Let’s start with the basic premise of this conversation – fracking is here to stay!  It doesn’t matter how many petitions you get in the mail, fracking is going to continue because the potential for gas production from fracking and the potential to fundamentally change our energy future, near or long-term, far outweighs the risk or economic and security disruptions from abandoning fracking efforts.  It looks like there is a lot of trapped gas, even if the well exponentially decay production in the first three years, although many well can be recovered by refracking.  It is an issue that residents and utilities need to accept.  The question is really how to assess the risks to water supplies from fracking and what is what can we do about it?

There are a number of immediate regulatory issues that should be pursued, none of which Vikram Rao (2010) suggests are truly deal killers.  They start with the disclosure of the fracking fluids, which for most legitimate companies that are fracking are relatively benign (and do not include diesel fuel).  Baseline and ongoing monitoring of formations above the extraction zones, and especially in water production zones is needed.  Research on water quality treatment solutions is needed because t may be impossible to completely eliminate escaping gas is needed.  Requirements to improve and verify well construction and cementing of formation is needed in all states (they are not now) and recycling frack water and brine should be pursued to avoid impacts on streams and wastewater plants, which limits the loss of water due to fracking operation and the potential for contamination of surface water bodies.  It will be important to push for these types of regulations in states like Ohio and West Virginia that need jobs and are likely places for fracking to occur, but they are also likely places where there will be political pushback that is afraid of discouraging job investments, but in reality this is unfounded.  The gas is there, so the fracking will follow. The question is will the states implement needed regulations to protect the public.

More interesting will be the ancillary issues associated with gas and wet gas.  A lot of by products come from wet gas, like polyethylene which can be used as stock for a host of plastics.  “Crakers” are chemical processing plants that are needed to separate the methane and other products.  Where will those facilities be located, is an issue.  Right now they are on the Gulf coast, which does not help the Midwest.  Do we really need to ship the gas to Louisiana for processing or do we locate facilities where the gas and byproducts are needed (in the Midwest)?  The Midwest is a prime candidate for cracker location, which will create both jobs as well as potential exports.  Also stripping the gas impurities like ethane, DEM and others needs to occur.

So what do utilities need to look at the potential impacts on their water supplies and monitor.  If the states will not make the fracking industry do it, we need to.  Finding a problem from fracking after the fact is not helpful.  We need to look at potential competition for water supplies, which is in part why recycling frack water brine is needed.  Eliminating highly salty brine from going to a treatment plant or a water supply are imperatives.  Sharing solutions to help treat some of these wastes may be useful – something we can help the industry with is treating water.

We also need to look at the processing plants.  We need to be looking at the impact of these facilities in light of water and sewer demands (and limitations). Wet gas facilities will require water as will plastics and chemical plants. Historically a lot of these facilities were in the Midwest and the research and skill sets may still be present.  How can these industries can be merged into current water/sewer scenarios without adverse impacts.  Communities will compete for these facilities, but good decisions may dictate that vying is not the best way to locate a plant. 

But there is another impact to utilities and that affects green technologies. The cost of gas is low and looks like it will remain low in the near future.  Low gas prices mean that renewable solutions like solar and wind will be less attractive, especially if federal subsidies disappear.  Wind is the largest addition to the power generation profile in the last 5 years, while many oil facilities changed to gas.  Cheap gas may frustrate efforts to create distributed power options at water and wastewater treatment plants throughout the country which can directly benefit utilities, not just where fracking occurs. So we need to be cognizant of these cost issues as well.  And you thought the fracking discussion might not affect you….

 


Once upon a time, many years ago there was a young city manager in a backwood town in the south. He had been told he was a bright young man, and had done well in city manager school. He was full of ideas on how to serve the public to make things better for the community and the people in the community, realizing you can’t get rich being a city manager. Getting rich was not his issue – he wanted to help people and thought he could bring his education and ideas to bear on the many problems city’s face. He was also very entrepreneurial – he tried to organize the city to operate like the business that it was by trying to make operations more efficient, providing training to employees that basically never had any, developing mechanisms to track work performed, and updating infrastructure (piping, curbs, sewers, treatment plants). He spent 60-80 hours a week, including countless nights each week at his job, no doubt underpaid. For the most part, the employees bought into his ideas because, well, he never asked them to do something he wouldn’t do, and often would go into the field to work with them on important projects to show them what was needed or what he expected. The staff became well trained and efficient. So far, so good.

Over time he noticed a few interesting trends, but because he was young, he did not have a point of reference to understand them all. One he noticed was that the elected officials always asked for multiple alternatives. But when he presented more than one, he found that the worst option, the one most difficult to implement, or the one that would create added problems, always seemed to be the one chosen. Bad options were like a magnet for these elected officials. So he became more reluctant to present more than one option because doing so made his job much more difficult and, well the point of presenting options that have issues seems counterproductive to good government. Of course that created some friction.

Ok now that you are done laughing hysterically at this young man, keep in mind the story is true and happened less than 30 years ago, so this is not ancient history. It took a few years after frustration and stress took their toll and this young man moved on in his career. City management was just too stressful. It took a few more years to understand that answer to the options riddle – the bad options were chosen because some was lobbying the elected officials for that bad option. Why? Because those lobbying always knew someone who could benefit from the need to “fix” the problem created by that option. So the idealist meets the reality – kind of deflating. He moved on from there.

So how does that affect utilities? Think about your budgets, and especially your capital budgets. Figure out what you NEED to do your job, and then figure out if you have a budget strategy to get it. Do you pad your budget to insure the budget office doesn’t arbitrarily cut your request, because “that’s what they do?” Do your elected officials delay capital projects because it is an election year and they do not want to raise rates? Does the city manager remove the new hires because he needs more money to be diverted to the general fund? Sound familiar? Welcome to the game this young man found so many years ago. 30 years and things definitely have not improved. When you run a business, you know what you need to do the job. You should be able to ask for what you need, and get it without a lot of conflict. Your budget and finance directors should be SUPPORT positions, not gatekeepers. Their job is to find money to pay for operations. You should set the need, and they find the funds, but it doesn’t work that way does it?

The budget battle is a huge expense for every community, and one that largely provides no real benefit but detracts from productivity. None of the game playing helps the utility or the ratepayers, just like the bad options don’t help the community at large either. Yet it is funny that over time, city managers have moved away from people with technical backgrounds in public works and public administration toward people with business experience. The argument is that we need to run the city more like a business, so this should be a good fit. But it is not in part because there is a lack of understanding of the underlying public works services. Public works is a service, not a business. As a result, we see far too much political expediency as opposed to benefits to the payors.

From a business perspective, creating a series of enterprise funds like water, sewer, storm water, roads, and parks is a step in the right direction, but only if those separate enterprises (think companies) can stand on their own. For example, it is completely inappropriate to use your utility to fund the general fund. Borrow from it, yes; some purchased services, yes; huge subsidies, no. When large amounts of funding are diverted, it means that both the general fund and the utility suffer (and for the moment let’s ignore the legal issue if the utility rate base is not the same as the city tax base). Business rarely diverts large revenue streams from other enterprises to keep them afloat for long, so why in government, do business people pursue this path? In the business world, if the general fund was such a loser, we’d cut it loose, or spin it off and make it stand on its own. Ok we can’t really cut the general fund loose (police and fire are in there and we love them), but making is stand on its own is what finance, budget and city managers should be pushing elected officials to do. That would make set up a system of full-cost operations, which will allow residents to understand the true cost of their services, which is completely appropriate. Subsidizing services at the expense of public health is not a good long-term policy is it? . And while you are at if general fund, where are those surpluses we ran to allow us to reduce borrowing for capital projects?


So Detroit defaulted on it’s debt obligations.  Do does that impact you?  Well, that depends on whether you are a utility looking revenue bonds, a city looking for general fund bonds or some combination.  The issue in Detroit with debt is that they pledged the full faith and credit of their taxing authority to repay the debt.  Their taxing ability was insufficient to accomplish this goal, which means that there could now be distrust in that promise for other cities.  So if you are a city and you are making this pledge, Detroit could impact you, or at least create more review on your balance sheets.  If you are a utility that is pledging revenues that have no limitations on amount, the concern is likely less.  Of course in either cases, the question is what the rest of your balance sheet looks like.  If you have no reserves, do not charge the full cost for service, have a heavy debt load, have high rates already, or send a lot of funds to the general fund, that could be a problem.  If you have avoided these pitfalls, the bond market will see much less of an issue. 

Keep in mind that Detroit is not the only default – another big one is the Birmingham and several other create questions about general fund uses of funds, which makes it of greater importance to keep our financial house in order.  IN part this can be done by creating the appropriate enterprise funds and remove those services from the general property tax fund.  That permits local focus on the true cost of general taxing users and creates a delineation between general fund and enterprise costs.  That can help elected officials focus on the true general fund issues:  police, fire, EMS, administration without hiding those costs with subsidies from other funds.

 


My students are back from the ASCE Southeast Regional Student Competition.  They received 2 second place awards out of 18 contests.  Not too shabby considering there were only about 30 students that were active in putting this together, all going to school full-time, and many working and supporting families.  And they were competing against 30 other schools, including several far bigger engineering schools like the Universities of Florida, Alabama, and Central Florida and Auburn University. 

So how did they do?  Let’s start with the canoe.  The canoe was indestructible (see photo).  The students rowed well given very little experience.  Far better than some of the other schools despite the wind and currents in the canal.  The canoe was 700 lbs and it still floated.  They finished second on plan reading and professional paper competitions.  The environmental filter worked super well the first trial.  A little plugging on the second but a good job regardless.  The balsa bridge held 700 lbs and the 186 g 2 x 2 x 2 inch cube – 1400 lbs.  They also did surveying, shuffleboard with concrete materials, and several others.  All good efforts, and each year gets better. 

If you have never seen these competitions, you need to.  The students work hard, compete well and have fun.  It is a good means to meet other students and see what they do.  The key is to autopsy the results to help the next students.  Overall a good experience for all of them.  So congratulations!


I read a recent article in Roads and Bridges on the reconstruction of the roadways to Estes Park.  An excellent effort by state officials and private contractors to rebuild over 20 miles of roads that were wiped away in mid-September when unprecedented rainstorms cut Estes Park off from the front range.  I actually had reservations in Estes Park as part of a plan to go hiking at Lawn Lake, among others.  Lawn Lake was one the harder hit areas in the park.  Went to Leadville.  If you have never been, go.  The early money in Colorado came out of Leadville – silver was the money-maker.   I did a 12 mile hike thought the mining district as it snowed - note it is the 2 mile high City.  Great hike in the am – the photos were fantastic as well.  

But the point is that people expect government to solve problems like the roadways in Colorado.  They expect we will solve water, sewer and storm water problems.  We have done a great job of it because people take these services for granted.  What we don’t want is to have a catastrophic failure, natural or otherwise.. ..


Sorry I have been off-blog for over a week.  Things can get crazy as we all know.  Collegiate activities accelerate after Spring Break, which was the first week of March for the Florida universities.  Now we are on to midterms, finishing projects and competitions.  So this weekend is the southeast competition for ASCE student chapters.  Those of you who are civil engineers likely remember the competitions.  Concrete canoes, steel bridges, soil stabilization, water treatment (filters), and a variety of other “contest” abound.  We had concrete Frisbees when I was in school.  I think I saw where a school in Oregon has carried on a tradition that has never made it to the southeast competition.  Some think these competitions are purely a weekend on fun, but that fails to recognize the effort put into the contests by students.  Yeah, it’s fun, but a concrete canoe takes many hours of effort by dozens of student to insure it floats.  Problem solving is needed to insure the concrete is both lightweight and strong enough to hold up.  Might get rammed you know.  Seen it happen. It is a good place to meet other students and faculty to exchange ideas.  Many practicioners act as judges to the connection to the “real” world is present as well.

We get back from the ASCE contest for the Concrete Expo on campus, which is an opportunity for the students to meet practicioners in a seminar environment (outside of course).  It is an opportunity to meet students and very helpful if you are looking for the next generation of people to fill your jobs.  Except that we are seeing most of our seniors with jobs before they graduate, sometimes as early as late junior year. That means the economy is improving so jump on the good students early.

After the concrete expo we have the FWEA student water/wastewater design contest.  So our students are competing and their project is an indirect potable reuse concept to recharge wellfields for a local community that has looked at the idea.  We have researched the subject here before and did some work to demonstrate we could remove phosphorous to under 10 ppb and remove the constituents of emerging concern – the pharmaceuticals etc.  Worked great and I think most of our papers are out on the project.  Our students looked at and improved it for their contest entry.  Then it is time for the FE, final capstone projects and graduation.  So much in a month. 

And somehow I missed St. Paddy’s day…… 

 


We all know that our infrastructure is deteriorating.  Deferred maintenance increases the risk of system failure. The need for capital reinvestment within the utility industry has historically been very low. As a result, in its “2013 Report Card for America’s Infrastructure,” the American Society of Civil Engineers assigned a grade of “D” to America’s drinking water systems, citing billions of dollars of annual funding shortfalls to replace aging facilities near the end of their useful lives and to comply with existing future federal water regulations (ASCE, 2013).  AWWA estimates that investments of at least $1 trillion are needed over the next 25 years.

While a pay-as-you-go capital funding seems like the best way to go, that is difficult to accomplish with the large outlays needed to upgrade the infrastructure system and the controls on rates often exercised by local officials.  As a result, borrowing is required and the condition of infrastructure and the lack of reserves are a part of how the utility is viewed by those who lend monies.   Utility managers need to understand how the lending agencies evaluate risk. 

Lenders use many tests.  Among them are: whether the utility’s annual depreciation expense is used of accumulated as reinvestment in the system, whether adequate reserves are present, whether  annual capital spending that is below the amount of annual depreciation and the amount of revenues in excess of projected debt (debt service coverage).  The target debt service coverage may depend upon the requirements of the underwriter, the rating agencies and the investors.  Debt service coverage could be as low as 15% or as high as 50%.  In 2012, the median all-in annual debt service coverage excluding connection fees for utilities rated “AAA” by Fitch Ratings was 220%, while the median for AA-rated and A-rated utilities was 180% and 140%, respectively. (Fitch, 2012).  

A working capital target of 90 days of rate revenue is a minimum, but since 2008, more is likely to be required depending on the size of the system and the history of revenues.  Where the revenues were stable despite 2008, less may be required.  For those utilities that suffered major decreases, reserves should be far larger – perhaps a year or more.  Other criteria that could be used to evaluate the projects when borrowing money include public health and safety, regulatory compliance, system reliability, the risk and consequences of asset failure, redundancy, community/customer benefit  and sustainability. At the same time, the expectation is that  the utility systems that retain all monies in the system to be utilized to improve the system and pay for debt service, except those used  for the purchase of indirect services from the General Fund that are justified with indirect cost studies. 

 

Despite the above, rate are an issue.  Fitch Ratings has indicated that it considers rates for combined water and wastewater service that are higher than 2% of the median household income – or 1% for an individual water or wastewater utility – to be financially burdensome (Fitch, 2012).  The Environmental Protection Agency (EPA) considers that rates for an individual water or wastewater utility that are greater than 2% of median household income may have a high financial impact on customers. (EPA, 1997). Utilities with a stronger financial profile might have residential charges for combined water and wastewater service that are less than or equal to 1.2% of median household income, or less than or equal to 0.6% for an individual water or wastewater utility. All revenues generated through system operations generally must remain within the system and can only be used for lawful purposes of the system.

Canadian utilities employ more formal polices to establish fiscal policies to provide reserves to insure stability in the event of unforeseen circumstances. Reserve targets focus on ensuring liquidity in the event there is an interruption in funding, increased capital costs due to new regulatory requirements or a short term funding emergency – all the issues evaluated by the bankers.  Reserve targets are policy decisions. Benchmarking is an evolving practice within Canadian public sector utilities particularly as it relates to financial planning and capital financing. The benchmarking exercise provides valuable information to help assess fiscal performance, the needs of customers, and provide the tools to help support optimum performance. 

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