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.
I had to share this, from a nonscientific survey of people adamantly opposed to any consideration of changes to our climate:
1. I can’t do anything about it so I don’t care about it
2. People can’t alter what is happening with the earth because it is too big
3. It’s natural, so we can’t do anything about it
4. It’s not an issue now, so it’s somebody else’s future problem
5. The science is inconclusive so why do anything yet. Let’s see what happens
6. Trying to address it will cut jobs
7. We won’t be competitive (i.e our profits will drop)
8. It requires changing our business model (energy)
9. If we talk about it no one will develop in our community
10. Costs too much
I had to post this as many of you will have comments. But before you do, these about this a minute……
The first five are based on no facts, but a desire to ignore the issue entirely. The second five are more poignant because aren’t these pretty much the same arguments to deny the need to correct water pollution concerns in the 1930s? Or 1950s? Or even 1970s? Or even today with hog farms, frack water, acid mine waste, coal dust slurries, etc.? Or actually pretty much every regulation? I seem to recall Tom Delay making this argument when he was in Congress before he was indicted.
Now think about the Clean Water Act, Clean Air Act, Safe Drinking Water Act, and others. These regulations are designed to correct ills of the past that were simply ignored due to the first five arguments above, ignoring the fact that prevention is always less costly than cleanup afterward. To we pass regulations to clean up problems and protect the public health going forward. Otherwise why have a regulation?
So let’s talk about that jobs impact. The reason is that after the passage of these regulations, didn’t the number of professional jobs (like civil and environmental engineers, environmental and other scientists – STEM jobs) increase? Isn’t increasing STEM jobs a priority? So won’t dealing with climate issue perhaps create a similar increase in STEM jobs? Yes, costs for water increased and the cost for the effects of climate changes will cost money, but don’t these challenges create opportunities? Isn’t this akin to dealing with problems with development from the past? Just asking…..
At a recent conference I was listening to a presentation by the Army Corps of Engineers explaining the investments made over the last 80 years. Subsequent presentations discussed that the need to reinvest in infrastructure appears to be about 3.6% of infrastructure value per year, but that the US is spending about 2.4%. The best condition of our infrastructure was in the 1980s, but decreases in reinvestment due to funding limitations has caused an ongoing decline in infrastructure value, which is why the ASCE report cards show most of our infrastructure at the D or D- level. It is getting old and it needs repair and replacement. You would rarely buy a house, never maintain it, and expect it to live in it without problems for 50 years. Roofs leak, pipes need replacing, mechanical equipment, lights and appliances fail. It is the cost of owning a home. You have to update. Most times the new equipment is more efficient that the old stuff, saving money. So why do we do this with infrastructure?
More interesting was the response to how some of these agencies may deal with this backlog of deferred maintenance. So far I have heard the Corps, state transportation agencies, state land agencies and another federal government say that they are figuring out means to prioritize the assets and dispose of those not needed. So let’s see how that would work and I kid you not, these are suggestions:
Hey I like the idea of giving, but seriously, how does the “recipient” deal with this problem. The low value assets are low value because they serve limited people and are deemed to have little economic or useful value or are too expensive to maintain. So what does the recipient do with it? They do not have nearly the resources that larger governmental entities have, and if the big guys cannot find the money, will locals? Are we just kicking the problem to the next guy? Sounds like used car sales to me.
It sounds suspiciously like the argument I have heard several times from a city manager who talked about cutting the size of local government, only what he did was contract with other entities to do the services, which means cuts in employees for his city, but the cost is just transferred to another entity. The rate/taxpayers will foot the bill unless the service is completely discontinued. In his case, they all paid more.
The State of Florida and the federal government have both cut employees and both contract heavily for services that never used to be contracted. There is a whole industry of contracting for government work that used to be done in-house. In other words, they privatized portions of the operations. But did the cost of government decrease in either case? No.
So going back to the initial question – will governments abandon infrastructure? The answer appears to be yes, but the problem is that that infrastructure IS being used by people so the reality of full abandonment is impossible. The result will be that underlying local entities will be stuck with the bill. Planning is needed. “Fail to plan = Plan to fail” as my friend Albert says. We need to identify where these “gifts” may occur and identify a means to deal with the inherent obligation that goes with them. For water and sewer utilities, waterways and roadways are of particular concern, but so could watersheds and well sites.
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….
My students are back from the ASCE Southeast Regional Student Competition. They received 2 second place awards out of 18 contests. Not too shabby considering there were only about 30 students that were active in putting this together, all going to school full-time, and many working and supporting families. And they were competing against 30 other schools, including several far bigger engineering schools like the Universities of Florida, Alabama, and Central Florida and Auburn University.
So how did they do? Let’s start with the canoe. The canoe was indestructible (see photo). The students rowed well given very little experience. Far better than some of the other schools despite the wind and currents in the canal. The canoe was 700 lbs and it still floated. They finished second on plan reading and professional paper competitions. The environmental filter worked super well the first trial. A little plugging on the second but a good job regardless. The balsa bridge held 700 lbs and the 186 g 2 x 2 x 2 inch cube – 1400 lbs. They also did surveying, shuffleboard with concrete materials, and several others. All good efforts, and each year gets better.
If you have never seen these competitions, you need to. The students work hard, compete well and have fun. It is a good means to meet other students and see what they do. The key is to autopsy the results to help the next students. Overall a good experience for all of them. So congratulations!
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.. ..
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.
We have talked about reserves, the need for them, reasons why they are neglected and how to establish appropriate numbers (an area where more research is needed). Reserves are an issue when the economy tanks. We all recall the problem in 2008, but this is where utilities need to look beyond just their system to see what might be coming. 2008 was a problem that we should have seen coming, or at least planned for, but did not. But it means that we need to look at the national and local economic picture and understand a little about events beyond our reach that can affect us. Utilities and governments generally do not do this well.
In 2005-2007, it was very clear we had a property bubble going on. There was discussion on the news, financial channels, Wall Street Journal and even columns by economist like Paul Krugman. A few of us may have taken advantage of the bubble through prudent real estate sales, but many did not. Likewise, few utilities or governments planned for its inevitable fall. After the crunch hit, those who owed the least amount of money, had savings and had stable incomes fared better than those who did not. Same for governments. Unfortunately most Americans and most governments fell into the “did not” category.
So let’s look at a couple issues. First, we knew there was a bubble and should know that all bubbles pop. We had the tech stock bubble in the late 1990s. People on Wall Street knew that the investments had turned to real estate and bankers where busy loaning money out with no interest for two years, no money down, adjustable rate mortgages and the like. If you owned a computer you were inundated with Countryside and various other folks trying to loan you money. Or buy your house and pay you an annuity if you were older.
The reason that these “opportunities” were so prevalent was to help speculators who expected to own the property for short periods of time, or help those who might not have the means to buy time to get the means to support the payments. All the subsequent financial instruments discussed in books like “Too Big to Fail” come from tools used by bankers to disperse the risk associated with speculators and the risky. It made money for bankers and investment houses (remember they are private businesses beholden to their private stockholders).
Like all bubbles, we get caught up in the money being made by speculators (and yes if you invest in the stock market you are speculating). We try to grab onto the rising instruments to get ahead, but we forget that especially with real estate, the growth overall rate across the nation could only grow at the rate of population growth. It is basic supply and demand.
For governments, revenues rise, especially during real estate bubbles. Some bubbles last for years, which creates a distorted view of the future. In south Florida, there was a lot of buzz concerning water supply projections and arguments between regulatory staff and utilities over water supplies that were projected 20 years in the future, based on demand projections from 2000-2005. When the dust settled in 22011, most of those issued disappeared because virtually all projections were substantially revised downward. And most revenue growth projections were likewise revised downward and capacity needs delayed. Planning 20 years out is historically inaccurate because the global economy can impact local growth.
Of course these new projections are incorrect as well. Because the test period was 2005-2010 or 2000- 2010, the growth is stunted. So they are likely underestimating demand and revenues. Uncertainty with time means that the accuracy of projection decreases with time. As a result, simply relying on past projection methods increases risk that of significant deviations.
I do an exercise n class where I give students three sets of projections. 10 years apart, for 50 years. I tell them nothing else. The examples are The State of Nevada, Cleveland, and Collier County, FL. All are in the past (Cleveland is 1910-1950) There is absolutely no easy method that can project the growth in either Collier County or the State of Nevada, or that Cleveland’s population will drop in half. We could do the same with Detroit and never project that decrease either. But when you tell them where the population are and what year, the wheels start to turn. They realize that economics is a major issue. While Nevada and Collier grew from 1960-2000, the rate of change is likely to be very different in 2010 to 2020 due to the 2008 recession.
Tracking economic activity is a utility responsibility. We need to know what is really happening, and understand bubbles. We need to recognize that when property values and housing number increase fast, it will be short term. Plan for savings and reserves. Figure out what your recovery period might be. We need to understand our economic base. For example try this out and see what your conclusion is. Florida’s economy is based on three major industries: agriculture, tourism and housing. What could possibly go wrong with that model? Well if we have an economic problem nationally, 2 of 3 take major hits because people outside the state do not travel to Florida and retirements get put off. The economy gets hit hard and recovery is slow. We have experienced that exact phenomenon from 2009 to date. And many of those jobs are low wage positions which means the people who struggle most get hit hardest. Storm events can impact the state. Bit hits to all three, and agriculture is also a low wage industry. It is a precarious economic model that sets itself up for potential fluctuations. We need to plan for this. It is our responsibility, utility staff and decision-makers to plan and prepare for the next big event.
Check out today’s Sun Sentinel. FL Legislature looking to cut $1 billion in tax revenues. So much for saving for a rainy day!
As water and sewer utilities, the public health and safety of our customers is our priority – it is both a legal and moral responsibility. The economic stability and growth of our community depends on reliable services or high quality. The priority is not the same with private business. Private businesses have a fiduciary responsibility to their stockholders, so cutting services will always be preferred to cutting profits. Therein lies the difference and yet the approach is different. Many corporations retain reserves for stability and investment and to protect profits. Many governments retain inadequate reserves which compromises their ability to be stable and protect the public health and safety. Unlike corporations, for government and utilities, expenses are more difficult to change without impacting services that someone is using or expects to use or endangering public health. Our recent economic backdrop indicates that we cannot assume income will increase so we need to reconsider options in dealing with income (revenue) fluctuations. If there are no reserves, when times are lean or economic disruptions occur (and they do regularly), finding funds to make up the difference is a problem. The credit market for governments is not nearly as “easy” to access as it is for people in part because the exposure is much greater. If they can borrow, the rates may be high, meaning greater costs to repay. Reserves are one option, but reserves are a one-time expense and cannot be repeated indefinitely. So if your reserves are not very large, the subsequent years require either raising taxes/rates or cutting costs. An example of the problem is illustrated in Figure 1. In this example the revenues took a big hit in 2009 as a result of the downturn in the economy. Note it has yet to fully return to prior levels as in many utilities. This system had accumulated $5.2 million in reserves form 2000-2008, but has a $5.5 million deficit there after. Reserves only go so far. Eventually the revenues will need to be raised, but the rate shock is far less if you have prudently planned with reserves. You don’t get elected raising rates, but you have a moral responsibility to do so to insure system stability and protection of the public health. So home much is enough for healthy reserves? That is a far more difficult question. In the past 1.5 months of operating reserves was a minimum, and 3 or more months was more common. However, the 2008-2011 economic times should change the model significantly. Many local governments and utilities saw significant revenue drops. Property tax decreases of 50% were not uncommon. It might take 5 to 10 years for those property values to rebound so a ten year need might be required. Sales taxes dropped 30 percent, but those typically bounce back more quickly - 3-5 years. Water and sewer utilities saw decreases of 10-30%, or perhaps more in some tourist destinations. Those revenues may take 3-5 years to rebound as well. Moving money from the utility to the general fund, hampers the situation further. Analysis of the situation, while utility (government) specific, indicates that appropriate reserves to help weather the economic downturns could be years as opposed to months. The conclusion is that governments and utilities should follow the model of trying to stabilize their expenses. Collect reserves. Use them in lean times. Develop a tool to determine the appropriate amounts. Educate local decision-makers and the public. Develop a financial plan that accounts for uncertainty and extreme events that might impact their long-term stability. Take advantage of opportunities and most of all be ready for next time. In other words, plan for that rainy day.
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