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sustainability

Highest Risk States for Losses

August 28, 2014
Climate, Colorado, economy, Flooding, infrastructure, sea level rise, sustainability
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As those of you who follow this blog know, we periodically touch on climate issues.  Sea level rise is a particularly acute issue here at ground zero – southeast Florida.  But as I have said for some time, this is not an immediate crisis, but a slow steady creep that gives us time to adapt to the changes related to sea level rise.  I am optimistic that while we will spend a lot more money to engineer water management so we will need more engineers, there are solutions that will allow us to thrive here for a long time – probably a lot longer than we have been here, which is just over 100 years.

Our bigger, current challenge is the temporal but catastrophic impact of tropical storm activity that can create immediate consequences that last for years, much as Hurricane Andrew did in 1992 and Hurricane Wilma almost ten years ago.  Of course there have been others, like Donna in 1960 which were worse.  I mention this because the peak of hurricane season in Sept 10 – only two weeks away.  We have been lucky for years now, and of course we are all hoping it remains that way.

But I found another interesting article this weekend hat talked about the states with the most weather losses since 2006 (and in a subsequent blog I will look back further for comparison). is New Jersey.  OK, no huge surprise given the recent experience of Sandy.  But who is number 2?  Or for that matter 2-10?  Would you believe that Florida is not on the list at all.  Neither is California despite the fires.  Or North Carolina another hurricane prone state.

No, according to the Tribune, the states  (in order:after  New Jersey) are: Texas, Tennessee, Missouri, Alabama, Oklahoma, Mississippi, Louisiana, Colorado and Arizona.  The most common causes: thunderstorms, heavy rain, flash flood and tornados.  And the impacts range from $24 billion in New Jersey to $3.5 billion in Arizona.  An interesting factoid as we approach the peak of hurricane season.  May Florida stay off the list.

POWER PLAYS – Subsidies and water utilities

August 2, 2014
Climate, energy, Environment, fracking, infrastructure, innovation, power, power demands, power-water nexus, sustainability, Uncategorized, water sewer management, wind power
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So what does this mean for water and sewer utilities. First, we’d love to stay out of the fray. Water and sewer utilities recognize that they are the “peak” power supply for electric utilities. The means to expand power supplies is made difficult by the rules for capital recovery for power utilities that penalizes peak and redundant power supply construction. It must be used and useful to qualify for a return. Hence NextEra builds inexpensive, small increment renewable wind systems to be made whole and encourages residents to reduce demands so they do not need to build more large scale capacity. That works as long as access to renewables or increases in efficiency are available. The use of federal subsidies encourages the used of new technology but without the subsidies, expect the construction to slow.

The European Union is looking to phase out renewable power subsidies by 2017, which may have fairly significant consequences for the European renewable market. The Koch brothers and the Tea Party operatives they fund through many organizations like the Institute for Energy Research, Americans for Prosperity and the Heritage Foundation, are fighting federal tax credits for wind, while backing tax credits for oil and gas. Why do the Koch brothers keep showing up? Because as we noted in a prior blog – they stand to lose profits if the US depends less on oil and gas IT si a problem with big money interests using that money for self preservation as opposed to progression of technology and ideas.

Think what would have happened 100 years ago if big money was allowed to control progress. And I have just the perfect scenario pitting two sides of my family. My mother’s great uncle made Concord coaches. As long as horse drawn carriages and coaches were the primary transportation options, they made money. OF course many cities and towns found that they spend much of their tax money cleaning up after the horses, one of the all-time yuckiest jobs. Tons of horse poop was cleaned up nightly on the streets on many cities. Images are available on line. Of course there was also the stench, disease, vectors, etc associated with all that poop.

Then came Henry Ford. My Dad’s side of the family were Detroiters. They got jobs in the Ford factories, and made money from services to autoworkers as well. The cities loved having cars – less poop. In fact Henry’s cars worked so well, that very quickly cities didn’t have to pick up poop. And the stench and disease decreased. Of course back then, my mothers’ family did not have the same means to buy influence to prevent Henry Ford from producing cars. My uncle went broke, but America and my father’s family in Detroit, benefitted greatly as a result of the new technology. I think we all benefitted from the automobile. Thankfully the coachmakers didn’t have money.

Using politics and influence to resist new technology seems unAmerican. Using subsidies to encourage is seems far more beneficial to society as long as those subsidies actually benefit society. Subsidies have long been a means for governments to alter consumer and corporate behavior and encourage new technologies. Subsidies for recycling steel, aluminum, glass, paper and other materials remained in place until the technology was cost effective to compete with new materials. Now recovered steel is cheaper than new steel materials. The subsidies had their effect. The same is true with aluminum and glass. Subsidies in the form of grants encouraged water and sewer utilities to upgrade treatment and install pipes to serve new customers. Now those are low interest loans because most of the cost effective connections have been made. It benefitted society.

Subsides have been used for years in the US and Europe to encourage renewable power use. The result is a reduction in renewable costs as more people invested in the technology. Greater supply means lower costs (economy of scale, and, theory of economic supply and demand), and subsides are designed to reduce purchase prices sooner than the market might otherwise. Otherwise most of these industries never get off the ground because they cannot get to cost effective production levels. Stay tuned.

Economic Challenges or Challenges to Economics?

May 26, 2014
Congress, debt funding, economy, Education, finance, funding, infrastructure, innovation, Leadership, local government, management, planning, politics, Reserve Funding, reserves, Revenues, Surpluses, sustainability, Tax cuts, Uncategorized, utilities, Water Funding, water sewer management
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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. 

THE SHRINKING MIDDLE CLASS

May 21, 2014
economy, funding, graduation, infrastructure, Leadership, local government, management, planning, politics, sustainability, utilities, Water Funding
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In the last blog I commented on the Donald Sterling, Thomas Sowell and Clive Bundy comments the week before. I wonder if letting the hate out just a way to keep us from looking at the bigger picture from a political (and maybe business) perspective? And should utilities we concerned? The answers may be yes, and yes an dhere is why. An August 2012 Pew Research Center report noted that only half of American households are middle-income, down from 61 percent in the 1970s. The shift was downward, not upward as the very rich (0.1%) control 58% of the wealth in the US. In addition, median middle-class income decreased by 5 percent in the last decade, while total wealth dropped 28 percent. The need for social programs, despite cutbacks and revisions to the welfare programs in the Clinton era, have increased – since 2000 Medicaid has increased from 34 million people to 54 million in 2011 and the Supplemental Nutrition Assistance Program (SNAP, or food stamps) from 17 million to 45 million in 2011. Keep in mind that income drives qualification for these services so it means that incomes are down for millions in America. The increase in people needing help is no surprise since there is an ongoing increase in the number of lower-wage service jobs like food preparation, retail and service industry, but the number of middle-class occupations, like teaching and construction, have declined. Since 2010, the State of Florida has added 400,000 jobs, impressive except that the vast majority are service and retail jobs that pay just above minimum wage. The job growth in low wage jobs does not replace the loss of middle income jobs which is why 47% of households did not earn enough to pay income tax in 2103. It is not because they don’t want to, it’s because they don’t get paid enough. And we have tens of millions of these low wage jobs that don’t pay enough for the recipients to pay taxes. Just the opposite of what some of the political discussion would have you believe.

The loss of wages is felt locally more than nationally. It means that local officials hear about costs more because water, sewer, power, etc competes for an ever larger portion of the shrinking paycheck. So we see more attention paid to affordability indexes, the ability to pay. The concept of affordability is to take your annual water and sewer bill and divide it by the average or median local income. The goal is water plus wastewater is under 3.5% of the median income. Keeping the percent low is great and easy when people are making more money, but creates a lot of difficulty when the incomes are static or dropping. An our costs are rising due to the increasing need to maintain and upgrade infrastructure that has been neglected since 1980 (the annual investment is under 1.4% for most of the US infrastructure for the last 30 years. We need to invest above 2.3% to keep up according to GAO).

When income drop, costs become more important, and local water and sewer costs are often easier targets to limit than groceries, rent, power, telephone, cable or other services that are not subject to local official votes. So it is in all of our interests to work with local officials, colleges, vocational schools, public schools et al. to attract or build a economy that features higher income jobs, to get everyone employed, and to provide training, infrastructure, outreach, health care and other help to establish a competent, highly skilled workforce in a community. That means that utilities must support the local efforts to effect social change in the community, to help meet the needs of residents not just with water, but with respect to the local economy as well. Does that mean we are actually agents for social change?

Sea Level Rise, SE Florida Style

May 6, 2014
Climate, economy, engineering, Flooding, funding, infrastructure, planning, politics, sea level rise, sustainability, Uncategorized, utilities, water sewer management, water supplies
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There has been significant discussion about the potential impacts of climate change on the world:  more intense rainfall events, more severe thunderstorms and tropical cyclones, droughts, loss of glacial ice and storage, increased demand for crop irrigation.  However for much of the State of Florida, and for much of the coastal United States east of the Rio Grande River, the climate issue that is most likely to create significant risk to health and economic activity is sea-level rise.  Data gathered by NOAA from multiple sites indicates that sea level rise is occurring, and has been for over 100 years. About 8 inches since 1930.

The impact of climate change on Florida is two-fold – Florida often is water-supply limited as topography limits the ability to store excess precipitation for water use during the dry periods and sea level rise will exacerbate local flooding.  The highly engineered stormwater drainage system of canals and control structures has effectively enabled management of water tables and saltwater intrusion by gravity. The advent of sea-level rise will present new challenges, because the water table is currently maintained at the highest possible levels to counter saltwater intrusion, while limiting flood risk in southeast Florida’s low-lying terrain and providing for water supplies.  As sea level rises, the water will not flow by gravity, which disrupts that balance struck between flood risk and water supply availability in the canal system.

Occasional flooding is not new to Florida, but the increasing frequency we currently experience is related to sea level rise, not just along the coast, but for large expanses of developed property inland due to topography and groundwater levels.  As a result, the challenge for water managers in the state, especially in southeast Florida, is to control the groundwater table, because control of the water table is essential to prevent flooding of the low terrain.

The issue is not lost on local governments in south Florida nor on the educational institutions in the area.  Florida Universities are studying the impacts to the region to identify ways in which we can mitigate, respond to and adapt to these changes. My university, Florida Atlantic University, is located in this vulnerable part of the State has been proactive in partnership with the Four County Compact in addressing these issues and we have now joined with other Universities in the State to form the Florida Climate Institute, a consortium working with state and federal agencies to address the multiple challenges and opportunities facing this State. FAU in particular, has been proactive in developing tools to evaluate risk and identify adaptation strategies to protect local and regional infrastructure and property. 

Our efforts have included using high resolution NOAA data to map topography at the +/- 6 inch level, combined that topography with mapping of infrastructure and groundwater, to identify vulnerable areas throughout Broward, Miami-Dade and Monroe Counties, as well as initiated projects in Palm Beach County and other coastal regions throughout the state.  By identifying vulnerability based on sea level changes, the timing and tools for adaptation can be designed and funded to insure a “no-regrets” strategy that neither accelerates nor delays infrastructure beyond its need. 

While we have all heard the discussion of an estimated two to three feet if sea level rise is anticipated by 2100; sea level rise is a slow, albeit permanent change to our environment.  The slow part allows us to make informed decisions about adaptation strategies that may prove useful in the long term as well as the short term.  Of prime importance is the need to plan for these needs 50 or more years out so that we do not increase our exposure to risk.  Keeping development out of low lying areas, redeveloping pumping and piping systems with change in mind and reserving areas where major efforts will need to be undertaken, is important to the public interest and will affect private business, tourism and homeowners.  Sea level rise is already a problem for many low lying areas such as Miami Beach, Fort Lauderdale, Hollywood, and other coastal communities. It will be an incremental problem creeping up on us for the rest of the century and beyond.

The lowest lying areas are the roadways, which are also the location of electrical, water, sewer, phone and drainage infrastructure.  Fortunately given the current Federally funded special imagery and NOAA data systems we are able to predict pretty accurately where flooding will occur.  Linking that information with detailed projections of sea level rise impacts we can  map vulnerable areas and build adaptive measures into every action and plan we undertake.  But the impacts are not only on the coast. Sea level affects ground water table levels and with our intense rainfall areas far inland can be flooded, even subject to long term inundation.  Water levels are rising and will continue to rise as groundwater rises concurrently with sea level. Add the impact summer rains and dealing with water becomes a major priority. Figures 1 and 2 outline the roadway network degradation at present, 1, 2, and 3 ft of sea level rise.  The figures demonstrate that a major, underestimated amount of property is vulnerable on the western edge of the developed areas because the elevations are decreasing as one moves west from I95. 

Image

While time will impact our environment, there are three options to address the change:

 

  • Protect infrastructure from the impacts of climate change
  • Adapt to the changes, and
  • In the worst case retreat from the change.

 Retreat does not need to be considered in the short or medium term.  South Florida has developed in the last 100 years and there will be well over 100 years of life left.  As a result, the best option is adaptation.  Adaptation takes different forms depending on location.  I have developed a toolbox of options that can be applied to address these adaptation demands, resulting in an approach that will need a more managed integrated water system, more operations and inevitably more dollars.  For example we can install more coastal salinity structures, raise road beds, abandon some local roads, increase storm water pumping, add storm water retention etc. to address many of the problems.  The technology is available today.

Much of the actual needs are local, but the problem is regional and requires a concerted effort of federal, state and local agencies and the private sector to address the scales of the problem.  A community can address the local problems, but the regional canals, barriers, etc., are beyond the scope of individual agencies.  Collaboration and discussion are needed. 

The needs will be large – in the tens of billions.  But there are two things in south Florida’s favor – time and money.  The expenditures are over many, many years.  Most important in the near term need is the early planning and identification of critical components of infrastructure and policy needs and timing for same.  That is what FAU does best.  At risk are nearly 6 million of Floridians their economy and lifestyle, $3.7 trillion in property (2012) in south east Florida alone and a $260 billion annual economy.  All of these are expected to continue to increase assuming the appropriate plans are made to adapt to the changing sea level.  Protection of the area for the next 100-150 years is achievable as long as we have the science, the understanding and the will to do it.  Plan now, and over the rest of this century starting now we can raise those billions of dollars needed.

 

US Senate Subcommittee I testified at

April 27, 2014
sea level rise, sustainability
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Hi All

I had to post this Miami Herald Article (p 1 and 2) regarding a sea level rise hearing conducted by the US senate here in Miami Beach. I was one of six asked to testify. This is a very rare opportunity. I was very privileged by that opportunity. Check it out.

Article

Fracking and Water – Do They Mix?

April 14, 2014
energy, engineering, fracking, Leadership, local government, management, renewable power, sustainability, Uncategorized
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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….

 

Will the Default in Detroit Affect Me?

April 8, 2014
borrowing for infrastructure, debt funding, Detroit, economy, engineering, Environment, finance, infrastructure, innovation, local government, Michigan, planning, politics, Risk Management, stormwater, sustainability, Uncategorized, utilities
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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.

 

Colorado Connected

March 30, 2014
Climate, Colorado, contractors, economy, engineering, Environment, finance, Flooding, Road Repair, sustainability, Transportation, Uncategorized
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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.. ..

Infrastructure Replacement

March 10, 2014
Banking industry, borrowing for infrastructure, debt funding, economy, engineering, finance, funding, infrastructure, Leadership, local government, management, planning, Revenues, Risk, sustainability, Uncategorized, underwriters, utilities, Water Funding, water sewer management
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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.