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As 2017 gets rolling, we are set to swear in a new President.  The politics are already interesting.  The question is what will change, when and how.  For example there has been an ongoing discussion of infrastructure bills, but aside from WITAF approval, little clear direction has been forthcoming.  We only know that private sector participation will be encouraged.  Of course virtually all projects constructed in the public sector are constructed by private contractors, so how/if that will change is unclear.

It is also unclear which industries will be affected.  There are already comments about not pursuing he renewable energy opportunities  – China sees 13 million jobs in the coming 5 years as their economy cranks up to meet the needs.  They are contributing $360 billion to enhance this sector.  I have previously blogged about potential opportunities in the US to grow renewables.  But they are just like recycling in the 1970s.  Recycling needed to be subsidized until such time as the facilities and processes were in place to make it competitive.  Now for steel and aluminum, it is less costly than virgin iron or bauxite.  That has several benefits to the economy and the environment.

I have previously suggested that those who do the research, develop the solutions and control the patents tend to rule the economy.  The US did in throughout the 20th century.  Energy is the 21st century opportunity and I would hope we don’t cede that elsewhere due to politics.  13 million jobs would really help places in rural America and place like Detroit and Flint which have the workers.  It may be that instead of the federal government doing much in this arena, the state and local officials will lead the charge.  California has been successful to a degree in this regard.  Let’s see if making money will “trump” the politics of oil. That would be good for a lot of local governments that have workers and factories, but not jobs.  That would help people like those in Flint.  And it would help their utilities.  Let’s work on this with our local officials


Power costs are stable.  Gas prices decreased markedly in 2014 Oil futures are low compared to 2013 and earlier.  .  Production is constant.  Low energy likely is fueling an economic expansion.  Gas economy in vehicles is at an all-time high.  Fuel efficiency lowers GHGs and cuts oil imports.  America is less reliant on foreign oil.  We have more money in our pockets.  Utility power costs and vehicle costs are lower.  Generator operations are lower.  Life is great.  Or is it?

 

Well, that depends on who you talk to.  Politicians in states with in oil and gas based economies are scrambling to deal with large deficits in their budgets.  The railroads are not happy over the Keystone pipeline vote.  Green energy manufacturer are unhappy.  Environmentalists are unhappy.    Heck even the Koch brothers are probably not completely happy

 

The first issue is methane gas.  Pipelines and fracking operations lose about 6% of the gas. A Washington Post article estimates 8 million metric tons of methane is lost each year.  That is where we are trying to capture and transport it.  The Bakken fields lack pipelines for gas, so much if it may be flared.  The amount of fracking will continue (Florida Power and Light has said it will get into the business – but outside of Florida), so more exploration will likely lead to more methane escaping.  Why do we care?  Methane is 22 to 80 times the greenhouse gas that carbon dioxide it (depending on who you talk to).  It accounts for 9% of GHG emission in the US – a third of that from the oil and gas industry.  That gas is concentrated in the western US which makes them ripe for regulation.

 

Enter cap and trade.  The cap and trade “industry” has been opposed by the oil and gas industry for years.  However there are a number of groups –from Indian tribes to NextEra Energy are posed to benefit from cap and trade (C&T) rules.   They have reduced their carbon footprint enough that they can sell carbon credits.  It is doubtful that this Congress with pass C&T legislation, but much of the regulatory focus could be shifted if C&T was in place.  C&T could accelerate green energy efforts.

 

Green energy folks want continued subsides or policies that encourage increased green power supplies, improve technology and reduce prices – all at the same time.  Rolling out a major change in the energy picture is a huge investment that will not gain traction without policies to encourage it   At least for now, green energy creates more jobs per KW-hr than conventional oil and gas, primarily in research and development and product manufacturing.  Sewing up the patents would portend positively for America in the 21st century, much as sewing up the car, gas engine, and nuclear patents did for the 20th century.  He who owns the technology should benefit.  Unfortunately that isn’t the Koch brothers who are unhappy with green energy but are happy that lower oil prices might decrease the competition in the future when oil prices inevitably rise.  But America would be better off in a non-oil based economy in 50 years if we developed an energy policy to address these issues with a long-term view.

 

However, that would take a lot of business and political leadership to overcome some of those who do not want change.  These are people who have more money than the Concord coach makers who could not fight the technology change to automobiles in the early 20th century.  It also takes a vision of what America should look like in 50 years. We might be short on those visionaries.  And how will utilities be a part of it.


ASCE came out with more bad news about infrastructure.  60 Minutes did a piece about deterioration of bridges. The magazine American City and County has published a couple articles about the risks of aging infrastructure.  Asset management is practiced by few governments, and even fewer small ones.  The public doesn’t want to foot the bill and lobbyists want taxes cut further.  Where does it end?

The infrastructure crisis is a political and business leadership crisis.  Or vacuum.  The economy of America and much of the developed world was built on advanced (for their time) infrastructure systems constructed by governments with a vision to the future.  Some of this infrastructure was repurposed (federal interstate system for example), but much of it has addressed critical issues that hampered our development.  For example, the lack of water severely inhibits many third world nations.  Even when they have water, it is unsafe to drink or use.  In America, at the turn of the 20th century 1:100,000 people DIED each summer from typhoid.  Just typhoid, not all the other waterborne disease options.  Many more were sick.  And the population was much smaller.  Talk about reduced productivity.  Now we have advanced water systems, disinfection practices that protect people and pipes, and few event get sick from contaminated water.  Those that do, become headlines.  You don’t want to be a headline.  Productivity is up.  But we expect good water and can’t see the pipes.

Sewer is an even better example.  People just don’t want to know.  Flush and it’s gone.  But the equipment, treatment and materials may be even more complex than the water system.  But few people get sick from sewage because of the systems we have built.  Now think about third world examples.  Or conditions you have seen in documentaries, the news or movies.  Being in sewage is not a great place to be.  Even the manhole thriving cockroaches agree..

Stormwater is probably the laggard here, in part because changes in development patterns have overwhelmed the old systems.  Miami Beach experienced this when redevelopment replaced small houses on permeable lots with large housed with mostly impermeable property.  Oops.  Meanwhile road and bridges have received a lot of funding – with much to do (see bridge that collapsed on I-75 in Cincinnati a few weeks back).  Most states fund transportation at a magnitude more than water and sewer.

What is the problem?  Local officials do not convey an understanding of these complex system to the public very well.  In part this may be because understanding the maintenance needs is difficult and highly variable.  And many do not fully comprehend the assets they have, their condition, life expectancy or technological needs.  No one knows when things will fails, so maintenance or replacement of some equipment or pipeline is always the thing cut in the budget, with no real understanding of the consequences.

The public does not see the asset, assumes it will have a long life, so is unconcerned until they are affected.  Then it is personal.  The public does not understood the impact or value that these assets have to society – they tend to be personal focused, not societal.  That is a leadership issue.  That leadership starts with vision and communication from those that understand the issue to the elected officials that need to advocate for their infrastructure.  Elected officials need to take ownership of infrastructure.  It is like your house – you need to upgrade and protect it constantly.  You do not let that roof leak keep leaking!  Elected officials that do not invest in infrastructure, are letting the roof leak.  Making is someone else’s problem for political expediency is not leadership.

Despite the infrastructure crisis, the good news is that construction of piping is increasing – both new and replacement.  Every so many months, the magazine Utility Contractor will note current trends and pipe seems to be going up.  That’s good but there is a long way to go.  Better news – the construction of buildings is increasing.  That could lead to more revenues.  In Florida, all of a sudden finding experienced construction workers is a problem.  Things are definitely better economically, but are we taking advantage to improve the local infrastructure, or is you economy simply an infrastructure disruption away from another fault?


The Union of Concerned Scientists reviewed recent wildfires in the west. One of the concerns they raised was that increased forest fires are both a climate change and a man-induced issue.  Wildfires on federal land has increased 75% on federally owned land.  Fire impacted areas are larger and impact more development which encroaches on those federal holdings.  We spend over $1 billion in fire fighting on federal lands each year.  But why?

Because many of the forest are in mountainous areas, fire season starts earlier in year with less mountain snowfall.  And that is  most years as snowfall accumulation decrease.  Temperatures are warmer, earlier with shortens the snow season.   Water runs off faster.  Of course the fact that we altered management philosophies to prevent all forest fires didn’t help because some burning is natural each year. As a result there is a huge reserve of unburned land out west.  The beetles did not help either as they left millions of acres of dead trees on mountain sides from Canada to New Mexico. Beetle infestation is clearly climate change driven.

The solutions are more difficult.  Building up next to federal land needs to be restricted.  Regulations in dealing with trees, bushes and underbrush in fire prone areas need to be enacted and enforced. Early spring fires set as control burns need to happen more frequently. But these are all local responses to a global climate problem.  That response is currently lacking.  These are leadership issues.

From a utility perspective, this issue may be significant.  We like those high, clean mountain streams.  But after a forest fire, those streams are often warmer and less clean.  The soot, ash and runoff from now barren land can create significant impacts on water plant, create major treatment alterations, increase costs, and risk contamination.  A friend some years ago suggested that utilities were instruments of social change.  The fact that we have treated water and sewer creates social change.  We need to protect water supplies and therefore we should be a part of the conversation on land use.  That requires some leadership.

 


The first month of the fall semester has slammed me, which accounts for a little less blog activity on my part.  But as fall rolls in many local governments are dealing with final budgets, new projects and dealing with taxes and fees.  Students are back to school and industries are looking to the end of the year and 2015.  How fast time flies.  Our students that graduated last spring all have jobs and half of our seniors that will graduate in December do as well.  With engineers or contractors.

The good news is that the economy continues to tick up, construction and construction jobs are back to 2005 levels (which if you recall was a lot), and the stock markets are making money for somebody because they are up as well.  Alan Greenspan can complain that housing maybe lagging, but that is more a lack of people having funds or being able to move.  Meanwhile construction of projects that were deferred might be addressed?  Time will tell but it raises an interesting question –  can we plan on growth forever?  We assume a continuous growth rate (like 1 or 2% per year), but is that reasonable since it means more people come to an area each year than they did the year before?  Works for bacteria, maybe not so much for people.  Ask Detroit.  Or Cleveland.  And does this type of growth create unintended consequences for us?  I think this is a  good question for a future blog and of course a question that economists and politicians do not want to answer.  It would be highly disruptive to our plans.   So since it is election season again, we all need to be prepared for the inundation of campaign sales pitches that try to convince us to vote for someone, or more likely to vote against someone.  That’s probably not the way it was intended to go, but it’s what politics has degenerated to in so many places.  Ideology and adherence to it under any circumstances often prevents us from looking objectively at issues and reaching real solutions, some of which may have winners and losers, but may be necessary to improve long-range forecasts.  Listen to the political patter and decide where the plan is.

For example, ignoring the evidence that the climate is changing, places constituents in perilous positions…..in the future.  Not now and few climate impacts need drastic immediate action.  But longer term, storm sewer will be inadequate, there will be less water stored in glaciers, less rainfall in places (like the southwestern US), more frequent flooding in coastal areas, etc.  The problem may be 50 years from now, but wholesale infrastructure programs take that long.  It took the US 50 years to build the interstate system.  Nearly 40 years to dig canals in south Florida, 20 year to acquire property for a reservoir in North Carolina, etc.  Things take time and meanwhile if we need to alter current practice, such as elevating roadways and building to avoid flooding, the time to start is now, not in 50 years when solving that problem is overwhelming.  Find those water sources now, so development and competitors can be controlled.  Finding water that may take 20 years to secure and construct is an unmanageable issue the year before you need it.  You need a plan.  Where do you hear that planning?

What about that failing infrastructure?  We tend to ignore it until it fails.  But if it fails, that can be catastrophic.  Engineers and operations personnel know deterioration occurs, and know that it will take time to plan, design and refurbish of replace infrastructure.  But projects continue to get deferred for lack of funds.  Aggressively planning repair and replacement may actually save money in the long-run, but our planning tends only to be short-term.  So how do we change that?  Perhaps the state agencies that require local planning to be submitted and approved will push for better evaluation of infrastructure.  GASB 34 clearly did not go far enough.  Too many communities do not track their work and even fewer document the conditions when they make repairs.  Too little data is collected on what fails, when and why.  WE can collect huge amounts of data with work orders that track work.  Perhaps a regulatory frontier.  Or maybe, just maybe, some enlightened managers will decide tracking information is actually fairly easy.  The question is the platform.  Stay tuned… we are working on that…


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.

 


Several weeks ago we looked at the phenomenon of population, income, education and unemployment.  The impact to from the combination of these factors in certain communities can be difficult.  Let’s explore a little further as there is more, interesting data every day.  The US Department of Agriculture is releasing its report of rural America.  The findings are interesting and counter-intuitive to the understanding of voters in many of those communities.  Their findings include:

  • The rural areas grew 0.5 % vs 1.6% in urban areas from mid-2011-mid 2012
  • Rural incomes are 17% lower than urban incomes.
  • The highest income rural works (95th percentile) earn 27% less than their urban counterparts
  • 17.7% of rural constituents live in poverty vs 14.5% in urban areas
  • 80% of the high poverty rate counties were rural
  • All the high income counties are urban.

Wow!  So the ghetto has move to the country? According to these statistics there is truth in that statement.  Let’s look a little further using some on-line mapping. 

First let’s look at where these rural counties are.  Figure 1 is a map from www.dailyyonder.com  that shows (in green) the rural counties in the US.  Wikipaedia shows the 100 lowest income counties in Figure 2.  For the most part, these counties are rural, with the exceptions being a few areas in south Texas and in the Albuquerque/Santa Fe area of New Mexico. Raceonline.com shows the populations in poverty by county.  The red areas are the highest poverty rates.  The red areas in Figure 3 expand Figure 2 to include much of the rural deep south, Appalachia, more of Texas and New Mexico and part of the central valley in California.

Figure 4 shows how the number of young people has changed between 2000 and 2009 in rural counties (urban counties are white and not included – red means a decrease).  Figure 5 shows population growth (or not) by county. What you see in these two maps is that the young people are moving to the rocky mountain states and vacating the high poverty counties in Figure 3.  Yong people do not see jobs in the rural area – unemployment is 20% higher in rural America and the jobs that are there pay less.  Figures 6 and 7 show unemployment by County in 2008 after the start of the Great Recession and in 2013.  What these figures show is that with exception of the Plains states and Rockies, is that many of the areas with high poverty also had high unemployment, and that the unemployment has remains stubbornly high in many rural areas in the Deep South, Appalachia and New Mexico, plus high unemployment in parts to  the Great Lakes, but the poverty rates are still lower.  Education may by a factor in why the Plains states and Rocky Mountains have less unemployment – despite being rural their students are far more likely to graduate from high school than those in the deep South, Appalachia where unemployment remains high and incomes low. 

So what does this possibly have to do with utilities?  Utilities need to understand this problem as is demands some real, on-the-ground leadership.  Small and rural utilities are more costly to operate per thousand gallons than larger utilities.  A 1997 study by the author showed that economy-of-scale manifested itself to a great extent with water and wastewater operations.  The differences were not close – it is a lot less costly to operate large utilities vs small ones.  Rural utilities complicate the issue further because not only is the number of customers limited, but the pipe per customer is less so the capital investment per customer is far higher than in urban areas.  The impact is that utilities are under pressure to reduce rates to customers, or create a set of lower cost rates for those in poverty, while at the same time their costs are increasing and infrastructure demands are incrementally higher than their larger neighbors.  The scenario cannot be sustained, especially when large portions of rural infrastructure was installed with FHA grants, meaning the customers never paid for the capital cost in the first place.  There was no or lower debt, than what larger utility customers have.  The rural rates since these investments have been set artificially lower than they should as a result. But with Congress talking about reducing SRF and FHA programs, FHA is unlikely to step in to replace their initial investment, meaning that the billions of rural investment dollars that will be needed in the coming years will need to be locally derived, and rate shock will become a major source of controversy in areas that are largely very conservative politically and tend to vote against projects that will increase costs to them.

The good news is that much of the rural infrastructure may be newer when compared to much of the urban infrastructure.  So there is time to build the argument that local investment is needed.  The community needs to be engaged in this discussion sooner as opposed to when problems occur.  Saving for the infrastructure may be the best course since rural utilities will have limited access to the borrowing market because of their size, but that means raising rates now and keeping those saved funds as opposed to using them to deer rate increases.  If ongoing efforts in the House deplete federal funding further, the pinch will be felt sooner by rural customers who will lose the federal dollars from SRF and FHA programs. 

 

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Figures 1 – Rural Counties

http://www.dailyyonder.com/united-states-rural-urban-and-exurban-counties/2009/03/17/2002

 

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Figure 2.  100 lowest income Counties in the US

 

http://en.wikipedia.org/wiki/List_of_lowest-income_counties_in_the_United_States

 

 

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Figure 3.  Estimated population in poverty

http://www.raconline.org/racmaps/mapfiles/poverty.jpg

 

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Figure 4.  Where the Young People Are

http://www.raconline.org/maps/topic_details.php?topic=55

 

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Figure 5.  Where people are moving to http://www.raconline.org/maps

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Figure 6  Unemployment 2008

http://en.wikipedia.org/wiki/Unemployment

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Figure 7  Unemployment 2013 http://www.huduser.org/portal/pdredge/pdr_edge_featd_article_040

 

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