Issues in Water and Energy Security

Prepared for the 2020 Governor’s Conference on Energy and the Environment 
by Tom FitzGerald, Director, Kentucky Resources Council, Inc. 

If I were to summarize the challenges facing water security and energy security for Kentuckians in a few sentences, it would be that “the costs of water quality, water supply, and wastewater infrastructure maintenance have been too-long deferred and the bill has come due” and “ratepayers, and in particular those who can least afford to, are paying ever-higher prices for using less water, wastewater, gas and electric services, in this time of pandemic.” 

If I were to summarize the opportunities, I would say that “with thoughtful planning, political courage and foresight, and meaningful tax reform, we can create robust employment opportunities and improve the quality of lives across the Commonwealth while addressing these pressing infrastructure needs,” and “with the reinfusion of the concepts of affordability and fairness into the concept of what is ‘fair, just, and reasonable’ with respect to the cost of essential water and energy services, and with rethinking of rate design and structure, we can better align the interests of utilities with those of the ratepayers in matters such as affordability, climate accounting, and energy conservation.” 

What Are Key Issues Facing Kentuckians Regarding Water Security 

Numerous challenges face Kentucky with respect to water security in the coming years. Among the foremost are issues relating to the aging water and wastewater infrastructure and mechanisms for funding needed improvements; drinking water quality, reliability, and affordability, and defining the optimal roles of municipal and regulated water and wastewater utilities, including the tensions between municipal and for-profit water utilities. 

The American Society of Civil Engineers has developed and issued a “report card” for each state since 2001. Kentucky’s Infrastructure Grades generally fall in the category of C+ to D+ - from mediocre to poor. 

In the Drinking Water category, Kentucky received a C+ for 2019, earning kudos for work towards regional cooperation and water system consolidation that has extended public water service to some 97 percent of the state’s population. Yet ASCE identified several challenges, including the ability of smaller systems to afford continued compliance with the Safe Drinking Water Act (SDWA) Rule; water loss that averages 30 percent on a state-wide basis; and drinking water infrastructure needs that have increased 33 percent from 2013 to 2017, with a current estimate of $8.2 billion over 20 years. 

Integrally related to water availability and to public safety is the issue of integrity and stability of public and private dams. In this category, Kentucky received a grade of D+. A majority of the Commonwealth’s dam structures are now more than 50 years old. Funding is needed to rehabilitate high-hazard dams, support public and private dam owners in maintenance needs, improve emergency preparedness, increase education of dam safety for both owners and the public, update inspection methods and equipment, and hire additional staff for regulatory condition inspections. 

Our management of wastewater needs drew us a C- in the 2019 report. While recognizing the improvements that have been made in the past 20 years, the report notes that the Commonwealth is faced with treatment facilities that are an average of 36 years old, and aging pipelines, some of which are more than 70 years old. Meanwhile, the ASCE noted that 40 percent of Kentuckians rely on septic tanks or other private systems, the condition of which is largely unknown. A 2012 report estimated that funding needed to implement all necessary improvements for the aging wastewater infrastructure were in the range of $6.2 billion, and that number has only grown since then. 

In developing solutions to address the costs of upgrading and maintaining water quality, water supply, and wastewater management infrastructure, questions of equity and affordability must be addressed. As with our economic fortunes more generally, we have seen the widening of a gap between larger and more affluent communities that have the customer base to support investments in infrastructure, and those communities hard hit by the perfect storm of erosion of the employment base, loss of industries, and loss of population necessary to spread the costs of system maintenance. While better training, access to capital, and as appropriate regionalization of systems can be of benefit, privatization brings with it a number of issues requiring appropriate scrutiny both for the value to customers of acquired systems, and customers of the existing system who may be called upon to fund the acquisition and upgrading of the new system. 

KRC applauds the efforts of the legislative task forces that have been empaneled to study water and wastewater infrastructure problems, and the private, public, and municipal utility representatives that have presented recommendations to those panels in recent years. The time for action is upon us. 

What are some possible solutions? 

There are several measures that could be included in a comprehensive plan for water and wastewater infrastructure investment and improvement. 

1. Dedicated public funding sources on the local, state, and federal levels need to be consistently and sufficiently funded from user-generated fees, with infrastructure trust funds never used to offset shortfalls in other parts of a budget. 
2. Fees paid by customers to utilities must never be diverted or commingled with other funds. 
3. Infrastructure owners and operators must charge, and we must be willing to pay, rates and fees that reflect the true cost of using, maintaining, and improving all infrastructure, including our water, waste, transportation, and energy services. External review and audits, as appropriate, to assure that rates reflect full costs is essential. 
4. Authorize programs to improve specific categories of deficient infrastructure and support that commitment by fully funding them in an expedient, prioritized manner. 
5. Those entities in the Commonwealth with expertise in planning and management of water and wastewater systems should coordinate training, assistance, management audits, and other tools to assist struggling systems. 
6. Require all major projects use life cycle cost analysis and develop a plan for funding the project, including its maintenance and operation, until the end of its service life. 
7. Create incentives for local governments and the private sector to invest in maintenance, and to improve the efficiency and performance of existing infrastructure. 
8. Develop tools to ensure that projects in each essential category that are most in need of investment and maintenance are prioritized and that economy of scale is considered in prioritizing funding, to leverage limited funding wisely and without political interference. 
9. Streamline the project permitting process across infrastructure sectors, but with robust safeguards to protect the quality of the natural and built environment, and to infuse considerations of equity and justice into infrastructure investments. 
10. Assure that all public-private partnerships for essential infrastructure are scrutinized and structured to assure life-cycle benefits over costs for the public, and to prevent overreaching by the private sector. 

What Are Key Issues Facing Kentuckians Regarding Energy Security 

1. Misalignment of Interests In Current Rate Design 
   Currently, there is a tension between the interests of consumers, particularly low and fixed-income consumers, at controlling energy costs, and the interest of utilities in recovering fixed costs and for-profit utilities, recovery of costs plus a rate of return for investors that is otherwise unprecedented in the marketplace that utility regulation is theoretically intended to replicate. (One wonders where else in the marketplace is an almost-assured return on investment rewarded with a 9 or 10% return?) 
   
   At a time of ample to excess non-economic fossil-fuel fired capacity that is increasingly becoming costly relative to power purchases and to declining costs of renewables, the interests of the electric utilities are oppositional to those of customers seeking to better control costs by conservation and distributed generation – values that once the utilities were subsidized to advance. 
   
   The utility war on rooftop solar – with the expenditure of utility resources far beyond any theoretical rate impact on non-participating customers, is either an aberration, or potentially represents the beginning of a far more fundamental campaign by utilities to disaggregate costs within a customer class and to shift the opportunity to recover costs and ROR from a class of customers through better management and planning, to an effort to single out ratepayers within a class who have responded to past valued signals and have attempted to reduce usage through investments in efficiency. As utilities struggle to market and to deploy uneconomic resources, the temptation to isolate and punish those who use less becomes more irresistible. 
   
   If we are going to go down the path (either legislatively or as a matter of commission policy) of disaggregating costs of service within a class of customers, how do we respond to imposition of costs on more vulnerable ratepayers disproportionate to the actual cost of their service. Do we exempt renters from paying for DSM and EE measures that don’t benefit them as a class? Do we single out customers who installed energy-efficient windows, doors, or HVAC systems because they are paying a disproportionately low amount of the costs embedded in the volumetric rates? 
   
   A consideration of what is “fair,” what is really “just” and what, from a ratepayer’s standpoint, is “reasonable” in a time of pandemic, is a metaphysical inquiry too often bounded in narrow terms. 
    
2. What is “fair” “just” and “reasonable?” The Intersection of Poverty and Utility Costs
   Affordability is an essential value. Why do we regulate utilities if not to assure availability of essential services? 
    
3. Climate Resilience And Adaptation 
   Historically, the bandwidth of utility commission concerns regarding consideration of environmental issues has been narrow. Yet so-called externalities have a nasty way of ingratiating themselves into the equation eventually, and often at a higher cost than if decisions had initially considered such matters, particularly when addressing plans to meet energy needs. 
    
4. Is there a need for an Office of Public Utility Advocate 
   In any utility-related proceeding, whether an application for a certificate of public convenience and necessity or a rate proceeding, the interests of the most vulnerable residential ratepayers, and in many cases the interests of small businesses, are often un or under-represented. Big industry, big-box business, big cities are typically allowed to be parties, while low-income advocates may or may not be allowed at the table. 
   
   While the Office of the Attorney General represents ratepayers in the aggregate, there is a real need for a consistent voice that can work with those most directly affected by utility issues, to be sure that their interests are represented in a robust and consistent manner.