Asset Management,
Utility Rates, and S.1961
- Commentary by Ken Harlow,
February 25, 2002
SCWRN special report
Introduction
Senate Bill 1961, "The Water
Investment Act of 2002," was introduced on February 15, 2002.
Its stated purpose is "to improve the financial and
environmental sustainability of the water programs of the United
States." The full text is available here.
The bill, co-sponsored by Senator
Jeffords (I-VT), chair of the Environment and Public Works
Committee, is not yet law and may be changed substantially before
enactment. But it is significant because, for the first time,
it ties availability of State Revolving Fund (SRF) loans to
improved asset management and utility rates that adequately
recover capital costs. It also encourages consideration of
alternative governance arrangements and "non-structural
alternatives" to capital construction where the environment
might benefit.
The very brief discussions below
consider only two aspects of new SRF loan eligibility
requirements: Asset management and adequate rates. The language is
almost identical in the sections applying to each type of SRF, so
only language from the Safe Drinking Water Act amendments is
quoted.
Asset Management
The bill requires that: "the
recipient of each loan that reflects a significant capital
investment has in effect, or will have in effect on completion of
the project, an asset management plan (for which the Administrator
may publish information to assist States in determining required
content) that:
(i) conforms to generally
accepted industry practices; and
(ii) includes:
(I) an inventory of existing
assets (including an estimate of the useful life of the
assets); and
(II) an optimal schedule of
operations, maintenance, and capital investment required to
meet and sustain performance objectives."
The asset management focus here is
clearly on the capital side, with the aim of ensuring that
facilities receive adequare re-investment and do not become
dilapidated. The words "useful life of the assets" and
"capital investment required to meet and sustain performance
objectives" will sound familiar to students of capital asset
management.
Less clear is the definition of an
"asset management plan." Small comfort that the
Administrator may provide, at some point, guidance to the states.
There is no common vision of what asset management is among the
feds, the states, or the industry players. It is difficult to see
how any consistency in enforcement of this provision can be
attained over the next few years.
Adequate Rates
The bill requires that: "the
recipient of the loan funds has in effect a plan to achieve,
within a reasonable period of time, a rate structure that, to the
maximum extent practicable:
(i) reflects the actual cost
of service provided by the recipient; and
(ii) addresses capital
replacement funds."
It seems that GASB 34 has had some
influence here! As above, however, these fine-sounding words
become somewhat nebulous on close inspection.
- First, what is the "actual
cost of service?" For regulated utilities, the answer is
clear because years of legal history have resulted in a
precise set of definitions. There is no such consistency in
the public arena.
- Second, how does a public
utility "address capital replacement funds?" Suppose
a utility formally adopted a policy of replacing capital
assets by 100 percent debt financing. Would it then have
"addressed" the issue in the context of its rate
structure? A literal-minded person would have to answer
"yes!"
The authors of the bill were
obviously aware of these problems since we later find two million
dollars being appropriated for the National Academy of Sciences to
perform a cross-sectional study of water and wastewater utilities
to "recommend a set of best industry practices for public
water systems and treatment works for use in establishing a rate
structure that:
(i) adequately addresses the
true cost of service; and
(ii) takes into consideration
the needs of disadvantaged individuals and communities."
Summary
The Water Investment Act of 2002 is
an important but not unexpected development. The AWWA, WEF, AMSA
and others have actively promoted major grants for water
infrastructure rehabilitation and replacement. But legislation has
held up by intensive lobbying from the Water Partnership Council,
the H2O Coalition, and others who say, "Look what happened
last time you gave away money to the public utilities. They didn't
adequately sustain their assets, and now they're back asking for
more."
Many public utility managers
sympathize with this viewpoint and would actually welcome federal
requirements for better asset management and more adequate rates,
if only because they believe it will otherwise be politically
impossible to sustain their infrastructures. A recent
poll conducted by the author asked the question,
"Should the feds require improved asset management as a
condition for subsidizing local water and wastewater
infrastructure replacement and rehabilitation costs?" 81
percent of industry respondents answered "yes." How
often do we see an industry welcoming new regulation so warmly?
For these managers, the Water
Investment Act of 2002 will be a giant step in the right
direction. However, without clear standards for asset management
and rate adequacy (and none exist now), enforcement of the bill's
eligibility requirements is likely to be inconsistent or even
capricious.
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