Water Today and Tomorrow

1. Water Today and Tomorrow The National Regulatory Research Institute Presented by Melissa J. Stanford Senior Research Specialist MARC June 20, 2006

2. Needs, Factors and Trends in the Regulated Water Industry Implementation of SDWA Comprehensive Asset Management Consumers Infrastructure Replacement Costs Regulated Water Community Consumer Awareness Costs of Implementing SDWA Source Water Protection Consolidations & Mergers Water Shortages & Impairments Regulators Utilities Regionalization Cost of Capital Surcharges Privatization Source: NRRI Survey Data

3. How Do We Use Our Water? Only 4 percent of residential use is for potable uses such as drinking and cooking.

4. Agricultural Use Agriculture takes 70 percent of the water consumed worldwide. Half or more is lost to evaporation and run-off. Drip irrigation uses from 30-70 less water but is used on less than 1percent of irrigated land. Why ? Lack of incentives – irrigation is heavily subsidized. Source: Fen Montaigne, “Water Pressure”, National Geographic, Sept. 2002

5. Who Regulates ? • Environmental regulation • Quality • U.S. Environmental Protection Agency (U.S. EPA) • State Primacy Agency (Dep. Of Health or Environment) • State PSC (quality of customer service) • Quantity • U.S. EPA • State Primacy Agency • State PSC (reliability, minimizing water losses)

6. Who Regulates? • Economic regulation of: • Municipalities (City or county government, water boards, some PSCs e.g. Wisconsin) • State Commissions (most have original jurisdiction over investor-owned water and wastewater utilities)

7. State Commission Effort Regulation of water and wastewater utilities comprises a relatively small part of the responsibilities of most commissions, but can take a disproportionate amount of effort. Interagency efforts around water and wastewater issues are becoming more common.

8. Two primary pieces of legislation associated with water and water resources in the United States Clean Water Act (1972): Ambient water quality and wastewater treatment CWA governs permitting of discharges Discharges from sewage treatment plants leading source of water quality impairment in rivers, streams, lakes… Legislative Overview

9. Legislative Overview - continued • Safe Drinking Water Act (1974): passed to protect the public from contaminants in drinking water • Reauthorized in 1996 (SDWA96) • “safe drinking water is essential to the protection of public health” • authorized state revolving loan funds • water quality standards based on “sound science”, consider costs/benefits of regulation • capacity and capacity development • public involvement and consumer information (CCR)

10. Legislative Overview -continued • Capacity Development • Water system capacity: • “the ability to plan for, achieve, and maintain compliance with applicable drinking water standards” • three necessary components:technical, managerial, and financial • Water system capacity development: • the process of acquiring and maintaining adequate technical, managerial, and financial capacity

11. Capacity Development Technical, Managerial and Financial Capacity- SDWA96 - Technical Capacity Managerial Capacity • Source Water • Infrastructure Adequacy • Technical Knowledge • Ownership • Staffing & Organization • External Linkages Financial Capacity • Revenue Sufficiency • Credit Worthiness • Fiscal Management Source: EPA 816-R-98-008

12. Small Water Difficulties • Sometimes (not always!) lack managerial, technical, and financial expertise • Lack economies of scale • Often lack adequate financial resources • Limited or inability to attract outside capital • Inability to generate funds internally

13. Sometimes Small Works “Key to small system success is relevant, ongoing operator training….Some areas may be best served by small, well-run systems” – G. Grunenfelder, Wash Dept. of Health • Decentralized methodologies-use wastewater as a resource • Some see institutional bias in favor of larger systems • Commission Help: Staff Assisted rate cases, technical assistance, streamlined proceedings, generic rates of return • NRRI Small Systems Benchmarking: Data Analysis Near Completion, includes MARC states: Indiana, Ohio, Illinois, Wisconsin, Missouri

14. Takes advantage of economies of scale Growth opportunity May be beneficial w/o interconnection Most small utilities within five miles of another Commission Encouragement Publicly owned systems Nonprofits Private contractors Investor-owned companies Foreign investors… now departing Consolidation- Why? Who is Doing it?

15. RWE to sell its American Water companies operating in 29 states by 2007 IPO announced in March 2006 Commissions evaluate/oversee divestment’s impact on ratepayers UK-based Kelda to sell interest in Aquarion to Australia’s Macquarie Bank RWE Announces Sale

16. Alternative Regulatory Mechanisms • System Improvement Surcharges • Added to rates to pay for qualifying projects; usually capped at 3 – 7 percent • In PA on water side for ten yrs., appeal pending on wastewater side • newer to Ill, OH and MO • Tool to encourage timely infrastructure investment • Best if tied to comprehensive asset management

17. Trends and Observations • Water utility expansion into wastewater • Proliferation of decentralized, small wastewater systems (TN, TX) • Commissions updating/raising certification requirements; requiring a bond or other surety (N.C., S.C., TN) • Total Water Management- from source to tap, watershed basis

18. Low-Income Issues • NRRI research sponsored by NARUC Committees on Water and Consumer Affairs to discover need for/existence of water customer assistance programs • One model: national LIHEAP or LIWAP fund

19. Needs, Factors and Trends in the Regulated Water Industry Implementation of SDWA Comprehensive Asset Management Consumers Infrastructure Replacement Costs Regulated Water Community Consumer Awareness Costs of Implementing SDWA Source Water Protection Consolidations & Mergers Water Shortages & Impairments Regulators Utilities Regionalization Cost of Capital Surcharges Privatization Source: NRRI Survey Data

20. Thank you. Melissa J. Stanford 208 Greenwood Avenue Jenkintown, PA 19046 614.832-7170 phone 215.884-7272 fax mjstanford@nrri.ohio-state.edu