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The election and post-election discussions have included some concepts about funding for infrastructure.  While this may have been more focused had Clinton been elected, it remains a discussion topic in the Trump White House.  How it would be manifested is a question, with Trump’s faction discussion private cash influxes to make this happen.  The Senate seems to view infrastructure as DOA, which means nothing might occur.  However, in any instances, there needs to be a definition of the word infrastructure and what would qualify for funding.  There are three basic types of infrastructure – public, private and regulated private.  Most SRF programs limit recipients of funding to public entities.

The infrastructure in the public arena falls into three categories which have vastly different types of infrastructures:

Local – water, sewer, stormwater/drainage, local roads, limited bridges.  In larger communities, rail and airports might be included, but the latter is mostly federal subsidies.  Much of water and sewer infrastructure is over 50 years old and is showing signs of weakening.  Buried pipelines are the most at risk.  This would include the 6 million lead services lines in place.  Sewer lines are primarily vitrified clay, also 50+ years old and likely cracked.  Stormwater is corrugated metal and concrete.  Roadway bases in most communities are historical and do not meet today’s standards.  Hence ASCE rates these a D or D-.  Municipal buildings in older communities may also have lead services, asbestos, wood and galvanized pipelines, and other issues to address. The majority of infrastructure under this definition is under local control.

State – highways and bridges – much of America’s commerce depends on these roadways.  25% of bridges need work, 10% are deficient.  Funding for rail and airports is a need from a state perspective.  States may spend more money on transportation that all other infrastructure combined.

Federal – these are very large scale projects like dikes, dams, reservoirs and water transmission systems.  It also includes national parks ($11 billion deficiency), and federal buildings.  The dikes in New Orleans are an example.  However a lot of the funds for these projects are disseminated to locals (like New Orleans), so the actual use may be unclear.

The literature suggests that public investments in infrastructure create at least a 4:1 return.  Good infrastructure is necessary for a vibrant economy.  Deteriorating infrastructure leads to …. Flint, New Orleans after Katrina, and a host of obvious failures.  The impact of climate on communities, particularly sea level rise, can be partially addressed with infrastructure improvements.  Large scale construction can secure jobs both immediately and for the foreseeable future.  The question then is how to secure finding that will lead to jobs, lead to economic development and return on those investments, and will make notable improvements.  That is the challenge at all three levels.  The easiest to address from a sill perspective is state roads and local infrastructure.  From a state perspective the work is focused on highways and transportation.  Locally, the benefit is the local labor force that requires no travel or added overhead.  Just training.  So the question is whether an infrastructure bill can/should have a jobs component built in?

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Once upon a time, people worked until they died.  But the longer people lived, the more infirmities impacted older people, and the concept of stopping work came into play.  So these folks labored all their lives, put some money away in a safe place, like a bank, where someone else would watch over an manage their money until they needed it.  Then one day, they found out that the banks have gambled and lost on real estate, and their money was gone.  There was no government to bail anyone out.  So the people had to try to go back to work, became beggars and destitute or died.  The government thought this was unfair to those older folks who had worked so hard, but through absolutely no fault of their own, had lost everything.  So the government decided that it would “tax” people a portion of their income, and put it into a retirement system.  People could retire at 65, and of course they were only expected to live another r3 or 4 years.  There were 16 people laying in for every person taking out.  And the government told the banks that they could not gamble with people’s hard earned savings, passed legislation and created an insurance pool to backstop losses by criminal or unethical activity.  All was good and the people were happy.

As time went on some things changed.  For one, people lived more than 3 or 4 years.  The population retirees increased, and the ratio dropped to 1:10 and then to 1:6 ration of retirees:workers, but the “tax” did not go up, but investments were made that increased the pool.  It was called good management.  The government also encouraged people to save money by deferring taxes, which they did, and the banks used it to make money.  All good as long as the investors gambled well.  They gambled so well, they were able to talk the government into undoing the anti-gambling rules from the past, so their pool to invest was twice as much.  And the markets grew and the portfolios grew and the people were happy.

And then it came to pass that the banks again gambled on real estates, and created complicated investment tools to hide the risk, but the risk was exposed and half the money was gone overnight.  And the retired were wondering about jobs again.  But there were no jobs.  And the employed now had fewer jobs.  So less people paid into the system.  And the people were sad.  And mad because they thought they were being protected from the gambling of the past.  They did not understand.

And the government could supply no answers because they had changed the rules and they knew the people would be unhappy, so the government felt there was no choice, so they borrowed money, and bailed out the banks.  And some people were happy.  And some people were concerned about all that debt.  And some people wondered why it was that history could repeat itself and put society at risk.  And some people asked why people who did bad things were not punished.

And none of these questions has been answered.  Good thing that these fairy tales don’t depict anything real right?


Earlier this year the Journal for AWWA had several articles about water use and infrastructure needs.  One of the major concerns that has arisen in older communities, especially in the Rust Belt and the West is that demands per person have decreased.  There are a number of reasons for this –the 1992 Energy Policy Act changes to plumbing codes that implemented low flush fixtures, the realization in the west that water supplies are finite and conservation is cheaper than new supplies, a decline in population, deindustrialization, and climate induced needs.  But all add up to the result that total water use has not really changed over the past 30 years and in many locales, water sales may have decreased.  Water utilities rely on water sales for revenues so any decrease in sales must be met with an increase in cost.  Price elasticity suggests the increase will be met with another decrease in sales, etc.  It is a difficult circle to deal with.  So less water, whether through deliberate water conservation or other means, creates a water revenue dilemma for utilities.  A concern about conserving to much and eliminating slack in the system also results.

Less water means less money for infrastructure.  Communities do not see a need for new infrastructure because there are fewer new people to serve.  Replacing old infrastructure has always been a more difficult sell because “I already have service, why should I be paying for more service” is a common cry, unless you are in my neighborhood where the water pipes keep breaking and we are begging the City to install new lines (they are on my street J)  Educating customers about the water (and sewer) system are needed to help resident understand the impacts, and risk they face as infrastructure ages.  They also want to understand that the solutions are “permanent” meaning that in 5 or 10 years we won’t be back to do more work.  Elected officials and projected elected officials (the tough one) should be engaged in this discussion because they should all be on the same page in selling the ideas to the public.  And the needs are big.  We are looking at $1 trillion just for water line replacement by 2050 and that is probably a low number(2010 dollars).  The biggest needs are in the south where infrastructure will start hitting its expected life.  The south want west will also be looking for about $700 billion in growth needs as well.  All this will cause a need for higher rates, especially with ¼ less low interest SRF funds avaialalbe this year from Congress.


Public water and sewer systems have the responsibility to protect the health, safety and welfare of the public they serve, just as engineers do.  This is includes not just complying with regulatory mandates (they are minimum standards), but enacting such precautions as are needed to address things not included in the regs.  Unfortunately we continue to pay too much attention on regulatory compliance and evaluate the condition of the system using unaccounted for water losses or leaks fixed in the system as a measure of condition.  That may be an incorrect assumption.  The problem is that unless we understand how the system operates, including how it deteriorates with time, the data from the past may well be at odds with the reality of the future.  For example, that leak in your roof can be a simple irritation for a long time if you ignore it.  But ignoring it creates considerable potential for damage, including roof failure if too much of the structure underneath is damaged.  With a water system, pipes will provide good service for many years will minimal indication of deterioration.  Then things will happen, but there is little data to indicate a pattern.  But like your roof leak, the damage has been done and the leaks are an indication of the potential for failure.  Bacteria, color, pressure problems and flow volumes are all indicators of potential problems, but long-term tracking is needed to determine develop statistical tools that can help with identifying end of life events.  Basic tools like graphs will not help here.

Construction to repair and replace local water, sewer and stormwater infrastructure is expected to reach $3.2 and $4.8 billion respectively for water and sanitary sewer. The federal SRF programs are only $1.7 Billion in SRF loans, 24% below 2012 and well below the levels identified by the federal government to sustain infrastructure condition.  The only reason for the decrease seems to be a demand by Congress to reduce budgets, especially EPA’s budget where this money resides.  But the 2008 recession and its lingering effects to date have deferred a significant amount of infrastructure investments, and the forecast does not rectify the past deficits, and likely does not address the current needs either.  Few water and sewer systems are flush with funds to update infrastructure and borrowing has become a difficult sell for many public officials.  Lake Worth, FL just had a $60 million bond issue for infrastructure redevelopment defeated by voters two weeks ago.  The officials know they need this infrastructure, but the public is unconvinced because few serious problems have occurred.  We have to get the public past this view so we can improve reliability and public safety.  Those are the arguments we need to demonstrate.  The question is how.

 


In this blog we are going to talk about trends in the power industry and how they may affect utilities.  One of the ongoing themes of this blog is that to be leaders in the field, we need to be cognizant of what others are doing and how those actions might affect utility operations.  Power is a big cost for utilities – often 10-15% of the total operations costs where a lot of pumping is involved. In most communities, the utility system is among the largest consumers of power, which is why many utilities have load control agreements in place – power companies can off-load power demands by having the utilities go to onsite generators.  Our community’s building account for 70% or more of local energy use.

The need for power is expanding, albeit at a lower rate that population growth in many communities.  This is because new building construction measures tend to insulate better and install more energy efficient equipment.  Power companies often will subsidize these improvements to reduce the need for more expensive plant expansions.  Where expansions are needed, purchase/transfer agreements or renewables are often a convenient answer.

But long-term we are seeing that the power industry is changing in other ways too.  Already we see a migration away from coal for power generation.  This was occurring before the new regulations were in place for carbon dioxide.  Certain utility companies like NextEra, the largest wind and solar power generator in the US, and the parent of Florida Power and Light, have reduced greenhouse gas emissions from their plants by converting to other sources like combined heat and power (CHP), and increasing efficiency.  The typical oil or coal power plant is 30-35% efficient, while the newer gas turbine systems are up to 45% efficient.  That makes a big difference in costs as well as emissions when gas emissions are half the coal and oil emissions.  NextEra is well placed for carbon trading, a concept some fight, but the US had been emission trading since the early 1990s, so carbon trading markets are already in place.  The only thing needed is the regulations to put them into play.  Buy that NextEra stock now and hope for carbon trading!

But NextEra is not the only likely winner under this carbon trading scenario.  ExxonMobile is big into gas, Exelon is big in the nuclear power industry, Siemens and General Electric, which make wind and gas turbines, are also likely to see growth.  All have poised themselves years ago as the impact of carbon dioxide becomes more apparent.  Most of the industry executives acknowledge climate issues and recognize that people will expect the industry to do its part (the Koch brothers aside).  Many power generators like ConEd and FPL are making changes as well, in advance of the regulatory requirements to do so.  They see it as good business.  They also see it as a means to make more power at a given facility (by increasing efficiency) while reducing water use.  Water use can be a limiting factor, so we will discuss that in a couple days…

 

 


As you are aware, I have several hobbies and interest, and economics is one of them.  Economics has theorists from many different viewpoints, and the commonality among them is that there is no “school of thought” that explains everything.  So new schools get developed to explain the current events, or old ones that were discredits are resuscitated, but unfortunately we too often neglect the past, or at least the examples of the past.  Too often the obvious gets ignored.  For example, we cave money because we know there will be ups and downs.  Individual do it, so why don’t governments?  We know that we will pay for a product we need.  Demand drives the price.  If more people want it, the price goes up.  Been that way for…. ever maybe?  So in my recent reading I came across several musing that keep getting talked about by political pundits, but may be they are not what they appear to be.  So let’s take a look at a couple of these that might just affect us….

 

Is supply side economics is a myth developed by corporate economists to argue for lower taxes.  The concept is to give tax breaks to encourage manufacturers and businesses to produce more product which will reduce costs.  You know this is patently false.  Try selling your reclaimed water at a discount (or give it away) when it is raining.  Demand drives the economy, not supply.  Every economics student learns this in economics 101.  The supply side economics school developed as a means to explain stagflation in the 1970s. The idea what to give tax cuts to those who invested, so they would invest more to make new products, which would trickle down to the rest of us.  Still doesn’t work.  Why?  What they ignored was that the US industrial sector had saturated the US economy with goods and could not grow without new sectors to sell to.  Hence the push on Nixon to open up China to foreign trade and investment.  But opening foreign markets was great, except they could not afford our products.  So we had to make the products there, increase local wages so they could buy the products, and still shipped products back at a cheaper cost that to build them in America.  The idea is not new – recall Henry Ford set up the assembly line to cuts costs to allow him to increase wages so his workers could buy his cars.  The obvious question is when we saturate China, then what?  Africa?  Then what?  The economy cannot grow faster than the increase in population.  So why does supply side economics keep getting traction?  Did we mention those tax cuts….

 

To the big fashion in Germany and the EU is austerity.  Austerity is an economic idea that never seems to die despite very limited success and many, many failures.  It sounds great – cut costs and balance the budget while cutting revenues (income).  Ok, so let’s see how that works in your household – you quit your middle class job and take a minimum wage job.  You cut your expenses.  Except you can’t sell your house without a loss (and you do not have the cash to make up the difference) and you need your car to get to your new job.  But austerity says that if you eat rice, beans, cereal and Ramen noodles, you will soon be far better off than you are now.  No one will suffer.   Do you believe it?  Do you wonder why the Greeks and Irish are not doing so well today and why people are restless?  They used to devalue their currency, but the Euro prevents this.  They do not have away out.  Meanwhile Iceland devalued currency, let the banks fail, took over the bank assets, and are doing much better.  Austerity was not the option…. Just saying…  And who suffers the most?  Not the high income folks.

 

Tax cuts stimulate the economy.  Sounds great.  But, from 1944 to 1963, the income tax rate on the highest earning bracket in 1960 was 90% over $200,000.  Yes 90%!   The economy was great.  The middle class was born.  House ownerships jumped.  Education was up.  The economy in the 1970s stagnated after we cut tax rates.  We cut the income tax rate in the 1980s, but raised other taxes, and things improved, but then declined.  The economy improved after the Bush tax hike in 1991. It did not improve after the Bush tax cuts in 2001.  Interesting in their book Presimetrics, Mike Kimel and Mike Kanell noted that higher taxes seem to correlate with a better economy.  Is it because investors can’t sell stock so easily when they made a profit so corporations can count of investments longer?  Or is it that the increase in revenues allows the federal government to invest in more research and development that further stimulates the economy?  Did we mention the tax cuts favor the wealthy?

 

The moral of the story is that utility managers cannot ignore the economic realities around them.  We cannot be trapped by the musings of people who have hidden agendas, which means that our understanding of the way things are must extend beyond the utility itself.  The economy, economics, monetary policy, tax policy, demographics and change are areas that utility managers need to be current on.  Engineers and managers often understand these issues easily (most are mathematical) but we tend to focus only in out areas.  We need to become educated.  Recall the earlier blog where I noted the city manager who realized later that the reason elected officials tended to bad alternatives was they were being lobbied to approve the poorer options because their clients could make money from it.  You know many ideas that will be lobbied to elected officials and business people in the future.  You need to become educated on these ideas and how they affect your utility.  You know that rates that are too low will not increase revenues.  You know you need to expand sales when possible, perhaps serving new areas, and making the investments for same.  You know that not spending money will only increase the risk of failure in the system.  You know that not increasing pay will disenfranchise employees.  Prepare for these assaults so you can lead your utility down the proper path. 


Back during the dark days of the late-1970s, when America was being held hostage by Middle East oil interests, the Department of Energy was created, ostensibly to free our economy from the dependence on foreign oil and all that trappings that go with it.  It was a noble goal – the American economy could grow without the risks posed by foreign governments.  Thirty five years later, could we finally be reaching that goal? 

Interesting the often criticized billions of energy company subsidies of the Bush era do not appear to be responsible for solving the issue.  Nor are the prior efforts to subsidize or otherwise encourage investments before.  The energy subsides since 2000 do not appear to be the reason, but the arctic wilderness did not need to be disturbed either.  The success had nothing to do with any of it, but instead a series of private risk takers to a gamble on an unproven technology, to make great strides – fracking.

Based on the success of the development of fracking for natural gas, we have made major improvements.  But it is not just fracking, as many power plants are or have been rehabilitated to convert away from oil and coal to cleaner burning natural gas, thereby developing the market for natural gas.  Local governments have been migrating their fleets to natural gas for years – natural gas can use the same engine with an $8000 conversion kit that allows automobiles to run on both.  The conversions have made the demand for natural gas greater, making the investments needed to frack, more profitable.  The US has significant reserves of natural gas, and fracking has made it easier to capture this resource.  The benefit of natural gas is that the demand for oil is down, creating a glut of oil on the market and a decrease in price (at least for now).

But the question that has been left unanswered is what the domino effect of natural gas is.  Certain advertisements will argue there is 200 years of natural gas available for the US so we don’t need to worry about energy.  Others will argue that only 10-15% of that supply is actually recoverable (it should be noted that this assumes current methods), which is a far shorter horizon.  But in either case, natural gas in the ground is not a renewable resource so the question must be asked – does the fracking boom interfere with investment in truly renewable resources? 

Since 2000, Washington has invested heavily in renewable resources – wind, solar and to an extent waves.  Some energy companies like NextEra have been investing heavily in wind and solar power (they are the biggest investors in renewable power in the US), so what of these truly renewable investments?  Will the rush to frack turn resources away from truly renewables?  Or will renewable continue to be a small fraction of energy demands for the near future?  The question remains unanswered for now.

The bigger question for utilities is whether fracking will divert money away from plans for renewable efforts like digester gas capture, solar cells and wind power at reservoirs and the like that utilities are using to help reduce power purchases.  Will it impact utility efforts to become self-sufficient energy consumers like East Bay MUD?  You see the economy has few favorites.  Government can create favorites, by subsidizing products that would otherwise be too expensive like PV panels. The benefit of subsides can be to reduce costs of emerging technologies that may never otherwise see widespread use.  Subsidizing renewables fit this mode.

Utilities should be concerned that the rush to frack pulls money away from their plans for renewable power.  As the feds look to reduce their contributions to water and wastewater infrastructure, public money to energy does not appear to be decreasing.  And unlike publically owned water and sewer systems, private investment in energy is increasingly available as a result of the potential profits that can be made.  The diversion of funds may decrease prospects for funding water and sewer utility options, especially if interest rates begin to rise.  The Federal Reserve Bank’s concern about rising interest rates was manifested earlier this year when interest rate increased, housing sales decreased immediately.

Of course the issue of fracking goes beyond the potential to disrupt monies for renewable energy.  There are questions about the practice of fracking include water quality impacts, causing earthquakes, land subsidence, etc., issue that have yet to be resolved.  Keep an eye out for a risk assessment that AWWA and others will be involved with to look at these risks.  

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