Securing Cost-Effective Capital
To complement the August 2010 article titled, “Bridging the Funding Gap,” Water & Wastes Digest Editorial Director Neda Simeonova asked American Water President and CEO Donald Correll to comment on the role public-private partnerships (PPPs) have in helping address today’s funding challenges for the water and wastewater industry.
Neda Simeonova: Currently, what are some of the most significant funding challenges for water and wastewater facilities in the country?
Donald Correll: Our country’s water and wastewater infrastructure is in serious need of repair. Both received a ‘D-’ from the American Society of Civil Engineers’ report last year. Communities across the nation are faced with the challenge of replacing aging and deteriorating water and wastewater infrastructure at the estimated cost of more than $2.5 trillion over the next 20 years, according to the U.S. Conference of Mayors.
Government-owned utilities have a limited taxpayer and revenue base that must service all a municipality’s needs, not just water and wastewater services. As a result, many municipalities, particularly medium to smaller systems, find themselves with significant constraints in their ability to obtain the capital to make infrastructure improvements.
Contributing to this is the state of the water and wastewater industry. The industry is highly fragmented. There are approximately 53,000 community water systems and approximately 16,000 wastewater facilities in this country. Government-owned systems make up the vast majority of the U.S. water and wastewater utility segment—84% of all water and 98% of all wastewater systems.
Another key element to the story of the U.S. water industry is the fact that it’s taken for granted. The U.S. has one of the highest per capita consumption rates and lowest costs of water. Because of how our systems are managed, generally the U.S. is not paying for the true cost of water.
Simeonova: How do PPPs assist in addressing financial and infrastructure challenges for municipalities?
Correll: Large investor-owned water utilities often have a greater ability to secure cost-effective capital and thus make major necessary investments. For example, in the last year alone, American Water invested approximately $800 million in capital improvements to ensure that communities served by its utility subsidiaries continue to receive reliable, high-quality water services.
There are many solid PPP examples out there that demonstrate that when the public and private sectors work together, the challenges are addressed quite successfully. Some are routine, such as a private-sector company assisting a municipality with operation of its water systems for a short time period. Others are more complex, such as a design-build-operate arrangement, where a single contract is awarded for the design, construction and operation of a new or expanded facility and could involve subcontract arrangements and long-term, multiple-year operating contracts.
Investor-owned companies provide more cost efficiencies and economies of scale. Most public systems have little bargaining power to pay for equipment, tools, services, chemicals and other goods, increasing the direct costs of operations, upgrades and major infrastructure repairs.
By operating on a larger scale and serving multiple communities, investor-owned water utilities take advantage of economies of scale in purchasing, bargaining to keep down construction and operation costs. Investor-owned companies also provide more cost-efficient access to technology and expertise.
We maintain highly specialized staffs of scientific experts and engineers—across multiple water systems in a variety of geographic settings—who can be made available to communities as needed. So municipalities gain access to technical expertise and resources that would otherwise be unavailable or costly to contract. It is economically unfeasible for most communities to employ large numbers of highly sophisticated full-time personnel to manage complex updates and infrastructure upgrades.
Currently we are having discussions with about 75 different municipalities and private entities across the country looking for different solutions to their water challenges, and whether that is a bulk-sale contract, or an operation and maintenance, or an acquisition, it really comes down to what the customer wants.
The bottom line is that many communities are looking for help because they do not want to fall further and further behind in maintaining and upgrading their infrastructure, and in most instances, private water companies can help them.
Simeonova: What does the future hold for water and wastewater infrastructure funding?
Correll: The tax-exempt private activity bond (PAB) is one of the most useful tools the federal government can offer states and municipalities to help provide for long-term, capital-intensive infrastructure projects. But Congress controls the issuance of these bonds by limiting each state with an annual cap.
In 2009, the state volume cap was equal to the greater amount of either $90 per state resident or $273.27 million, depending on population. This cap hinders the use of PABs for water and wastewater infrastructure projects, which are generally multiyear projects, in favor of short-term, politically attractive projects such as housing and education. In fact, in 2007, only 1.3% of all PABs were issued to water and wastewater projects.
The Sustainable Water Infrastructure Investment Act (H.R.537; S.3262), which is included in the upcoming tax extender bill, will remove the cap for public-purpose water and wastewater projects. Once passed, this legislation will not only address the nation’s deteriorating water and wastewater infrastructure, it will also generate thousands of jobs and help stimulate the economy.
The U.S. Environmental Protection Agency projected that this simple change in the tax code could pump as much as $5 billion to $6 billion annually toward addressing our nation’s infrastructure challenges. This legislation will also result in lower-cost financing for water utilities, and those savings can be passed on to customers. It will also spread the financial risk to the private sector and help relieve all levels of government from the burden of funding these needed investments.
SIDEBAR: Public-Private Partnerships: Doing Better for Customers and the Environment
The Oak Valley Water Reclamation Facility, located in Homer Glen, Ill., was originally built in the 1970s. An expansion of the plant was critical to serve a growing population. The expansion presented an opportunity to incorporate new technologies to provide more effective and efficient treatment while reducing environmental impact. The plant is located within a residential subdivision and adjacent to the Spring Creek watershed, and all improvements had to be made within the existing plant footprint. Illinois American Water personnel needed to work closely with state and local officials as well as residents to create an expansion plan that meets regulatory obligations while satisfying concerns regarding odor, appearance and impact on the local watershed.
The capacity of the plant was expanded from 0.75 million gal per day (mgd) to 1.5 mgd, doubling the size of the population it serves to approximately 15,000 people. Higher-capacity pumps were installed in selected locations to handle expanded demands. The existing two-stage activated sludge package plants were replaced with a single-stage, extended air activated sludge process (a two-channel oxidation ditch). A new final clarifier was built along with a service building to house chemical feed and pumping equipment. Chlorine disinfection was replaced with UV disinfection. For additional odor control, vapors are processed through an air scrubber prior to release into the atmosphere.
Illinois American Water personnel engaged with stakeholders throughout the planning and construction of the expansion. The project represented one of the largest infrastructure initiatives completed in the Homer Glen community in many years, and great care was taken to address the needs and concerns of the community.
Managing the environmental impact of the plant was a priority for everyone involved in the project. The incorporation of biological nutrient removal as part of the treatment process was critical to minimizing any impact to Spring Creek, the waterway that receives the discharge of plant effluent. The replacement of chlorine disinfection with ultraviolet light disinfection reduced the possibility of chlorine toxicity in the waterway as well.
The plant’s location in a residential subdivision necessitated the use of systems to control odor, and a new fence was installed around the facility to screen it from view. To further enhance the surroundings, landscaping was installed featuring trees and other plantings as well as a bike trail at the front of the property.
The completed plant has been designed to meet the projected wastewater treatment demands for Homer Glen through 2019, and it is compliant with existing and known future environmental regulations.