Water Infrastructure
Information on Financing, Capital Planning, and Privatization Gao ID: GAO-02-764 August 16, 2002According to the Environmental Protection Agency (EPA) and water utility industry groups, communities will need as much as $1 trillion during the next 20 years to repair, replace, or upgrade aging drinking water and wastewater facilities; accommodate a growing population; and meet new water quality standards. GAO found that the amount of funds obtained from user charges and other local sources of revenue was less than the full cost of providing service--including operation and maintenance, debt service, depreciation, and taxes--for more than a quarter of drinking water utilities and more than 4 out of 10 wastewater utilities in their most recent fiscal year. GAO also found that more than a quarter of utilities lacked plans recommended by utility associations for managing their existing capital assets, but nearly all had plans that identify future capital improvement needs. A privatization agreement's potential to generate profits is the key factor influencing decisions by private companies that enter into such agreements with publicly owned utilities or the governmental entities they serve, according to the companies GAO contacted.
GAO-02-764, Water Infrastructure: Information on Financing, Capital Planning, and Privatization
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United States General Accounting Office:
GAO:
Report to Congressional Requesters:
August 2002:
Water Infrastructure:
Information on Financing, Capital Planning, and Privatization:
GAO-02-764:
Contents:
Letter:
Executive Summary:
Purpose:
Background:
Results in Brief:
Principal Findings:
Agency Comments:
Chapter 1:
Introduction:
Federal, State, and Local Entities Play Important Roles in Ensuring
Safe Drinking Water and Effective Wastewater Treatment:
Addressing Future Drinking Water and Wastewater Infrastructure Needs
Will Require Major Investments:
Adequacy of User Charges Is Key Indicator of Sound Management at
Drinking Water and Wastewater Utilities:
Utilities Use Approaches Such as Asset Management and Privatization to
Increase Operational Efficiency:
Objectives, Scope, and Methodology:
Chapter 2:
User Charges and Other Local Sources of Funds Covered Much, but Not
All, of Utilities‘ Cost of Providing Service:
Funds Collected from Local Sources Were Often Less Than Utilities‘ Cost
of Providing Service:
Funds from Local Sources Generally Exceeded Operation and Maintenance
Costs:
User Charges Represented a Major Source of Local Funds, but Were
Increased Two Times or Fewer by Half of the Utilities:
Chapter 3:
Many Utilities Lacked Comprehensive Asset Management Plans, but Most
Had Identified Future Capital Needs:
Many Utilities Lacked Comprehensive Asset Management Plans:
Despite Pipelines in Poor Condition, Some Utilities Had Deferred
Maintenance, Capital Improvements, or Both:
Age and Condition of Pipelines:
Rehabilitation and Replacement Activities:
Most Utilities Had Capital Improvement Plans, but Many Questioned
Adequacy of Future Funding:
Chapter 4:
Profit Potential Is Key Factor in Private Companies‘ Decisions to
Assume Operation or Ownership of Utilities:
Profit Potential Is Key Consideration for Private Companies:
States‘ Policies May Also Influence Companies‘ Decisions:
Appendix I: Survey of Drinking Water Utilities:
Appendix II: Survey of Wastewater Utilities:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Estimated Percentages of Utilities That Used Each Source of
Funding in Their Most Recently Completed Fiscal Year:
Table 2: Relationship between the Frequency of Rate Increases and
Utilities‘ Ability to Cover Their Cost of Providing Service Using
Revenues from All Local Sources, 1992–2001:
Table 3: Frequency of Rate Increases, 1992 through 2001, by Size of
Population Served:
Table 4: Extent to Which Utilities‘ Asset Management Plans Covered
Assets and Key Elements:
Table 5: Desired and Actual Rehabilitation and Replacement Rates for
Pipelines (on average, for fiscal years 1998 through 2000):
Table 6: Relationship between Adequacy of Projected Funding to Meet
Needs Over the Next 5 to 10 Years and Other Key Variables Related to
Funding:
Figures:
Figure 1: Estimated Life of Pipes According to Major Eras of Water Main
Installation:
Figure 2: Extent to Which Utilities‘ Actual Rate of Pipeline
Rehabilitation and Replacement Met or Exceeded Their Desired Rate (on
average, fiscal years 1998 through 2000):
Abbreviation:
EPA: Environmental Protection Agency:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
August 16, 2002:
The Honorable Robert Smith:
Ranking Minority Member:
Committee on Environment and Public Works:
United States Senate:
The Honorable Michael Crapo:
Ranking Minority Member:
Subcommittee on Fisheries, Wildlife, and Water:
Committee on Environment and Public Works:
United States Senate:
In response to your request, this report provides information on the
financing and planning activities of public and private drinking water
and wastewater utilities, as well as issues related to privatizing
these utility functions.
Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days from the date of this letter.
At that time, we will send copies to appropriate congressional
committees, the Administrator of the Environmental Protection Agency,
and the Director of the Office of Management and Budget. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
Please call me at (202) 512-3841 if you or your staff have any
questions. Major contributors to this report are listed in appendix
III.
Signed by:
David G. Wood:
Director, Natural Resources and Environment:
[End of letter]
Executive Summary:
Purpose:
According to the Environmental Protection Agency (EPA) and water
utility industry groups, communities will need an estimated $300
billion to $1 trillion over the next 20 years to repair, replace, or
upgrade aging drinking water and wastewater facilities; accommodate a
growing population; and meet new water quality standards. As the agency
that regulates drinking water and surface water quality, EPA provides a
significant amount of financial assistance for these facilities. Other
federal agencies, as well as states, also provide assistance. Given the
magnitude of estimated needs, some industry groups are seeking
increased federal funding, and the Congress is considering several
legislative options.
While drinking water and wastewater utilities use a multitude of funding
sources”including federal and state loans and grants, bonds, and other
debt and equity instruments”they rely primarily on user charges. Indeed,
operating principles established by water utility associations call for
fully supporting the utilities‘ operating and capital costs through
user and service charges. Utilities that follow these principles derive
a ’cost of providing service“ to establish their revenue requirements
and set their user rates. Depending on the utility, the cost of service
may include operation and maintenance expenses, taxes (or payments in
lieu of taxes), depreciation, debt service payments, contributions to
specified reserves (for example, putting aside funds for future capital
needs), other capital expenditures, and a rate of return on the value
of the utility‘s assets. According to water utility associations,
utilities should manage their capital assets to maximize the useful
life of the assets, control operating costs, and generally enhance the
efficiency of their operations. Utilities can develop asset management
plans, which should contain such key elements as an assessment of the
physical condition of all capital assets, descriptions of the criteria
used to measure and report on the condition of the assets, information
on the condition in which the assets will be maintained, and a
comparison of the planned and actual dollar amounts used to maintain
the assets at the established condition level. To address financial and
management challenges, some publicly owned utilities have entered into
public-private partnerships that use private sector resources in an
effort to upgrade or replace deteriorating infrastructure or to operate
more efficiently.
The respective Ranking Minority Members of the Senate Committee on
Environment and Public Works and its Subcommittee on Fisheries,
Wildlife, and Water, asked GAO to examine several issues relating to the
funding available to help meet the capital investment needs of the
nation‘s drinking water and wastewater facilities. Given the broad
scope of the request, GAO agreed to provide the information in two
reports. The first report, issued in November 2001, addressed the
amounts and sources of federal and state financial assistance for
drinking water and wastewater infrastructure during fiscal years 1991
through 2000. [Footnote 1]
This second report examines (1) how the amount of funds obtained by
large public and private drinking water and wastewater utilities”those
serving populations greater than 10,000”through user charges and other
local funding sources compare with their cost of providing service,
(2) how such utilities manage existing capital assets and plan for
needed capital improvements, and (3) what factors influence private
companies‘ interest in assuming the operation or ownership of publicly
owned drinking water and wastewater facilities. To address the first
and second objectives, GAO mailed questionnaires to 1,425 public and
private drinking water systems and 2,391 public and private wastewater
systems, which it identified using EPA databases. In the analysis,
utilities were weighted to account statistically for all utilities in
the population, including those not selected in the sample. Overall,
GAO received responses from an estimated 77 percent of the drinking
water utilities serving more than 10,000 and 73 percent of the
wastewater utilities of this size. GAO used the weighted results to
make estimates about the entire population of drinking water and
wastewater utilities serving more than 10,000. The percentages cited
throughout the report are thus estimates and have 95-percent confidence
intervals of plus or minus 10 percentage points or less. (Copies of the
questionnaires, including a summary of the utilities‘ responses, are
included as appendixes I and II.) To address the third objective, GAO
obtained information from officials with five private companies that
have significant experience with privatization agreements and are among
the most active participants in this field, either nationally or
regionally. In addition, because company officials identified state
requirements and policies as a significant factor in privatization
decisions, GAO contacted officials in eight states (California,
Connecticut, Georgia, Indiana, New Jersey, Pennsylvania, Texas, and
Washington) that the companies, EPA, and industry associations
identified as having requirements or policies that could affect
privatization decisions.
Background:
Americans rely on their drinking water and wastewater utilities to
provide clean and safe water for a variety of uses and to protect
public health and the environment. Regulated under the Safe Drinking
Water Act and the Clean Water Act, respectively, community drinking
water systems and wastewater collection and treatment facilities are
critical elements in the nation‘s infrastructure. Local drinking water
and wastewater utilities, supported primarily through user charges,
have invested billions of dollars over the past century in the
facilities that supply the nation‘s drinking water and treat its
wastewater. In many instances, local communities have received
financial assistance from federal and state programs. However, even
with maintenance and repair activities, infrastructure deteriorates
over time and eventually needs replacement and the estimated needs for
upgrading existing facilities and building new ones are very large, up
to $1 trillion.
In response to growing concerns about the condition of the existing
water infrastructure and calls for increased financial assistance, the
Congress is considering a number of infrastructure-related proposals.
At the local level, community leaders are faced with increasing demands
for funding all types of infrastructure and services and must find new
ways to control costs or build public support for necessary
expenditures. Water utility associations, including the Association of
Metropolitan Sewerage Agencies, the Association of Metropolitan Water
Agencies, the American Water Works Association, and the Water
Environment Federation, have established operating principles and
guidance for managing utilities‘ assets and planning for future capital
needs. In addition, public-private partnerships offer one approach to
increasing utilities‘ operational efficiency.
Results in Brief:
According to GAO‘s survey, the amount of funds obtained from user
charges and other local sources of revenue was less than the full cost
of providing service”including operation and maintenance, debt service,
depreciation, and taxes”for over a quarter of drinking water utilities
and more than 4 out of 10 wastewater utilities in their most recent
fiscal year. Revenues from user charges and other local sources were
adequate to cover at least operation and maintenance costs for nearly
all of the utilities; however, an estimated 29 percent of the utilities
deferred maintenance because of insufficient funding. Revenues from
user charges accounted for most of utilities‘ locally generated
funds”at least three-quarters of all funds from local sources for at
least three-quarters of utilities. GAO‘s survey found that about half
of the utilities raised their user rates two times or less from 1992 to
2001.
GAO‘s survey found that more than a quarter of utilities lacked plans
recommended by utility associations for managing their existing capital
assets, but nearly all had plans that identify future capital
improvement needs. Among the utilities that had plans for managing
their existing assets, more than half did not cover all their assets or
omitted key plan elements, such as an assessment of the assets‘
physical condition. In addition, while most utilities had a preventive
rehabilitation and replacement program for their pipelines, for about
60 percent of the drinking water utilities and 65 percent of the
wastewater utilities, the actual rate of rehabilitation and replacement
in recent years was less than their desired levels, and many had
deferred maintenance, capital expenditures, or both. Almost all
utilities reviewed their future capital improvement needs annually,
whether or not a formal plan was in place. Many utilities also had
plans for financing their future capital needs, but nearly half
believed that their projected funding over the next 5 to 10 years would
not be sufficient to meet their needs.
A privatization agreement‘s potential to generate profits is the key
factor influencing decisions by private companies that enter into such
agreements with publicly owned utilities or the governmental entities
they serve, according to the companies GAO contacted. In assessing
profit potential, the companies cited several specific criteria, such
as the extent of opportunities to enhance operational efficiency, the
utility‘s proximity to the companies‘ existing operations, the
potential for system growth, and the potential need for capital
investments. State policies can also influence privatization
agreements. For example, two states that GAO contacted restrict the use
of design-build-operate contracts, which give a single entity complete
control over a project. Other states offer incentives to encourage the
takeover of financially troubled public utilities.
Principal Findings:
User Charges and Other Local Sources of Funds Covered Much, but Not All,
of Utilities‘ Cost of Providing Service:
GAO found that revenues from user charges exceeded the cost of service
at an estimated 39 percent of the drinking water utilities and 33
percent of the wastewater utilities. (For the purpose of this analysis,
GAO defined a utility‘s cost of service as operation and maintenance
expenses, taxes, depreciation, and debt service.) When revenues from
user charges were combined with funding from other local sources, such
as hook-up and connection fees and sales of services to other
utilities, an estimated 71 percent of the drinking water utilities and
59 percent of the wastewater utilities covered their cost of providing
service. For both drinking water and wastewater utilities, GAO did not
find statistically significant differences between utilities by the
size of the populations they serve; that is, smaller utilities were
neither more nor less likely than larger utilities to have covered
their cost of providing service with revenues from user charges and
other local sources. Similarly, GAO did not find statistically
significant differences between drinking water utilities by public or
private ownership. [Footnote 2]
According to GAO‘s survey results, about 85 percent of drinking water
utilities and 82 percent of wastewater utilities covered at least the
operation and maintenance portion of the cost of providing service using
revenues from user charges alone. Moreover, adding other locally
generated funds to the user charges, about 93 percent of the utilities
covered their operation and maintenance costs. Operation and
maintenance costs are of particular interest because historically,
wastewater utilities”as a condition of receiving certain grants under
the Clean Water Act”generally were required to cover these costs with
user charges. While drinking water utilities are not subject to a
similar requirement, both EPA and water industry associations consider
adequate user charges to be a key indicator of utilities‘ financial
health. Despite covering operation and maintenance costs, an estimated
29 percent of the utilities deferred maintenance because of
insufficient funding.
GAO found that more than half of utilities whose revenues from user
charges and other local sources did not cover their cost of providing
service raised their rates two times or less during the 10-year period
from 1992 to 2001. Overall, GAO found no statistically significant
differences in the frequency of rate increases between the utilities
that did not cover their costs and those that did.
Many Utilities Lacked Comprehensive Asset Management Plans and Had
Deferred Maintenance or Capital Improvements, but Most Had Identified
Future Capital Needs:
According to GAO‘s survey, a significant percentage of drinking water
and wastewater utilities”about 27 percent and 31 percent,
respectively”did not have plans for managing their existing capital
assets, although some utilities were in the process of developing such
plans. Further, of the utilities with plans, more than half did not
include all of their assets or omitted one or more key elements
recommended by industry associations; for example, 16 percent of
drinking water utilities‘ plans and 21 percent of wastewater utilities‘
plans did not include information on the condition level at which the
utility intends to maintain the assets. GAO found no statistical
differences among utilities of different sizes with regard to the
inclusion or exclusion of any of the key elements in their asset
management plans. However, GAO found that the plans developed by
privately owned drinking water utilities tended to be more comprehensive
than those developed by publicly owned utilities.
According to GAO‘s survey results, some utilities had significant
portions of pipelines in poor condition; for example, more than one-
third of the utilities had 20 percent or more of their pipelines
nearing the end of their useful life. Nevertheless, for about 60
percent of drinking water utilities and 65 percent of wastewater
utilities, the actual levels of pipeline rehabilitation and replacement
in recent years were less than the utilities‘ desired levels. For
example, GAO‘s survey indicates that roughly half of the utilities
actually rehabilitated or replaced 1 percent or less of their pipelines
annually, even though an estimated 89 percent of drinking water
utilities and 76 percent of wastewater utilities believed that a higher
level of rehabilitation and replacement should be occurring. Further,
in each of three categories”maintenance, minor capital improvements,
and major capital improvements”about one-third or so of the utilities
had deferred expenditures in their most recent fiscal years, and 20
percent had deferred expenditures in all three categories. With one
exception, there were no statistically significant differences among
utilities of different sizes; however, GAO found that public drinking
water utilities were more likely than their privately owned
counterparts to defer maintenance and major capital projects.
Overall, GAO‘s survey results indicate that about 90 percent of drinking
water and wastewater utilities had capital improvement plans to identify
future capital needs, and about 90 percent of utilities reviewed their
needs annually whether or not they had developed formal plans. About
95 percent of the utilities‘ capital improvement plans covered 5 years
or more”with about 25 percent of drinking water utilities and about
20 percent of wastewater utilities covering 10 years or more. The
smallest systems (those serving 10,001 to 25,000 people) were slightly
less likely than larger systems to have such plans. Most of the
utilities with capital improvement plans also had plans for financing
the projects they identified; according to GAO‘s survey, 86 percent of
the utilities had such financing plans, including virtually all of the
largest utilities (those serving populations of over 100,000). However,
about 45 percent of the drinking water and wastewater utilities
anticipated that their projected funding would not be sufficient to
cover future needs over the next 5 to 10 years. Regarding this outlook,
there were no statistically significant differences among wastewater
utilities of different sizes; however, the largest drinking water
utilities were less likely to believe that their projected revenues
would be insufficient to cover anticipated future needs than their
smaller counterparts. Also, public drinking water utilities were
somewhat more likely than privately owned systems to have concerns
about future funding.
Profit Potential Is Key Factor in Private Companies‘ Decisions to
Assume Operation or Ownership of Drinking Water or Wastewater
Utilities:
Privatization agreements range from contracts to operate and maintain
local drinking water or wastewater facilities to outright ownership by
private entities. Not surprisingly, all five of the companies GAO
contacted evaluate the potential for profits when considering entering
into privatization agreements. Criteria important to assessing the
profitability of a proposed utility privatization agreement include the
potential to improve the efficiency of the utility‘s operations; the
proximity to the company‘s other utility operations; the potential for
system growth; the terms of a proposed contract; and the potential need
for capital investments. Each of the five companies GAO contacted
employs a somewhat different business strategy in its pursuit of
privatization agreements, such as placing more emphasis on contract
operations rather than assuming ownership of utilities or focusing on
utilities of particular sizes or in particular locations. Differences
in the companies‘ business strategies had some influence on the
relative importance of the factors to each company. In addition to
identifying the site-specific factors they consider in evaluating
privatization opportunities, representatives from all five companies
also provided comments on state requirements or policies that can
facilitate or impede privatization arrangements.
Officials in eight states GAO contacted said their primary interest is
the delivery of adequate service to the public, whether the service is
provided by publicly or privately owned utilities. However, some
requirements and policies can affect companies‘ privatization
decisions. For example, among the states GAO contacted, state
regulators in Indiana and Pennsylvania have established programs that
provide incentives to acquire or take over troubled utilities. In
Indiana, for example, the acquiring utility is often permitted an
’acquisition adjustment,“ which allows the utility to charge customers
higher rates. On the other hand, state policies may have the effect of
limiting privatization; two of the states GAO contacted restrict the
use of design-build-operate contracts. In Texas, for example, the state
requires the use of qualification-based criteria for selection of
engineering design services and a bidding process for construction
services, requirements that effectively preclude combining design,
construction, and operating services in a single procurement.
Agency Comments:
GAO provided a draft of this report to EPA for its review and comment.
GAO received comments from officials in EPA‘s Office of Water, including
the Office of Ground Water and Drinking Water and the Office of
Wastewater Management. EPA agreed with the information presented in
the report and characterized the findings as interesting and
informative. EPA officials also provided several technical comments and
clarifications, which GAO incorporated as appropriate.
[End of section]
Chapter 1: Introduction:
Americans rely on their drinking water and wastewater utilities to
provide clean and safe water for a variety of uses and to protect
public health and the environment. Regulated under the Safe Drinking
Water Act and the Clean Water Act, respectively, community drinking
water systems and wastewater collection and treatment facilities are
critical elements in the nation‘s infrastructure. Local drinking water
and wastewater utilities, supported primarily through user charges,
have invested billions of dollars over the past century to create the
treatment, collection, storage, and distribution facilities that supply
the nation‘s drinking water and treat its wastewater, in accordance
with applicable federal and state quality standards. In many instances,
local communities have also received financial assistance from federal
or state programs to improve or expand their water infrastructure. Even
with maintenance and repair activities, infrastructure deteriorates
over time and eventually needs replacement. According to recent
estimates, the level of investment that will be required over the next
20 years to repair, replace, or upgrade aging facilities; accommodate
the nation‘s growing population; and meet new quality standards will be
very large, up to $1 trillion. Moreover, following the terrorist
attacks of September 11, 2001, both drinking water and wastewater
utilities may have to make additional investments to increase the
security of their operations.
In response to growing concerns about the condition of the existing
water infrastructure and calls for increased financial assistance, the
Congress is considering a number of infrastructure-related proposals.
At the local level, utility managers must find new ways to control
costs or build public support for increasing the rates charged to
customers. Among the options available to help local utilities meet the
challenges they face are ensuring that revenues are adequate to cover
costs, finding more cost-effective ways to manage utility assets, and
entering into public-private partnerships.
Federal, State, and Local Entities Play Important Roles in Ensuring Safe
Drinking Water and Effective Wastewater Treatment:
The Environmental Protection Agency (EPA) sets standards for the
quality of drinking water and wastewater and issues other regulations
and guidance to implement the requirements of the Safe Drinking Water
Act and the Clean Water Act. Under the Safe Drinking Water Act, EPA is
required to establish (1) standards or treatment techniques for
contaminants that could adversely affect public health and (2)
requirements for monitoring the quality of drinking water and for
ensuring the proper operation and maintenance of water systems. The
Clean Water Act‘s National Pollutant Discharge Elimination System
program limits the types and amounts of pollutants that industrial and
municipal wastewater treatment facilities may discharge into the
nation‘s surface waters. EPA has issued national guidance and
regulations to assist the states in establishing standards to protect
the quality of their waters and in issuing permits to facilities to
limit discharges of pollutants.
Both federal and state agencies also provide a significant amount of
funding for drinking water and wastewater infrastructure through grant
and loan programs. In November 2001, we reported that from fiscal year
1991 through fiscal year 2000, nine federal agencies made available
about $44 billion for capital improvements at drinking water and
wastewater systems, and states made available about $25 billion over
the same period. [Footnote 3] EPA represents the largest source of
financial assistance at the federal level through its Drinking Water
and Clean Water State Revolving Funds, contributing about 56 percent of
the total. Under these programs, EPA provides grants to the states to
capitalize revolving loan funds. The states, which are required to
contribute matching funds equal to 20 percent of the EPA grants, make
loans to local communities or utilities; as loans are repaid, the
states‘ revolving loan funds are replenished. In addition to
contributing over $10 billion to match EPA‘s capitalization grants for
the Drinking Water and Clean Water State Revolving Funds, the states
made over $9 billion available under state-sponsored grant and loan
programs and provided about $6 billion through general obligation and
revenue bonds and other funding mechanisms.
At the local level, a variety of public and privately owned utilities
operate thousands of systems that supply drinking water and treat
wastewater for millions of Americans. In total, about 55,000 community
drinking water systems and nearly 30,000 wastewater treatment and
collection facilities are subject to numerous treatment, testing, and
operational requirements under the Safe Drinking Water Act and the
Clean Water Act, respectively. Although many of these utilities are
quite small, particularly in the case of drinking water systems,
[Footnote 4] larger utilities serve most of the U.S. population and
account for most of the infrastructure needs identified in periodic
surveys of such needs conducted by EPA. Specifically, according to EPA‘s
Safe Drinking Water Information System, as of January 2001, 4,079
utilities, or about 7 percent of all community water systems, each
served more than 10,000 people and accounted for about 65 percent of the
estimated infrastructure needs for drinking water utilities. In the
case of wastewater utilities, about 8,744 treatment and collection
facilities, or about 29 percent of the total, are estimated to serve
more than 10,000 people. These facilities account for approximately 89
percent of the estimated infrastructure needs for wastewater utilities.
[Footnote 5]
Publicly owned drinking water and wastewater utilities include systems
owned by municipalities, townships, counties, water and/or sewer
districts, and water and/or sewer authorities. Private ownership
encompasses a broad range of owners, from homeowners‘ associations,
mobile home parks, and other entities whose primary business is
unrelated to water supply or wastewater treatment, to larger, investor-
owned companies. About half of the nation‘s drinking water systems and
an estimated 20 percent of the wastewater systems are privately owned,
according to EPA and industry sources. According to EPA, most of the
privately owned drinking water and wastewater systems serve populations
of less than 10,000.
Addressing Future Drinking Water and Wastewater Infrastructure Needs
Will Require Major Investments:
EPA and a variety of industry groups are predicting that major
investments will be needed to upgrade, repair, or replace existing
infrastructure; meet demands for additional capacity; or comply with
new regulatory requirements. Pipeline rehabilitation and replacement
represents a significant portion of the projected infrastructure needs.
According to EPA estimates, for example, at least half of the drinking
water and wastewater infrastructure need is in the form of pipes buried
under ground. A study sponsored by a major water industry association
concluded that much of the existing pipe network is at or near the end
of its expected lifespan. [Footnote 6] Using average life estimates for
different types of pipe and counting the years since the lines were
originally installed, the study predicts that drinking water utilities
will face significant repair and replacement costs over the next 3
decades. Other studies make similar predictions for the pipelines owned
by wastewater utilities. [Footnote 7] Figure 1 shows the estimated life
expectancy of the pipelines installed during major periods of utility
growth.
Figure 1: Estimated Life of Pipes According to Major Eras of Water Main
Installation:
[See PDF for image]
This figure is a horizontal bar graph depicting the following data:
Estimated Life of Pipes According to Major Eras of Water Main
Installation:
Installation period: 1890s;
Average life expectancy: 1890 to 2005.
Installation period: Post World War I;
Average life expectancy: 1902 to 2020.
Installation period: Post World War II;
Average life expectancy: 1945 to 20205.
Source: American Water Works Association Water Industry Technical
Action Fund, Dawn of the Replacement Era: Reinvesting in Drinking Water
Infrastructure (Denver, Colo.: May 2001) pp. 10-11.
[End of figure]
While the size, period covered, and specific assumptions of individual
estimates vary, the amount needed for future capital investments in
water and wastewater infrastructure will be substantial. Several recent
studies project future infrastructure needs over a 20-year period:
* According to EPA‘s 1999 survey of drinking water infrastructure
needs, the estimated needs would be at least $150.9 billion through
2019, including an estimated $83.2 billion just for water transmission
and distribution lines. [Footnote 8]
* Similarly, EPA‘s 1996 survey of ’clean water“ needs estimated that
total wastewater infrastructure-related needs will be about $128
billion through 2016. [Footnote 9] In a subsequent analysis, EPA
estimated that an additional $56 billion to $87 billion would be needed
to correct existing sanitary sewer overflow problems.
* In April 2000, the Water Infrastructure Network, a consortium of
industry, municipal, state, and nonprofit associations, projected needs
of up to 1 trillion dollars over the next 20 years for drinking water
and wastewater utilities combined, when both the capital investment
needs and the cost of financing are considered. [Footnote 10]
* In May 2002, the Congressional Budget Office estimated that the cost
of drinking water and wastewater infrastructure over the next 20 years
would be $492 billion under a low-cost scenario and $820 billion under a
high-cost scenario, including both the cost of physical capital and
interest on loans and bonds. [Footnote 11]
Whatever the level of investment turns out to be, the needs will be
likely be met by some combination of local, state, and federal funding
sources. As the Congressional Budget Office noted in its recent report,
society as a whole will ultimately foot the bill, whether through the
rates charged to users or through federal, state, or local taxes.
Adequacy of User Charges Is Key Indicator of Sound Management at
Drinking Water and Wastewater Utilities:
Drinking water and wastewater utilities need revenue to maintain current
service levels, meet new demands for service, adequately maintain
existing plant and equipment, and plan for future needs in an orderly
manner. To accomplish these goals, water industry associations
generally support the principle that utilities should generate enough
revenue through user rates and service charges to fully cover the cost
of providing service, without relying on subsidies from other revenue
sources. [Footnote 12] That is, the rates that utilities charge their
customers should be sufficient to finance all of the utilities‘
operating and maintenance expenses as well as capital costs. For
example, according to a group of water industry associations known as
the H2O Coalition, water utilities should move toward becoming self-
sustaining by charging their customers rates that reflect the full cost
of service, thus ensuring that utilities will get as much of the
revenues they need as possible from their customers. [Footnote 13]
EPA‘s Office of Water also supports the concept of fiscal
sustainability for water utilities and sees rates that result in
revenues sufficient to meet the cost of service as a measure of the
utilities‘ financial health.
In some instances, drinking water and wastewater utilities may have to
establish user rates that meet certain minimum requirements as a
condition of receiving federal or state financial assistance. For
example, the Clean Water Act requires wastewater utilities that received
construction grants under title II of the act to establish rates that
generate enough revenue to cover operation and maintenance costs. Less
specific requirements apply to wastewater utilities that receive loans
under the Clean Water State Revolving Fund Program. Although the Safe
Drinking Water Act does not contain any explicit requirements for
minimum user charges at drinking water utilities, EPA has addressed the
issue indirectly in guidance to the states. Under the Safe Drinking
Water Act Amendments of 1996, states are required to develop programs
to ensure that drinking water systems have the financial, managerial,
and technical capacity to comply with national drinking water
regulations. EPA‘s guidance on implementing such programs suggests that
the criteria for assessing the systems‘ financial capacity include a
determination of whether water rates and charges are adequate to cover
the cost of water. [Footnote 14]
Utilities Use Approaches Such as Asset Management and Privatization to
Increase Operational Efficiency:
In addition to maintaining adequate user charges, utilities can ensure
that their revenues are sufficient by increasing their operational
efficiency and thus controlling their costs. One approach recommended
by industry experts is ’asset management.“ The goal of asset management
is to manage infrastructure assets so that the total cost of owning and
operating them is minimized and desired customer service levels are
maintained. The asset management process involves assessing the
condition of a system‘s infrastructure assets, estimating the life
expectancy of these assets, and ensuring that sufficient funds are
allocated over the life of the assets to optimize their value.
Asset management is seen as particularly relevant to the water utility
industry because drinking water and wastewater utilities are capital-
intensive and have a sizeable investment in pipes and other assets with
a relatively long service life. According to a comprehensive industry
handbook on managing capital assets, there is a growing awareness among
water utilities that ’preserving the life and function of
infrastructure assets will help optimize operations and maintenance and
identify needed capital resources, thereby reducing funding gaps
between future capital needs and available financial resources.“
[Footnote 15] Given the magnitude of the estimates for future
infrastructure needs, it is important for utilities to adopt a strategy
for managing the repair and replacement of key assets as cost-
effectively as possible.
In recent years, privatization of public facilities and services,
particularly at drinking water utilities, has been occurring in the
United States at an increasing rate. Some municipal drinking water and
wastewater utilities have explored privatization as another option for
increasing operational efficiency. Privatization is commonly defined as
any process aimed at shifting functions and responsibilities, in whole
or in part, from the municipal government to the private sector.
Municipalities may turn to privatization agreements to address issues
such as needed infrastructure improvements, rising costs, or more
stringent regulatory requirements.
Privatization can take different forms, ranging from contracting for
specific services to the actual sale of a facility to a private
company. The most common form of privatization is contracting, which
typically entails a competition among private bidders to perform
certain activities. In the case of drinking water and wastewater
utilities, such activities typically include operation and maintenance.
When a municipality contracts with a private company for services, the
government remains the financier and has management and policy control
over the quality of services to be provided. In some instances,
privatization involves the transfer of the ownership of utility assets
from a municipality to the private sector. Once the assets have been
sold, the government generally has no role in their financial support,
management, or oversight.
Objectives, Scope, and Methodology:
The Ranking Minority Member, Senate Committee on Environment and Public
Works, and the Ranking Minority Member, Subcommittee on Fisheries,
Wildlife, and Water, Senate Committee on Environment and Public Works,
asked us to examine several issues relating to the funding available to
help meet the capital investment needs of the nation‘s drinking water
and wastewater facilities. [Footnote 16] This report provides
information on:
* how the amount of funds obtained by large public and private drinking
water and wastewater utilities”those serving populations greater than
10,000”through user charges and other local funding sources compare
with the cost of providing service;
* how such utilities manage existing capital assets and plan for needed
capital improvements, and;
* what factors influence private companies‘ interest in assuming the
operation or ownership of publicly owned drinking water and wastewater
facilities.
To address the first two objectives, we obtained information on utility
finances and capital management practices by surveying, using a mailed
questionnaire, drinking water and wastewater utilities that serve
populations greater than 10,000. We developed similar but separate
questionnaires, one for drinking water utilities and one for wastewater
utilities. We focused on utilities serving populations of more than
10,000 because they (1) accounted for a large share of infrastructure
needs and (2) were more likely than their smaller counterparts to have
the means to respond to our survey. A copy of the drinking water
utility questionnaire, with summary response data, is in appendix I,
and a copy of the wastewater utility questionnaire, with summary
response data, is in appendix II.
We obtained contact information for the drinking water utilities from
EPA‘s Safe Drinking Water Information System database. We mailed
questionnaires to all 480 private drinking water utilities and to a
sample of 945 public drinking water systems, stratified by size of
population served (the size categories appear on the questionnaires),
identified in the database. (Thus, we sent questionnaires to a total of
1,425 utilities.) We obtained contact information for the public and
private wastewater utilities from EPA‘s Clean Water Needs Survey
database and EPA‘s Permit Compliance System database. [Footnote 17] EPA
does not collect information specifically on the size of the population
served by wastewater utilities. However, EPA officials estimate that
facilities that process more than 1 million gallons of wastewater per
day are roughly equivalent to facilities that serve populations of more
than 10,000 people. Thus, we used EPA‘s data on plant capacity to
approximate the sizes of wastewater utilities. We then mailed
questionnaires to all 2,391 of the systems estimated on this basis to
serve populations greater than 10,000.
We included on the questionnaires a ’screening“ question to make certain
that the responses we obtained and used were in fact from utilities that
served populations greater than 10,000. We obtained 821 useable
responses from drinking water utilities and 1,113 useable responses from
wastewater utilities. In the analysis, utilities were weighted to
account statistically for all utilities serving populations greater
than 10,000, including those not selected for our sample. Overall,
using response data from the screening question and from nonrespondent
follow-up efforts to adjust the estimated number of drinking water and
wastewater utilities serving populations greater than 10,000, we
estimate that 77 percent of the drinking water utilities serving more
than 10,000 people and 73 percent of the wastewater utilities of this
size responded to the survey. We used the weighted results to make
estimates about the entire population of such drinking water and
wastewater utilities. Therefore, all utility percentages cited in the
remainder of the report are estimates and have some sampling error
associated with them. All estimates cited have 95-percent confidence
intervals of plus or minus 10 percentage points or less; that is, we are
95 percent confident that the ’actual“ population value is contained in
an interval of 10 percentage points above or below the estimate. We used
these sampling errors to assess statistically significant differences
between percentages as well.
In addition to sampling errors, surveys can be subject to other types of
systematic error or bias that can affect the results, commonly referred
to as nonsampling errors. For example, questions may be misinterpreted;
the respondents, as a group, may differ from those who did not respond
in ways that are important; or response data could be erroneously
transcribed or entered into a database. We took several steps in an
attempt to reduce such errors. For example, to minimize the chances of
questions being misinterpreted, we developed our survey questions with
the aid of a survey specialist. We discussed the questionnaire with
officials from the EPA‘s Office of Water; the Association of
Metropolitan Sewerage Agencies; the American Water Works Association;
the Water Environment Federation; three consulting firms that
specialize in the water utility industry: Beecher Policy Research,
Inc., Hayden Reynolds & Associates, Pty. Ltd., and PA Consulting Group;
and public utility commissions in the states of West Virginia and
Wisconsin. In addition, we pretested the questionnaires with five
drinking water utilities and five wastewater utilities. [Footnote 18]
To maximize our response rate, we sent reminder postcards and mailed
two follow-up questionnaires to all nonrespondents. All data were
double keyed during data entry, and we verified a sample of the
resulting automated data. We ran various edit checks and other computer
analyses to identify inconsistencies and potential errors in the data,
and a technical specialist independently reviewed all computer programs.
One of our objectives was to compare public and privately owned
utilities. However, we did not receive enough responses from privately
owned wastewater utilities for a meaningful analysis (as noted
previously, according to EPA, most privately owned wastewater systems
serve populations of less than 10,000 people). Therefore, our analyses
concerning utility ownership type were limited to drinking water
utilities only. In comparing utilities according to the size of the
population served, we collapsed the size categories into four:
utilities serving populations of 10,001 to 25,000; 25,001 to 50,000;
50,001 to 100,000; and over 100,000.
To address the third objective, we interviewed officials from five
private companies that have significant experience with privatization
agreements and are among the most active participants in this field
either nationally or regionally. The companies are American Water Works
Service Company, Inc., United States Filter Corporation, and United
Water (companies that operate nationally in a total of 40 states); ECO
Resources, Inc., which operates principally in the Southwest; and
Philadelphia Suburban Water Company, which focuses its operations in
the mid-Atlantic and Midwest. In addition, because company officials
identified state requirements and policies as a significant factor in
their investment decisions, we interviewed officials from eight states
(California, Connecticut, Georgia, Indiana, New Jersey, Pennsylvania,
Texas, and Washington) that the companies, EPA, or industry officials
identified as having requirements or policies that could affect
privatization.
We conducted our work between May 2001 and July 2002 in accordance
with generally accepted government audit standards.
[End of chapter]
Chapter 2: User Charges and Other Local Sources of Funds Covered Much,
but Not All, of Utilities‘ Cost of Providing Service:
According to our survey, the amount of funds obtained from user charges
and other local sources of revenue was less than the full cost of
providing service”including operation and maintenance, debt service,
depreciation, and taxes”for an estimated 29 percent of drinking water
utilities and 41 percent of wastewater utilities. (Our survey requested
information on utilities‘ revenues and costs during their most recently
completed fiscal year.) Revenues from user charges and other local
sources were adequate to cover at least operation and maintenance costs
for over 93 percent of the utilities, but about 29 percent of the
utilities deferred maintenance during the same time period because of
insufficient funding. Revenues from user charges usually accounted for
most of utilities‘ locally generated funds. Our survey found that about
half of the utilities raised their user rates infrequently”once, twice,
or not at all”from 1992 to 2001.
Funds Collected from Local Sources Were Often Less Than Utilities‘ Cost
of Providing Service:
We found that revenues from user charges and other local sources often
fell short of utilities‘ cost of providing service, as defined below.
According to EPA and major water industry associations, in order to be
self-sustaining, drinking water and wastewater utilities must recover
the full cost of providing service through their user rates and service
charges. Rates that generate sufficient revenue to cover the full cost
of service lessen the need for external assistance, such as federal or
state grants and loans. Determining the cost of service establishes a
utility‘s revenue requirements and, accordingly, can serve as a basis
for its rate structure.
According to the National Regulatory Research Institute, ’determining
utility revenue requirements involves an examination of aggregate annual
costs, including operating as well as capital costs,“ to derive the
utility‘s cost of providing service. [Footnote 19] In a November 1993
report, the Institute explained that water utilities generally use one
of two basic methods of determining their revenue requirements for the
purpose of setting user rates, largely depending on whether the utility
is public or privately owned: [Footnote 20]
* Under the ’utility“ approach, which is typically used by investor or
privately owned utilities, the total cost of service includes operation
and maintenance expenses, taxes, depreciation, and a rate of return on
the value of the utilities‘ assets less accumulated depreciation.
* Under the ’cash needs“ approach, used by many public utilities, the
total cost of service includes operation and maintenance expenses, tax
equivalents (e.g., payments in lieu of taxes), debt service payments
(including both interest charges and repayment of principal),
contributions to specified reserves, and capital expenditures not
financed by either debt or contributions.
To determine whether revenues from user charges and other local sources
were large enough to cover the cost of providing service among the
utilities covered by our survey, we adapted the utility approach. We
developed a modified utility method because it allowed us to (1) adopt a
standard approach to deriving the ’cost of providing service“ for both
public and privately owned utilities, thereby enabling more meaningful
summaries and comparisons among all of the utilities and (2) make the
most effective use of the categories of cost data we collected.
Specifically, to calculate the cost of service, we included the amounts
reported for operation and maintenance expenses, taxes, and
depreciation. [Footnote 21] We also included the amounts reported as
debt service (including interest charges and repayment of principal) as
a surrogate for rate of return, a category for which our survey did not
request information. [Footnote 22] Because of the approach we used, we
may have overstated some utilities‘ costs and thus the number of
utilities that did not cover their costs. The reason is that for some
utilities the portion of debt service attributable to repayment of
principal may have been covered, in part, by the inclusion of
depreciation in computing the cost of service.
User Charges Represent One of Many Sources of Funding Used by
Utilities:
Our survey showed that virtually all utilities obtained revenues from
user charges during their most recently completed fiscal year. Other
common funding sources included hook-up and connection fees and interest
earnings, used by an estimated 80 to 90 percent of utilities. Table 1
summarizes the types of funding used by drinking water and wastewater
utilities during their most recently completed fiscal year, according
to our survey.
Table 1: Estimated Percentages of Utilities That Used Each Source of
Funding in Their Most Recently Completed Fiscal Year:
Funding source: User charges;
Estimated percentage of utilities using funding source[A]: Drinking
water: 98;
Estimated percentage of utilities using funding source[A]: Wastewater:
97.
Funding source: Other local revenues: Property taxes;
Estimated percentage of utilities using funding source[A]: Drinking
water: 8;
Estimated percentage of utilities using funding source[A]: Wastewater:
10.
Funding source: Other local revenues: Sales to other utilities;
Estimated percentage of utilities using funding source[A]: Drinking
water: 42;
Estimated percentage of utilities using funding source[A]: Wastewater:
32.
Funding source: Other local revenues: Product sales;
Estimated percentage of utilities using funding source[A]: Drinking
water: [B];
Estimated percentage of utilities using funding source[A]: Wastewater:
12.
Funding source: Other local revenues: Special operating cost levies;
Estimated percentage of utilities using funding source[A]: Drinking
water: 3;
Estimated percentage of utilities using funding source[A]: Wastewater:
39.
Funding source: Other local revenues: Interest earned;
Estimated percentage of utilities using funding source[A]: Drinking
water: 77;
Estimated percentage of utilities using funding source[A]: Wastewater:
78.
Funding source: Other local revenues: Assessments;
Estimated percentage of utilities using funding source[A]: Drinking
water: 14;
Estimated percentage of utilities using funding source[A]: Wastewater:
21.
Funding source: Other local revenues: Permit and inspection fees;
Estimated percentage of utilities using funding source[A]: Drinking
water: 41;
Estimated percentage of utilities using funding source[A]: Wastewater:
50.
Funding source: Other local revenues: Hook-up, connection, or tap fees;
Estimated percentage of utilities using funding source[A]: Drinking
water: 89;
Estimated percentage of utilities using funding source[A]: Wastewater:
78.
Funding source: Other local revenues: Reserves;
Estimated percentage of utilities using funding source[A]: Drinking
water: 35;
Estimated percentage of utilities using funding source[A]: Wastewater:
37.
Funding source: Other local revenues: Other;
Estimated percentage of utilities using funding source[A]: Drinking
water: 51;
Estimated percentage of utilities using funding source[A]: Wastewater:
29.
Funding source: Grants: Federal grants;
Estimated percentage of utilities using funding source[A]: Drinking
water: 16;
Estimated percentage of utilities using funding source[A]: Wastewater:
18.
Funding source: Grants: State grants;
Estimated percentage of utilities using funding source[A]: Drinking
water: 21;
Estimated percentage of utilities using funding source[A]: Wastewater:
31.
Funding source: Grants: Other grants;
Estimated percentage of utilities using funding source[A]: Drinking
water: 4;
Estimated percentage of utilities using funding source[A]: Wastewater:
4.
Funding source: Debt and equity: Federal loans;
Estimated percentage of utilities using funding source[A]: Drinking
water: 12;
Estimated percentage of utilities using funding source[A]: Wastewater:
8.
Funding source: Debt and equity: State loans;
Estimated percentage of utilities using funding source[A]: Drinking
water: 25;
Estimated percentage of utilities using funding source[A]: Wastewater:
40.
Funding source: Debt and equity: Commercial loans;
Estimated percentage of utilities using funding source[A]: Drinking
water: 9;
Estimated percentage of utilities using funding source[A]: Wastewater:
6.
Funding source: Debt and equity: Revenue bonds;
Estimated percentage of utilities using funding source[A]: Drinking
water: 36;
Estimated percentage of utilities using funding source[A]: Wastewater:
36.
Funding source: Debt and equity: General obligation bonds;
Estimated percentage of utilities using funding source[A]: Drinking
water: 19;
Estimated percentage of utilities using funding source[A]: Wastewater:
23.
Funding source: Debt and equity: Private activity bonds;
Estimated percentage of utilities using funding source[A]: Drinking
water: 2;
Estimated percentage of utilities using funding source[A]: Wastewater:
less than 1.
Funding source: Debt and equity: Sale of stock;
Estimated percentage of utilities using funding source[A]: Drinking
water: 2;
Estimated percentage of utilities using funding source[A]: Wastewater:
0.
Funding source: Debt and equity: Other short-term debt;
Estimated percentage of utilities using funding source[A]: Drinking
water: 8;
Estimated percentage of utilities using funding source[A]: Wastewater:
5.
Funding source: Debt and equity: Other long-term debt;
Estimated percentage of utilities using funding source[A]: Drinking
water: 7;
Estimated percentage of utilities using funding source[A]: Wastewater:
3.
Funding source: Debt and equity: Other debt and equity instruments;
Estimated percentage of utilities using funding source[A]: Drinking
water: 2;
Estimated percentage of utilities using funding source[A]: Wastewater:
1.
Funding source: Other:
Estimated percentage of utilities using funding source[A]: Drinking
water: 7;
Estimated percentage of utilities using funding source[A]: Wastewater:
7.
[A] Our survey did not collect information on the dollar amount of
funding generated by nonlocal sources.
[B] Our survey also did not collect information on whether drinking
water utilities obtained revenues from product sales. This may account
for the large percentage of such utilities that used the Other category
under the Other local revenues category (51 percent compared to 29
percent of wastewater utilities).
Source: GAO‘s analysis of survey data.
[End of table]
User Charges and Other Local Revenues Were Less Than Many Utilities‘
Cost of Providing Service:
Using the modified utility approach described earlier, we analyzed our
survey data to compare utilities‘ costs and revenues. Among other
things, we found that for many utilities, revenues from user charges
alone were not enough to cover the cost of service in their most
recently completed fiscal year. Specifically, we found that revenues
from user charges exceeded the cost of service at an estimated 39
percent of the drinking water utilities and 33 percent of the
wastewater utilities. However, combining revenues from user charges
with funding from other local sources, such as hook-up and connection
fees and sales of services to other utilities, we found that more
utilities were able to cover their cost of providing service.
Specifically, for an estimated 71 percent of the drinking water
utilities and 59 percent of the wastewater utilities, user charges plus
other local revenues exceeded the cost of providing service.
We analyzed our survey data to determine if there were any statistically
significant relationships between certain utility characteristics and
the utilities‘ ability to cover costs with user charges and/or other
local revenues. First, we examined these relationships for both (1) the
size of the population served by the utilities and (2) the type of
ownership (public or private). We found the following:
* For both drinking water and wastewater utilities, there were no
statistically significant differences between utilities based on the
size of the populations they served; that is, smaller utilities were
neither more nor less likely than larger utilities to have covered
their cost of providing service, whether we looked at revenues from
user charges alone or revenues from all local sources.
* Among drinking water utilities, ownership type did make a difference
when comparing the cost of providing service with revenue from user
charges alone. We found that 62 percent of public drinking water
utilities did not cover their cost of service with user charges alone,
compared with 44 percent of privately owned systems. However, when we
included revenues from other local sources in the analysis, we found no
statistical difference between public and privately owned drinking
water utilities.
EPA has reached similar conclusions about the ability of some utilities
to cover their costs. For example, in a July 1999 report on the
characteristics of small drinking water systems, defined as those
serving less than 10,000 people, EPA compared such systems to larger
ones serving more than 10,000 people”the same group included in our
study. EPA reported that an estimated 20 percent of the larger systems
did not have sufficient revenues to cover their debt service costs
after paying operating expenses. [Footnote 23] In the case of
wastewater utilities, a September 1990 study on user fees reported that
when total wastewater revenues were compared to total wastewater
treatment costs, a significant percentage of the utilities included in
the study”31 percent of those serving populations of 10,000 to 100,000
and 26 percent of those serving over 100,000 people”were operating with
a revenue shortfall. [Footnote 24] As defined in the study, total
treatment costs consisted of debt repayment costs plus operation,
maintenance, and equipment replacement costs.
We next analyzed our survey data to determine if there were any
statistically significant relationships between utilities‘ ability to
cover costs with user charges and/or other local revenues and other
characteristics. Overall, we found few significant differences; that
is, for the most part, utilities that covered their cost of providing
service with revenues from user charges and/or other local sources did
not differ”on the basis of characteristics we examined”from those that
did not. More specifically, we found the following regarding utilities‘
ability to cover their cost of providing service with user charges and
other local revenues and the following characteristics:
* Use of federal or state grants or loans. An estimated 24 percent of
the drinking water utilities and 36 percent of the wastewater utilities
that did not cover their costs obtained federal and/or state grants
during their most recently completed fiscal year. These utilities
obtained grants at about the same rate as the drinking water and
wastewater utilities that did cover their costs. Similarly, when we
included utilities that received federal or state loans in our
analysis”in addition to the utilities that received assistance from
grants”we found that an estimated 43 percent of the drinking water
utilities and 60 percent of the wastewater utilities that did not cover
their costs used some form of federal or state grant or loan. These
utilities received assistance at about the same rate as utilities that
did cover their costs.
* Dedication of rate revenues for specific purposes. We found no
statistical differences regarding the extent to which utilities‘ rates
included amounts to cover the cost of preventive rehabilitation and
replacement programs for pipelines. Based on our survey, an estimated
85 percent of the utilities‘ rates included such amounts, whether or
not the utilities covered their cost of providing service. Similarly,
both drinking water and wastewater utilities that covered their cost of
service were no more likely than those that did not to dedicate a
portion of revenues from user charges specifically to future capital
needs. Overall, according to our survey, about 70 percent of drinking
water and wastewater utilities dedicated a portion of their user
charges to future capital needs in developing their rates.
* Existence of rate relief or other subsidy for lower-income customers.
About the same percentage of utilities offered some type of subsidy to
lower-income customers”about 14 percent of the drinking water utilities
and about 13 percent of the wastewater utilities”whether or not the
utilities covered their cost of service.
More comprehensive information might have allowed us to draw some
clearer distinctions between utilities that did and did not cover their
costs. However, to limit the burden on our survey respondents, we did
not ask utilities to report the amount of any assistance they received,
and we requested data on only the most recently completed fiscal year.
Funds from Local Sources Generally Exceeded Operation and Maintenance
Costs:
Annual operation and maintenance costs are those associated with
operating and maintaining a utility”including the costs of labor,
energy, chemicals, and accounting services. Operation and maintenance
costs are of particular interest because of certain requirements
imposed on many wastewater utilities as a condition of receiving
construction grants under the Clean Water Act. Specifically, the
wastewater utilities are required to generate sufficient revenues
through user charges to cover operation and maintenance costs.
[Footnote 25] According to EPA‘s 1990 report on wastewater user fees,
all wastewater utilities serving more than 10,000 people at that time
received such grants. [Footnote 26] While drinking water utilities are
not subject to a similar requirement, both EPA and key water industry
associations consider adequate user charges to be a key indicator of
utilities‘ financial health.
According to our survey results, an estimated 85 percent of drinking
water utilities and 82 percent of wastewater utilities were able to
cover their operation and maintenance costs using revenues from user
charges alone. Moreover, adding other locally generated funds to the
user charges, we estimated that over 93 percent of the utilities were
able to cover their operation and maintenance costs. With one
exception, we also found that a utility‘s size or type of ownership did
not influence its ability to cover operation and maintenance costs.
However, privately owned drinking water utilities were somewhat more
likely to have sufficient revenues from user charges to cover their
operation and maintenance costs than public utilities (the estimates
were 91 percent compared to 85 percent).
Our findings are consistent with EPA‘s July 1999 report on the
characteristics of small drinking water systems, which compared systems
serving less than 10,000 people to systems serving more than 10,000
people. EPA reported that 13 percent of the larger systems (those
serving populations of more than 10,000) had operation and maintenance
expenses that exceeded their operating revenues. [Footnote 27] For the
purposes of its study, EPA defined operating revenues as the sum of
water sales and the following water-related revenues: connection fees,
inspection fees, developer fees, usage fees, other fees, and general
fund revenues. Interest earned, primary business revenues, fines or
penalties, and other water related revenues were not included. Although
our results indicate that a smaller percentage of utilities were not
covering their costs than EPA‘s study concluded, we defined local
sources of revenue more broadly than EPA and included some categories,
such as interest earnings and reserve payments, that were used by large
percentages of utilities. EPA has not done a similar analysis of
wastewater utilities.
While our survey shows that, for an overwhelming majority of utilities,
locally generated funds met or exceeded their operation and maintenance
costs, it provides some indications that utilities‘ costs may be lower
than they should be to adequately maintain facilities and equipment.
Specifically, we looked at the extent to which utilities that were
covering their operation and maintenance costs also deferred maintenance
’because available funding was not sufficient.“ We found that for both
drinking water and wastewater utilities, an estimated 29 percent of the
utilities that covered their costs also deferred maintenance in their
most recently completed fiscal year. However, there was no statistical
difference in the extent to which the utilities deferred maintenance,
whether they covered their operation and maintenance costs or not.
The fact that utilities were deferring maintenance suggests that either
unanticipated expenses forced the utilities to reschedule planned
maintenance or their budgets were never sufficient to cover the needed
expenses in the first place. According to EPA and water industry
experts, deferring maintenance beyond the optimal point for system
repair and renewal can lead to earlier capital replacement needs and
increases in the cost of providing service.
User Charges Represented a Major Source of Local Funds, but Were
Increased Two Times or Fewer by Half of the Utilities:
User charges represent a major source of locally generated funding at
both drinking water and wastewater utilities. According to our survey,
for about half of the utilities, user charges accounted for at least 90
percent of their local funds in their most recently completed fiscal
year. [Footnote 28] User charges accounted for at least three-quarters
of the funds from local sources at an estimated 80 percent of the
drinking water utilities and about 75 percent of the wastewater
utilities.
We analyzed the data on utilities‘ user charges to determine if the
utilities‘ ability to cover their cost of providing service was related
to the frequency of their rate increases. As noted earlier, our survey-
based estimates are that 29 percent of drinking water utilities and 41
percent of wastewater utilities had revenues from user charges and
other local sources that were less than their cost of providing
service. As table 2 shows, we found that more than half of these
utilities reported raising their rates infrequently”once, twice, or not
at all”during the 10-year period from 1992 to 2001. However, overall we
found no statistically significant differences in the frequency of rate
increases between the utilities that did not cover their costs and
those that did.
We did not ask utilities to provide information on the magnitude of
their rate increases. Some utilities may have a strategy of seeking
fewer but larger rate increases. This strategy could enable them to
cover more of their costs if the rate increases, though infrequent, are
sufficiently large.
Table 2: Relationship between the Frequency of Rate Increases and
Utilities‘ Ability to Cover Their Cost of Providing Service Using
Revenues from All Local Sources, 1992–2001:
Estimated percentage of utilities that increased rates, by frequency of
increase:
Number of rate increases: 0;
Drinking water: Did not cover cost of providing service: 11%;
Drinking water: Covered cost of providing service: 7%;
Wastewater: Did not cover cost of providing service: 15%;
Wastewater: Covered cost of providing service: 13%.
Number of rate increases: 1-2;
Drinking water: Did not cover cost of providing service: 41%;
Drinking water: Covered cost of providing service: 44%;
Wastewater: Did not cover cost of providing service: 37%;
Wastewater: Covered cost of providing service: 38%.
Number of rate increases: 3-4;
Drinking water: Did not cover cost of providing service: 21%;
Drinking water: Covered cost of providing service: 22%;
Wastewater: Did not cover cost of providing service: 23%;
Wastewater: Covered cost of providing service: 19%.
Number of rate increases: 5-7;
Drinking water: Did not cover cost of providing service: 19%;
Drinking water: Covered cost of providing service: 17%;
Wastewater: Did not cover cost of providing service: 17%;
Wastewater: Covered cost of providing service: 18%.
Number of rate increases: 8-10;
Drinking water: Did not cover cost of providing service: 9%;
Drinking water: Covered cost of providing service: 9%;
Wastewater: Did not cover cost of providing service: 8%;
Wastewater: Covered cost of providing service: 11%.
Source: GAO‘s analysis of survey data.
[End of table]
Other studies provide some data on the magnitude and frequency of rate
increases by water utilities. In its July 1999 report on the
characteristics of small drinking water systems, EPA examined the
frequency and magnitude of rate increases and found that for larger
systems (those serving more than 10,000 people), about 2-½ years had
elapsed, on average, since the last increase. [Footnote 29] In
addition, EPA reported that the average size of the increase was 14
percent. Similarly, data collected by the Association of Metropolitan
Sewerage Agencies for its 1999 financial survey indicated that the
current rates had been in effect for an average of about 2-½ years.
This survey also found that the sewer rates had increased 9 percent
annually, on average, between 1996 and 1999. [Footnote 30]
We further analyzed our survey data to determine if the frequency of
rate increases varied depending on the utilities‘ size. We found that
larger utilities, particularly those serving more than 100,000 people,
were more likely to have had 5 to 10 rate increases from 1992 to 2001
than smaller utilities. Conversely, smaller utilities were more likely
than larger ones to have increased their rates infrequently during the
10-year period. Table 3 summarizes the results of our analysis.
Table 3: Frequency of Rate Increases, 1992 through 2001, by Size of
Population Served:
Frequency of rate increases, by population served: No increases: 10,001-
25,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 8;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 15.
Frequency of rate increases, by population served: No increases: 25,001-
50,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 12;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 14.
Frequency of rate increases, by population served: No increases: 50,001-
100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 7;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 17.
Frequency of rate increases, by population served: No increases: Over
100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 6;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 13.
Frequency of rate increases, by population served: 1-2 increases:
10,001-25,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 51;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 41.
Frequency of rate increases, by population served: 1-2 increases:
25,001-50,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 44;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 44.
Frequency of rate increases, by population served: 1-2 increases:
50,001-100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 36;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 32.
Frequency of rate increases, by population served: 1-2 increases: Over
100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 27;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 23.
Frequency of rate increases, by population served: 3-4 increases:
10,001-25,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 19;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 22.
Frequency of rate increases, by population served: 3-4 increases:
25,001-50,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 24;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 21.
Frequency of rate increases, by population served: 3-4 increases:
50,001-100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 25;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 21.
Frequency of rate increases, by population served: 3-4 increases: Over
100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 23;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 17.
Frequency of rate increases, by population served: 5-7 increases:
10,001-25,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 16;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 16.
Frequency of rate increases, by population served: 5-7 increases:
25,001-50,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 14;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 13.
Frequency of rate increases, by population served: 5-7 increases:
50,001-100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 22;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 18.
Frequency of rate increases, by population served: 5-7 increases: Over
100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 24;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 29.
Frequency of rate increases, by population served: 8-10 increases:
10,001-25,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 6;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 7.
Frequency of rate increases, by population served: 8-10 increases:
25,001-50,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 6;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 9.
Frequency of rate increases, by population served: 8-10 increases:
50,001-100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 10;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 11.
Frequency of rate increases, by population served: 8-10 increases: Over
100,000;
Estimated percentage of utilities that increased rates, by frequency:
Drinking water utilities: 21;
Estimated percentage of utilities that increased rates, by frequency:
Wastewater utilities: 18.
Source: GAO‘s analysis of survey data.
[End of table]
When we analyzed the data according to the utilities‘ ownership type, we
found no statistical differences in the frequency of rate increases at
drinking water utilities, whether they were public or privately owned.
[End of chapter]
Chapter 3: Many Utilities Lacked Comprehensive Asset Management Plans,
but Most Had Identified Future Capital Needs:
According to our survey, more than one out of four utilities lacked
plans recommended by utility associations for managing their existing
capital assets. Further, over half of the utilities with plans did not
cover all their assets or omitted key plan elements, such as an
assessment of the assets‘ physical condition. In addition, while most
utilities had a preventive rehabilitation and replacement program, for
about 60 percent of the drinking water utilities and 65 percent of the
wastewater utilities, the actual rate of pipeline rehabilitation and
replacement in recent years was less than their desired levels.
Further, in their most recent fiscal year, an estimated one-third of
the utilities deferred maintenance; one-third deferred major capital
improvements; and one-third deferred minor capital improvements.
Our survey indicates that about 90 percent of the utilities had capital
improvement plans that identify future needs and that about the same
percentage of utilities reviewed their capital improvement needs
annually whether or not a formal plan was in place. Utilities‘ capital
improvement plans generally had a long-term focus”the large majority
covered 5 years or more”as recommended by industry associations. Most
utilities also had plans for financing their future capital needs, but
an estimated 45 percent believed that their projected funding over the
next 5 to 10 years would not be sufficient to meet the needs.
Many Utilities Lacked Comprehensive Asset Management Plans:
According to our survey, more than 25 percent of drinking water and
wastewater utilities lacked asset management plans, although some were
in the process of developing such plans. Of the utilities with plans,
more than half did not include all of their assets or omitted key plan
elements.
Drinking water and wastewater utilities manage their existing capital
assets to maximize the useful life of the assets, control operating
costs, and generally enhance the efficiency of their operations.
According to a comprehensive industry handbook, published in 2001, the
term ’asset management“ means managing infrastructure-related assets,
such as pipelines and equipment, to minimize the total cost of owning
and operating them while maintaining adequate service to customers.
[Footnote 31] The handbook states that asset management allows an
organization to characterize the condition of capital assets and
quantify an ongoing renewal program to maximize their reliability. The
handbook further provides that a goal of an asset management system
should be ’the ability to merge what is known about an organization‘s
capital assets with rehabilitation standards and costs and with risk
assessments of asset failures to identify critical assets.“ [Footnote
32]
For the purposes of our survey, we focused on four areas identified as
key elements of good asset management systems: an inventory of the
assets, assessment criteria, the assets‘ condition, and the planned and
actual expenditures to maintain the assets. [Footnote 33] More
specifically, we asked drinking water and wastewater utilities (1) if
they had plans for managing their existing capital assets and (2) if
so, whether these plans included a complete assessment of the physical
condition of all capital assets, descriptions of the criteria used to
measure and report on the condition of the assets, the condition level
at which the assets will be maintained, and a comparison of the planned
and actual dollar amounts used to maintain the assets at the
established condition level. For each of the key elements, we also
asked if the plans covered all or some capital assets or did not
address the element at all.
Some Utilities Did Not Have Plans:
Based on the results of our survey, a significant percentage of drinking
water and wastewater utilities”an estimated 27 percent and 31 percent,
respectively”did not have plans for managing their existing capital
assets. However, 40 percent of the drinking water utilities and about
50 percent of the wastewater utilities were developing such plans at
the time of our survey.
When we looked at the characteristics of the utilities without asset
management plans, for the most part, we found no statistical differences
between utilities of different sizes for either drinking water or
wastewater utilities, with one exception: about twice as many of the
smallest drinking water utilities”those serving populations of 10,001
to 25,000”lacked plans compared with the largest ones, serving
populations of over 100,000 (the estimates were 34 percent and 17
percent, respectively). We also found that public drinking water
utilities were somewhat more likely than their privately owned
counterparts not to have plans for managing their existing capital
assets (an estimated 29 percent compared with 11 percent).
Many Utilities‘ Plans Did Not Cover All Assets or Lacked Key Elements:
According to our survey, more than two-thirds of the utilities had asset
management plans”an estimated 69 percent of the drinking water utilities
and 65 percent of the wastewater utilities”but many of the plans did not
cover all of the utilities‘ assets or did not contain one or more key
elements. [Footnote 34] Table 4 summarizes the extent of coverage of
utilities‘ assets and the four key elements in utilities‘ asset
management plans.
Table 4: Extent to Which Utilities‘ Asset Management Plans Covered
Assets and Key Elements:
Plan element: Complete assessment of the physical condition of the
utility‘s capital assets;
Estimated percentage of plan coverage: Drinking water utilities: All
assets: 41;
Estimated percentage of plan coverage: Wastewater utilities: All
assets: 38.
Plan element: Complete assessment of the physical condition of the
utility‘s capital assets;
Estimated percentage of plan coverage: Drinking water utilities: Some
assets: 53;
Estimated percentage of plan coverage: Wastewater utilities: Some
assets: 54.
Plan element: Complete assessment of the physical condition of the
utility‘s capital assets;
Estimated percentage of plan coverage: Drinking water utilities: Not
addressed in plan: 6;
Estimated percentage of plan coverage: Wastewater utilities: Not
addressed in plan: 7.
Plan element: Descriptions of the criteria used to measure and report
the assets‘ condition;
Estimated percentage of plan coverage: Drinking water utilities: All
assets: 30;
Estimated percentage of plan coverage: Wastewater utilities: All
assets: 26.
Plan element: Descriptions of the criteria used to measure and report
the assets‘ condition;
Estimated percentage of plan coverage: Drinking water utilities: Some
assets: 53;
Estimated percentage of plan coverage: Wastewater utilities: Some
assets: 51.
Plan element: Descriptions of the criteria used to measure and report
the assets‘ condition;
Estimated percentage of plan coverage: Drinking water utilities: Not
addressed in plan: 17;
Estimated percentage of plan coverage: Wastewater utilities: Not
addressed in plan: 23.
Plan element: Condition level at which utility intends to maintain the
assets;
Estimated percentage of plan coverage: Drinking water utilities: All
assets: 34;
Estimated percentage of plan coverage: Wastewater utilities: All
assets: 25.
Plan element: Condition level at which utility intends to maintain the
assets;
Estimated percentage of plan coverage: Drinking water utilities: Some
assets: 50;
Estimated percentage of plan coverage: Wastewater utilities: Some
assets: 54.
Plan element: Condition level at which utility intends to maintain the
assets;
Estimated percentage of plan coverage: Drinking water utilities: Not
addressed in plan: 16;
Estimated percentage of plan coverage: Wastewater utilities: Not
addressed in plan: 21.
Plan element: Comparison of the planned and actual dollar amounts used
to maintain the assets at the condition level established by the
utility;
Estimated percentage of plan coverage: Drinking water utilities: All
assets: 28;
Estimated percentage of plan coverage: Wastewater utilities: All
assets: 22.
Plan element: Comparison of the planned and actual dollar amounts used
to maintain the assets at the condition level established by the
utility;
Estimated percentage of plan coverage: Drinking water utilities: Some
assets: 40;
Estimated percentage of plan coverage: Wastewater utilities: Some
assets: 41.
Plan element: Comparison of the planned and actual dollar amounts used
to maintain the assets at the condition level established by the
utility;
Estimated percentage of plan coverage: Drinking water utilities: Not
addressed in plan: 32;
Estimated percentage of plan coverage: Wastewater utilities: Not
addressed in plan: 36.
Note: Numbers are estimated percentages of all utilities that have
plans.
Source: GAO‘s analysis based on survey data.
[End of table]
Significantly, our survey results indicate that over 50 percent of
utilities‘ asset management plans did not cover all assets. Industry
associations for both drinking water and wastewater utilities advocate
the inclusion of all capital assets in such plans. They also believe
that good asset management planning starts with a comprehensive
inventory of existing assets and encompasses other elements addressed
in our survey as well. In fact, the comprehensive industry handbook
cited earlier indicates that an integrated asset management system
includes, among other things, a maintenance management system as well
as components designed to inventory and analyze the condition of a
utility‘s assets. [Footnote 35] Using this information, utilities can
optimize decisions on what system components require maintenance or
need to be rehabilitated or replaced, when these actions need to occur,
and what they will cost.
To minimize the reporting burden on utilities, we did not ask the
surveyed utilities to be more explicit about the types of assets that
were or were not covered by the plans. However, some evidence suggests
that utilities might not be developing comprehensive plans for the
management of their pipelines, a potentially critical omission
considering that pipelines account for about 75 percent of the nation‘s
investment in drinking water and wastewater infrastructure. A study
sponsored by the American Water Works Association Research Foundation
concluded that effective planning for pipeline rehabilitation and
replacement falls into three categories:
(1) developing asset inventory data on pipe condition by segment; (2)
developing priorities for annual replacement plans, and; (3) developing
long-term plans to optimize the rate of replacement. [Footnote 36]
However, the report states that 15 of the 18 utilities reviewed for the
study had not developed comprehensive information projecting their
pipeline replacement needs based on when the pipes were installed and
how long they are expected to last.
For utilities with plans, we analyzed our survey data according to the
size of the utility. We found no statistical differences among
utilities of different sizes with regard to the inclusion or exclusion
of any of the four key elements in their asset management plans.
However, when we similarly analyzed the data according to the type of
utility ownership, we found that the asset management plans developed
by privately owned drinking water utilities tended to be more
comprehensive than those developed by publicly owned utilities. For
example, we found that an estimated:
* 55 percent of private utilities‘ plans covered all capital assets,
compared with 40 percent of public utilities;
* 46 percent of private utilities‘ plans included criteria for all
assets, compared with 28 percent for public utilities;
* 43 percent of private utilities‘ plans included the condition level
at which the assets would be maintained, compared with 33 percent for
public utilities; and;
* 40 percent of private utilities‘ plans included a comparison of the
planned and actual expenditures for maintaining the assets, compared
with 26 percent for public utilities.
Despite Pipelines in Poor Condition, Some Utilities Had Deferred
Maintenance, Capital Improvements, or Both:
According to our survey results, some utilities had significant
portions of pipelines in poor condition; for example, more than one-
third of utilities had 20 percent or more of their pipelines nearing
the end of their useful life. We also found that for an estimated 60
percent of drinking water utilities and 65 percent of wastewater
utilities, the actual levels of pipeline rehabilitation and replacement
in recent years were less than the utilities‘ desired levels. Further,
in each of three categories”maintenance, minor capital improvements,
and major capital improvements”an estimated one-third or so of
utilities had deferred expenditures in their most recent fiscal year,
and 20 percent had deferred expenditures in all three categories.
Drinking water and wastewater utilities carry out various activities to
ensure efficient and cost-effective operations and plan for needed
improvements. According to the industry handbook, for example, utilities
carry out planned maintenance of plant, equipment, and pipes to prevent,
minimize, or delay failures or shutdowns that result in unplanned
maintenance activities and increased costs. [Footnote 37] Utility
officials told us that they also rehabilitate existing assets, such as
pipelines, to extend their useful life. Both regular maintenance and
rehabilitation of key assets help utilities keep their operating costs
as low as possible. When maintenance and asset rehabilitation are no
longer cost-effective options and capital assets reach the end of their
useful life, they must be replaced, often requiring large investments.
Despite their needs, utilities may have to postpone capital
improvements because revenues are not sufficient to finance the costs
or more immediate needs divert resources away from the planned
improvements. However, deferring major or minor capital improvements
can ultimately result in higher costs to the utilities. For example,
additional costs may be incurred to repair damage associated with the
failure of a major asset that was not replaced when planned.
Some Utilities Had Pipelines in Poor Condition and Rehabilitation and
Replacement Rates That Were Less Than Desired:
In looking at how utilities were managing their existing capital
assets, we decided to focus on utilities‘ pipelines for several
reasons. First, as noted earlier, EPA estimates that underground
pipelines account for about 75 percent of the nation‘s existing capital
investment in drinking water and wastewater infrastructure. Moreover,
aging pipelines”including the water supply, transmission, and
distribution lines at drinking water utilities and the sanitary sewer
lines and other underground systems at wastewater utilities”represent a
significant share of the estimated future capital investment needs. In
May 2001, the American Water Works Association, citing a ’huge wave of
aging pipe infrastructure,“ predicted significant increases in pipe
break rates and repair costs over the next 30 years”even if utilities
increase their investment in pipe replacement by several times over
today‘s levels. [Footnote 38] According to EPA‘s 1999 Drinking Water
Infrastructure Needs Survey, the largest category of need is the
installation and rehabilitation of transmission and distribution
systems”accounting for $83.2 billion, or 55 percent of the needs
projected through 2019. For wastewater systems, EPA‘s 1996 Clean Water
Needs Survey projected infrastructure-related needs for wastewater
systems of $128 billion through 2016. However, according to an EPA
official, the needs survey estimate substantially underestimates the
needs associated with the rehabilitation and replacement of the
underground infrastructure because these needs are frequently not
detected and therefore tend not to be included in long-range capital
plans. As a result, the national survey tends not to include these
costs. However, EPA has developed a more comprehensive estimate that
does include such needs. Although the new estimate has not yet been
released, the official confirmed that at least half of the projected
capital need for wastewater systems will be associated with the
rehabilitation and replacement of the underground infrastructure.
Given the projected needs for rehabilitating and replacing drinking
water and wastewater pipelines, we asked for more detailed information
on their age and condition. Among other things, this enabled us to
explore the relationship between the age and condition of utilities‘
pipelines and their rehabilitation/replacement activities. [Footnote
39]
Age and Condition of Pipelines:
For our survey, we asked the utilities to estimate the percentage of
their pipelines that were installed during each 25-year period between
1900 and 2000, as well as prior to 1900 and from 2000 to the present.
Our results indicate that, in general, for about a third of utilities,
a significant portion of their pipelines is relatively new”50 percent
or more was built since 1975. At the other end of the spectrum, for an
estimated 5 percent of the utilities, a significant portion of their
pipelines is quite old: 50 percent or more was built before 1925.
Also, according to our survey, significant portions of pipelines are in
poor condition at some utilities. Specifically, we estimate that for
more than one-third of utilities, 20 percent or more of their pipelines
were nearing the end of their useful life; and for 1 in 10 utilities,
50 percent or more of their pipelines were nearing the end of their
useful life.
By size and type of utility, our survey results indicate the following:
* Utilities with 20 percent or more of their pipelines in poor condition
tended to be smaller. In the case of drinking water utilities, an
estimated 35 percent of the systems serving 10,001 to 25,000 people and
41 percent of the systems serving 25,001 to 50,000 people fell into
this category, compared with 24 percent of the largest systems (those
serving over 100,000 people). Among wastewater utilities, the survey
data indicate that 42 percent of the smallest (serving 10,001 to 25,000
people) have at least 20 percent of their pipelines in poor condition,
compared with 24 percent of the largest systems. We found no
statistically significant differences between utilities in other size
categories.
* Wastewater utilities with 50 percent or more of their pipelines in
poor condition also tended to be smaller. A somewhat larger percentage
of the systems serving populations of 10,001 to 25,000 and 25,001 to
50,000 fell into this category than systems serving more than 100,000
people (an estimated 14 and 13 percent, respectively, compared with 3
percent). We found no statistical differences among the population size
categories for drinking water utilities.
* There was no statistical difference between public and privately owned
drinking water utilities in terms of the percentage of pipelines
reported to be nearing the end of their useful life.
In exploring the relationship between age and condition of the
pipelines, we found some indication that utilities with a preponderance
of ’newer“ pipelines were less likely to have pipelines in poor
condition. For example, according to our survey, among drinking water
utilities that had built three-quarters or more of their pipelines
since 1950, an estimated 47 percent of the utilities reported having 20
percent or more of their pipelines nearing the end of its useful life.
In contrast, an estimated 72 percent of the utilities that reported
having less than 20 percent of their pipelines in poor condition had a
preponderance of newer pipelines. Our findings were similar with regard
to wastewater utilities.
However, the relationship between pipeline age and condition was not
consistent. Indeed, industry studies have found that older pipe
typically has a longer life expectancy than pipe of more recent vintage
because of the type of material used, manufacturing techniques, and
other factors. In addition, technological advances in pipeline
rehabilitation allow drinking water and wastewater utilities to extend
the useful life of existing pipelines by installing special liners,
injecting grout or epoxy, or using other techniques.
Finally, we found little or no relationship between the condition of
utilities‘ pipelines and the frequency with which the utilities had
raised their user rates during the 10-year period from 1992 to 2001.
Utilities with higher percentages of pipelines nearing the end of their
useful life did not increase rates with any greater or lesser frequency
than utilities with smaller percentages of such pipelines.
Rehabilitation and Replacement Activities:
While no industry benchmark exists for the optimal pace of pipeline
rehabilitation and replacement that is applicable to all utilities, our
survey shows that nearly two-thirds of utilities have fallen short of
their desired pace of rehabilitation and replacement.
Little consensus exists among industry experts regarding what the
appropriate rate of pipeline rehabilitation and replacement is for the
average utility. Some experts have expressed concern that even though
utilities may have kept up with the workload so far, the pace of
pipeline upgrades will have to increase significantly because much of
the existing pipeline is nearing the end of its useful life. For
example, according to the industry report, Dawn of the Replacement Era,
the United States is not so much faced with making up for an historical
gap in the level of replacement funding, but it now has a compelling
need to increase spending on pipeline replacement to prevent a serious
funding gap from developing. Footnote 40] The report also points out
that as pipes age, they tend to break more frequently, and utilities
will be experiencing an estimated three-fold increase in pipeline
repair costs at the same time replacement costs are rising. On the
other hand, some experts believe that utilities are already facing a
backlog of work. As the Water Environment Research Foundation reported
in 2000, ’years of reactive maintenance and minimal expenditures on
sewers have left a huge backlog of repair and renewal work.“ [Footnote
41]
While we could not compare our data to an industry benchmark because
the optimal pace of pipeline rehabilitation and replacement is best
determined on a utility-by-utility basis, we did examine the extent to
which utilities were achieving what they had determined to be
appropriate for their own circumstances. We found that many of them
were falling short of their goals. As shown in figure 2, for many
drinking water and wastewater utilities, a significant disparity exists
between utilities‘ actual rehabilitation and replacement of pipelines
and the rate at which they believe it should be occurring.
Figure 2: Extent to Which Utilities‘ Actual Rate of Pipeline
Rehabilitation and Replacement Met or Exceeded Their Desired Rate (on
average, fiscal years 1998 through 2000):
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Utility: Drinking water utilities;
Met or exceeded desired rate: 40%;
Did not meet desired rate: 60%.
Utility: Wastewater utilities;
Met or exceeded desired rate: 35%;
Did not meet desired rate: 65%.
Source: GAO‘s analysis of survey data.
[End of figure]
Our survey indicates that roughly half of the utilities actually
rehabilitated or replaced 1 percent or less of their pipelines
annually, even though an estimated 89 percent of drinking water
utilities and 76 percent of wastewater utilities believed that a higher
level of rehabilitation and replacement should be occurring. More
specifically, about 35 percent of drinking water utilities and 42
percent wastewater utilities believed that they should be annually
rehabilitating or replacing more than 4 percent of their pipelines;
yet, only an estimated 18 percent of these utilities were actually
doing so. Table 5 shows in more detail how utilities‘ desired rates of
rehabilitation and replacement compared with their average actual rates
during recent fiscal years (1998 through 2000).
Table 5: Desired and Actual Rehabilitation and Replacement Rates for
Pipelines (on average, for fiscal years 1998 through 2000):
Desired rate: Drinking water utilities: 0 to 1 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent; 87%;
greater than 1 to 2 percent: 8%;
greater than 2 to 3 percent: 2%;
greater than 3 to 4 percent: 1%;
greater than 4 percent: 2%;
Total: 100%.
Desired rate: Drinking water utilities: greater than 1 to 2 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 64% [Shaded];
greater than 1 to 2 percent: 23%;
greater than 2 to 3 percent: 5%;
greater than 3 to 4 percent: 1%;
greater than 4 percent: 6%.
Total: 100%.
Desired rate: Drinking water utilities: greater than 2 to 3 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 42% [Shaded];
greater than 1 to 2 percent: 33% [Shaded];
greater than 2 to 3 percent: 17%;
greater than 3 to 4 percent: 1%;
greater than 4 percent: 1%;
Total: 100%.
Desired rate: Drinking water utilities: greater than 3 to 4 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 32% [Shaded];
greater than 1 to 2 percent: 45% [Shaded];
greater than 2 to 3 percent: 4% [Shaded];
greater than 3 to 4 percent: 14%;
greater than 4 percent: 6%;
Total: 100%.
Desired rate: Drinking water utilities: greater than 4 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 35% [Shaded];
greater than 1 to 2 percent: 14% [Shaded];
greater than 2 to 3 percent: 5% [Shaded];
greater than 3 to 4 percent: 5% [Shaded];
greater than 4 percent: 41%.
Total: 100%.
Desired rate: Wastewater utilities: 0 to 1 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent; 85%;
greater than 1 to 2 percent: 8%;
greater than 2 to 3 percent: 1%;
greater than 3 to 4 percent: 1%;
greater than 4 percent: 4%;
Total: 100%.
Desired rate: Wastewater utilities: greater than 1 to 2 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 47% [Shaded];
greater than 1 to 2 percent: 40%;
greater than 2 to 3 percent: 7%;
greater than 3 to 4 percent: 4%;
greater than 4 percent: 3%.
Total: 100%.
Desired rate: Wastewater utilities: greater than 2 to 3 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 51%[Shaded];
greater than 1 to 2 percent: 23% [Shaded];
greater than 2 to 3 percent: 18%;
greater than 3 to 4 percent: 2%;
greater than 4 percent: 6%.
Total:
Desired rate: Wastewater utilities: greater than 3 to 4 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 35% [Shaded];
greater than 1 to 2 percent: 39% [Shaded];
greater than 2 to 3 percent: 10% [Shaded];
greater than 3 to 4 percent: 4%;
greater than 4 percent: 12%;
Total: 100%.
Desired rate: Wastewater utilities: greater than 4 percent;
Rate at which rehabilitation/replacement actually occurred:
0 to 1 percent: 28% [Shaded];
greater than 1 to 2 percent: 23% [Shaded];
greater than 2 to 3 percent: 7% [Shaded];
greater than 3 to 4 percent: 6% [Shaded];
greater than 4 percent: 36%.
Total: 100%.
Notes: In seeking information on utilities‘ desired and actual
rehabilitation and replacement rates, we asked the survey respondents
to provide separate answers for the percentage of pipeline subject to
rehabilitation and the percentage subject to replacement, to the extent
possible. For the purposes of this analysis, we added the percentages
together to get combined rehabilitation and replacement rates. Totals
may not add to 100 due to rounding.
Legend: Numbers are percentage of utilities within each category of
desired rehabilitation/replacement rate. Shaded areas denote cases in
which utilities‘ actual rehabilitation and replacement of pipelines was
less than the utilities‘ desired rate.
Source: GAO‘s analysis of survey data.
[End of table]
For replacement rates alone, we found that about 60 percent of the
drinking water utilities and 77 percent of the wastewater utilities
replaced 1 percent or less of their pipelines annually, on average,
from fiscal years 1998 through 2000. [Footnote 42] At these rates, the
utilities would need at least 100 years to replace their entire
inventory of pipelines. These results are consistent with a 2001 study
by the American Water Works Association Research Foundation, which
reported that at least 9 of the 15 North American utilities examined in
the study replaced their water mains at an annual rate ranging from 0.1
percent to 1 percent. [Footnote 43] According to a 1994 Research
Foundation study, an estimated 4,400 miles of pipeline, or 0.5 percent
of the estimated 880,000 miles of existing pipeline, were being
replaced annually. [Footnote 44] The study concluded that utilities
would replace any given pipe only once every 200 years at the estimated
replacement rate and noted that no pipe has a 200-year life expectancy.
We also took a closer look at utilities with large percentages of
pipelines nearing the end of their useful life. Specifically, we
examined whether these utilities were any more or less likely than
utilities with small percentages of pipelines nearing the end of their
useful life to (1) have a preventive rehabilitation and replacement
program or (2) achieve their desired rehabilitation and replacement
rate for their pipelines. We found the following:
* Utilities with a large percentage of pipelines nearing the end of
their useful life were no more likely to have a preventive
rehabilitation and replacement program than utilities with a small
percentage of pipelines nearing the end of their useful life.
* Utilities with larger percentages of pipelines nearing the end of
their useful life were somewhat less likely to have achieved their
desired rehabilitation and replacement rate. More specifically, a
larger proportion of utilities with 20 percent or more of their
pipelines nearing the end of their useful life did not achieve their
desired rates than those with less than 20 percent of pipelines nearing
the end of their useful life (the estimates were about 80 percent and
about 50 percent of utilities, respectively). When we compared those
having 50 percent or more of their pipelines nearing the end of their
useful life with those having less than 50 percent nearing the end of
their useful life, we found a similar difference.
Many Utilities Deferred Maintenance, Capital Improvements, or Both:
We asked the surveyed utilities whether, in their most recent fiscal
year, they had deferred maintenance, minor capital improvements, and/or
major capital improvements as a result of insufficient funding. We
found that about one-third of the utilities deferred maintenance
expenditures and similar percentages of utilities deferred expenditures
in the other categories.
By size and type of ownership, we found the following:
* With one exception, there were no statistically significant
differences among utilities of different sizes. However, the smallest
drinking water utilities (serving populations of 10,001 to 25,000) were
more likely to defer maintenance and major capital projects than
utilities serving populations of 25,001 to 50,000”an estimated 35
percent compared with 24 percent for maintenance and an estimated 47
percent compared with 33 percent for major capital projects.
* Public drinking water utilities were more likely than their privately
owned counterparts to defer maintenance (an estimated 31 percent
compared with 12 percent) and major capital projects (42 percent
compared with 26 percent).
About 20 percent of utilities had deferred expenditures in all three
categories. Although we found no statistical differences among these
utilities based on population size, we found that public drinking water
utilities were more likely to defer all three than privately owned
drinking water utilities (an estimated 21 percent compared with 7
percent).
Utilities that deferred expenditures in all three categories because
available funding was not sufficient might also be expected to have
other indications of financial problems. However, we found no
statistically significant differences in the percentage of utilities
that were unable to cover their cost of providing service through local
sources of revenue, whether or not they deferred maintenance and
capital improvements. Similarly, we found only one significant
difference when we compared the frequency of rate increases among the
utilities that deferred expenditures: wastewater utilities that had
deferred expenditures in all three categories were somewhat more likely
to have had frequent rate increases (8 to 10 rate increases from 1992
to 2001) than no increases during this period (an estimated 25 percent
were in the first category, compared with 11 percent in the latter).
[Footnote 45]
Most Utilities Had Capital Improvement Plans, but Many Questioned
Adequacy of Future Funding:
According to our survey, the large majority”about 90 percent”of
utilities had capital improvement plans to identify future capital
needs, and most also had plans for financing the projects identified.
However, almost half of the utilities anticipated that their projected
funding would not be sufficient to cover future needs over the next 5
to 10 years.
Utilities prepare capital improvement plans to identify future needs for
plant and equipment as a result of the rehabilitation and replacement of
existing infrastructure, compliance with regulatory requirements, and
growth. According to EPA and industry sources, such plans should contain
detailed information on all needed capital projects, the reasons for
each project, and their estimated cost, for a specified period of time.
Experts also agree that capital improvement plans should be updated on
a regular basis to reflect changes in existing circumstances. The
projected financing for needed capital projects should be identified
and detailed in the utility‘s capital improvement plan, a separate
financing plan, or some other document, and ideally, should reflect
several alternative scenarios and their impact on user rates.
Most Utilities Had Capital Improvement Plans:
Overall, our survey results indicate that about 90 percent of drinking
water and wastewater utilities had capital improvement plans to
identify future capital needs. The smallest systems, serving 10,001 to
25,000 people, were slightly less likely than larger systems to have
had such plans (an estimated 86 percent for drinking water utilities
and 81 percent for wastewater utilities). Also, the survey results show
that about 90 percent of utilities reviewed their needs
annually”whether or not they had developed formal plans.
Experts familiar with capital planning in the utility industry recommend
that capital improvement plans have a longer-term focus and cover a
5- to 10-year period, at a minimum. The industry handbook developed by
the Association of Metropolitan Sewerage Agencies recommends that
utilities also forecast system replacement and expansion needs for a
much longer period of time”even 50 to 100 years, if possible.
[Footnote 46] Our survey results indicate that about 95 percent of the
utilities‘ capital improvement plans covered 5 years or more”with about
25 percent of drinking water utilities and about 20 percent of
wastewater utilities covering 10 years or more. The remaining utilities
had plans covering 4 years or less.
Most Utilities Had Plans for Financing Capital Needs, but Many
Questioned Whether Funds Would Be Adequate:
Most of the drinking water and wastewater utilities with capital
improvement plans also had plans for financing the projects identified
in their plans. According to our survey, 86 percent of the utilities
had such plans, including virtually all of the largest utilities (those
serving populations of over 100,000). Utilities with financing plans
were somewhat more likely to dedicate a portion of their income to
future capital needs. Specifically, our survey results indicate that
about 73 percent of the drinking water utilities with plans considered
future capital needs when developing their user rates by dedicating a
portion of their income to future needs, while about 59 percent of the
utilities without plans did so. In the case of wastewater utilities, an
estimated 78 percent of the utilities with plans dedicated a portion of
their income to future needs, while about 48 percent of those without
plans did so.
According to our survey results, about 45 percent of the drinking water
and wastewater utilities anticipated that their projected funding would
not be sufficient to cover future needs over the next 5 to 10 years. The
comprehensive industry handbook developed by the Association of
Metropolitan Sewerage Agencies recommends that drinking water and
wastewater utilities use a detailed financial planning window of at
least 5 to 10 years to provide for future capital needs. However, the
handbook notes that some utilities have a very narrow time line for
financial planning; while such utilities may identify their future
capital needs over a 5- to 10-year period, they only address detailed
financial forecasting as part of their annual budget development
process.
By utility size and type of ownership, we found the following:
* Drinking water utilities serving populations of 10,001 to 25,000 and
50,001 to 100,000 were more likely to believe that their projected
revenues will be insufficient to cover anticipated future needs than
the utilities serving over 100,000 people (an estimated 47 percent for
the smaller population groups compared with 35 percent for the largest
population group).
* There were no statistically significant differences among wastewater
utilities of different sizes.
* Public drinking water utilities were somewhat more likely than
privately owned systems to have concerns about future funding (an
estimated 44 percent compared with 33 percent).
We also looked at the relationship between the extent to which utilities
anticipated that their projected funding will be adequate to meet future
needs and a number of other key variables related to funding. As table 6
shows, we found that both drinking water and wastewater utilities that
anticipated that future funding will be inadequate were significantly
more likely to have deferred maintenance, minor capital expenditures,
or major capital expenditures in recent years compared with utilities
that anticipated adequate future funding.
Table 6: Relationship between Adequacy of Projected Funding to Meet
Needs Over the Next 5 to 10 Years and Other Key Variables Related to
Funding:
Key variables (percentage of utilities reporting in each category):
Deferred maintenance in most recently completed fiscal year;
Drinking water utilities: Anticipated funding would not be adequate to
meet future needs: 49%;
Drinking water utilities: Anticipated funding would be adequate to meet
future needs: 15%;
Wastewater utilities: Anticipated funding would not be adequate to meet
future needs: 47%;
Wastewater utilities: Anticipated funding would be adequate to meet
future needs: 15%.
Key variables (percentage of utilities reporting in each category):
Deferred minor capital improvements in most recently completed fiscal
year;
Drinking water utilities: Anticipated funding would not be adequate to
meet future needs: 53%;
Drinking water utilities: Anticipated funding would be adequate to meet
future needs: 20%;
Wastewater utilities: Anticipated funding would not be adequate to meet
future needs: 50%;
Wastewater utilities: Anticipated funding would be adequate to meet
future needs: 20%.
Key variables (percentage of utilities reporting in each category):
Deferred major capital improvements in most recently completed fiscal
year;
Drinking water utilities: Anticipated funding would not be adequate to
meet future needs: 63%;
Drinking water utilities: Anticipated funding would be adequate to meet
future needs: 24%;
Wastewater utilities: Anticipated funding would not be adequate to meet
future needs: 57%;
Wastewater utilities: Anticipated funding would be adequate to meet
future needs: 20%.
Key variables (percentage of utilities reporting in each category):
Increased rates 1-2 times or not at all from 1992 to 2001:
Drinking water utilities: Anticipated funding would not be adequate to
meet future needs: 53%;
Drinking water utilities: Anticipated funding would be adequate to meet
future needs: 51%;
Wastewater utilities: Anticipated funding would not be adequate to meet
future needs: 54%;
Wastewater utilities: Anticipated funding would be adequate to meet
future needs: 50%.
Key variables (percentage of utilities reporting in each category):
Dedicated portion of income from user charges to future capital needs;
Drinking water utilities: Anticipated funding would not be adequate to
meet future needs: 66%;
Drinking water utilities: Anticipated funding would be adequate to meet
future needs: 71%;
Wastewater utilities: Anticipated funding would not be adequate to meet
future needs: 65%;
Wastewater utilities: Anticipated funding would be adequate to meet
future needs: 76%.
Note: Numbers are estimated percentages of utilities that meet both row
and column criteria.
Source: GAO‘s analysis of survey data.
[End of table]
[End of chapter]
Chapter 4: Profit Potential Is Key Factor in Private Companies‘
Decisions to Assume Operation or Ownership of Utilities:
In making decisions to enter into privatization agreements with publicly
owned utilities or the governmental entities they serve, the private
companies we contacted primarily focus on a venture‘s potential to
generate profits for the company. In assessing profit potential, the
companies cited several specific criteria, such as the extent of
opportunities to enhance operational efficiency, the utility‘s
proximity to the companies‘ existing operations, and the potential for
system growth. They also noted that state policies can influence
privatization agreements. For example, two states that we contacted
restrict the use of design-build-operate contracts, which give a single
entity complete control over a project. Other states offer incentives
to encourage the takeover of financially troubled public utilities.
Profit Potential Is Key Consideration for Private Companies:
Privatization agreements range from contracts to operate and maintain
drinking water or wastewater facilities to outright ownership by private
entities. Regardless of the specific type of agreement, the companies we
contacted all evaluate the potential for profits when considering
entering into privatization agreements. Each of the five companies
employs a somewhat different business strategy in its pursuit of
privatization agreements, such as placing more emphasis on contract
operations rather than on ownership of utilities or focusing on
utilities of particular sizes or in particular locations. While none of
the companies would consider entering into a privatization agreement
without the potential to make a profit, differences in the companies‘
business strategies had some influence on the relative importance of
the factors company officials cited as affecting profit potential.
Companies Engage in Different Types of Privatization Arrangements:
Privatization can take different forms, ranging from contracting for
specific services to selling the facilities to a private company. The
most common form of privatization is contracting, which typically
entails a competition among private bidders to perform certain
activities. In the case of drinking water and wastewater utilities,
such activities typically include operation and maintenance for a set
period of time. When a municipality contracts with a private company
for services, the government or public entity remains the financier and
has management and policy control over the quality of services to be
provided. According to an official at one of the largest companies we
contacted, the most common type of public-private partnership in the
field of drinking water and wastewater utilities has historically been
operations and maintenance contracts covering from 1- to 5-year
periods.
A variation of this type of contractual arrangement is called ’design-
build-operate,“ in which a private company (or a team of companies)
designs, builds, and operates a facility under one agreement. Under
this model, the local government retains ownership of the utility once
it has been constructed and the contractor is responsible for operation
and maintenance over the life of the contract, often a long-term
agreement of 10 to 20 years.
In some instances, privatization involves transferring the ownership of
utility assets from a municipality to the private sector. Once the
assets have been sold, the municipality generally has no role in their
financial support, management, or oversight. Collectively, the
companies we contacted are involved in all of these types of
privatization agreements.
Companies Cite Several Criteria for Evaluating Ventures‘ Profit
Potential:
According to officials of the five companies, criteria important to
assessing the profitability of a proposed agreement to privatize a
utility include the potential to improve the efficiency of the
utility‘s operations; the proximity to the company‘s other utility
operations; the potential for system growth; the terms of a proposed
contract; and the potential need for capital investments. The relative
importance of the factors varies, depending on the companies‘ business
strategies.
All five of the companies saw the opportunity to improve the efficiency
of a utility‘s operations as a key factor in evaluating candidates for
privatization because of its potential impact on the companies‘ ability
to make a profit. For example, in two cases, company officials said that
operating efficiency can be improved by either reworking resources
already in place (e.g., training workers or correcting inefficient
practices) or investing in cost-effective improvements (e.g.,
computerizing operations or installing energy-efficient equipment).
Officials in two other companies commented that the potential for
correcting operational inefficiencies exists because public utilities
often lack the financial or technical capabilities of companies that
are in the business of assuming the operation or ownership of drinking
water and wastewater utilities.
Officials of one company said that they focus on three major cost areas
in looking for ways to increase efficiency: employees, energy, and
chemicals. The officials acknowledged that dealing with employees can
be sensitive because of concerns about potential job losses; thus, the
savings in this area typically come about as a result of attrition or
retraining. Energy consumption is a target of operational improvements
because it accounts for about one-third of the average utility‘s
operating costs. Because chemicals are also a major cost element,
utilities can achieve significant savings through bulk purchases.
At drinking water utilities, another area with significant potential
for cost savings is the reduction of ’unaccounted for“ water. This
water represents the difference between the volume of water that leaves
the treatment works and the volume that is ’metered“ (that is, used by
customers according to their water meters). For example, utilities may
experience leaks in their water distribution systems. According to an
official of one of the largest companies we contacted, it is not
uncommon for many communities to be unable to account for 25 percent or
more of the water they produce.
The companies provided examples of the types of operational
improvements that have resulted in cost savings or increased revenues:
* At a California drinking water utility, a company worked with state
regulatory authorities to reduce the utility‘s requirements to monitor
water quality, thus achieving over $200,000 savings in annual
laboratory costs.
* At another utility, also in California, the company introduced
improvements that reduced energy consumption by 13 percent and certain
treatment costs by 22 percent.
* At a Georgia utility, the same company implemented a leak detection
program that reduced unaccounted for water from 60 percent to 30
percent.
* Another company helped a Massachusetts wastewater utility to improve
the treatment process and modify the utility‘s incinerator, which
reduced incineration costs by about 75 percent.
* At a Texas drinking water utility, a meter replacement program is
projected to increase water revenues by $1 million over 10 years.
Other criteria cited by the companies for evaluating profit potential of
privatization opportunities include the following:
* Proximity to the companies‘ existing operations. Four of the five
companies we contacted consider the utilities‘ proximity to their other
operations when they decide whether or not to pursue a public-private
partnership. In one case, company officials told us that their
preference is to add new business in close proximity to existing
operations because, among other things, the company‘s technical experts
can make site visits at a reasonable cost. Officials from the other
companies indicated that proximity to existing operations allows them
to take advantage of economies of scale. For example, certain commonly
used products and equipment such as chemicals, pipe, and meters can be
purchased in bulk at lower costs and, with an expanded service area and
customer base, the companies can spread the costs over more customers.
An official from one of the companies commented that proximity is more
of a consideration in the case of smaller utilities because they get
more of a benefit than larger systems from sharing staff and other
resources.
Increasing efficiency through economies of scale may be more difficult,
however, in the case of relatively small and isolated utilities.
According to an official of the National Association of Water
Companies, a plan to consolidate several small, remote utilities
probably would not be cost-effective where miles of pipelines were
needed, for example, to connect the remote utilities. On the other
hand, he noted that there are ways that privatization agreements with
such utilities can be profitable. For example, private companies can
bring in professional management expertise to oversee multiple
utilities, use a limited number of system operators to run several
small utilities that do not require full-time operators, and
consolidate purchases of equipment and chemicals to get better prices.
* Potential for system growth. The projected growth in the population
served by a utility”its customer base”was also mentioned as a factor by
several companies. Officials from one company told us that projected
population growth allows the company to increase its customer base and
thus be assured of additional revenues. According to officials of
another company, a utility‘s growth potential is more of a
consideration when the privatization opportunity involves a smaller
utility. The officials indicated that they examine this factor more
closely at smaller utilities because these utilities may have to grow
before they become profitable. According to an official of the National
Rural Water Association, private companies generally consider public
water systems serving rural, low-density populations an unattractive
investment. Further, according to an official of the Kansas Rural Water
Association, small towns often have relatively high water and sewer
rates as well as a greater proportion of households with lower median
incomes. [Footnote 47]
* Terms of operation and maintenance contracts. Three of the companies
told us that, in the case of operation and maintenance agreements, the
length of time covered by a proposed contract is a key factor in their
decisions. Generally, the longer the time period covered by the
contract, the more time the company has to recoup its investment.
According to an official at one of the largest companies we contacted,
over the past 2 years the number of longer-term contracts has increased
markedly, partly because of the increased use of design-build-operate
contracts. The official also cited two examples of restrictive contract
provisions that his company views as deal breakers. First, he said that
some communities insist on unlimited liability guarantees from companies
that bid on privatization contracts; however, responsible companies have
to limit their liability. Second, restrictive maintenance provisions can
impose a ceiling”typically $10,000”on a contractor‘s responsibility for
maintenance items. According to the company official, this kind of
restriction limits a company‘s ability to offer comprehensive solutions,
which could be more cost-effective over the long term.
* The potential need for capital investment. The extent to which
companies foresee a need to invest their funds to repair, replace, or
upgrade utilities‘ plant and equipment can affect whether they enter
into an agreement or what type of agreement they enter. Officials from
several companies indicated that the condition of a utility‘s
infrastructure is not a deterrent as long as the amount and nature of
any investment needs are accurately reflected in the contract and the
company is fairly compensated. One official commented that it is
difficult to operate a utility as a contractor when the company has no
control over the level of capital investment”and the level has not been
adequate. In these situations, his company has tried to become more
involved in developing capital improvement plans for the utilities they
manage and to assume more responsibility for capital investments in
general. The same official also commented that even if the condition of
a utility‘s infrastructure is adequate, company officials may determine
that a substantial investment will be required just to make the utility
more efficient.
* Other factors. For drinking water utilities, officials of two
companies noted the importance of a reliable water source. For example,
according to one of the companies, an unreliable source limits profit
potential because it can be costly to purchase water from other systems
or develop a new source. For wastewater utilities, two companies
pointed out that the presence of large quantities of industrial waste
in the influent (the water flowing into the treatment facilities) can
be a deterrent to an agreement. For example, one company official noted
that industrial waste can increase treatment costs as well as pose a
potential liability issue for the facility owner or operator.
States‘ Policies May Also Influence Companies‘ Decisions:
In addition to identifying the site-specific factors they consider in
evaluating privatization opportunities, representatives from all five
of the companies we contacted also commented on state requirements or
policies that can facilitate or impede privatization arrangements. We
contacted officials of eight states identified by the five companies,
EPA, and industry officials as having particular requirements or
policies that affect privatization, either positively or negatively.
Our contacts included representatives from the state agencies that
oversee the drinking water and wastewater management programs and the
public utility commissions, which regulate the rates and other
activities of privately owned (and, in some cases, publicly owned)
utilities. The state officials told us that their agencies are
primarily interested in the delivery of adequate service to the public,
whether the service is provided by publicly or privately owned
utilities. However, the states have some requirements and policies that
can affect companies‘ privatization decisions, including laws that
address the acquisition of ’troubled“ utilities [Footnote 48] and the
use of design-build-operate contracts.
State regulators in Indiana and Pennsylvania have established programs
that provide utilities in good standing with incentives to acquire or
take over troubled utilities. For example, under Indiana‘s program, the
acquiring utility is permitted to add an ’acquisition adjustment“ to
its user rates as an incentive for taking over a troubled utility.
Similarly, Pennsylvania‘s incentive program allows, under certain
circumstances, the acquiring utility to increase the rate of return on
its investment and thus, accelerate the recovery of costs incurred for
needed system improvements. This program targets small utilities that
lack the financial, managerial, and/or technical capacity to comply
with applicable regulatory requirements. To encourage faster
replacement of aging water distribution systems, Pennsylvania also
established a special pipe surcharge program”the Distribution System
Improvement Charge Program”in which companies make improvements to
utilities‘ distribution systems. In return, the companies are allowed
to raise rates by up to 5 percent without going through a formal
hearing process.
In addition to the incentive programs, four of the eight states we
contacted”Connecticut, Indiana, New Jersey, and Pennsylvania”have
enacted laws that give state regulators the authority to provide for
qualified utilities to acquire or take over certain ’troubled“
utilities to resolve specific problems. For example, in New Jersey, the
state may order the acquisition of small drinking water or wastewater
utilities (with less than 1,000 connections) by a suitable public
utility or a privately owned company if the small utilities fail to
comply with an enforcement order. In New Jersey and the other states,
the orders are directed at serious violations involving, for example,
the availability, potability, or provision of water at adequate volume
or pressure or the failure to remedy ’severe deficiencies.“ While these
laws could affect companies‘ privatization decisions by compelling the
takeover of particular utilities, state officials indicated that the
laws are rarely used.
Other state requirements or policies can affect the use of design-build-
operate contracts, which couple the design and construction of new,
expanded, or upgraded facilities with comprehensive agreements to
operate and maintain the facilities. For example, Texas officials told
us that professional services such as engineering design must be
procured using a qualification-based selection while construction
services must be procured using a bidding process. As a result, the
design, construction, and operating services cannot be combined in a
single procurement. The situation in Pennsylvania was similar; a state
official told us that the state‘s procurement regulations have not been
updated to allow the kind of combined procurement contemplated in a
design-build-operate contract. In other instances, state laws can also
facilitate the use of design-build-operate contracts. For example,
Georgia amended its official code in 2000 to specifically authorize
local governments to enter into contracts with private entities ’for
the design, construction, repair, reconditioning, replacement,
maintenance, and operation of the system, or any combination of such
services“ at drinking water or wastewater systems.
We also identified certain requirements that could affect companies‘
privatization decisions and are specific to individual states. For
example, New Jersey law requires that privatization proposals be
approved by the applicable state agency. Among other things, state
regulators assess the financial and technical capacity of the private
company; the reasonableness of the contract terms; the extent to which
the interests of utility customers are protected; and whether the
particular contract terms, such as user charges and the status of
current utility employees, are clearly spelled out. In addition, under
California law, sales of drinking water and wastewater systems must be
approved by voters in the affected community.
[End of chapter]
Appendix I: Survey of Drinking Water Utilities:
United States General Accounting Office:
GAO:
Survey of Drinking Water Utilities:
Introduction:
The U.S. General Accounting Office (GAO) is an agency that assists the
U.S. Congress in evaluating federal programs. In anticipation of
analyzing a number of water infrastructure-related proposals this year,
the Committee on Environment and Public Works, U. S. Senate, has asked
GAO to collect information on user charges and infrastructure planning
at both public and privately owned drinking water utilities.
Your utility has been randomly selected to receive this nationwide
survey of drinking water utilities. As part of our study, we are asking
for your help in completing this survey so that we can provide
congressional decisionmakers with the information they need.
Part I of the survey collects general information on your utility. Part
II collects information on funding from user charges and other sources.
Part III collects information on your utility's infrastructure
planning.
Instructions:
When answering the questions in this questionnaire, please coordinate
with the appropriate staff who have knowledge of your utility's user
charges, other sources of funds, and capital improvement plans.
Please return your completed questionnaire in the enclosed, pre-
addressed business reply envelope. If the envelope is misplaced, the
return address is:
U.S. General Accounting Office:
Attn: Lisa Turner:
441 G Street, NW – Room 2T23 A:
Washington, DC 20548-0001:
In testing this questionnaire, we found that it took some utilities
less than an hour to complete and others about 2-3 hours.
If you have any questions about specific items in the questionnaire,
call or e-mail your questions to:
* Lisa Turner at (202) 512-6559 (e-mail address: tumerl@gao.gov); or;
* Terri Dee at (202) 512-9592 (e-mail address: deet@gao.gov).
Please provide the following information for the person we should
contact if we have any follow-up questions:
Name:
Title:
Utility:
Phone #:
E-mail:
n = number of utilities that responded to our survey.
Part I ” General Information on the Utility:
1. Does your utility have wholesale and/or resale customers (i.e., your
utility hills other utilities for water or other services provided by
you)? Do not include customers purchasing water or other services on an
emergency basis. (Please check one)
n = 810:
1. Yes, continue to question 2: 46.1%;
2. No, skip to question 4: 53.9%.
2. What was the estimated population served by your utility's wholesale
and/or resale customers for your most recently completed fiscal year?
(Please check one)
n = 386:
1. 10,000 or fewer: 44.5%;
2. 10,001 ” 25,000: 24.4%;
3. 25,001 ” 50,000: 10.0%;
4. 50,001 ” 100,000: 9.7%;
5. 100,001 ” 500,000: 6.4%;
6. 500,001 ” 1,000,000; 1.2%;
7. Over 1,000,000: 1.4%;
8. Don't know: 2.5%.
3. What is the number of wholesale or resale accounts that your utility
served for your most recently completed fiscal year? (Please insert
number in the space provided.)
n = 379:
90.0%: less than or equal to 30.
4. Does your utility have retail customers (i.e., your utility bills
residential, commercial, and/or industrial customers directly)?
n = 819:
1. Yes, continue to question 5: 98.7%;
2. No, skip to question 7: 1.3%.
5. What was the estimated population served by your retail operations
for your most recently completed fiscal year? (Please check one)
n = 821:
1. 10,000 or fewer: 0.0%;
2. 10,001 25,000: 44.0%;
3. 25,001 ” 50,000: 28.2%;
4. 50,001 ” 100,000: 15.1%;
5. 100,001 ” 500,000: 10.2%;
6. 500,001 ” 1,000,000: 1.7%;
7. Over 1,000,000: 0.9%;
8. Don't know; 0.0%.
6. What is the number of retail accounts that your utility served for
your most recently completed fiscal year? (Please indicate number in
the space provided.)
n = 787:
90.0% less than or equal to 35,500.
7. Which of the following services does your utility provide to its
customers? (Check all that apply)
n = 821:
1. Source of supply: 77.0%;
2. Treatment: 78.1%;
3. Distribution and transmission (including storage tanks, booster
stations, etc.): 97.9%;
4. Contract operations: 23.0%;
5. Other (Please explain): 5.5%.
Definition for question 7: Contract operations occur when one utility
provides services to another utility. Such services could include
treatment, distribution, billing, collection, etc.
8. What is the total length of the supply, transmission, and
distribution lines owned by your utility for your most recently
competed fiscal year? (Please insert number in the space provided)
n = 792:
90.1% less than or equal to 725 miles.
9. What percentage (in physical terms--not cost) of your supply,
transmission, and distribution lines were built in each of the
following periods?
1. Pre 1900: 90.1% less than or equal to 10 percent; n = 418;
2. 1900-24: 92.1% less than or equal to 25 percent; n = 478;
3. 1925-49: 89.2% less than or equal to 38 percent; n = 577;
4. 1950-74: 90.8% less than or equal to 60 percent; n = 701;
5. 1975-99: 90.3% less than or equal to 79 percent; n = 733;
6. 2000-present: 91.3% less than or equal to 10 percent; n = 686.
10. Which one of the following best describes the ownership of your
utility? (Please check one)
Publicly owned by:
1. a municipal government 72.9%; n = 821;
2. a water district 11.4%; n = 821;
3. a water authority 8.3% n = 821
Privately owned by:
4. a for profit organization (e.g., investor-owned company) 4.7%;
n = 821;
5. a not for profit organization (e.g., homeowners association) 2.8%;
n = 803.
Other:
6. other (Please describe) 1.5%; n = 821.
11. Does your utility contract with a private entity to perform all or
almost all services related to the management, operation, and
maintenance of your drinking water system (i.e., the private entity
provides full contract operations)? (Please check one)
n = 818:
1. Yes; 3.8%;
2. No; 96.3%.
12. Are any of your utility's activities regulated by a state utility
commission? (Please check one) n = 815:
1. Yes; continue to question 13; 25.3%;
2. No; skip to question 14; 71.8%;
3. Don't know; skip to question 14; 2.9%.
13. Which of the following does your state utility commission regulate?
(Please check all that apply)
1. User rates; 52.4%; n = 242;
2. Billing practices 47.0%; n = 241;
3. Notifications to customers 71.9%; n = 242;
4. Other (Please describe) 32.6%; n = 241.
14. Does your utility also provide sewerage services? (Please check one)
n = 815;
1. Yes; 69.0%;
2. No; 31.0%;
Part II ” Funding Sources for Drinking Water Utilities:
15. In your most recently completed fiscal year, what were your
utility's sources of funds? (Please check all that apply)
n = 821:
Utility and community sources:
1. User charges: 97.9%;
2. Property taxes: 7.5%;
3. Sales to other utilities (e.g., water and other services): 41.6%;
4. Special operating cost levies (revenues from a specific user or
group of users for a specific operating purpose, e.g., a large seasonal
user such as a cannery): 3.1%;
5. Interest earned: 77.1%;
6. Assessments: 14.0%;
7. Permit and inspection fees: 40.7%;
8. Hook-up, connection, or tap fees: 88.9%;
9. Reserves: 34.6%;
10. Other (e.g., fire hydrant maintenance fees, communication antenna
leases, developer contributions, etc.): 51.0%.
Grant sources:
11. Federal grants: 15.5%;
12. State grants: 20.6%;
13. Other grant sources: 3.5%.
Debt and equity sources:
14. Federal loans: 11.5%;
15. State loans: 25.4%;
16. Commercial loans: 8.9%;
17. Revenue bond proceeds: 35.7%;
18. General obligation bond proceeds: 19.0%;
19. Private activity bond proceeds: 1.5%;
20. Sale of stock: 2.2%;
21. Other short-term debt instruments: 7.9%;
22. Other long-term debt instruments: 7.0%;
23. Other debt and equity sources: 2.3%,
Other sources:
24. Other (Please describe): 8.6%.
16. This question refers to some of the funding sources that you may
have checked in question 15. For your most recently completed fiscal
year, approximately how much funding did your utility generate from
user charges and other utility and community sources? (Please insert
the dollar amount in the space provided. If none, enter "0")
Funding source: User charges (item 1 in question 15) n = 738;
Amount of funds generated: [Empty].
Funding source: Utility and community sources, excluding user charges
(items 2 through 10 in question 15) n = 658;
Amount of funds generated: [Empty].
17. Does your utility offer rate relief and/or some other type of
subsidy for customers with lower incomes? (Please check one)
n = 804:
1. Yes: 13.1%.
2. No: 86.7%.
18. For your most recently completed fiscal year, approximately what
were your utility's costs in the following categories? (Please insert
the dollar amount in the space provided. If none, enter "0")
1. Operations and maintenance: n = 765:
2. Capital expenditures: n = 728:
3. Debt service: n = 714:
4. Reserve payments: n = 447:
5. Depreciation expense: n = 624:
6. Total taxes: n = 477:
7. Other: n = 312:
Please describe other costs:
Definitions for question 18:
Operations and maintenance expenses are the day-to-day costs of
providing your utility's services, including labor, board Or council
member fees, retirement system contributions, insurance premiums,
energy, chemicals, supplies, replacement parts, repair services, fuel
and other vehicle operating costs, communications services, any other
utility service charges, permit fees, advertisements, public relations,
travel and mileage expenses, training costs, reference materials,
postage and delivery services, bad debt, legal services, engineering
services, accounting services, laboratory services, etc.
Capital expenditures are costs of replacing capital assets that have
reached the end of their useful lives, acquiring new assets that are
intended to serve existing customers, and constructing new treatment
plants and collection system components required to serve new areas or
new users. Capital expenditures may include costs associated with
materials, labor, architectural and/or engineering services, legal
services, financial services, permit fees, etc.
Debt service expenses include the principal and interest paid on
borrowed funds.
Reserve payments include revenues transferred to a reserve fund for
paying future costs or as required by bond documents.
Depreciation expense is an amount deducted from revenue in determining
income, based on an allocation of a long-lived asset's original cost
over the years of its useful life.
Definition for question 19:
End of useful life may be determined by age of the lines, the type of
material used in the lines, inspection, and history of line leakage and
breakage.
Rehabilitation extends the life of lines through technologies such as
microtunneling, sliplining, pipebursting, and form-in-place.
19. Does your utility have a preventive replacement and rehabilitation
program for lines that are coming to the end of their useful life? We
are referring to preventive replacement and rehabilitation rather than
replacement due to breakage. (Please check one)
n = 807:
1. Yes: continue to question 20; 59.1%;
2. No: skip to question 21; 40.9%.
20. In developing the current rates charged to users, did your utility
include an amount to cover the cost of your utility's preventive
replacement and rehabilitation program? We are referring to preventive
replacement and rehabilitation rather than replacement due to breakage.
(Please check one)
n = 492:
1. Yes: 85.4%;
2. No: 12.8%;
3. Not applicable, prohibited by public utility commission: 1.9%.
21. Approximately what percentage of your utility's supply,
transmission, and distribution lines are nearing the end of their
useful life? (Please indicate the percentage below. If none, enter 0)
n = 766:
89.8%: less than or equal to 49 percent.
22. For your last three fiscal years (FY 1998 through FY 2000), on
average, approximately what percentages of your supply, transmission,
and distribution lines were replaced and rehabilitated annually?
(Please calculate the average percentages for fiscal years 1998 through
2000 and indicate the amounts below. If none, enter 0)
1. 79.2%: less than or equal to 2 percent replaced annually; n = 770;
2. 88.5%: less than or equal to 2 percent rehabilitated annually; n =
617.
23. Given the age of your utility's supply, transmission, and
distribution lines, approximately what does your utility believe the
annual rates of replacement and rehabilitation should be? (Please enter
percentage. If none, enter "0". If you cannot determine a separate rate
for each, please provide a combined rate.)
1. 59.1%: less than or equal to 2 percent replacement rate; n = 468;
2. 79.7%: less than or equal to 2 percent rehabilitation rate; n = 300;
or:
3. 63.0%: less than or equal to 4 percent combined rate; n = 470.
24. In developing the current rates charged to users, does your utility
dedicate a portion of its income each year to provide for future
capital needs? (Please check one); n = 807:
1. Yes: skip to question 26; 69.6%;
2. No: continue to question 25; 28.6%;
3. Not applicable, prohibited by public utility commission: continue to
question 25; l.8%.
25. Does a state or local law or regulation prohibit your utility from
accumulating funds to provide for future capital needs? (Please check
one) n = 243:
1. Yes: 12.0%;
2. No: 75.2%;
3. Don't know: 12.8%.
26. If your utility generates revenues in excess of costs, what happens
to the excess revenues? (Check all that apply) n = 821:
1. Retained in total by the utility for future use: 73.9%;
2. Retained in part by the utility for future use; 13.3%;
3. Transferred in total to the local government for activities related
to the utility's operations (such as personnel or legal services):
0.9%;
4. Transferred in part to the local government for activities related
to the utility's operations (such as personnel or legal services):
8.3%;
5. Transferred in total to the local government for activities not
related to the utility's operations (such as construction of schools or
roads): 1.8%;
6. Transferred in part to the local government for activities not
related to the utility's operations (such as construction of schools or
roads): 6.6%;
7. Paid out to investors as dividends: 2.9%;
8. Refunded to customers when allowed rate of return is exceeded: 1.3%;
9. Other (Please explain): 2.5%.
Part III ” Infrastructure Planning:
27. Does your utility have a plan for managing its existing capital
assets? (Please check one) n = 801:
1. Yes: skip to question 29: 69.4%;
2. No: continue to question 28: 27.3%;
3. Don't know: continue to question 28: 3.3%.
28. Is your utility currently developing a plan for managing its
existing capital assets? (Please check one) n = 217:
1. Yes: skip to question 30: 38.9%;
2. No: skip to question 30: 50.1%;
3. Don't know: skip to question 30: 11.0%.
29. Do your utility's plans for managing existing capital assets
include the following components? (Please check one for each of the
following items.)
a. A complete assessment of the physical condition of the utility's
capital assets; n = 570:
1 . Yes, for all capital assets: 41.3%;
2. Yes, for some capital assets: 52.8%;
3. No: 5.9%.
b. Descriptions of the criteria used to measure and report asset
condition; n = 559:
l. Yes, for all capital assets: 29.5%;
2. Yes, for some capital assets: 52.9%;
3. No: 17.6%.
c. The condition level at which your utility intends to maintain the
assets; n = 559:
1. Yes, for all capital assets: 33.9%;
2. Yes, for some capital assets: 49.5%;
3. No: 16.6%.
d. A comparison of the estimated and actual dollar amounts required to
maintain the assets at the condition level established by your utility;
n = 560:
1. Yes, for all capital assets: 27.7%;
2. Yes, for some capital assets: 40.3%;
3. No: 32.0%.
Definition for question 30:
Capital improvement plan contains detailed information on all needed
capital projects, the reason for each project. and their costs, for a
specified period of time.
30. Does your utility have a plan that identifies future capital needs
(i.e., a capital improvement plan)? (Please check one); n = 810:
1. Yes: continue to question 31: 91.1%;
2. No: skip to question 33: 7.7%;
3. Don't know: skip to question 33: 1.2%.
31. How many years does your utility's capital improvement plan cover?
(Please enter number of years in the space provided); n = 740:
93.7%: greater than or equal to 5 years.
32. Does your utility have a plan for financing the capital projects
identified in your capital improvement plan? (Please check one) n =
750:
1. Yes: 86.9%;
2. No: 13.1%.
33. How often does your utility review its capital improvement needs?
(Please check one)
1. Annually: 91.7%; n = 803;
2. Other (Please indicate the time period in years): 8.3%; n = 58.
34. In which of the following years did your utility request rate
increases? (Please check all that apply.)
1. 1992: 21.5%; n = 814;
2. 1993: 22.4%; n = 814;
3. 1994: 22.6%; n = 814;
4. 1995: 22.4%; n = 814;
5. 1996: 24.9%; n = 814;
6. 1997: 23.6%; n = 814;
7. 1998: 25.7%; n = 814;
8. 1999: 25.7%; n = 814;
9. 2000: 29.1%; n = 814;
10. 2001: 30.6%; n = 814;
11. No rate increases requested during this period: 5.2%; n = 814;
12. Not applicable; rate increases are not subject to external review
and/or approval: 17.6%; n = 815.
35. In which of the following years did your utility increase rates?
(Please check all that apply) n = 820;
1. 1992: 27.2%;
2. 1993: 26.3%;
3. 1994: 29.5%;
4. 1995: 28.3%;
5. 1996: 32.1%;
6. 1997: 30.8%;
7. 1998: 34.0%;
8. 1999: 30.7%;
9. 2000: 35.1%;
10. 2001: 38.3%;
11. Did not increase rates during this period: 6.0%.
36. In your most recently completed fiscal year, did your utility defer
any maintenance because available funding was not sufficient? (Please
check one) n = 813;
1. Yes: 30.0%;
2. No: 70.0%.
37. In your most recently completed fiscal year, did your utility defer
any minor capital improvements because available funding was not
sufficient? (Please check one)
1. Yes: 34.1%;
2 No: 65.9%.
38. In your most recently completed fiscal year, did your utility defer
any major capital projects because available funding was not
sufficient? (Please check one) n = 810;
1. Yes: 40.6%;
2. No: 59.4%.
39. Do you anticipate that, over the next 5 to 10 years, your utility's
projected revenues and other funding will be sufficient to cover
anticipated future needs? (Please check one) n = 807;
1. Yes: 57.0%;
2. No: 43.0%.
40. If you have any additional comments on matters discussed in this
survey or related to drinking water and wastewater infrastructure
planning and funding, please use the space below or attach additional
pages, if needed. n = 821;
Thank you for your help!
[End section]
Appendix II: Survey of Wastewater Utilities:
United States General Accounting Office:
GAO:
Survey of Wastewater Water Utilities:
Introduction:
The U.S. General Accounting Office (GAO) is an agency that assists the
U.S. Congress in evaluating federal programs. In anticipation of
analyzing a number of water infrastructure-related proposals this year,
the Committee on Environment and Public Works, U. S. Senate, has asked
GAO to collect information on user charges and infrastructure planning
at both public and privately owned drinking water utilities.
Your utility has been randomly selected to receive this nationwide
survey of drinking water utilities. As part of our study, we are asking
for your help in completing this survey so that we can provide
congressional decisionmakers with the information they need.
Part I of the survey collects general information on your utility. Part
II collects information on funding from user charges and other sources.
Part III collects information on your utility's infrastructure
planning.
Instructions:
When answering the questions in this questionnaire, please coordinate
with the appropriate staff who have knowledge of your utility's user
charges, other sources of funds, and capital improvement plans.
Please return your completed questionnaire in the enclosed, pre-
addressed business reply envelope. If the envelope is misplaced, the
return address is:
U.S. General Accounting Office:
Attn: Lisa Turner:
441 G Street, NW – Room 2T23 A:
Washington, DC 20548-0001:
In testing this questionnaire, we found that it took some utilities
less than an hour to complete and others about 2-3 hours.
If you have any questions about specific items in the questionnaire,
call or e-mail your questions to:
* Lisa Turner at (202) 512-6559 (e-mail address: tumerl@gao.gov); or;
* Terri Dee at (202) 512-9592 (e-mail address: deet@gao.gov).
Please provide the following information for the person we should
contact if we have any follow-up questions:
Name:
Title:
Utility:
Phone #:
E-mail:
n = number of utilities that responded to our survey.
Part I ” General Information on the Utility:
1. Does your utility have wholesale customers (i.e., your utility bills
other utilities for services provided by you)? (Please check one) n =
1,104;
1. Yes: continue to question 2: 40.3%;
2. No: skip to question 4: 59.8%.
2. What was the estimated population served by your utility's wholesale
customers for your most recently completed fiscal year? (Please check
one) n = 448;
1. 10,000 or fewer: 42.2%;
2. 10,001 - 25,000: 20.6%;
3. 25,001 - 50,000: 11.6%;
4. 50,001 - 100,000: 14.5%;
5. 100,001 - 500,000: 7.5%;
6. 500,001 - 1,000,000: 1.4%;
7. Over 1,000,000: 1.1%;
8. Don't know: 1.1%.
3. What is the number of wholesale accounts that your utility served
for your most recently completed fiscal year? (Please insert number in
the space provided) n = 437;
90.3%: less than or equal to 10.
4. Does your utility have retail customers (i.e., your utility bills
residential, commercial, and/or industrial customers directly)? (Please
check one) n = 1,109;
1. Yes: continue to question 5: 94.2%;
2. No: skip to question 7: 5.8%.
5. What was the estimated population served by your retail operations
for your most recently completed fiscal year? (Please check one) n =
1,113;
1. 10,000 or fewer: 0.0%;
2. 10,001- 25,000: 43.7%;
3. 25.001- 50,000: 24.0%;
4. 50,001-100,000: 17.2%;
5. 100,001- 500,000: 11.2%;
6. 500,001 - 1,000,000: 2.2%;
7. Over 1,000,000: 1.6%;
8. Don't know: 0.0%,
6. What is the number of retail accounts that your utility served for
your most recently completed fiscal year? (Please indicate number in
the space provided) n = 974;
90.0%: less than or equal to 40,214.
7. Which of the following services does your utility provide? (Check
all that apply) n = 1,113;
1. Collection system (including pump stations): 82.3%;
2. Interceptor system (including pump stations): 70.9%;
3. Treatment (include biosolids disposal): 93.8%;
4. Reclaimed wastewater/effluent reuse: 17.6%;
5. Contract operations: 17.3%;
6. Other (Please explain): 5.6%.
Definition for question 7: Contract operations occur when one utility
provides services to another utility. Such services could include
treatment, collection, billing, etc.
8. What is the total length of separate sanitary sewer lines owned by
your utility for your most recently completed fiscal year? (Please
insert number in the space provided) n = 1,079;
90.1%: less than or equal to 500 miles.
9. What percentage (in physical terms - not cost) of your separate
sanitary sewer lines were built in each of the following periods?
(Please enter percentages in spaces provided)
1. Pre 1900: 91.7%: less than or equal to 10 percent; n = 567;
2. 1900-24: 90.9%: less than or equal to 25 percent; n = 672;
3. 1925-49: 91.1%: less than or equal to 40 percent; n = 794;
4. 1950-74: 91.1%: less than or equal to 70 percent; n = 934;
5. 1975-99: 90.4%: less than or equal to 75 percent; n = 970;
6. 2000-present: 90.2%: less than or equal to 10 percent; n = 53.
10. What is the total length of combined storm/sanitary sewer lines
owned by your utility for your most recently completed fiscal year?
(Please insert number in the space provided) n = 1,053;
90.1%: less than or equal to 67 miles.
l1. What percentage (in physical terms - not cost) of your combined
storm/sanitary sewer lines were built in each of the following periods?
(Please enter percentages in spaces provided)
1. Pre 1900: 92.0%: less than or equal to 30 percent; n = 214;
2. 1900-24: 89.7%: less than or equal to 44 percent; n = 234;
3. 1925-49: 89.9%: less than or equal to 60 percent; n = 239;
4. 1950-74: 91.2%: less than or equal to 50 percent; n = 263;
5. 1975-99: 89.8%: less than or equal to 36 percent; n = 251;
6. 2000-present: 90.2%: less than or equal to 5 percent; n = 226.
12. Which one of the following best describes the ownership of your
utility? (Please check one)
Publicly owned by:
1. a municipal government: 76.8%; n = 1,113;
2. a sewer district: 10.7%; n = 1,113;
3. a sewer authority: 12.6%; n = 1,113.
Privately owned by:
4. a for profit organization (e.g., investor-owned company): 0.1%; n =
1,113;
5. a not for profit organization (e.g., homeowners association): 0.5%;
n = 1,110.
Other:
6. other (Please describe): 1.4%; n = 1,113.
13. Does your utility contract with a private entity to perform all or
almost all services related to the management, operation, and
maintenance of your wastewater system (i.e., the private entity
provides full contract operations)? (Please check one); n = 1,111;
1. Yes: 6.1%;
2. No: 93.9%.
14. Are any of your utility's activities regulated by a state utility
commission? (Please check one) n = 1,103;
1. Yes: continue to question 15: 13.6%;
2. No: skip to question 16: 83.2%;
3. Don't know: skip to question 16: 3.3%.
15 . Which of the following does your state utility commission
regulate? (Please check all that apply)
1. User rates: 32.2%; n = 150;
2. Billing practices: 23.2%; n = 150;
3. Notifications to customers: 48.7%; n = 150;
4. Other (Please describe): 48.3%; n = 152.
16. Does your utility also provide drinking water services? (Please
check one) n = 1,097;
1. Yes: 58.8%;
2. No: 41.2%.
Part II ” Funding Sources for Wastewater Utilities:
17. In your most recently completed fiscal year, what were your
utility's sources of funds? (Please check all that apply) n = 1,113;
Utility and community sources:
1. User charges: 96.9%;
2. Property taxes: 10.3%;
3. Sales to other utilities (e.g., treatment and other services):
32.1%;
4. Product sales (e.g., reclaimed water, biosolids, fertilizer
products, etc.): 12.3%;
5. Special operating cost levies (revenues from a specific user or
group of users for a specific operating purpose, e.g., pretreatment
charges for high strength waste): 38.6%;
6. Interest earned: 78.2%;
7. Assessments: 20.8%;
8. Permit and inspection fees: 49.7%;
9. Hook-up or connection fees: 77.8%;
10. Reserves: 36.7%;
11. Other (e.g., developer contributions, etc.): 29.1%.
Grant sources:
12. Federal grants: 18.1%;
13. State grants: 30.8%;
14. Other grant sources: 3.5%.
Debt and equity sources:
15. Federal loans: 7.5%;
16. State loans: 40.3%;
17. Commercial loans: 6.4%;
18. Revenue bond proceeds: 36.0%;
19. General obligation bond proceeds: 22.6%;
20. Private activity bond proceeds: 0.9%;
21. Sale of stock: 0.0%;
22. Other short-term debt instruments: 5.2%;
23. Other long-term debt instruments: 3.1%;
24. Other debt and equity sources 1.4%.
Other sources:
25. Other (Please describe): 7.4%.
18. This question refers to some of the funding 20 sources that you may
have checked in question 17. For your most recently completed fiscal
year, approximately how much funding did your utility generate from
user charges and other utility and community sources? (Please insert
the dollar amount in the space provided. If none, enter "0")
Funding source: User charges (item 1 in question 17); n = 1,001;
Amount of funds generated:
Funding source: Utility and community sources, excluding user charges
(items 2 through 11 in question 17); n = 872;
Amount of funds generated:
19. Does your utility offer rate relief and/or some other type of
subsidy for customers with lower incomes? (Please check one) n = 1,071;
1. Yes: 13.0%;
2. No: 87.0%.
20. For your most recently completed fiscal year, approximately what
were your utility's costs in the following categories? (Please insert
the dollar amount in the space provided. If none, enter "0")
1. Operations and maintenance: n = 1,059;
2. Capital expenditures: n = 993;
3. Debt service: n = 983;
4. Reserve payments: n = 623;
5. Depreciation expense: n = 780;
6. Total taxes: n = 541;
7. Other: n = 435.
Please describe other costs:
Definitions for question 20:
Operations and maintenance expenses are the day-to-day costs of
providing your utility's services, including labor, board or council
member fees, retirement system contributions, insurance premiums,
energy, chemicals, supplies, replacement parts, repair services, fuel
and other vehicle operating costs, communications services, any other
utility service charges, permit fees, advertisements, public relations,
travel and mileage expenses, training costs, reference materials,
postage and delivery services, bad debt, legal services, engineering
services, accounting services, laboratory services, etc.
Capital expenditures are costs of replacing capital assets that have
reached the end of their useful lives, acquiring new assets that are
intended to serve existing customers, and constructing new treatment
plants and collection system components required to serve new areas or
new users. Capital expenditures may include costs associated with
materials, labor, architectural and/or engineering services, legal
services, financial services, permit fees, etc.
Debt service expenses include the principal and interest paid on
borrowed funds.
Reserve payments include revenues transferred to a reserve fund for
paying future costs or as required by bond documents.
Depreciation expense is an amount deducted from revenue in determining
income, based on an allocation of a long-lived asset's original cost
over the years of its useful life.
Definition for question 21:
End of useful life may be determined by age of the lines, the type of
material used in the lines, inspection, and history of line leakage and
breakage.
Rehabilitation extends the life of lines through technologies such as
microtunneling, sliplining, pipebursting, and form-in-place.
21. Does your utility have a preventive replacement and rehabilitation
program for lines that are coming to the end of their useful life? We
are referring to preventive replacement and rehabilitation rather than
replacement due to breakage. (Please check one); n = 1,091;
1. Yes: continue to question 22: 56.2%;
2. No: skip to question 23: 43.8%.
22. In developing the current rates charged to users, did your utility
include an amount to cover the cost of your utility's preventive
replacement and rehabilitation program? (Please check one) n = 613;
1. Yes: 85.4%;
2. No: 14.0%;
3. Not applicable, prohibited by public utility commission: 0.7%.
23. Approximately what percentages (in physical terms”not cost) of your
utility's separate sanitary sewer lines and combined storm/sanitary
sewer lines are nearing the end of their useful life? (Please indicate
the percentage below. If none, enter 0)
1. 89.0%: less than or equal to 47 % separate sanitary sewer lines; n =
980;
2. 89.7%: less than or equal to 65 % combined storm/sanitary sewer
lines; n = 312.
24. For your last three fiscal years (FY 1998 through FY 2000), on
average, approximately what percentages (in physical terms”not cost) of
your separate sanitary sewer lines and combined storm/sanitary sewer
lines were replaced and rehabilitated annually? (Please calculate the
average percentages for fiscal years 1998 through 2000 and indicate the
amount below. If none, enter "0")
3. Separate sanitary sewer lines:
a. 86.0%: less than or equal to 2 percent replaced annually; n = 974;
b. 81.6%: less than or equal to 2 percent rehabilitated annually; n =
890.
4. Combined storm/sanitary sewer lines:
a. 87.8%: less than or equal to 2 percent replaced annually; n = 313;
b. 91.2%: less than or equal to 2 percent rehabilitated annually; n =
307.
25. Given the ages of your utility's separate sanitary sewer lines and
combined storm/sanitary sewer lines, approximately what does your
utility believe the annual rates (in physical terms”not cost) of
replacement and rehabilitation should be? (Please enter percentage. If
none, enter "0". If you cannot determine separate rates for replacement
and rehabilitation, please provide a rate that combines both)
a. Separate sanitary sewer lines:
a. 65.8%: less than or equal to 2 percent replacement rate; n = 559;
b. 56.3%: less than or equal to 2 percent rehabilitation rate; n = 501;
or:
c. 64.8%: less than or equal to 4 percent combined rate; n = 562.
b. Combined storm/sanitary sewer lines:
a. 73.1%: less than or equal to 2 percent replacement rate; n = 175;
b. 77.5%: less than or equal to 2 percent rehabilitation rate; n = 160;
c. 66.3%: less than or equal to 4 percent combined rate; n = 204.
26. In developing the current rates charged to users, does your utility
dedicate a portion of its income each year to provide for future
capital needs? (Please check one) n = 1,076;
1. Yes: skip to question 28; 71.1%;
2. No: continue to question 27; 28.4%;
3. Not applicable, prohibited by public utility commission: continue to
question 27; 0.5%.
27. Does a state or local law or regulation prohibit your utility from
accumulating funds to provide for future capital needs? (Please check
one) n= 316;
1. Yes: 6.3%;
2. No: 76.6%;
3. Don't know: 17.1%.
28. If your utility generates revenues in excess of costs, what happens
to the excess revenues? (Check all that apply) n = 1,113;
1. Retained in total by the utility for future use: 75.3%;
2. Retained in part by the utility for future use: 11.1%;
3. Transferred in total to the local government for activities related
to the utility's operations (such as personnel or legal services):
1.4%;
4. Transferred in part to the local government for activities related
to the utility's operations (such as personnel or legal services:
10.0%;
5. Transferred in total to the local government for activities not
related to the utility's operations (such as construction of schools or
roads): 1.1%;
6. Transferred in part to the local government for activities not
related to the utility's operations (such as construction of schools or
roads): 4.8%;
8. Refunded to customers when allowed rate of return is exceeded: 1.4%;
9. Other (Please explain): 3.7%.
Part III ” Infrastructure Planning:
29. Does your utility have a plan for managing its existing capital
assets? (Please check one) n = 1,076;
1. Yes: skip to question 31; 65.4%;
2. No: continue to question 30; 30.8%;
3. Don't know: continue to question 30; 3.8%.
30. Is your utility currently developing a plan for managing its
existing capital assets? (Please check one) n = 378;
1. Yes: 47.4%;
2. No: skip to question 32: 42.2%;
3. Don't know: skip to question 32: 10.4%.
31. Do your utility's plans for managing existing capital assets
include the following components? (Please check one for each of the
following items)
a. A complete assessment of the physical condition of the utility's
capital assets: n = 694;
1. Yes, for all capital assets: 38.3%;
2. Yes, for some capital assets: 53.9%;
3. No: 7.8%.
b. Descriptions of the criteria used to measure and report asset
condition: n = 682;
1. Yes, for all capital assets: 25.3%;
2. Yes, for some capital assets: 51.3%;
3. No: 23.3%.
c. The condition level at which your utility intends to maintain the
assets: n = 685;
1. Yes, for all capital assets: 25.1%;
2. Yes, for some capital assets: 54.1%;
3. No: 20.8%.
d. A comparison of the estimated and actual dollar amounts required to
maintain the assets at the condition level established by your utility:
n = 679;
1. Yes, for all capital assets: 22.2%;
2. Yes, for some capital assets: 41.3%;
3. No: 36.5%.
Definition for question 32:
Capital improvement plan contains detailed information on all needed
capital projects, the reason for each project, and their costs, for a
specified period of time.
32. Does your utility have a plan that identifies future capital needs
(i.e., a capital improvement plan)? (Please check one) n = 1,098;
1. Yes: continue to question 33: 87.5%;
2. No: skip to question 35: 11.6%;
3. Don't know: skip to question 35: 0.9%.
33. How many years does your utility's capital improvement plan cover?
(Please enter number of years in the space provided) n = 943;
95.4% greater than or equal to 5 years.
34. Does your utility have a plan for financing the capital projects
identified in your capital improvement plan? (Please check one) n =
949;
1. Yes: 86.5%;
2. No: 13.5%.
35. How often does your utility review its capital improvement needs?
(Please check one)
1. Annually: 92.7%; n = 1,078;
2. Other (Please indicate the time period in years): 7.3%; n = 78.
36. In which of the following years did your utility request rate
increases? (Please check all that apply)
1. 1992: 22.7%; n = 1,104;
2. 1993: 21.1%; n = 1,104;
3. 1994: 24.3%; n = 1,104;
4. 1995: 22.0%: n = 1,104;
5. 1996: 23.5%: n = 1,104;
6. 1997: 23.7%; n = 1,104;
7. 1998: 25.6%; n = 1,104;
8. 1999: 26.3%; n = 1,104;
9. 2000: 28.6%; n = 1,104;
10. 2001: 31.6%; n = 1,104;
11. No rate increases requested during this period: 8.1% n = 1,104;
12. Not applicable; rate increases are not subject to external review
and/or approval: 16.2%; n = 1,105.
37. In which of the following years did your utility increase rates?
(Please check all that apply.) n = 1,112;
1. 1992: 27.4%;
2. 1993: 26.8%;
3. 1994: 29.8%;
4. 1995: 27.0%;
5. 1996: 29.8%;
6. 1997: 30.7%;
7. 1998: 31.7%;
8. 1999: 32.0%;
9. 2000: 35.9%;
10. 2001: 39.8%;
11. Did not increase rates during this period: 9.9%;
38. In your most recently completed fiscal year, did your utility defer
any maintenance because available funding was not sufficient? (Please
check one) n = 1,098;
1. Yes: 28.6%;
2. No: 71.4%.
39. In your most recently completed fiscal year, did your utility defer
any minor capital improvements because available funding was not
sufficient? (Please check one) n = 1,095;
1. Yes: 34.0%;
2. No: 66.0%.
40. In your most recently completed fiscal year, did your utility defer
any major capital projects because available funding was not sufficient?
(Please check one) n = 1,099;
1. Yes: 36.3%;
2. No: 63.7%.
41. Do you anticipate that, over the next 5 to 10 years, your utility's
projected revenues and other funding will be sufficient to cover
anticipated future needs? (Please check one) n = 1,085;
1. Yes: 56.1%;
2. No: 43.9%.
42. If you have any additional comments on matters discussed in this
survey or related to wastewater and drinking water infrastructure
planning and funding, please use the space below or attach additional
pages, if needed. n = 1,113;
Thank you for your help!
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Ellen Crocker, (617) 565-7469:
Lisa Turner, (202) 512-6559:
Acknowledgments:
In addition to the individuals named above, Wendy Ahmed, Mark Connolly,
Teresa Dee, Laura Greene, Jerry Laudermilk, Grant Mallie, and Laura
Shumway made key contributions to this report. Important contributions
were also made by Ulana Bihun, Stuart Kaufman, Karen Keegan, Jonathan
McMurray, Mehrzad Nadji, Carol Herrnstadt Shulman, and the staff in
GAO‘s Shared Services Center.
[End of section]
Footnotes:
[1] See U.S. General Accounting Office, Water Infrastructure:
Information on Federal and State Financial Assistance, GAO-02-134
(Washington, D.C.: Nov. 30, 2001).
[2] GAO did not receive enough responses from privately owned
wastewater utilities for a meaningful analysis of ownership types.
According to EPA, most privately owned wastewater systems serve
populations of less than 10,000.
[3] In constant year 2000 dollars. See U.S. General Accounting Office,
Water Infrastructure: Information on Federal and State Financial
Assistance, GAO-02-134 (Washington, D.C.: Nov. 30, 2001).
[4] For example, nearly 60 percent of the community drinking water
systems serve populations of 500 or fewer.
[5] For the purposes of our review, we focused on wastewater treatment
facilities only to avoid double counting collection facilities that
serve multiple treatment plants. According to an EPA official,
wastewater treatment facilities serving 10,000 or more people account
for approximately 65 percent of the estimated infrastructure needs for
wastewater utilities.
[6] American Water Works Association Water Industry Technical Action
Fund, Dawn of the Replacement Era: Reinvesting in Drinking Water
Infrastructure (Denver, Colo.: May 2001).
[7] For example, see Water Environment Research Foundation, New Pipes
for Old: A Study of Recent Advances in Sewer Pipe Materials and
Technology (2000).
[8] U.S. Environmental Protection Agency, Drinking Water Infrastructure
Needs Survey: Second Report to Congress, EPA 816-R-01-004 (Washington,
D.C.: February 2001).
[9] U.S. Environmental Protection Agency, 1996 Clean Water Needs Survey
Report to Congress, EPA 832-R-97-003 (Washington, D.C.: September
1997).
[10] Water Infrastructure Network, Clean & Safe Water for the 21st
Century (April 2000).
[11] Congressional Budget Office, Future Investment in Drinking Water
and Wastewater Infrastructure, (Washington, D.C.: May 2002). The report
states that assumptions about the rate at which drinking water pipes
are replaced, the savings associated with improved efficiency, the
costs of controlling combined sewer overflows, and the borrowing term
are primarily responsible for the difference between the low and high
estimates.
[12] Among the associations that support the principle that utilities
should be self-sustaining are the American Water Works Association, the
Association of Metropolitan Sewerage Agencies, the Association of State
Drinking Water Administrators, the National Association of Water
Companies, the National Council for Public Private Partnerships, and
the Water and Wastewater Equipment Manufacturers.
[13] The H2O Coalition includes the National Association of Water
Companies, the National Council for Public-Private Partnerships, the
Water and Wastewater Equipment Manufacturers Association, and the
Association of State Drinking Water Administrators.
[14] U.S. Environmental Protection Agency, Guidance on Implementing the
Capacity Development Provisions of the Safe Drinking Water Act
Amendments of 1996, EPA 816-R-98-006 (Washington, D.C.: July 1998).
[15] Association of Metropolitan Sewerage Agencies, Managing Public
Infrastructure Assets to Minimize Cost and Maximize Performance, p. 4.
[16] As noted earlier, our November 2001 report addressed the amounts
and sources of federal and state financial assistance for drinking
water and wastewater infrastructure during fiscal years 1991 through
2000. See GAO-02-134.
[17] We did not send questionnaires to drinking water and wastewater
utilities whose ownership was specified as ’federal government,“ ’state
government,“ ’native American,“ or ’not specified.“
[18] The five drinking water and five wastewater utilities were chosen
to represent a variety of size categories (based on population served
by each utility) and both public and private ownership.
[19] The National Regulatory Research Institute was established by the
National Association of Regulatory Utility Commissioners in 1976 at the
Ohio State University and is the official research arm of the
association. The Institute provides research and assistance to state
public utility commissions and other selected national and
international clients. See National Regulatory Research Institute,
Meeting Water Utility Revenue Requirements: Financing and Ratemaking
Alternatives (Nov. 1993) p. 63.
[20] Meeting Water Utility Revenue Requirements: Financing and
Ratemaking Alternatives, p. 64.
[21] Our survey allowed utilities to report miscellaneous costs under
an ’Other“ category, and some utilities did so. When appropriate, we
recategorized these costs. For example, some public systems reported
transfers to other city departments in the Other category; when the
survey document indicated that the transfer was for administrative
services, such as accounting or legal services, we included the amount
in the ’Operations and Maintenance“ category. When it was not possible
to discern a more appropriate category for particular costs, we
included them in the calculation of cost of service as other costs.
[22] We considered using the cash needs approach to calculate the cost
of service because most of our respondents were public utilities and,
as such, were more likely to use the applicable cost categories.
However, while our survey requested information on the amount of
utilities‘ capital expenditures during their most recently completed
fiscal year, the survey did not specifically request information on
’capital expenditures not financed by either debt capital or
contributions.“
[23] U.S Environmental Protection Agency, National Characteristics of
Drinking Water Systems Serving Populations Under 10,000, EPA 816-R-99-
010 (Washington, D.C.: July 1999). Among other things, the report
compares the financial characteristics of several different subsets of
small systems serving less than 10,000 people to the systems that serve
more than 10,000 people in a number of ways, including the ratio of
annual debt service payments to net available revenue (i.e., total
revenues minus operating and maintenance expenses).
[24] U.S. Environmental Protection Agency, National Wastewater User Fee
Study of the Construction Grants Program, EPA 430/09-90-011
(Washington, D.C.: September 1990).
[25] The user charge requirement applies to construction grants awarded
under title II of the Clean Water Act. According to EPA, although most
of these grants were expended long ago, the user charge requirement
applies ’in perpetuity,“ as long as the facilities for which the grants
were used remain in operation.
[26] National Wastewater User Fee Study of the Construction Grants
Program, p. 2. The last year for which the Congress authorized funding
for construction grants was 1990.
[27] National Characteristics of Drinking Water Systems Serving
Populations Under 10,000, p. 4-1. EPA compared the financial
characteristics of small systems and larger ones, in this instance, by
dividing operating revenues by operation and maintenance expenses and
deriving an ’operating ratio“ as a measure of financial health.
Generally, an operating ratio below 1 is considered to be an indicator
of weak financial health.
[28] About 21 percent of the drinking water utilities and 23 percent of
the wastewater utilities indicated that they had local sources of
funding in addition to user charges, but they did not report an amount.
We have no way of knowing whether the amounts these utilities reported
as user charges actually represented revenues from all local sources or
from user charges alone. We excluded these utilities when we calculated
the percentage of locally generated funding represented by user
charges.
[29] National Characteristics of Drinking Water Systems Serving
Populations Under 10,000, p. 4-8.
[30] Association of Metropolitan Sewerage Agencies, AMSA 1999 Financial
Survey: A National Survey of Municipal Wastewater Management Financing
Trends (1999), pp. 13, 65. The survey included 119 utilities serving
populations greater than 21,000. Of the 93 utilities that provided
information on how long current rates had been in effect, 45 reported
that their rates had been in effect for less than 1 year prior to the
survey; the longest period of time that a rate was unchanged was 17
years.
[31] The Association of Metropolitan Sewerage Agencies developed the
handbook, Managing Public Infrastructure Assets to Minimize Cost and
Maximize Performance, in partnership with the Association of
Metropolitan Water Agencies, the American Water Works Association, and
the Water Environment Federation, to help water and wastewater
utilities adopt advanced management methods that can reduce long-term
costs and improve service to customers.
[32] Managing Public Infrastructure Assets to Minimize Cost and
Maximize Performance, p. 154.
[33] We focused on elements of an asset management system identified by
the Governmental Accounting Standards Board in a June 30, 1999,
statement that made comprehensive changes in state and local
governments‘ financial reporting. Among other things, it requires, for
the first time, the governments to report information about public
infrastructure assets, including their drinking water and wastewater
facilities. Specifically, the governments must begin reporting
depreciation of their capital assets or implement an asset management
system. See Governmental Accounting Standards Board Statement No. 34,
Basic Financial Statements”and Management‘s Discussion and Analysis”for
State and Local Governments.
[34] Three percent of drinking water utilities and 4 percent of
wastewater utilities did not indicate that they did or did not have a
plan.
[35] Managing Public Infrastructure Assets to Minimize Cost and
Maximize Performance, pp. 156-157.
[36] American Water Works Association Research Foundation, Financial
and Economic Optimization of Water Main Replacement Programs (Denver,
Colo.: 2001). This study included 18 utilities”13 in the United States,
2 in Canada, and 3 in Australia. The objective of the study was to
identify and document best practices in planning for the rehabilitation
and replacement of aging, deteriorated water main piping.
[37] Managing Public Infrastructure Assets to Minimize Cost and
Maximize Performance, p. 80.
[38] Dawn of the Replacement Era: Reinvesting in Drinking Water
Infrastructure, p. 13.
[39] For wastewater utilities, the information on the condition of
pipeline, and its rehabilitation and replacement, represents what the
utilities reported for their sanitary sewer lines. Our survey also
requested information on combined storm/sanitary sewer lines, but
because only about 20 percent of the utilities reported having such
lines, we did not include the information in our analysis.
[40] Dawn of the Replacement Era: Reinvesting in Drinking Water
Infrastructure, pp. 13-14.
[41] Water Environment Research Foundation, New Pipes for Old: A Study
of Recent Advances in Sewer Pipe Materials and Technology (2000), p. 4-
1.
[42] As noted earlier, for wastewater utilities, the information on
pipeline rehabilitation and replacement represents the information they
reported for the sanitary sewer lines.
[43] American Water Works Association Research Foundation, Financial
and Economic Optimization of Water Main Replacement Programs (Denver,
Colo.: 2001), pp. 63–81. For some utilities, the actual replacement
rate was unknown or not reported.
[44] American Water Works Association Research Foundation, An
Assessment of Water Distribution Systems and Associated Research Needs
(Denver, Colo.: 1994), p. xv.
[45] For the latter two analyses, we also compared utilities that
deferred expenditures in all three areas with the utilities that had
not deferred expenditures in any of the categories. We found no
statistical differences in their ability to cover their cost of
providing service or the frequency of their rate increases.
[46] Managing Public Infrastructure Assets to Minimize Cost and
Maximize Performance, pp. 133-134.
[47] Testimony of Elmer Ronnebaum, General Manager of the Kansas Rural
Water Association, before the Subcommittee on Fisheries, Wildlife, and
Water, Senate Committee on Environment and Public Works, February 28,
2002.
[48] Under some state laws, either public or privately owned utilities
may be the ’acquiring utility; in other cases, state law specifies that
the acquiring utility must be privately owned.“
[End of section]
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