Phil Montgomery, Chairperson, PSC Wisconsin Public Utilities Institute ‐ Water Forum October 17, 2013 I am pleased to be here today to talk about the challenges and opportunities facing the water industry in Wisconsin. First of all, I would like to thank the Wisconsin Public Utilities Institute for hosting this first‐of‐its‐kind forum on water. While energy issues have historically been front‐and‐center for WPUI and the PSC, there is a growing recognition of the importance of water to Wisconsin’s economy. Nearly two‐thirds of Wisconsin citizens rely on a public utility for their water. Likewise, many important Wisconsin industries – such as manufacturing, papermaking, breweries, and food processing—rely on public water utilities for access to safe, reliable and affordable water. When you stop to think, it is truly amazing that we can simply turn our taps or flush a toilet with certainty in the outcome – 24 hours a day, 7 days a week. This is possible due to the investments we have made in our water systems and the efforts of the professionals working in the water industry. Their efforts go largely unrecognized until there is a problem. I would like to take this opportunity to thank all of the water professionals here today for the work you do every day to protect public health and ensure that Wisconsin’s economy remains strong. The water industry itself represents a significant economic driver for the state’s economy. In 2012, Wisconsin’s water utilities reported nearly $700 million in revenues in their annual reports – supporting highly skilled jobs in many small communities throughout the state. Nationally, the U.S. Department of Commerce estimates that for every dollar spent on water infrastructure, about $2.62 is generated in the private economy. Recent efforts by the Milwaukee Water Council and others recognize the value of water‐related businesses to the Wisconsin economy As PSC chair, I am committed to ensuring that the citizens and businesses of Wisconsin continue to enjoy safe, affordable, and reliable water service. The vast majority of the state’s water systems are municipally owned. Water utility regulation in Wisconsin is unique because both the PSC and local 1 governments share the responsibility for managing water utilities. Municipalities are responsible for the day‐to‐day decision making, but the PSC has jurisdiction to set rates and service standards. No other commission in the country has the same regulatory jurisdiction over municipal systems. This regulatory model has worked well for more than 100 years and I believe it can continue to do so into the future. But, as you know, maintaining the top‐notch level of service we have come to expect does not come without costs. In the past 2 years, the PSC approved rate increases of more than 25 percent for 69 of the 124 water rate cases filed. This reflects the fact that the revenue for many utilities has not kept pace with growing costs. In some communities, the water and wastewater bill rivals electric, telephone, and cable bills. At these prices, people are beginning to take notice of water. The reason for the increased cost is no secret. Our water and wastewater systems are aging. And, utilities are being asked to comply with increasingly complex regulations to protect public health. Much of the nation’s water infrastructure was installed more than 50 years ago. For many systems, the need to upgrade and replace aging water infrastructure is the single biggest cost driver on the horizon. Recently, the American Society of Civil Engineers released a report card that gave the United States a “D” for its water and wastewater infrastructure. Unscheduled repair work on water main breaks causes disruptions to service, transportation, and commerce. Failing water systems are a threat to public health and a barrier to economic growth. The U.S. EPA estimates that the nation’s drinking water utilities need nearly $400 billion in infrastructure investments over the next 20 years. Wastewater systems face similar investment needs. This represents thousands of miles of pipe, treatment plant upgrades, storage tanks, and information systems. In Wisconsin alone, water and wastewater utilities will need to invest more than $12 billion over the next 20 years. This is a staggering amount of money, and utilities should begin thinking now on how to approach this growing concern. 2 Many communities have benefitted from the state revolving loan funds, including principal forgiveness, to finance water infrastructure. However, the availability of these funds for water projects is limited and the future is somewhat uncertain due to federal fiscal constraints. Given the existing pressures on water rates, we need to look for creative ways to pay for our water infrastructure while controlling costs and protecting ratepayers. For example, the PSC is working with utilities to reduce costs by eliminating waste through conservation and efficiency programs. In 2012, Wisconsin water utilities lost nearly 21 billion gallons of water through leaks in their distribution systems. That is enough water to supply the City of Madison for a year. Let that settle in for a second… Just the leaks throughout the state produce enough water to sustain the state’s second largest city. This represents a significant cost, because this water is pumped and treated to drinking water standards, but is lost before it makes it to the customer. By repairing these leaks, we can reduce pumping and treatment costs while avoiding the need to build new wells and supply capacity. But, conservation alone is not sufficient. Water utilities still need to replace outdated pipes, pumps, and tanks. I believe that part of the answer to meeting the coming challenges may be increased cooperation and regionalization among local communities and their utilities. Municipal water utilities, and their customers, simply cannot afford to continue with a business‐as‐usual approach. Currently, water service in Wisconsin is provided by 583 regulated water utilities and numerous small unregulated public water systems. By comparison, there are fewer than 100 electric utilities in the state, including both public and investor‐owned systems. Water utilities range in size from those serving fewer than 100 customers to Milwaukee Water Works, which provides water to nearly 1 million people, through retail and wholesale sales. Of the 583 water utilities, more than half serve fewer than 1,000 customers. The fragmentation in the water industry contributes to missed opportunities for resource management, increases costs, and ultimately, hampers economic growth. 3 The affordability of a water system depends, in some degree, on its size. During my term as chairman, the Commission has been focused on ensuring the financial viability of very small water systems. The water sector is by far the most capital‐intensive utility industry. In Wisconsin, water utilities average $9.40 in gross plant investment for every dollar of revenue, compared to $1.80 for municipal electric utilities. For small water utilities, this amount can be much, much higher. Likewise, operating costs per customer are much higher for small systems. The average operating expense per customer was about $250 in 2012. This compares to average operating expenses of around $575 for utilities with fewer than 100 customers. By pooling the resources of several smaller utilities, all could be managed more efficiently to the benefit of the ratepayers. As you will hear today from the experts, there are lots of ways to increase cooperation and regionalization. Many examples already exist in cities across the state. These include wholesale arrangements, shared water treatment facilities, regional water authorities, and municipalities that provide retail service outside of their communities. For example, 55 water utilities purchase water on a wholesale basis from another utility. While these arrangements can be adversarial during a rate case, they generally result in lower costs for both parties. What can we do to encourage regionalization while minimizing increased controversy come rate‐case time? Another option is to pool the resources of several utilities in a region. This could include sharing facilities, operations staff, or administrative tasks such as meter reading and billing. Particularly in areas with water quantity or quality concerns, we need to ask whether it makes sense for neighboring communities to build duplicative wells, water treatment systems, and storage facilities. Are there opportunities for neighboring utilities to work together in a way that benefits their ratepayers? Also, it is worthwhile investigating whether efficiencies could be gained through public‐private partnerships. I understand that in other states, private companies play a much larger role in the management and ownership of water utilities. While this can be a controversial topic, I think it is worth 4 considering the role of private business. This doesn’t necessarily mean privatizing our water utilities – but rather looking for creative solutions to address specific needs. Already, a number of Wisconsin municipalities contract with private companies to manage and operate their water or wastewater systems. This may be a viable option, particularly for small utilities that lack the technical or financial expertise to comply with increasingly complex financial and public health regulations. Another idea being discussed is lifting the volume cap on private activity bonds. Private activity bonds are a form of tax‐exempt financing that allows state and local governments to leverage private capital to meet public needs, such as water, wastewater, airports, commuter rail, and solid waste disposal facilities. The IRS establishes the caps for each state, based on population. Raising the cap would make more private capital available to invest in water and wastewater infrastructure. What are the barriers to public‐private partnerships and is there a role for increased private investment in Wisconsin’s water utilities? Certainly, Wisconsin’s municipal water systems are diverse and no single solution will work for every community. I recognize that municipal water systems are different from investor‐owned utilities. For many local governments, water and wastewater are only one of many growth‐related issues that they are dealing with. This presents both legal and political challenges to intergovernmental cooperation. However, this forum provides an opportunity to identify these barriers and to have an “everything is on the table” discussion about possible solutions. Again, I applaud WPUI for exploring this important topic. I look forward to hearing what we, as regulators, can do to encourage greater cooperation and regionalization while keeping water rates affordable. Thank you for the opportunity to speak with you today. 5