Is the water sector embarking on a new era of pipe replacement?

Published September 5th, 2012

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Insight from Christopher Gasson, GWI publisher

When the American Water Works Association released its “Buried No Longer” report back in February, water industry observers’ reactions to the $1 trillion pipe replacement figure ranged from sticker shock to skepticism. Even those who believe that figure – which is spread across a relatively small window of 23 years – is a little inflated know that most of America’s water and wastewater infrastructure is nearing the end of its useful life.

There are encouraging signs, however, that both the public and private sectors are beginning to take this problem seriously. Recently released data from the U.S. Census Bureau shows that wastewater line and drain construction spending increased 9.1 percent in June 2012 over the previous year (see Chart of the Month opposite). That figure increased every month since February only to tick slightly downward in the month of June – hopefully just a blip and not the peak of a positive trend.

AWI’s annual tariff survey, which is featured on page 8 of this magazine, reveals once again that overall water and sewer rate increases in 2012 were driven by a handful of cities that performed various significant upgrades to their systems. A review of the kinds of projects those cities have undertaken in the past few years, however, seems to reveal a renewed commitment to distribution system rehabilitation.

The most notable example is Chicago, which in January kicked off an ambitious 10-year plan to replace 900 miles of water mains and 700 miles of sewer lines. The Windy City’s water department will be off to a good start on the water pipes if it reaches its stated goal of 70 miles in 2012, but it will have to do better than its benchmark of 17 miles this year if it wants to reach 700 by 2022.

A couple of cities surveyed by AWI appear to have come to grips with the urgency of replacing water and sewer mains after years of stasis. Cleveland, Ohio, hiked its combined fixed charges by more than 30 percent to keep up with its pipe replacement program while its population is declining by 2 to 3 percent each year. Meanwhile, a spokeswoman for the City of Atlanta admitted that water main replacement has been “neglected” in years past, but told AWI a new critical mains replacement program is underway.

The recent actions of regulators in some states are encouraging more infrastructure investments from the private sector. American Water in August filed paperwork with the New Jersey Board of Public Utilities that, if approved, will lead to $140 million in investments funded by the state’s new DSIC. Even the state of Ohio – not widely recognized as a regulatory “Shangri-La” for private water companies – is pushing to expand the reach of its system improvement charge through a legislative change.

None of these developments should be interpreted as a sign that the water sector is well on its way to reaching that goal of $1 trillion by 2035. Cities have a long way to go before they can raise enough revenue to fully replace their aging infrastructure. It can’t be done only through persistent rate increases – there’s only so much American ratepayers will tolerate before putting up coordinated resistance. A combination of mechanisms to raise revenue (and therefore, operating surpluses) and investments from private water utilities, along with more investments from private equity players, may help make that $1 trillion look less intimidating.