February 2000 and possibly several months prior.\15\
     Several operational errors occurred at a wastewater 
treatment plant, including spills and contamination of re-use water in 
February and March 2000.\16\
     Preventive maintenance at a wastewater treatment plant was 
not always performed timely or to minimum manufacturer recommended 
standards, as required by the contract.\17\
     ST failed to perform $108,310 worth of maintenance work on 
water meters.\18\
     A large number of monthly customer billings were delayed 
from April to July 2000, resulting in $596,614 not being billed in 
timely manner. The number of billing employees and meter readers may 
not have been sufficient for timely billing.\19\
     The Lee County Department of Natural Resources found 
concerns with the handling of hazardous materials in its assessments in 
1998 and 2000, with conditions in the latter year being worse.\20\
    In response to the problems with ST and to the battle between ST 
and Azurix, the county's Board of Commissioners voted in October 2000 
to return the water and sewer to public control.\21\
    The following spring, county utilities director Rick Diaz sent a 
memo to the county's new public works director, Jim Lavender, outlining 
STs failure to properly maintain the infrastructure as required by the 
contract. The memo said it would cost more than $8 million to bring the 
neglected infrastructure up to par. According to Diaz, the contract 
required ST to clean more than 2.3 million linear feet of sewer lines 
over 5 years, but the company reported cleaning less than 1 million 
feet. The contract also obligated the company to make 23,000 manhole 
inspections, Diaz said, however less than 10,000 were actually 
completed.\22\
    Lee County and ST are currently in postcontract discussions 
regarding the performance issues. Assistant county attorney David Owen 
anticipates that the two parties will evaluate their legal positions 
and options if the negotiations result in an impasse.\23\

                            ATLANTA, GEORGIA

    In 1998, the city of Atlanta awarded United Water, a subsidiary of 
the French water giant Suez Lyonnaise des Eaux, a contract to operate 
the city's water system. The company promised cost savings in exchange 
for a $21.4 million annual fee. Three years into the contract, the 
question of whether residents are benefiting from it continues to be 
raised.
    In 2000, some Atlanta residents began to find debris in their 
water. Additionally, the water assumed brown tones, which usually 
signals high levels of iron oxide--rust. The company, however, did not 
initially acknowledge there was a problem.\24\ Four months later, 
residents were still experiencing the same problems.\25\
    Moreover, cases of dry or inoperative fire hydrants have been 
reported. Again, United Water did not promptly address the problem, 
even though inoperative fire hydrants could be a matter of life and 
death. And, in response to residents' inquiries, the company has said 
that testing the fire hydrants after they were repaired was the city's 
obligation--a claim city has rejected, holding that the company should 
ensure that fire hydrants are in working order after repair or 
replacement.\26\
    Complaints of delays and slow service have also been registered. 
For example, when the Breakwater homeowners association paid $2,700 in 
March 1999 to have three meters installed, United Water told the group 
that the request would take 10 weeks to fulfill. Six months later the 
company installed the first meter. According to the contract, the 
company has 1 day to respond to leaks and 15 days to install a 
meter.\27\ One reason for delays may be understaffing. Today, United 
Water has just 327 employees, down from 731 in 1997, a year before 
privatization.\28\
    The city is currently conducting a comprehensive review and audit 
of the company's performance.\29\

                              NEW ORLEANS

    The city of New Orleans has contracted out its sewage treatment 
operations and maintenance (O&M) since 1992. The original contractor, 
Professional Services Group (PSG), transferred its O&M operations to 
U.S. Filter, which was in turn acquired by the French conglomerate 
Vivendi.
    This past July 26, an electrical fire interrupted operations at the 
East Bank Sewage Treatment Plant, which serves about 440,000 people, 
for two and a half hours.\30\ Raw sewage backed up, covering the 
surrounding land and making its way through some of the plant's 
offices. The plant's operators diverted raw sewage into the Mississippi 
River for 2 hours before the plant was returned to operation.
    Joe Puglia, a spokesperson for the city's Sewerage and Water Board 
(S&WB), claimed it was not possible to estimate the amount of sewage 
diverted into the river.\31\ Because sewage systems generally have flow 
meters, and because flow estimates are usually easy to calculate, this 
claim is open to debate. Interestingly, Puglia is an employee of a 
private firm, the Public Relations Group, which carries out a bulk of 
S&WB's public relations work.\32\
    According to City Council member Jim Singleton, S&WB officials told 
him that U.S. Filter was aware of problems with equipment for several 
weeks and the dangers they could create, but failed to address 
them.\33\
    The fire came only a few months after the sewage plant's two broken 
incinerators resulted in the trucking of excess untreated sewage sludge 
out of the plant through the neighboring Arabi Park and Carolyn Park 
communities of St. Bernard Parish. Residents there were exposed to the 
putrid odor for more than 2 months.\34\
    Ironically, the fire took place just a day after the S&WB voted to 
invite bids to privatize the city's water and wastewater treatment 
systems, despite apprehensive citizens and the labor community. U.S. 
Filter is among several companies that have expressed interest in 
running the city's water.

                        JERSEY CITY, NEW JERSEY

    In 1996, the city contracted United Water Resources to operate and 
maintain its water system. Five years later, the city no longer 
expresses as much enthusiasm about the arrangement. According to 
Kathleen Deely of the Municipal Utility Authority (MUA), the city has 
learned that the private operation is ``no worse, no better.'' United 
Water did improve bill collection, but overall the quality of water 
service did not change.\35\
    Though still set by the MUA, rates are greatly influenced by 
operation fees paid to United Water. According to a senior MUA 
official, a lack of financial transparency prevents the city from 
evaluating whether the price commanded by the company is reasonable. 
The company is not required to open its books for a municipal review. 
Instead, it just sends a bill. The contract does not prevent the 
company from overcharging because no review process is built in.\36\
    According to the same MUA official, United Water's customer service 
is in need of improvement. Customer service representatives often 
direct citizen complaints to the MUA, even though in many cases the 
company is responsible for the problems triggering these complaints, 
and some of the problems are preventable. And, United Water contracts 
out meter reading to another company. A combination of broken meters 
and underpaid readers often leads to erroneous billing.\37\
    The MUA official does not believe that the ``public/private 
partnership'' is a bona fide partnership. The company's goal is to make 
a profit, regardless of the consequences. It has little concern, the 
officials said, for public good and is resistant to doing work unless 
it is compensated for it.\38\

    PRIVATE OWNERSHIP AND THE MOVE TO DEPRIVATIZE--CHARLESTON, WEST 
                                VIRGINIA

    In the Year 2000 Water and Wastewater Rate Survey of 194 U.S. 
cities and counties performed by a leading consulting firm, Raftelis 
Financial Consulting, Charleston stood out due to its exceptionally 
high rates.
    Monthly water charges for an average customer using 7,480 gallons 
of water were $46.21, some $31.84--or 221 percent higher than the 
$14.37 average for cities of comparable size. This amount was augmented 
by an additional $12.69 monthly fee--once again, the highest in the 
category. Finally, the affordability index showed that the cost.of 
7,480 gallons of water amounted to 1.65 percent of the median income in 
Charleston. The city was the only one in its category with an index of 
more than 1 percent. The cost of water as a percentage of median income 
was more than 3.5 times higher than the amount for like-sized 
cities.\39\
    Charleston residents get their water from West Virginia-American, a 
subsidiary of American Water Works Co., the largest private water 
company in the U.S. According to the West Virginia Public Service 
Commission, average bills increased by 66.5 percent for the company's 
customers over the last decade.\40\ West Virginia-American has 
increased its rates 15 times during that period.\41\
    Roy Ferrell, the company's rates and revenues director, attributes 
the skyrocketing rates to West Virginia's mountainous landscape that 
makes it difficult to lay pipe and new construction. According to 
Ferrell, the company has consolidated its plants, reducing the number 
from 26 to nine. Eight of the remaining plants were either refurbished 
or replaced. To provide remote locales with access to water, extensions 
had to be built. The company claims to have spent $240 million on 
construction.\42\
     Billy Jack Gregg, director of the Consumer Advocate Division in 
West Virginia's Public Service Commission, sees the picture a little 
differently. Gregg agrees that infrastructure construction is very 
costly, but he believes West Virginia-American is forcing existing 
customers to finance its own expansion. The company has extended its 
water service to areas where operations are not cost-effective. The 
investment required for such areas can be twice as high. Single tariff 
pricing, however, shifts costs to present customers. New service areas 
not only receive access to new infrastructure built with existing 
customers' money, but they also receive service at prices lower than 
real costs, thanks to higher rates paid by existing urban customers.
    Earlier this year, West Virginia-American filed for yet another 
rate increase, which would translate into an additional $1 million in 
annual revenues. Gregg says the company is seeking to recover $750,000 
it spent trying to acquire the water system in Parkersburg, West 
Virginia.\43\
    Ferrell pledged that the company would not request another rate 
hike for the next 20 years, because after the current request is 
approved all major construction will be finished.\44\ Given that 
American Water Works depends on rate increases for higher profits and 
dividends, it remains to be seen whether this is a promise the company 
can keep.
    In extending water lines to remote regions, West Virginia-American 
is mainly driven not by a sense of civic responsibility, but by the 
simple desire for higher profits. Single tariff pricing allows the 
company to expand to non-profitable areas, knowing it can easily 
increase rates statewide to maintain existing profit margins.
    The Raftelis survey shows that the median sewer charges for the 
cities of comparable size are 20 percent higher than the water rates . 
However, in Charleston the situation is reversed. The sewer charges 
don't amount to even a half of the water rates level.\45\ The solution 
to this paradox may lie in the fact that the sewer service is provided 
by the city, and not by a private company.

                         CHATTANOOGA, TENNESSEE

    In 1998, the city of Chattanooga moved to buy out Tennessee-
American, also a subsidiary of American Water Works, which has owned 
the utility for 130 years\46\ Chattanooga's Mayor Jon Kinsley, who 
spearheaded the takeover effort, projected that public ownership would 
result in a 25 percent rate reduction and some $100 million overall 
savings for customers over 10 years.\47\
    Kinsley was also responding to the company's exorbitant fire 
hydrant fees and to the possible export of city water to Atlanta 
without public approval. Tennessee-American Vice President Richard 
Sullivan admitted discussing supplying water to Atlanta with officials 
there.\48\
    Unwilling to sell, the company launched an extensive public 
relations and legal fight as the city filed a condemnation suit. In its 
quarterly earnings report, American Water Works acknowledged spending 
$6 million on costs incurred by the subsidiaries fighting takeover 
attempts in Chattanooga and Peoria, Illinois\49\ According to the 
company's officials, most of these pre-tax costs were in 
Chattanooga.\50\ Tennessee-American hired Burson Marsteller, a New 
York-based public relations firm, and Baker Donelson, Tennessee's 
largest law firm, to fight the takeover attempt.\51\
    Among other firms used by the company in the public relations 
offensive were Wirth Worldwide, which handled opinion polling, National 
Media, which handled advertisements, Moriah Group, which provided 
political insight, and a temporary agency, Special Counsel, which 
performed background checks on Mayor Kinsley and Ken Hays, his former 
chief of staff.\52\
    The public relations effort succeeded. In October 1999, the city 
reached a settlement with Tennessee-American under which the company 
agreed to lower its fire hydrant fees from $301.50 to $50 per hydrant, 
or from about $1.2 million to $200,000 a year.\53\ Such a significant 
drop raises the question whether the city was paying reasonable fees in 
the first place. The agreement also requires Tennessee-American to ask 
permission from local citizens before exporting water.\54\

             DUVAL, NASSAU AND ST. JOHNS COUNTIES, FLORIDA

    This past August 1, United Water Resources (UWR) accepted a $219 
million offer from the Jacksonville Electric Authority to buy out the 
company's Florida holdings in Duval, Nassau and St. Johns counties. JEA 
is a municipal authority serving residents of Jacksonville and 
surrounding areas. JEA's operations are expected to lower average water 
and sewer bills of former UWR customers by 25 percent.\55\
    The rate cut will be welcomed by many county residents. In 1997, 
when UWR was providing water and sewer services for the three counties, 
residents saw their rates increase by an average of $9.44 per month. 
Many residents expressed indignation with the rate hike. Richard H. 
Harlan, Jr., who was among the affected ratepayers quoted in the local 
media, called the company ``the biggest bunch of highway robbers.''\56\
    In 1998, the company requested yet another rate increase, which the 
Florida Public Service Commission granted the following year. Water 
rates then increased by 12.5 percent and sewage rates by 5.4 percent. 
When reviewing the rate hike request, the PSC found that United Water 
overestimated its expenses by $1.05 million.\57\

                    HINGHAM AND HULL, MASSACHUSETTS

    Massachusetts-American, another American Water Works subsidiary, 
owns the water system in the communities of Hingham and Hull. In 1996 
the company doubled water rates\58\ in the face of many objections. 
Massachusetts-American justified the hike by the need to build a new 
water treatment facility. Meanwhile, American Water Works profits grew 
by 10.4 percent that year.\59\
    This year yet another rate increase was approved for the company, 
which relied on claims of higher infrastructure spending and increased 
operation costs.
    When approached with a request for rate schedules in effect before 
the 1996 increase and those currently in effect, Connie Chapman of 
Massachusetts-American provided information on rates immediately after 
the increase, but not those preceding it. When asked again, she claimed 
that the 1995 rate schedules would be difficult to locate, even though 
locating the rate information just 1 year later apparently did not pose 
a problem.\60\
    According to James Lampke, Hull's town attorney, the two 
communities have some of the State's highest water prices.\61\ Lampke 
said the city understands that rates have been influenced by 
construction of the new plant. He believes, however, that the company 
chose a process that augmented the costs by spending millions of 
dollars that could have been avoided.
    For example, the company spent excessively to obtain approval for a 
site that was an unlikely location for the plant. According to Lampke, 
the State Department of Telecommunication and Energy, which regulates 
private water providers, has agreed with the city that the plant could 
have been built with less money.\62\

                          HUBER HEIGHTS, OHIO

    In 1993, Florida-based Avatar elected to sell its water holdings, 
including Ohio Suburban Water, a small outfit that provided water for 
40,000 customers in Huber Heights and parts of the Mad River Township. 
American Water Works expressed its desire to buy the utility.
    The city voiced concerns about the New Jersey-based water giant 
controlling its water. It feared the company would raise rates and 
extend service to areas beyond the city limits without annexation, thus 
impairing the city's ability to grow.\63\ Water services are an 
important incentive that municipalities use to expand. As a rule, 
outlying areas have to become part of a city before obtaining access to 
municipal water.
    The city attempted to acquire the water system from Avatar but was 
outbid by American Water Works. The Ohio Public Utilities Commission 
simultaneously approved the transfer and denied the city a hearing to 
plead its case.\64\
    The city's fears soon materialized. In 1993 the company increased 
its rates by 30 percent.\65\ At the same time the company moved to 
contract with Industrial Water to deliver up to 2 million gallons of 
Huber Heights' water a day to the Wiley Industrial Park, located 
outside the city.
    In an effort to prevent further rate hikes and to reclaim control 
of economic development, the city initiated proceedings to take over 
the system through the power of eminent domain.
    Once again, American Water Works unleashed a public relations 
campaign to prevent the takeover and collected enough signatures to put 
the issue on the ballot. The effort collapsed when city residents voted 
overwhelmingly in support of the city's efforts to acquire the 
system.\66\
    While the city continued to fight the legal battle to reclaim 
control of the water system, the company continued its efforts to 
export Huber Heights water outside the city. The city protested, 
arguing that water pipes should be extended only in the event of 
annexation.
    However, in pursuit of additional profits, the company disregarded 
the city's pleas and began piping Huber Heights water to the industrial 
park. Because the park used only 10,000 gallons a day, county officials 
wanted to make excess water available to the remainder of Bethel 
Township.\67\
    In March 1995 the city avoided a lengthy legal battle by 
negotiating an out-of-court settlement with the company and proceeded 
with the buyback. Even after the buyback, however, American Water Works 
continued to cause problems. Industrial Water, through which water was 
channeled to the industrial park, had subsequently sold its contract to 
neighboring Miami County, which claimed rights to two million gallons 
of water per day. Under the settlement, the city would continue piping 
water to the park ``until Ohio Suburban's obligations, if any, are 61 
resolved.'' \68\
    Because of American Water Works questionable actions, the city is 
now under a legal obligation to act against its own interests, due to 
the fact that Bethel Township is unfairly reaping benefits of the water 
infrastructure funded by Huber Heights' ratepayers and taxpayers, while 
avoiding paying city taxes. The city continues to argue that the 
township must be annexed to Huber Heights in order to have access to 
its water. The conflict remains unresolved.

                            PEKIN, ILLINOIS

    In 1982, Illinois-American, another subsidiary of American Water 
Works, acquired Pekin's water system from a local private owner. In the 
18 years that followed, rates increased by 204 percent. At the same 
time the company failed to keep infrastructure up to date.
    According to Pekin City Manager Dick Hierstein, pressure problems 
have plagued several parts of the city, especially those experiencing 
commercial growth. However, the company hesitated to construct the 
water tower it promised to build, while failing to upgrade undersized 
mains.\69\ The company's behavior negatively impacted the city's 
economic growth and added to its expenses.\70\
    In response to soaring rates and questionable quality of service, 
the city chose to consider acquiring the local water company from 
Illinois-American through its eminent domain powers. A report by the 
Water Study Committee, commissioned to evaluate feasibility of the 
acquisition, made a strong case for purchasing the water system. The 
committee found that the company's service record left much to be 
desired.
    For example, there was an instance of street flooding for over 24 
hours before any action was taken. In another case, water service to 
two schools was interrupted for a week. Company workers taped a message 
to school doors just before the students arrived for classes, instead 
of notifying the school officials in advance.\71\
    Citizens For Locally Owned Water (FLOW), a group that advocated 
public ownership of the water system, projected that with the present 
rate of infrastructure upgrades, it would take Illinois-American some 
268 years to replace all city mains. Given that some water mains were 
over 75 years old, FLOW found this rate of improvement unacceptable. 
The group also pointed out that in 1990 a local business was destroyed 
by fire after firefighters were confronted with broken fire hydrants 
and low water pressure.\72\ Hierstein also argued that the city could 
obtain financing for infrastructure improvements at lower interest 
rates than the company.\73\
    To remedy the problems, some city officials, including the city 
manager, began to advocate a buyout.
    Yet another elaborate public relations campaign by American Water 
Works sought to convince residents that the city did not have enough 
expertise to run the system properly. PR firms hired by Illinois-
American conducted surveying and placed television, newspaper and radio 
ads to fight the takeover efforts.\74\ Even the company's president was 
invited pay a visit in an effort to convince residents to support 
private ownership of the water system.\75\ The city estimates the 
company's public relations offensive cost about $1 million. Meanwhile, 
the city spent $30,000 on public outreach.\76\
    Illinois-American then hired a firm to collect enough signatures to 
put the issue on the ballot. The company narrowly won the election, 54 
to 46 percent,\77\ but the referendum was advisory, not binding.
    As a result of the close outcome and the battle preceding the 
referendum, Illinois-American did become more responsive to the public. 
The buyout question remains on hold, but Hierstein believes it will 
inevitably be raised again because of the stark differences in 
priorities of a ``profit-driven national company versus a service-
oriented and costconscious local government.'' Having been the city 
manager in communities with both private and public providers, 
Hierstein is convinced that citizens and the government are served 
``far better'' by publicly-owned systems.\78\

                            PEORIA, ILLINOIS

    In October 1998, the Peoria City Council voted to buy back the 
city's water system from American Water Works subsidiary Illinois-
American Water. The city believed that public ownership would stabilize 
rates and reduce operating costs.\79\
    According to Terry Kohlbuss, coordinator of the takeover effort, 
Peoria's rates at the time were among the highest in the rate survey 
prepared by Raftelis Financial Consulting.\80\ (The company has since 
stopped providing Peoria information to Raftelis, and in the 2000 
survey the city is not listed).
    Takeover proponents estimated that public ownership would result in 
a 31 percent rate reduction over the first 10 years.\81\
    The city also argued that the buyback would place the much-needed 
control over economic development back into the city's hands. City 
officials have characterized the company as being less than cooperative 
in economic development initiatives. In fact, a group of business 
leaders offered to lend the city up to $1 million for the takeover 
attempt.\82\
    Moreover, a financial analysis prepared by Raftelis showed the city 
would have $6 million a year in excess revenues if it owned the company 
itself.\83\
    City officials argued that the 1889 franchise agreement allowed 
Peoria to buy local assets of Illinois-American. The company disagreed 
and challenged the city's position in court.\84\ Soon thereafter 
Illinois-American, requested an 8.2 percent rate increase,\85\ as just 
3 years after an 8.8 percent increase,\86\
    Earlier this year, the U.S. Environmental Protection Agency fined 
Illinois-American $168,488 for failing to promptly report a release of 
chlorine vapors in 1998. The company waited 20 hours before reporting 
it. According to EPA spokesperson James Entzminger, the notification 
should have been made within 15 minutes of the spill. A Peoria 
firefighter was hospitalized after breathing the fumes.\87\
    The buyout effort is now on hold pending the outcome of the legal 
battle.\88\

                      WASHINGTON COURT HOUSE, OHIO

    In 1991, Washington Court House, decided to take over its water 
system from Ohio Water Service Co. The city believed it could operate 
the utility more efficiently and at a lower cost.
    As usually has been the case, the company mounted legal and public 
relations campaign, collecting enough signatures to put the issue on 
the ballot. Residents voted to retake control of the system and, after 
a 2-year legal battle, the city purchased the water system for $10 
million.\89\
    City operations proved to be a true success story. One of the 
conditions of the bond issued by the city to raise money for the 
purchase required the city to collect approximately 20 percent more in 
revenues than it spent to operate the system. Yet just 2 years 
following the takeover, the city was collecting 60 percent more and 
enjoying $500,000 annual surpluses. Not only did the city live up to 
its promises not to raise rates in the 3 years following the takeover, 
it was actually able to issue rebates to local ratepayers.\90\

          CONSULTING AND MANAGEMENT--SAN FRANCISCO, CALIFORNIA

    San Francisco is among a large number of U.S. cities whose water 
systems require intensive repairs and upgrades. The century-old Hetch 
Hetchy water system, which provides water to 2.3 million people in San 
Francisco, San Mateo, Santa Clara and Alameda counties, needs as much 
as $8 billion worth of seismic upgrades.\91\
    The city hired a private consulting firm as it embarked on this 
ambitious project. Last year, after much controversy, the city awarded 
a $45 million contract to an alliance led by Bechtel Corporation, the 
world's largest engineering firm and an emerging player in private 
water market. The city's Public Utilities Commission (PUC) claimed that 
hiring Bechtel would produce as much as $45 million in savings over 4 
years and allow access to the necessary expertise.
    Many spoke out against the contract, including city budget analyst 
Harvey Rose, who disagreed with the claim of prospective savings 
because no supporting evidence had been provided.\92\ Supervisor Tom 
Ammiano questioned the alliance's ability to produce cost-savings and 
suggested that the contract would eventually lead to further 
privatization.\93\ Nevertheless, the city Board of Supervisors approved 
the deal.
    Almost a year into the contract, many have voiced concern about its 
value. According to David Novogrodsky, the executive director of the 
Professional and Technical Engineers Local 21, Bechtel has so far done 
very little other than charge ``outrageous'' fees. Bechtel's workers do 
not work closely with the city engineers. Additionally, there are a few 
``higher-ups'' who go beyond their contractual role as consultants and 
often attempt to manage PUC staffers. And, there are many Bechtel 
support staff with no knowledge or experience unique to Bechtel.
    Moreover, said Novogrodsky, most staff members are not qualified, 
and it is not unusual to see Bechtel employees sitting down studying 
for their engineering exams, instead of performing actual work.\94\
    According to the San Francisco Bay Guardian, many city workers feel 
Bechtel is not aiding them in their work, and is actually slowing 
progress because the company has to approve certain in-house jobs. City 
workers also feel that instead of acquiring valuable skills from 
Bechtel's engineers, as was originally intended, they have to explain 
even basic operations to them. Finally, staffers feel the city is being 
billed for work already performed by city employees.\95\
    The city's first semiannual audit found the Bechtel consortium's 
performance to be satisfactory, although many tasks were not evaluated 
because they were in the startup phase.\96\ The auditor did find that 
of the $75,943 in reimbursement requests submitted by the consortium, 
$2,766 was not identified as allowable under the contract. These costs 
included refreshments and lunches, telephone charges, and relocation 
and travel expenses.\97\
    The auditor also found that the consortium did not inform the PUC 
about changes in staff work locations, which is essential in order for 
the city to determine whether the consortium is charging correct 
rates.\98\
    Additionally, a Bay Guardian investigation documented many 
instances of wasteful spending. Bechtel, for instance, was paid nearly 
$500,000 to restore and change the format of data already prepared by 
the city. Most of Bechtel's work, the newspaper said, was either 
``unnecessary, duplicated work that city staffers had already done, or 
wasn't specialized enough to require a highly paid outside consultant'' 
\99\

                               CONCLUSION

    Not every private company provides poor service, and not every 
operation and maintenance contract is a failure. In their marketing 
efforts, however, companies exploit their successes while carefully 
concealing their failures. And, analyses conducted by financial 
consultants are often biased in favor of privatization.
    As a result, the debate over the merits of transferring operations 
or ownership of public utilities to the private sector tends to be 
biased. The case histories in this report are intended to bring much 
needed balance to the debate, while helping government officials better 
assess the risks involved.
    Not every public utility has a satisfactory performance record. 
However, the solution lies in more government accountability and more 
investment in aging systems not in signing them away and admitting 
defeat. The risks that privatization brings are simply too great to be 
dismissed.

                                 Notes
    1. Cited in Water Infrastructure Network ``Water Infrastructure 
Now: Recommendations for clean and safe water in the 21st century.'' 
Feb 2001. p. 1.
    2. Ibid. p. 5.
    3. See ``Case studies of selected cities.'' The United States 
Conference of Mayors. Urban Water Council.'' Feb 2000, http://
www.usmayors.org/USCM/urbanwater/case--studies/.
    4. Ibid. Appendix B.
    5. Winton, Pete. ``Protests delay vote on private operation of Lee 
utilities.'' News-Press (Ft. Myers, FL), 14 Jan 1995.
    6. Matrullo, Tom. ``Charlotte Utilities: A Raging bull. County 
tries to tame utilities.'' Sarasota Herald-Tribune, 3 Aug 1997.
    7. As cited in Whitehead, Charlie. ``Former Lee utilities firm 
files lawsuit against ex-vice president.'' Bonita Daily News, 9 May 
2001.
    8. Whitehead, Charlie. ``Former Lee utilities firm files lawsuit 
against ex-vice president.'' Bonita Daily News, 9 May 2001.
    9. Ibid.
    10. Whitehead, Charlie. ``Audit reveals problems with way Lee 
wastewater treatment plants run.'' Bonita Daily News, 8 Jul 2000.
    11. Lee County Utilities, ST Contract Performance Audit Report, 
Internal Audit Department, Lee County Clerk of Courts, Lee County, Oct 
2000. p. 5.
    12. Ibid. p. 5.
    13. Ibid. p. 6.
    14. Ibid. p. 8.
    15. Ibid. p. 9.
    16. Ibid. p. 10.
    17. Ibid. p. 10.
    18. Ibid. p. 12.
    19. Ibid. p. 13.
    20. Ibid. p. 15.
    21. Lee County Board of Commissioners meeting minutes for 17 Oct 
2000. Available at: www.lee-county.com/minutes/101700.htm.
    22. Whitehead, Charlie. ``Utilities boss: $8M in work not done.'' 
Bonita Daily News, 5 May 2001.
    23. Personal communication with David Owen, assistant county 
attorney, Lee County. 27 Sep 2000.
    24. Soto, Lucy. ``Faucets spewing fears, confusion. Watered-down 
solutions: Virginia-Highland residents get lots of answers about 
problems with their drinking water. But which should they believe.'' 
The Atlanta Constitution, 1 May 2000.
    25. ``Work will start soon on intown water line.'' The Atlanta 
Journal, 4 Sep 2000.
    26. Campbell, Colin. ``Too many hydrants don't go with the flow.'' 
The Atlanta Journal, 30 Mar 2000.
    27. Hardie, Ann. ``City, firm up to their necks in complaints. 
Spotlight on a flood of excuses: Getting a problem with your water 
service solved has proven as difficult as figuring out who is to 
blame.'' The Atlanta Journal, 6 Sep 2000.
    28. Personal communication with Cherry Yeboah, United Water Human 
Resources Department, phone, 20 Aug 2001.
    29. E-mail from Melinda Langston, Atlanta Department of Water, 17 
Sep 2001.
    30. ``Fire temporarily closes sewage plant'' The Times-Picayune 
(New Orleans), 27 Jul 2001.
    31. Finch, Susan. ``Untreated waste diverted to river.'' The Times-
Picayune (New Orleans), 27 Jul 2001.
    32. Personal communication with the Office of Intergovernmental 
Relations, Sewer & Water Board, phone, 13 Aug 2001.
    33. Finch, Susan. ``Untreated waste diverted to river.'' The Times-
Picayune (New Orleans), 27 Jul 2001.
    34. ``Sewer plant blamed for Arabi odors. Broken incinerators to be 
repaired soon.'' The Times-Picayune, 30 May 2001.
    35. Personal communication with Kathleen Deely, Municipal Utility 
Authority, Jersey City, phone, 26 Jul 2001.
    36. Personal communication with a senior official of Municipal 
Utility Authority, Jersey City, NJ, phone, 14 Aug 2001.
    37. Ibid.
    38. Ibid.
    39. Raftelis Financial Consulting. ``Year 2000 Water and Wastewater 
Rate Survey.'' Raftelis Financial Consulting: Charlotte, 2000.
    40. Consumer Advocate Division of Public Service Commission. 
Monthly residential utility rates 1991-2001, Charleston, chart.
    41. West Virginia-American Water Company. Historical Rate 
Increases, chart.
    42. Personal communication with Roy Ferrel, Director of Rates and 
Revenues, West Virginia-American Water, phone, 9 Aug 2001.
    43. Personal communication with Billy Jack Gregg, Director of 
Consumer Advocate Division, West Virginia Public Service Commission, 
phone, 08 Aug 2001.
    44. Personal communication with Roy Ferrel, West Virginia-American 
Water, phone, 9 Aug 2001.
    45. Raftelis Financial Consulting. ``Year 2000 Water and Wastewater 
Rate Survey.'' Raftelis Financial Consulting: Charlotte, 2000.
    46. Sullivan, Drew. ``Chattanooga plans to regain control of water 
department.'' The Tennessean, 2 Dec. 1998.
    47. Gilbert, Kathy. ``Mayor releases figures on water takeover.'' 
The Times & Free Press, 22 Aug 1999.
    48. Sohn, Pam and John Commins. ``Panels pass bill to prevent 
diversion of Tennessee River water outside basin.'' The Times & Free 
Press, 6 Apr 2000.
    49. Securities and Exchange Commission filings. Form 10-Q, third 
quarter. p. 14.
    50. Flessner, Dave. ``Company spent $5 million in 2 water fights.'' 
The Times & Free Press, 6 Nov 1999.
    51. Flessner, Dave. ``Company spent $5 million in 2 water fights.'' 
The Times & Free Press, 6 Nov 1999.
    52. Flessner, Dave. ``Winning water company ads hailed.'' The Times 
& Free Press, 22 Jul 2000.
    53. Gilbert, Kathy and Judy Walton. ``Council OKs water 
settlement'' The Times & Free Press, 27 Oct. 1999.
    54. Gilbert, Kathy and Judy Walton. ``Council OKs water 
settlement'' The Times & Free Press, 27 Oct. 1999.
    55. Jacksonville Electric Authority. ``JEA and United Water reach 
innovative agreement.'' JEA News. Available online: http://www.jea.com/
about/news/press/unitedwateragreement.asp, 20 Aug 2001.
    56. Magee, Keri. ``Utility's rate hike enrages residents.'' The 
Florida Times-Union, 10 May 1997.
    57. Chapin, Veronica. ``Water bill mistakes resolved. Agreement 
reached with United Water.'' The Florida Times-Union, 12 May 1999.
    58. Personal communication with Connie Chapman, Customer Service 
Supervisor, Massachusetts-American Water, phone, 6 Aug 2001.
    59. Based on the company's Securities and Exchange Commission 
filings.
    60. Personal communication with Connie Chapman, Customer Service 
Supervisor, Massachusetts-American Water, phone, 6 Aug 2001.
    61. Personal communication with James Lampke, Hull, town counsel, 
10 Aug 2001.
    62. Ibid., 13 Aug 2001.
    63. Denger, Laurie. ``Wrestling control of water. Heights has 
battle plan.'' Dayton Daily News, 15 Dec 1993.
    64. Denger, Laurie. ``Water issue nears boil in Heights. City 
develops strategy for Jan. 11 election.'' Dayton Daily News, 3 Nov 
1993.
    65. Denger, Laurie. ``Wrestling control of water. Heights has 
battle plan.'' Dayton Daily News, 15 Dec 1993.
    66. Denger, Laurie. ``Win begins water war in Heights.'' Dayton 
Daily News, 12 Jan 1994.
    67. Bebbington, Jim. ``Lines pipe water to businesses. Miami 
industrial park seals deal with supplier.'' Dayton Daily News, 16 Nov 
1994.
    68. Babcock, Jim. ``Lawsuit--water fight begins in Miami County.'' 
Dayton Daily News, 3 Nov 1997.
    69. E-mail from the City Manager Dick Hierstein, 23 Jul 2001.
    70. ``City ownership of Pekin's water system makes good sense. 
Here's why.'' Citizens For Locally-Owned Water, 2000.
    71. Water Study Committee Report, city of Pekin, IL, 15 July 1999.
    72. City ownership of Pekin's water system makes good sense. Here's 
why.'' Citizens For Locally-Owned Water, 2000.
    73. Szoke, Anita. ``Pekin voters reject city buyout of water 
company franchise.'' Peoria Journal Star, 8 Nov 2000.
    74. E-mail from the City Manager Dick Hierstein, 23 Jul 2001.
    75. Szoke, Anita. ``Water company against Pekin taking over. 
Illinois-American president says private ownership is in customers' 
best interest.'' Peoria Journal Star, 27 May 1998.
    76. E-mail from the city manager Dick Hierstein, 23 Jul 2001.
    77. Szoke, Anita. ``Pekin voters reject city buyout of water 
company franchise.'' Peoria Journal Star, 8 Nov 2000.
    78. E-mail from the city manager Dick Hierstein, 24 Jul 2001.
    79. Ramsey, Mike. ``Pekin vote won't deter Bud Grieves.'' Peoria 
Star Journal, 9 Nov 2000.
    80. Personal communication with Terry Kohlbuss, phone, 2 Aug 2001.
    81. Flessner, Dave. ``Utility spent $5 million to win water war.'' 
The Times & Free Press, 4 Mar 2000.
    82. Ramsey, Mike. ``Illinois-American cuts jobs while bidding to 
expand base. Buying the Water.'' Peoria Journal Star, 24 Oct 1999.
    83. Personal communication with Terry Kohlbuss, phone, 2 Aug 2001.
    84. Ramsey, Mike. ``Illinois-American cuts jobs while bidding to 
expand base. Buying the water.'' Peoria Journal Star, 24 Oct 1999.
    85. Howard, Clare. ``Proposed increase renews interest in buyout'' 
Peoria Journal Star, 18 Apr 2000.
    86. Ramsey, Mike. ``Illinois-American's rate request gives mayor a 
big gun.'' Peoria Journal Star, 20 Apr 2000.
    87. Hopkins, Elaine. ``EPA: Firm late in reporting leak.'' Peoria 
Journal Star, 24 Aug 2001.
    88. Personal communication with Terry Kohlbuss, phone, 2 Aug 2001.
    89. Baird, Don. ``City-owned water system pays off in first 
rebates.'' The Columbus Dispatch, 10 Sep 1995.
    90. Ibid.
    91. Epstein, Edward. ``Price estimate doubles for fixing Hetch 
Hetchy. S.F. mayor seeks ways to cover $8 billion in repairs.'' The San 
Francisco Chronicle, 15 November 2000.
    92. Wilson, Yurni. ``Analyst for S.F. criticizes water contract 
award. PUC can't prove that moneys saved.'' The San Francisco 
Chronicle, 15 Jul 2000.
    93. Epstein, Edward. ``S.F. Board Oks Hetch Hetchy pact. Bechtel-
led consortium to renovate water system.'' The San Francisco Chronicle. 
29 Aug 2000.
    94. David Novogrodsky, Professional and Technical Engineers Local 
21, Phone conversation, 23 Jul 2001.
    95. Blackwell, Savannah. ``Blocking Bechtel.'' The San Francisco 
Bay Guardian, 20 Jun 2001.
    96 Audit of San Francisco Water Alliance contract, Controller's 
Office, City and County of San Francisco, July 2001, p. 8.
    97. Ibid. p. 7.
    98. Ibid. p. 8.
    99. Blackwell, Savannah. ``Bechtel's $45 million screw job.'' San 
Francisco Bay Guardian, 12 Sep 2001.
  

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