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INFRASTRUCTURE ISSUES COMES HOME TO ME

October 18, 2013
engineering, finance, infrastructure, Leadership, local government, management, planning, politics, Risk Management, sustainability, Uncategorized, water sewer management, water supplies
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In front of house

The doorbell rang and it was 1:30 am on a Saturday morning.  It was my neighbor telling me about a small problem on the street.  I looked out and the entire block was flooded.  Water was moving. It was dark, and while my street light was working, it shed little light in the blackness.  However I figured out the old AC pipeline in front of my house had sheared and the block’s leak was actually my problem.  We had no water.  Fortunately the water department was able to get the main repaired in a couple hours.

The next morning we were not as lucky.  Another break on the next street over had shut us down again.  AC water main, but this time under a tree.  They had to remove the tree before fixing the line.  We were out all day.  The water plant guys and the repair crew said that the lines were supposed to be replaced a couple years ago, but that the City had delayed the replacement for budget problems.  

SUSTAINABILITY OF UTILITIES – PART 2

October 11, 2013
Environment, finance, funding, infrastructure, Leadership, local government, management, planning, politics, Risk Management, sanitary sewer, sustainability, Uncategorized, water sewer management
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SUSTAINABILITY OF UTILITIES – PART 2

Let’s take a look at some scenarios. Let’s assume you are a utility that serves 20,000 people (8000 customers), with 60 miles of water pipe, 60 miles of sewer pipe, 17 lift stations, and a water and wastewater plant.  Replacing this infrastructure might be valued at $90 million for pipe, $35 million for treatment plants, water supply and pumping equipment (current day dollars).  Let’s also assume that their annual budget is $11 million and the typical demands are 3 MGD yielding a monthly bill of $115/mo (water and sewer).

Let’s make some general assumptions like that the pipe infrastructure might last 100 years, but clearly the treatment and mechanical parts would mot.  They would need ongoing maintenance and replacement.  50 years is probably too long, but let’s go with it.  If the overall costs increase at 3% per year and money is set aside for repair and replacement. The utility will see fairly steady rates if the customer base grows 2-3% per year.  Ten years out, the budget will be $16 million.  Now for the scenarios.

If the customer base has grown at 3% per year, the customers will increase to almost 27,000.  More of an issue is what happens if that increase in demand (from 3 to over 3.4 MGD) needs to come from a new water source and requires new capacity.  Many utilities will use impact fees to offset this cost to current customers so as not to adversely impact current customers too severely .That’s the current assumption.  The result looks like this at 10 and 20 years:

 

Component

  

Value today

10 years

20 years

Customers

  

20000

26878

36122

 

Accounts

  

8000

10751

14449

 

Water  Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Sewer Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     76,618,436

 $167,725,278

Operations budget

  

 $     9,000,000

 $     16,255,001

 $  29,358,340

Capital Budget

  

 $     1,600,000

 $       3,502,557

 $    7,667,441

Debt

  

 $        400,000

 $         400,000

 $      400,000

Monthly Amount

  

 $              115

 $                156

 $             216

Increase per year

    

5%

5%

 
         

 

Assume 1% of pipe Replacement Costs +2% Plant

    

 

Assume operating budget inc 3%/yr but construction increases 5%/yr

  

 
                     

 

But what if the new treatment and supply are 50% more costly and impact fees assume the lower investment (typical)?  The cost for the budget and for the infrastructure replacement increases (with the delta from debt).  Cost are 50% higher:

 

Component

  

Value today

10 years

20 years

Customers

  

20000

26878

36122

Accounts

  

8000

10751

14449

Water  Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Sewer Pipe

60 mi

 $   45,000,000

 $     98,509,418

 $215,646,786

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     92,289,117

 $202,029,937

Operations budget

  

 $     9,000,000

 $     23,731,487

 $  42,861,706

Capital Budget

  

 $     1,600,000

 $       3,815,971

 $    8,353,534

Debt

  

 $        400,000

 $       1,325,000

 $    2,825,000

Monthly Amount

  

 $              115

 $                224

 $             312

Increase per year

    

8%

7%

 

The normal assumptions are that growth will continue, but what if it does not?

 

What can be gleaned as a result of a non-growth or net decrease scenario?  How does sustainability get affected?  Let’s look at the no growth scenario.  In this light, rates will need to increase at least 5% per year to insure that the utility remains rate neutral.  If there is significant deferred maintenance, which is typical of may utilities, that cost will be added to the bill.  There are examples of utilities in Florida who finally caught up with deferred obligations which doubled their customers’ bill.  This scenario is doable, but the only real assumption changes that can be made are related to the lack of growth.  Deferring maintenance will once exacerbate the problem as there is not guarantee that growth will return.  Rate neutrality becomes a public relations issue, but not insurmountable.

 

Component

  

Value today

10 years

20 years

 

Customers

  

20000

20000

20000

Accounts

  

8000

8000

8000

Water  Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

Sewer Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     57,011,312

 $  92,865,420

Operations budget

  

 $     9,000,000

 $     12,095,247

 $  16,255,001

Capital Budget

  

 $     1,600,000

 $       2,606,231

 $    4,245,276

Debt

  

 $        400,000

 $         400,000

 $      400,000

Monthly Amount

  

 $              115

 $                157

 $             218

Increase per year

    

5%

5%
               

Now let’s look at the decline issue.  If the population decreases by 25% over the ten year horizon, what does this say?  The costs will remain relatively constant, but the number of customers and demands for water will drive the rates up significantly. In ten years the rates could double in a community that is likely economically disadvantaged.  The higher rates may begin to discourage economic development, rate neutrality exacerbate the problem and may increase in costs for regulatory or deferred maintenance obligation becomes a significant issue:

 

Component

  

Value today

10 years

20 years

Customers

  

20000

16341

13352

 

Accounts

  

8000

6537

5341

 

Water  Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

 

Sewer Pipe

60 mi

 $   45,000,000

 $     73,300,258

 $119,398,397

 

Treatment Plants and Pumping

3 MGD

 $   35,000,000

 $     57,011,312

 $  92,865,420

 

Operations budget

  

 $     9,000,000

 $     12,095,247

 $  16,255,001

 

Capital Budget

  

 $     1,600,000

 $       2,606,231

 $    4,245,276

 

Debt

  

 $        400,000

 $         400,000

 $      400,000

 

Monthly Amount

  

 $              115

 $                193

 $             326

 
     

7%

7%

 
         

 

Assume 1% of pipe Replacement Costs +2% Plant

    

 

Assume operating budget inc 3%/yr but construction increases 5%/yr

  

 
                         

 What can we glean from this?  Interestingly the failure to accumulate costs for growth, and the declining rate base end up with similar monthly costs.  Only by the no growth and collecting appropriate impact fees will costs be controlled, and even in that case, costs will double every 20 years or less.  The reality is that the failure to follow proper revenue collection protocols will severely limit the utility in future years.  High capital costs impact rates significantly.  Leaving it to some future commissioner to raise the rates is unfair to both the future decision-makers and customers.  It does not make you a leader either. 

SUSTAINABILITY OF UTILITIES – PART 1

October 8, 2013
engineering, finance, infrastructure, Leadership, local government, management, Marketing water, Risk Management, Uncategorized, water sewer management
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Pipe wears out.  Concrete deteriorates, Steel rusts.  Aluminum pits. Mines play out.  Wells run dry.  But we strive for sustainability.  How do these disparate facts coexist simultaneously?  And if they don’t, how does this impact our long term prospects for our utility systems and communities.  And how do the decisions impact our understanding of sustainability.

An AWWA publication from 2010 was a compendium of thoughts on the meaning of sustainability form the perspective of water utilities.  One of the findings of the publication was that the understanding of sustainability had more to do with the perspective of the person being asked about sustainability than an overall comprehension of the inter-relationships of the concept of sustainability among different sectors.  For water supply entities, the economic sustainability of the community is not really their primary concern.  Instead they focus more on impacts to customers.  But water is a driver for economic development in a community. 

The message is that water utilities may need to look at the broader picture of sustainability in their community and extend the definitions to a wider range because no one else is and the community is looking for leadership.  The first paragraph focuses on infrastructure issues, which are commonly ignored in dealing with the concept of sustainability, but they are the ones traditionally focused on water supply issues.  The utility needs to look at infrastructure and financial outlook as a part of an overall sustainability strategy. 

There are certain assumptions that we make on many of our systems, and perhaps we need to revisit some of these assumptions in light of potential future realities.  For example, what happens to communities that do not grow?  Our current assumptions generally assume that there will be an ongoing increase in population or water use that will drive increases in revenues without specific increases on customers.  However what if you are Detroit where the populations has dropped in half in the past 50 years.  How do we deal with aging infrastructure and demands for increased water quality and reliability while maintaining fees at affordable levels for customers?  This is a particular problem when there are economic disruptions that create a large group of disenfranchised people who become more economically disadvantaged than they might otherwise already be.  The competition for sustaining water rates, infrastructure condition and water supplies can be a difficult conundrum.

WATER SEWER GARBAGE FEES

October 4, 2013
economy, finance, funding, Leadership, local government, management, Uncategorized
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A recent article in the South Florida SunSentinel newspaper raised an interesting question.  What they did was line up all the cities in the county and identify the total fees paid to the City by residents.  They took the tax rates, plus water, sewer, storm water, fire, garbage and any other fees.  The article raised an interesting question.  For example, Hollywood, West Park and Lauderdale Lakes had the highest cost per household – in excess of $3500/year.  The other end of the spectrum was Hillsboro Beach, Sea Ranch Lakes and Southwest Ranches, each under $2000/household.  Of note is that Southwest Ranches provides no water or sewer service (all wells and septic tanks on large lots), so a direct comparison is not really appropriate.  Property taxes were low, but fire fees were really high.  Sea Ranch Lakes is a tiny community with no sewer, so again, not really a good comparison.  Hillsboro Beach is among the wealthiest communities, but also tiny. 

 Most communities had total fees between $2100 and 3200/resident.  Why the difference? First, the value of property varies widely.  West Park and Lauderdale lakes have among the lowest values per household, so their taxes must be higher to provide the same level of service.  Hollywood, and Dania Beach (#4 on the list) had higher water, sewer and storm water costs.  While both have recent, ongoing infrastructure programs, both have large transfers from the water and sewer fund to the general fund, and in both cases the water and sewer customer base does not match the property tax base.  In Dania Beach’s case, the service area is half the City, so those residents are supporting the property tax funded services at a higher rate than their neighbors.  Hollywood struggled with major budget issues to used water and sewer funds to balance the budget.

The problem that this article did not address, but should have was that where water, sewer and storm water costs were high, what was driving this? Was in infrastructure investments that others simply have yet to make?  That’s ok and the fact that these utilities invested now may be more timing.  If the result is due to transfers to the general fund, that is an entirely different, and somewhat disconcerting problem.  First since the service areas are not the same. There is a fairness issue.  Some residents pay more for the same services.  It means the water and sewer system is not really an enterprise, with rates based on service costs.  Instead it is being used as a tax source.

WHO GETS FOOD STAMPS

September 30, 2013
Congress, economy, finance, food stamps, funding, Leadership, Uncategorized
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One of the more interesting issues in Congress the past years is the Farm Bill which did not pass the House.  The issue was too many food stamp recipients.  The program has doubled in the past 10 years and now 1 in 7 families depend on supplemental assistance.   But here is an interesting question – wouldn’t you assume that the states with the greatest percentage of people getting food stamps would be those states that voted for the Farm Bill.  That would be those Democratic states like California, Colorado, the New England States, Pennsylvania and New York?  Well interestingly enough, you would be wrong.  The state with the highest percentage of people receiving food stamps is Alabama, followed by New Mexico and Tennessee, which are red states.  In fact all of the southeastern states are in the upper two third, all exceeding 15% of households.  Yet their representatives voted against their constituents!  This should not be a surprise.  All of the “blue” states, except Washington and Oregon were below 15%.  Some were below 10%. 

So how does this affect water and sewer systems?  There is an ongoing effort at the EFC at UNC Chapel Hill and other areas regarding the concept of affordability of water and sewer services.  The concept is that costs in excess of 3.5 or 4.5 % of income may be burdensome on residents.  Effort is trying to come up with ideas to address low income ratepayers.  The loss of food stamps actually exacerbates this problem since most of these same ratepayers are the ones receiving food stamps.  The conflict between paying for food and water/sewer service increases, putting more low income residents at risk.  Congress is doing utilities no favors by disrupting embedded programs that people depend on.  We can debate whether the program, a transfer of funding from wealthier, blue states, to poorer, red states is a appropriate federal revenue transfer, but the reality is that the dependency has been created.  Compounding the problem is that employment is not nearly back to 2007 levels, and salaries for most of us have declined with respect to buying power over the past 30 years.  As a result, many residents, including many hardworking, employed residents, continue to struggle.  We should be concerned about the acts of Congress and remember some of our representatives may not be voting to help their constituents.  

COLORADO IS DRY, WELL NOT ANYMORE

September 16, 2013
Drought, economy, engineering, Flooding, infrastructure, Insurance, Leadership, management, stormwater, sustainability, Uncategorized
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I went to Colorado in July, and it was bone dry like I noted in a prior blog.  The trend was expected to continue, but then something happened.  It rained.  A lot. It’s been raining for almost a month.  Last week it was wet out there, really wet, devastatingly wet on the east side of Rocky Mountain National Park (Boulder, Estes Park, Longmont, Lyons). The rain has not really let up so mountain streams are over-running their banks, flooding streets, washing away bridges, damaging property and businesses.  Helicopter evaluation of the damage indicates that miles of roadways are badly damaged. Route 34/36, the primary eastern entrance to Rocky Mountain National Park may have 17 miles (of 20) damage pavement and foundation needing immediate repair.  Estes Park is cut off from the world and there was mud in the streets.  Rocky Mountain National Park is closed to allow access from Grand Lake for emergency vehicles, residents and supplies.  And eastern emergency route from Nederland is also available.  Tourism has halted in the peak of Fall tourist season.

How fortunes have changed, and continue to change.  Three years ago it was the west side of Colorado with 300 inches of snow that flooded downstream communities.  Three months ago was drought. Are these changes part of a larger issue, or a continuation of the status quo?  Hard to know, but certainly both events were far above any prior events experienced in the area.  The local infrastructure was not constructed to meet these conditions, so either the climate is changing, our models are wrong, or both.  We see the same issue playing out regularly around the world when the 100 year or 500 year storm event occurs and wreaks havoc on a community which does not have infrastructure planned for events like this.

 Expect NE Colorado to be a federal disaster area.  Expect billions to be spent on reconstruction of roadways.   But the larger question is whether the new, replacement infrastructure will survive a similar, or larger climate event in the future.  Will our infrastructure planning be short sighted or will it be adjusted accordingly?  The potential for us to protect infrastructure, and property is completely related to our ability to adjust to infrastructure needs and to minimize exposure to weather events.  Keep in mind our economy and way of life is directly related to our infrastructure condition.  But people want to live near rivers and streams, but rarely consider the real risk and consequences. 

How do we address these risks?  FEMA evaluates the probability of flooding to set flood insurance, but FEMA does not prevent construction in flood zones.  Where construction can occur is a state or local issue.  Of course, few local entities want to limit development in any way, so we keep putting people at risk.  Local officials, like those in Florida, keep pushing FEMA officials to reduce flood risks, despite evidence of increasing rainfall intensity that would increase flooding.  Florida is not alone.  No doubt Colorado officials have the same views.  We need to impress upon local officials the risks and encourage them to reduce risks to citizens.  It’s our tax money and insurance premiums they are raising.  But they are rarely held accountable.  Nor are non-elected officials.  Somehow, this needs to change.  We need leaders to stand up and draw the  line in the sand.

WHY ARE HEALTH CARE COSTS SO HIGH?

September 8, 2013
communciations, Congress, economy, finance, funding, infrastructure, innovation, Insurance, Leadership, management, politics, Revenues, Uncategorized, Water Funding, water sewer management, water supplies
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Why are health care costs increasing so fast?  Did you ever wonder about that?  We keep hearing about how health care costs, Medicare, Medicare, Obamacare are going to bankrupt us, but why is that?  Why are the cots going up so fast?  It is an important challenge for local officials and utilities who generally pay the health insurance costs for their workers.  There is more to the story that we are not being told.

One problem that get identified quickly is that only 80% of the population is included in the health care system.  Many who are not are “healthy” young people who don’t demand the services.  The concept of the health care bill was to solve this problem by spreading the costs of health care across the entire population using private and public providers.  First, I think there are way more unhealthy  people included in the 20% than we realize because the political dialogue keeps focusing on the few that want to live off the grid – I feel great so I don’t need insurance.  That guy is part of the problem.  That guy gets into a car accident, gets taken to a public hospital, gets treated, gets a bill for $26,000 to fix his broken leg, refuses to pay anything, and the taxpayers get stuck with the bill.  My solution to that guy is if you don’t want to pay for health insurance, bring cash.  Otherwise, “no soup for you!” to paraphrase a famous Seinfeld episode.  Of course my doctor, nurse and therapy friends think that’s a little cold hearted. 

The next argument is the cost of doctors, therapists and nurses.  Okay, I know a bunch of them, and that’s not where the money goes.  These people have lost money in the past 10 years.  Many are going form full-time to part-time employments as Medicare, Medicaid and health insurance bureaucrats decide services are no longer needed.  They will tell you the major change in their lives is paperwork….hold that thought for a moment.

The cost of drugs comes up.  Medicare and Medicare are the largest purchasers of pharmaceuticals in the world.  So in other works, they set the lowest price by supposedly bidding the “contracts” for services. Only there is often only one provider, so exactly how does that work?   Sounds like we don’t get a good deal there, which is why the arguments for importing Canadian drugs or drugs from Mexico keeps popping up.  They get a better deal than we do and most of these are supposedly AMERICAN companies.  No home town discount (I guess I know where free agent baseball players get the idea).   And my medical friends confirm this as an issue.  Check out the comments from Mr. Falloon at Life Extension (www.lef.org) for discussion. 

So let’s go back to the paperwork discussion.  Once upon a time doctors simply sent a little paperwork to the health insurance company or the federal government and said you needed some service.  And the insurance company processed the bill for the services.  The cost was paid by insurance premiums collected by the insurance company.  Everyone was happy.  But then someone at an insurance company said, “wait we could make more money if we asked more questions and paid less for these services.  It would help our bottom line.”  So you hear the complaint that the folks at the insurance companies are deciding whether you need that procedure or not.  And contractors decide if someone needs Medicare or Medicaid services, not the government, not your doctor, your nurse or your therapist.  Not any person that knows you, but some unseen, private sector bureaucrat who’s goal is to minimize the amount of your premium spent on services so they can enhance their bottom line.  And apparently they are very effective because the health insurance industry is very lucrative.  So maybe we have stumbled onto something here.  Maybe the cost of medical coverage is more related to drugs and bureaucracy (and it is not government bureaucracy!!) than the actual cost of services.  Maybe the old system, even if there was some fraud in it, wasn’t nearly as bad as it was made out to be.  It reminds me of one of the 4 laws of City management I developed years ago:  Never give elected officials a bad alternative – it becomes a magnet.  It always worked (hence a law).  I didn’t learn why until years later when I realized, that the worst option was the one all the lobbyists lobbied for even at the local level.  It was the option where they could make the most money “fixing

SCHOOL’S STARTED

September 3, 2013
communciations, economy, engineering, Environment, graduation, innovation, Leadership, management, sutdents, Uncategorized
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School is back in session.  It is a great opportunity to see what kind of great things we can learn this year.  We can learn from the students as much as they learn from us.  Working with college students, in bridging that connection between my real world clients and my students keeps me engaged and allows me to act as a conduit of information between the two sectors.  That conduit potentially includes jobs for students and technology for clients.  It is remarkable how much the skills sets of the students have changes and increased in certain areas in five years, let alone 10.  I remind them that 5 years after they graduate, the skill set of the next group will be far ahead of theirs. Get your license and keep learning and staying up to date with technology.  It is far too easy to get behind and it is surprising how many graduates figure they are done with learning when the graduate.  Far from it.  The advances and changes in the industry move so quickly.  All my students are doing 3 dimensional projects versus cad drawings 5 years ago.  And those cad drawings were so far above the cad drawings of ten years ago.  All three groups are ahead of a lot of engineering firms with respect to technology.  And there accompanying utilities as well.  My students make great interns for GIS – it comes naturally to them.  My older friends?  Well, let’s say there is a bit of a learning curve.  As we try to be more efficient, training and skill development become continuous exercises.  It is obvious when you compare skill sets of recent, current or older graduates.  Of course skill sets may not translate to knowledge, for there is no substitute for field experience, especially in the water and engineering fields.  The reality is often much different than you expect, for a variety of reasons.  How you adapt means experience.  It is why the older crowd and the younger crowd need each other and need those communication avenues.  I find that my teaching keeps you engaged in the changes in technology, viewpoints and the new generation while maintaining the relationships with the real world