Archive

Tag Archives: funding

Fracking and Water – Do They Mix?

April 14, 2014
energy, engineering, fracking, Leadership, local government, management, renewable power, sustainability, Uncategorized
1 Comment

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….

 

Why Bad Ideas Won’t Die

April 11, 2014
contractors, engineering, funding, innovation, Leadership, local government, management, planning, politics
Leave a comment

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?

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
Leave a comment

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. 

How to Track Reserves

March 1, 2014
economy, finance, infrastructure, innovation, Leadership, local government, management, planning, politics, Revenues, Surpluses, sustainability, Uncategorized, water sewer management
Leave a comment

We have spent some time talking about the need to fund and maintain reserves.  I think most people reading this concur but how do you track reserves?  Every public sector utility gets audited annually.  How many people have actually looked at that audit?  Or attend the discussion with the elected officials with the auditors.  Or know how to read it?  This is an important part of our job.  We need to defend the utility and knowing the financial position is part of the defense. 

The annual audit is commonly called the Comprehensive Annual Financial Report of CAFR.  The finance director normally controls the process.  The CAFR is many, many pages long and include information on revenues and expenses, but also a bunch of other things like assets, depreciated assets, transfers to other funds, outstanding long and short term debt, fund balance and reserves.   The CAFR is designed to be a management tool to help with tracking performance of the entity with time.  CAFRs were redesigned by the Governmental Accounting Standards Board (GASB) about 15 years ago to provide more useful information to lenders and oversight agencies.  It was redesigned to help with management, discussion and analysis of the financial position.  The utility director should be a part of this management, discussion and analysis team and should fully understand its contents as it affects the utility. The CAFR should not be viewed simply as a compliance tool to submit and forget about. 

For example, the assets should include the value of all installed infrastructure (fixed) and all mobile equipment (non-fixed) as assets.  The depreciation is the total amount of depreciation, assigned as a straight line, since the acquisition of the assets.  You should always have more than 50% of the asset value remaining.  You should understand outstanding debt and debt plus depreciation should be less than your asset values, otherwise you are underwater with your assets.  You should understand the transfers to other funds and the justification for same.

But the reserves are key.  Some of these reserves may be restricted, which means they are likely impact fees, reserves to cover debt coverage requirements or covenants for repair and replacement of other purposes.  Most utilities do not have a separate repair and replacement reserve, but this would be useful for those capital expenses,  Likewise, operating reserves, for use to balance the budget in lean periods should be identified.  The reporting reserves for rate stabilization should be separate from the operating reserves (usually 1.5 to 3 months) to cover the day-to-day expenses.  An understanding of the value and tracking of these reserves is useful to long and short term decision making by utility managers.  Unfortunately most auditors and most finance director do not make separate reserves and tracking becomes a challenge.  But the utility is an operating entity.  Finance, like purchasing and human resources and support agencies designed to provide service to help accomplish the mission of the operating elements of the utility.  You need the support agencies to provide the necessary information to help your decision-making.  Doubtful your finance director wants to hear this, but really, does the utility operate because the finance department does the work or because the utility does?  Just food for though.

Surpluses?

February 16, 2014
economy, finance, funding, Holistic Water Planning, infrastructure, Leadership, local government, management, planning, politics, Revenues, sustainability, Water Funding
Leave a comment

It was not so long ago that we were talking about local and state governments suffering major shortfalls in their revenues as a result of the downturn in the economy.  Cuts were being made to police, fire, education and parks.  Politicians were fussing over the need to cut taxes and cut government expenditures in the process.  Employees lost jobs and benefits were cut.   In a prior blog we discussed the fact that economic upticks and downturns were cyclical, and unlike people, there is a tendency for local and state government policy makers to “hang with the curve” so to speak and have government expenses track the economy as opposed to try to stabilize spending by taking advantage of the ups to create reserves in order to take advantage of the downs.  They ignore the old adage that their grandparents told them – save for a rainy day.  And we don’t recognize those rainy days approaching!  It is not a lot different unfortunately than many citizens who spend when they have money, and are short when they don’t.  We are not a country of savers and it hurts us often.

There is however a major benefit for government to have reserves.  When government has reserves, it can take advantage of lower competition to construct or invest in infrastructure in lean times. There are many examples of governments getting construction done at discounted rates based on timing their projects to economic downturns.  A side benefit is that those governments are spending money at the time when they need to keep people employed.  FDR did this during the Great Depression.  Obama attempted to copy him in 2009 with the AARA monies.  In both cases they may not have invested enough, but both were faced with deficits on the federal level and a Congress that was reluctant to spend. 

The economy has rebounded and state and local governments are starting to run surpluses. The South Florida Sun-Sentinel recently reported that the big “challenge” for the Florida Legislature and many other state and local governments, is they are running surpluses.  Recall the last time the federal government ran a surplus, we got tax cuts that immediately put the feds back in the red because they had not built up any reserves, and won’t even with a balanced budget anytime soon.  Well Florida has $1.3 billion extra on hand and guess what we hear in this election year  – tax cuts, more money for special projects, extended sales tax exemption dates, etc.  Those running for office are thrilled with the surplus because it helps their platform but we hear nothing about restocking the trust funds that were raided during the 2009, 2010 and to some extent the 2011 budgets! 

Expect this to be the norm, and the rhetoric should be troubling to fiscally responsible people.   If we have surpluses, times must be better.  In good times we should be encouraging decision-makers to sock money away in reserves, savings and other solid investments, and at the same time restocking those accounts drained to pay the bills during the down time of the Great Recession.   In Florida, our highway trust fund, environmental trust funds and education funds were drained.  They have not been restocked.  In fact the cuts to most of those programs has not been restored either. The next economic downturn will come – will we be prepared to weather storm by spending our savings as opposed to cutting services which magnifies the impact of residents?

As times get better, utilities owned by local governments should pay particular attention to General Fund revenues.  Many of those General Funds increased contributions from the water and sewer funds to make up the difference in losses of property and sales tax dollars.  That prevented utilities from making investments, or forced them to borrow money to cover investments that might otherwise have been paid for in cash.  Time for the General Fund to pay the utility back!  Time to restock the reserves and time to spend money to catch-up with the deferred maintenance and capital.  Of course the costs are not what they were 3 or 4 years ago, and neither are the interest rates, so we all pay more for the same projects because we could not spend the reserves in the down period.

Utilities should always have significant reserves.  Nothing we do is inexpensive, so having reserves makes it possible to fix things that inevitably go wrong.  Reserves are a part of a well operated, fiscally sound utility. Taking money from the utility during down times hurts both the utility and the local government.  Total reserves diminish of the entity, making it less possible to deal with emergencies, cover the loss of revenues, or take advantage of lower costs for construction projects.  Meanwhile, creating reserves and a pay-as-you-go system for ongoing replacement of pipes and pumps is good business.  It insures that ongoing money is spent to prevent deterioration of the utility system.  The reserves allow for accelerated expenditures when times are tough, prices are down and people need work.  When utilities spend money, it translates to local jobs.  But the only way to do this is make convincing argument of the benefits of reserves and spending.  

SEA LEVEL RISE AND FLOOD PROTECTION

February 12, 2014
communciations, Flooding, funding, infrastructure, Leadership, local government, management, planning, politics, Revenues, sea level rise, stormwater, sustainability, Tidal flooding, Uncategorized, utilities
Leave a comment

Regardless of the causes, southeast Florida, with a population of 5.6 million (one-third of the State’s population), is among the most vulnerable areas in the world for climate change due its coastal proximity and low elevation (OECD, 2008; Murley et al. 2008), so assessing sea level rise (SLR) scenarios is needed to accurately project vulnerable infrastructure (Heimlich and Bloetscher, 2011). Sea level has been rising for over 100 years in Florida (Bloetscher, 2010, 2011; IPCC, 2007).  Various studies (Bindoff et al., 2007; Domingues et al., 2008; Edwards, 2007; Gregory, 2008; Vermeer and Rahmstorf, 2009; Jevrejeva, Moore and Grinsted, 2010; Heimlich, et al. 2009) indicate large uncertainty in projections of sea level rise by 2100. Gregory et al. (2012) note the last two decades, the global rate of SLR has been larger than the 20th-century time-mean, and Church et al. (2011) suggested further that the cause was increased rates of thermal expansion, glacier mass loss, and ice discharge from both ice-sheets. Gregory et al. (2012) suggested that there may also be increasing contributions to global SLR from the effects of groundwater depletion, reservoir impoundment and loss of storage capacity in surface waters due to siltation.

Why is this relevant?  The City of Fort Lauderdale reported last week that $1 billion will need to be spent to deal with the effect of sea level rise in Fort Lauderdale alone.  Fort Lauderdale is a coastal city with canals and ocean property, but it is not so different from much of Miami-Dade County, Hollywood, Hallandale Beach, Dania Beach and host of other coastal cities in southeast Florida.  Their costs may be a harbinger of costs to these other communities. Doing a “back of the napkin”  projection of Fort Lauderdale’s cost for 200,000 people to the additional million people in similar proximity to Fort Lauderdale means that $5 billion could easily be spent over the next 100 years for costal impoundments like flap gates, pumping stations, recharge wells, storm water preserves, exfiltration trenches and as discussed in this blog before, infiltration galleries. Keep in mind that would be the coastal number and we often ignore ancillary issues.  At the same time, an addition $5 to 10 billion may be needed for inland flooding problems due to the rise of groundwater as a result of SLR.

The question raised in conjunction with the announcement was “is it worth it?”  I suggest the answer is yes, and not just because local politicians may be willing to spend money to protect their constituents.  The reality is that $178 billion of the $750 billion economy of Florida, and a quarter of its population, is in the southeast. With nearly $4 trillion property values, raising a few billion for coastal improvements over 100 years is not an insurmountable task.  It is billions in local engineering and construction jobs, while only impacting taxpayers to the tune of less than 1/10 of a mill per year on property taxes. This is still not an insurmountable problem.

I think with good leadership, we can see our way.  However, that leadership will need to overcome a host of potential local community conflicts as some communities will “get more” than others, yet everyone benefits across the region.  New approaches to working together will need to be tried.  But the problem is not insurmountable, for now…

Detroit – Feast to Famine – it there a Lesson to Learn?

January 20, 2014
economy, engineering, finance, infrastructure, innovation, Leadership, local government, planning, Uncategorized, Water Funding, water sewer management
Leave a comment

I have said before in this blog that my Dad’s family were born and raised in Detroit – not the suburbs, in the City, about a mile north of Tiger Stadium.  My great-grandfather was a butcher.  His sons all became butchers, so my Dad grew up around the butcher shop as a kid.  It was the Depression, but because of the shop, my Dad had food on his table.  My Great-grandmother managed the money, and acquired a number of properties in the area of 13th and Magnolia that the sons, and extended families would eventually move to.  It was a solution to the difficulties outside the shop.  Family was the means to survive the hard times of the Depression. 

Of course Detroit was a booming city – over 100 auto companies were in Detroit at the turn of the last century, and the City was becoming the center of a new mode of transportation – the automobile.  Henry Ford developed the assembly line to allow everyone to own a car, furthering the status of the City.  As the twenties developed, Detroit and Chicago competed to become the “jewel” of the Midwest.  Elaborate stone buildings, expanding infrastructure for roads, trains, water, sewer and storm water were all centerpieces of pride in the City.  Employment and incomes were high, worker benefits were good, the workforce was highly skilled and education was good. Profits were good and the auto industry was Detroit-centric. Detroit was a vibrant City in the first 50 years of the last century. 

Scroll ahead 60 years and how the city has fallen.  The City has lost a million people.  It has $18 billion in debt, and is collecting $0.3 billion less in revenues since 2008.  The tax base has been decimated.  Houses can be purchased for minimal prices.  Churches have been abandoned.  Crime is high.  Employment is down, unemployment remains above the state and national average.  Poverty is up, incomes are down.  Huge areas must be served but serve no one or only a very few.   The City filed the highest profile bankruptcy for a municipality ever.

The television show Low Down Sun last summer provided a graphic look at the City – blocks of the City devoid or mostly so of housing or other buildings, schools no longer in use, roads in disrepair, classic stone buildings with the windows broken out.  You can see what the City was, and the haunting view of the City today are a stark reality.  To add insult to injury, the Sun-Sentinel wrote a recent article about how people are making money doing tours of abandoned buildings in Detroit, or how farming is occurring in the City limits. 

So if Detroit failed, why not Cleveland, Akron, Pittsburgh, St. Louis, Cincinnati or virtually any other large, older Midwestern industrial city?  Sadly many of these cities have lost the industries that made them famous and provided jobs and a stable tax base and incomes.  Many of these cities are also stressed, much as we found Birmingham was.  There are many arguments for what precipitated these losses:  unions, shifts in population, outsourcing offshore, competition within the US, changes in consumer preferences, technology…… the list goes on.  But the reality is it doesn’t matter why, the City must deal with the reality that is.  We all look at Detroit and its recent bankruptcy filings.  Maybe looking at Detroit allows us to feel better about our situations, but we need to learn the lesson from Detroit, Birmingham, Cleveland and others who filed for bankruptcy.  We need to look back to determine where the decisions were that created the issues.  Was it expanding to fast, poor economic assumptions, failure to manage finances better, political failures, failure to raise revenues/taxes/water fees, or failure to maintain or replace infrastructure?  Rarely is it corruption, so it is people trying to do well but failing in their jobs.  The question is why? 

I would start with training.  We need to train our public managers better, but MPA and MBA schools are not teaching about these failures.  In part it may be because we tend to teach positive lessons, versus negative ones, but they would be useful case study of the potential challenges.  In a prior blog I noted that the biggest challenge for government managers is managing in lean times.  Often lean times can be overcome by saving money as fund balances and investing (well), but long-term downturns like Detroit, Cleveland and other cities have experienced cannot be corrected this way.  There are major policy implications that must be overcome. 

From a utility perspective it is important to note that the economic difficulties are not limited to cities and counties but utilities are subject to long-term declines as well.  The problem is particularly acute in industrial communities where a large industry (think mills in the mid-Atlantic states) move away and leave water and wastewater facilities at far less capacity than they were designed for. Small systems may be especially at risk.

As an industry we need to learn from these failures.  We should study the difficult times to determine how the problems can be avoided.  The need to figure out how to manage funds better, deal with customer losses, and define strategies to overcome losses.  If anyone has some thoughts, please respond to the blog, but doesn’t this sound like a research project in the making?

INVESTING IN INFRASTRUCTURE

January 15, 2014
economy, Education, engineering, finance, funding, infrastructure, Leadership, planning, politics, Rural Utilities, Uncategorized, utilities, water sewer management
Leave a comment

When we ask what the biggest issues facing water and sewer are in the next 20 years, the number one answer is usually getting a handle on failing infrastructure.  Related to infrastructure is sustainability of supplies and revenue needs.  Resolving the infrastructure problem will require money, which means revenues, and overcoming the resistance to fully fund water and sewer system by local officials, the potential for significant costs or shortfalls for small, rural systems and the increasing concern about economically disadvantaged people. 

The US built fantastic infrastructure systems in the mid-20th century that allowed our economy to grow and for us to be productive.  But like all tools and equipment, it degrades, or wears out with time.  Our economy and our way of life requires access to high quality water and waste water. So this will continue to be critical. 

ASCE and USEPA have both noted the deteriorated condition of the water and wastewater systems.  In the US, we used to spend 4% of the gross GNP on infrastructure.  Currently is it 2%.  Based on the needs and spending, there is a clear need to reconstruct system to maintain our way of life.  This decrease in funding comes at a time when ASCE rates water and wastewater system condition as a D+ and estimates over $3 trillion in infrastructure investment will be needed by 2020.  USEPA believes infrastructure funding for water and sewer should be increased by over $500 billion per year versus the proposed federal decrease of similar amounts or more. 

Keep in mind much of what has made the US a major economic force in the middle 20th century is the same infrastructure we are using today. Clearly there is research to indicate there is greater need to invest in infrastructure while the politicians move the other way.  The public, caught in the middle, hears the two sides and prefers less to pay on their bills, so sides with the politicians as opposed to the data.  Make no mistake, our way of life results from extensive, highly efficient and economic infrastructure systems. 

In many ways we are victims of our own success.  The systems have run so well, the public takes them for granted.  It is hard to make the public understand that our cities are sitting on crumbling systems that have suffered from lack of adequate funding to consistently maintain and upgrade.  Public agencies are almost always reactive, as opposed to pro-active, which is why we continuously end up in defensive positions and at the lower end of the spending priorities. So we keep deferring needed maintenance. The life cycle analysis concepts used in business would help. A 20 year old truck, pump, backhoe, etc. just aren’t cost effective to operate and maintain.

Another part this problem is that people have grown used to the fact that water is abundant, cheap, and safe. Open the tap and here it comes; flush the toilet and there it goes, without a thought as to what is involved to produce, treat and distribute potable water as well as to collect, treat, and discharge wastewater.

Water and Sewer utilities are being funded at less than half the level needed to meet the 30 year demands.  Meanwhile relying on the federal government, which is trying to reduce funding for infrastructure for local utilities is not a good plan either. We need education, research and demonstrations to show those that control funding of the needs. The education many be the toughest part because making the those that control funding agree to increase rates carries a potential risk to them personally.  But there are no statues to those that don’t raise rates – only those with vision.  We need to instill vision in our decision-makers.

Oil Energy and Utilities

January 11, 2014
Congress, engineering, Environment, infrastructure, Leadership, management, planning, power demands, power-water nexus, renewable power, Water Funding, water sewer management, wind power
Leave a comment

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.  

Rural Utilities Part 2

December 21, 2013
economy, engineering, finance, funding, infrastructure, Leadership, Rural Utilities, Small systems, sustainability, Uncategorized, utilities, Water Funding, water sewer management
Leave a comment

In the last blog I talked about the challenge to rural utilities, many of which serve relatively few people and have used federal monies to pay for a lot of their infrastructure.  In this blog we will take a look at the trends for community water systems which are defined as systems that serve at least 15 service connections or serve an average of at least 25 people for at least 60 days a year. EPA breaks the size of systems down as follows:

  • Very Small water systems serve 25-500 people
  • Small water systems serve 501-3,300 people
  • Medium water systems serve 3,301-10,000 people
  • Large water systems serve 10,001-100,000 people
  • Very Large water systems serve 100,001+ people

Now let’s take a look at the breakdown (from NRC 1997).  In 1960, there were about 19,000 community water utilities in the US according to a National Research Council report published in 1997.  80% of the US population was served.  in 1963 there were approximately 16,700 water systems serving communities with populations of fewer than 10,000; by 1993 this number had more than tripled—to 54,200 such systems. Approximately 1,000 new small community water systems are formed each year (EPA, 1995). In 2007 there were over 52,000 community water systems according to EPA, and by 2010 the number was 54,000.  85% of the population is served. So the growth is in those small systems with incidental increases in the total number of people served (although the full numbers are more significant). 

 

TABLE 1 – U.S. Community Water Systems: Size Distribution and Population Served

 

Number of Community Systems Serving This Size Community a

Total Number of U.S. Residents Served by Systems This Size b>

Population Served

1963

1993

1963

1993

Under 500

5,433 (28%)

35,598 (62%)

1,725,000 (1%)

5,534,000 (2%)

501-10,000

11,308 (59%)

18,573 (32%)

27,322,000 (18%)

44,579,000 (19%)

More than 10,000

2,495 (13%)

3,390 (6%)

121,555,000 (81%)

192,566,000 (79%)

Total

19,236

57,561

150,602,000

242,679,000

a Percentage indicates the fraction of total U.S. community water supply systems in this category.

b Percentage is relative to the total population served by community water systems, which is less than the size of the U.S. population as a whole.

SOURCES: EPA, 1994; Public Health Service, 1965.

 

Updating these numbers, there are over 54,000 systems in the US, and growth is almost exclusively in the very small sector.  93% are considered to be small or very small systems—serving fewer than 10,000 people. Even though these small systems are numerous, they serve only a small fraction of the population. Very small systems, those that serve 3,300 people or fewer make up 84 percent of systems, yet serve 10 percent of the population.  Most critical is the 30,000 new very small systems that serve only 5 million people (averaging 170 per system).  In contrast, the very large systems currently serve 45% of the population.  Large plus very large make it 80%.  The 800 largest systems (1.6%) serve more than 56 percent of the population. 900 new systems were added, but large systems served an additional 90 million people.

What this information suggests if that the large and very large sector has the ability to raise funds to deal with infrastructure needs (as they have historically), but that there may be a significant issue for smaller, rural system that have grown up with federal funds over the past 50 years.  As these system start to come to the end of their useful life, rural customers are in for a significant rate shock. Pipeline average $100 per foot to install.  In and urban area with say, 60 ft lots, that is $3000/household.  In rural communities, the residents may be far more spread out.  As an example, a system I am familiar with in the Carolinas, a two mile loop served 100 houses.  That is a $1.05 million pipeline for 100 hours or $10,500 per house.  With dwindling federal funds, rural customers, who are already making 20% less than their urban counterparts, and who are used to very low rates, that generally do not account for replacement funding, will find major sticker shock. 

This large number of relatively small utilities may not have the operating expertise, financial and technological capability or economies of scale to provide services or raise capital to upgrade or maintain their infrastructure.  Keep in mind that small systems have less resources and less available expertise.  In contrast the record of large and very large utilities, EPA reports that 3.5 percent of all U.S. community water systems violated Safe Drinking Water Act microbiological standards one or more times between October 1992 and January 1995, and 1.3 percent violated chemical standards, according to data from the U.S. Environmental Protection Agency (EPA).. 

EPA and professionals have long argued that centralized infrastructure for water and sewer utilities makes sense form an economy of scale perspective.  Centralized drinking water supply infrastructure in the United States consists dams, wells, treatment plants, reservoirs, tanks, pumps and 2 million miles of pipe and appurtenances.   In total this infrastructure asset value is in the multi-trillion dollar range.  Likewise centralized sanitation infrastructure in the U.S. consists of 1.2 million miles of sewers and 22 million manholes, along with pump stations, treatment plants and disposal solutions in 16,024 systems.  It is difficult to build small reservoirs, dams, and treatment plants as they each cast far more per gallon to construct than larger systems.  Likewise operations, despite the allowance to have less on-site supervision, is far less per thousand gallons for large utilities when compared to small ones.  The following data shows that the economy-of-scale argument is true:

  • For water treatment, water distribution, sewer collection and wastewater treatment, the graphics clearly demonstrated the economy-of-scale of the larger utility operations versus small scale operations (see Figures 2-5). 
  • The administrative costs as a percentage of the.total budget parameter also demonstrated the economy-of-scale argument that larger utilities can perform tasks at a lesser cost per unit than the smaller utilities (see Figure 6).

Having reviewed the operations costs, the next step was to review the existing rates.  Given the economy-of-scale apparent in Figures 2 to 6, it was expected that there would be a tendency for smaller system to have higher rates.  Figures 2-6 demonstrate this phenomena. 

So what to do?  This is the challenge.  Rate hikes are the first issue, a tough sell in areas generally opposed to increases in taxes, rates and charges and who use voting to impose their desires.  Consolidation is anothe5r answer, but this is on contrast to the independent nature of many rural communities.  Onslow County, NC  figured out this was the only way to serve people efficiently 10 years ago, but it is a rougher sell in many, more rural communities.  Infrastructure banks might help, the question is who will create them and will the small system be able to afford to access them.  Commercial financing will be difficult because there is simply not enough income to offset the risk.  The key is to start planning now for the coming issue and realize that water is more valuable than your iPhone, internet, and cable tv.  In most cases we pay more for each of them than water (see Figure 7).  There is something wrong with that…

 Image

 

Figure 1  Breakdown of Size of Systems

Image

 

Fig 2 Cost of Water Treatment

Image

 

Fig 3 Cost of Water Distribution

Image

 

Fig 4 Cost of Sewer Collection

Image

 

Fig 5 Cost of Sewer Treatment

Image

Fig 6 Cost of Administration as a percent of total budget

 

Image

FIgure 7 Water vs other utilities