2009
Annual Report
The North Carolina
State Water Infrastructure Commission
To
The Governor
And Members of the North Carolina General Assembly
December 7, 2009
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The State Water Infrastructure Commission was created by act of the North Carolina General
Assembly in 2005. The purpose of the Commission is to identify the State’s water
infrastructure needs, develop a plan to meet those needs, and monitor implementation of
the plan. The Commission is comprised of 13 members representing State agencies and non-profits,
organizations representing North Carolina local governments and members of the
water infrastructure and water resources professions.
Report Author: Jean Crews-Klein, Staff to Commission
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Table of Contents
Background on the State Water Infrastructure Commission . . . . . . . . . . . . . . 4
List of Board Members 2008-2010
Duties Assigned by Legislature to the SWIC (Original and “Drought Bill” Duties)
Meetings 2008-2009
Work of the SWIC Covered in This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1. Infrastructure Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
a. Rate Setting Guide for Water Rates
b. High Unit Cost Threshold
c. Funder’s Forum
2. Water Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
a. Conservation Rates for Water
b. Water Audits
c. Leak Detection and Repair
d. Reclaimed Water
e. Regionalization
f. Asset Management
3. Program Evaluation Division Report on
Infrastructure Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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Background on the State Water Infrastructure Commission
The State Water Infrastructure Commission (SWIC) was created through passage of House
Bill 1095 during the 2005 Session of the North Carolina General Assembly. Passage of this bill
was led by The Honorable John Kerr of the NC Senate and The Honorable Pryor Gibson of the
NC House of Representatives and supported widely by members of the General Assembly.
The bill is codified as Session Law 2005-454, “An Act to Establish Uniform Criteria for
Drinking Water, Wastewater and Stormwater Loans and Grants, to Clarify and Revise the
Procedures that Apply to These Loans and Grants to Reflect the Exhaustion of the 1998
Clean Water Bond Proceeds, and to Provide for Greater Coordination Among Agencies that
Make Loans and Grants for Water Projects by Establishing the Water Infrastructure
Commission.”
The drive for creating the SWIC was to have available a forum where members could engage
in proactive policy discussions relating to infrastructure. Of significance to the creators of
SWIC were: 1) to make certain that the State’s policies governing infrastructure financing
were refined and updated to better align with current trends, and 2) to define the role of the
State in providing financial resources and supporting best management practices for needed
infrastructure investments.
The creation of the Commission and the modifications to the State’s existing water and
wastewater finance law were the product of a collaborative effort between major State
funders of infrastructure including the Department of Environment and Natural Resources,
the Clean Water Management Trust Fund and the Rural Economic Development Center.
Together, these three entities have served as the administering agents of State funds and
through this continue to make important water, wastewater and storm water investments
that have protected public health and the environment and created opportunities for
economic growth and development.
Appointments were completed in May 2006 and the Commission held its first meeting that
month. A list of the current members of the Board of Directors and the assigned duties of
the Commission follow below.
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Members of the State Water Infrastructure Commission:
2008 – 2010
Standing Members
Bill Holman, Chairman, Appointee of Senate President Pro Tempore
Robin Smith, NC Department of Environment and Natural Resources
James Hardin, NC Department of Commerce
Billy Ray Hall, President, NC Rural Economic Development Center
Ellis Hankins, Executive Director, NC League of Municipalities
Vance Holloman, Deputy State Treasurer, Office of State Treasurer
David Thompson, Executive Director, NC Association of County Commissioners
Richard Rogers, Executive Director, Clean Water Management Trust Fund
Appointed Members
Dr. Downey Brill, Professor, NC State University (Chancellor’s Appointee)
Steve Cavanaugh, P.E., Cavanaugh Associates (American Council of Engineering Companies
Appointee)
Harold Herring, Executive Director, Neuse Regional Water and Sewer Authority (Appointee
of the Governor)
The Honorable Bill Owens, NC House of Representatives (Appointee of Speaker of the
House)
Richard Whisnant, Associate Professor, UNC School of Government (Appointee of Water
Resources Research Institute)
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Duties of the State Water Infrastructure Commission:
The purpose of the SWIC, as established by the North Carolina Legislature, is to identify the
State’s water infrastructure needs, develop a plan to meet those needs, and monitor
implementation of the plan. The original, specific duties assigned are shown below:
1. To assess and make recommendations on the role of the
State in the development and funding of wastewater,
drinking water, and storm water infrastructure in the State.
2. To analyze the adequacy of projected funding to meet
projected needs over the next five years.
3. To propose State priorities for funding.
4. To make recommendations on ways to maximize the use of
current funding resources, whether federal, State, or local,
and to ensure that funds are used in a coordinated manner.
5. To review the application of management practices in
wastewater, drinking water, and stormwater utilities and
determine the best practices.
6. To assess the role of public-private partnerships in the future
provision of utility service.
7. To assess the application of the river basin approach to utility
planning and management.
8. To assess the need for a "troubled system" protocol.
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Duties Included in the 2008 “Drought Bill”
In a subsequent Legislative Session, the SWIC has been assigned additional duties.
Specifically, in the 2008 Session, the SWIC was tasked with developing guidelines for local
water systems to follow to set rates at a level to sustain the operation of the system and
guidelines for developing water conservation rates. This was included as part of the
“Drought Bill”, Session Law 2008-143, Section 17. In accordance with the law, an interim
report was delivered in January 2009. Recommendations on the water rates to sustain the
system are included in this Report beginning on page 9. Commission work on the water
conservation rates is ongoing.
Session Law 2008-143, Section 17:
The State Water Infrastructure Commission, in
consultation with the Department of Environment and
Natural Resources, the School of Government at the
University of North Carolina at Chapel Hill, the North
Carolina Utilities Commission, the Public Staff of the
North Carolina Utilities Commission, and the Local
Government Commission, shall develop guidelines for
water rate structures that are adequate to pay the cost of
maintaining, repairing, and operating the system,
including payment of principal and interest on
indebtedness incurred for maintenance or improvement
of the water system. The guidelines shall also consider
the effect of water rates on water conservation and
recommend rate structures that support water
conservation. Copies of the guidelines shall be made
available to the Department of Environment and Natural
Resources, the North Carolina Utilities Commission, and
to all local government water systems and large
community water systems, as defined in G.S. 143-350.
The Commission shall report to the Environmental
Review Commission on its progress in developing the
guidelines no later than January 1, 2009.
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SWIC Meetings Fiscal Year 2008-2009
The SWIC provides a monthly, public forum for local governments, state agencies, water
professionals, water utilities, funders, and the public to share information, debate ideas, and
develop recommendations to the Governor and General Assembly. The SWIC began
meeting in Fiscal Year 2006. While required only to meet quarterly, SWIC members voted
early on to meet monthly in order to address the numerous issues before the State related
to water resources and infrastructure financing. In fiscal year 2008-2009 the SWIC met on
the following dates:
July 8, 2008
August 12, 2008
September 9, 2008
October 21, 2008
November 12, 2008
December – no meeting
January 22, 2009
February 17, 2009
March 4, 2009 (HUC Sub-Committee)
March 20, 2009
April 17, 2009
May 15, 2009
June 19, 2009
The SWIC also met on the following dates in the current fiscal year. These are noted for the
record as no additional funding for administrative support of the SWIC was included in the
adopted State Budget for the current biennium. Utilizing funds saved from the 2006
appropriation extended for a three month period in to 2009-2010 fiscal year, the SWIC met
on the following occasions and the efforts of the SWCI during that period are captured in this
report:
July 17, 2009
August 21, 2009
September 18, 2009
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Commission Work 2008-2009
Work of the State Water Infrastructure Commission during this 15-month reporting period
focused on the topics listed below. A summary of activities and recommendations put
forward by the SWIC on Infrastructure Financing, Water Efficiency, and the Report of the
Program Evaluation Division of Infrastructure Finance follow.
1. Infrastructure Financing
The work of SWIC in support of infrastructure financing during this period focused on
developing guidelines for local water systems to follow in setting rates adequate to support
the system needs and on evaluating the adequacy of the current threshold established by
the NC Legislature for eligibility to receive grant funds. A summary of these activities follows.
a. Rate Guidelines for Setting Water Rates
Session Law 2008-143, commonly known as “The Drought Bill” included a specific charge to
SWIC for developing guidance on rate setting for local systems that included provision for
system revenues meeting the costs of operation and servicing of any debt on the system.
The law states in Section 17:
The State Water Infrastructure Commission, in consultation with the
Department of Environment and Natural Resources, the School of
Government at the University of North Carolina at Chapel Hill, the
North Carolina Utilities Commission, the Public Staff of the North
Carolina Utilities Commission, and the Local Government
Commission, shall develop guidelines for water rate structures that
are adequate to pay the cost of maintaining, repairing, and
operating the system, including payment of principal and interest on
indebtedness incurred for maintenance or improvement of the
water system. The guidelines shall also consider the effect of water
rates on water conservation and recommend rate structures that
support water conservation. Copies of the guidelines shall be made
available to the Department of Environment and Natural Resources,
the North Carolina Utilities Commission, and to all local government
water systems and large community water systems, as defined in
G.S. 143-350. The Commission shall report to the Environmental
Review Commission on its progress in developing the guidelines no
later than January 1, 2009.
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Infrastructure assets, like all other “business” assets, depreciate in value over time. Efforts
are underway in North Carolina by a host of professional organizations, non-profits and State
regulatory agencies, to encourage local water systems owners to operate their systems as a
business that provides a public service. This requires a move away from the older adopted
practice of operating as a public service only which discounted the need to operate within a
business model that is required in order to sustain the operation over time.
Operating within that business model, the accounting practices for North Carolina systems
have been developed and adopted. These accounting practices are built on a business
framework and title the water/sewer operations as an “Enterprise Fund” , implying that the
operation of the enterprise will fall within the normal business practices of costs being
recovered through the system revenues of rates and charges. Included in this model of
accounting is the provision of depreciation of assets. Each year, assets that are used in
conjunction with delivery of water and wastewater, such as the pipes, equipment, storage
tanks, etc., are depreciating. By funding depreciation the system is able to set aside capital
needed to replace these assets when they are fully depreciated or their useful life has
expired. By setting rate and charges at a level to cover the operational needs, cover any
debt service responsibilities and fund depreciation, a system can operate sustainably into
the future.
Not only is this important to be prepared for periods of drought, but also for sustainable
system operations under “normal” conditions. In its work this year, SWIC has focused on a
response to the fact that a growing number of water/sewer systems are not financially
sustainable. According to 2008 data submitted by system owners to the Local Government
Commission, almost half (48 percent) of systems operate without funding depreciation. The
actual fiscal challenge reaches deeper in certain systems. Many do not have rates and
charges set to recover even the day-to-day operating expenditures of the system; others
cannot cover debt service and operating expenditures without borrowing against their
electrical fund, general fund or reserves.
To address the specific charge of the Drought Bill, SWIC contracted with the staff of the
Environmental Finance Center (EFC) at the University of North Carolina at Chapel Hill –
School of Government. Using information reported by local government systems to the NC
Local Government Commission – NC Office of State Treasurer (LGC), the EFC staff proposed a
series of means tests and applied them to the systems reporting information to the LGC in FY
2008. The “tests” included the following:
1. System operating revenues (money collected from customers for rates and fees)
less than operating expenditures (costs to operate and maintain the system such
as labor, chemicals, electricity, etc.).
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2. System operating revenues less than operating expenditures and debt service
(principle and interest payment).
3. System operating revenues more than operating expenditures
 Less than 50% of depreciation funded
 50-99% depreciation funded
Based on the application of these tests to the systems in the State, it was found that the
operating revenues of 124 local government utilities or 27 percent of all local government
water systems did not cover their operating expenditures and principal and interest
payments during Fiscal Year 2007‐08. Following debate and discussion which included the
value of funding depreciation, the SWIC recommended that the State funders of water
infrastructure – the Rural Economic Development Center, the NC Department of Commerce
and the NC Department of Environment and Natural Resources – adopt the means test “2”
above as a starting point. The map below shows the distribution of systems according to the
tests above. A copy of the test rubric can be found as Appendix 1.
Recommendation
Require all local government water systems applying for State financial assistance for water
projects that include line extensions to expand the system to be fiscally sound and to have
system revenues meet operating expenditures. This does not include funding of
depreciation.
Source: EFC Final Report to SWIC – June 2009
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b. High Unit Cost Threshold
The General Assembly set the State’s “High Unit Cost Threshold” (HUC) as part of the Clean
Water and Natural Gas Critical Needs Bond Act of 1998. The purpose of the figure was to
establish a threshold at which systems applying for State funding to make infrastructure
improvements would be eligible to receive State grant funds. The metric was tied to the
Median Household Income of the applicant unit (the municipality or county). At the time
this was adopted as part of the 1998 Bond Act, the designation of “High Unit Cost Threshold”
was a name and number utilized by the NC Department of Environment and Natural
Resources – Construction Grants and Loans Section, for use in qualifying North Carolina
applicants for federal State Revolving Loan Funds. The 1.5 percent of Median Household
Income meant that at a minimum, the local system receiving funds would need to have a
combined water and sewer bill for a residential customer set so that it equaled 1.5 percent
of the Census Median Household Income for that jurisdiction. If the applicant unit did not
have rates set at a level to meet this threshold then they were not eligible for any available
grant funds.
Using a threshold in this manner is a common practice in states across the country. These
thresholds provide a means for a State to allocate scarce grant funds to those communities
where low median household incomes can make a needed project unaffordable to the
residents if the full cost of the project were carried in loan funds only. By infusing grant
funds into the project in the amount necessary only to bring the fair share cost of the project
down to an amount equal to 1.5 percent of the Median Household Income of the residents,
the project is deemed “affordable”. A corresponding rate of .75% was also set for systems
that only had a water utility.
In its 2008 Annual Report to the Governor and General Assembly the State Water
Infrastructure Commission (SWIC) committed itself to determining whether after eleven
years an increase in the HUC threshold would be appropriate and if so, how much of an
increase would be appropriate. A High Unit Cost Sub-Committee was created including Robin
Smith (NCDENR), Ellis Hankins (NCLM), Patrick Woodie (NCREDC) and Chairman Holman.
SWIC Review and Evaluation of HUC Threshold
Several factors guided SWIC’s review of the High Unit Cost (HUC) Threshold. First, the costs
associated with owning and operating water or wastewater systems have increased
significantly since the State’s HUC threshold was adopted. These include costs for operation
and maintenance – pipes, equipment, labor and fringes, electricity, chemicals - as well as
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costs of financing. Second, the volume of grant funds available from both the State and
Federal governments has decreased dramatically. Third, according to information available
from the NC Local Government Commission, almost half of the systems in the State
operated with revenues less than expenses (including depreciation) in 2008. Finally, it had
been eleven years since the threshold was established and a review of adequacy was
needed.
To assist with the evaluation, the SWIC retained the assistance of the staff at the UNC
Environmental Finance Center and the SWIC staff. A history of use of the threshold by the
Federal Government was documented and a review of the threshold applied to all municipal
and county water and sewer system owners/operators in the State was conducted. Data for
this portion of the work was taken from the Annual Survey of Rates and Charges conducted
by the NC League of Municipalities in concert with the Environmental Finance Center.
The results of the history of use of the threshold revealed that the Federal Government, in
the ten years since the State of North Carolina adopted the 1.5 percent threshold, had raised
its recommendation for threshold to 2.5 percent each for water and wastewater, or a
combined 5 percent of MHI. The review also found that numerous states across the country
are using a higher threshold, some as high as 7 percent, to reflect the increased costs of
owning and operating a water/sewer system.
Efforts of the Environmental Finance Center at UNC-Chapel Hill determined (using rate data
current as of January 2009) that 67 percent of NC water systems would qualify for high unit
cost grants if the threshold remains at 1.5% for combined water and wastewater systems. If
the threshold were increased to 2 percent, then 56 percent of NC water systems would
qualify for high unit cost grants.
Concerned about the impact of the move in the threshold for communities with high rates of
poverty, the Sub-Committee also looked at this threshold with a modifier where
communities with poverty rates equal to or greater than the State’s 2000 poverty rate (12.3
percent) would drop back to the 1.5 percent threshold.
The graphics on the following page illustrate the comparison.
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If the affordability target remains at >= 1.5% MHI for combined water and wastewater bills
for 5,000 GPM (ignoring water‐only systems):
282 out of 421 (67 percent) of water systems qualify (shown as Blue Diamonds)
Source: EFC Research for SWIC – High Unit Cost Threshold, 2009
If the affordability target is adjusted up to >= 2.0% MHI for combined water and wastewater
bills for 5,000 GPM (ignoring water‐only systems)
237 of 421 (56 percent) of water systems qualify (shown as Blue Diamonds)
Source: EFC Research for SWIC – High Unit Cost Threshold, 2009
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Recommendation
The SWIC recommends that the General Assembly increase the high unit cost threshold to
2.0% for combined water and wastewater systems and 1.0% for systems operating a single
water or wastewater utility and having a poverty rate of less than 12.3% and should retain
the high unit cost threshold at 1.5% for combined water and wastewater systems and 0.75%
for water or wastewater systems with a poverty rate of 12.3% or greater, effective July 1,
2010.
 That a common understanding and practice of determining whether a system meets
this threshold should include the use of the most recent decennial census figure for
poverty for the community with by the update factor now available from the US
Department of Housing and Urban Development. The updated Census number is not
utilized uniformly by all State funders.
 That the SWIC will work to develop other criteria to determine affordability and to
identify troubled or unsustainable water systems and will report to a future session
of the General Assembly.
 That this resolution does not apply to the economic development programs
administered by the NC Department of Commerce and the NC Rural Economic
Development Center which are intended to create and retain jobs
A resolution outlining these recommendations was distributed to Legislative Members
following its adoption. A copy of the resolution can be found as Appendix 2.
c. Funders Forum
The North Carolina Funders Forum is a loosely organized consortium of State and Federal
funders of drinking water, wastewater and stormwater infrastructure. The group has been
in existence since the early 1980s when the Rural Economic Development Center sponsored
the first meetings of the group.
The purpose of the Funder’s Forum is to provide a place and time for funders to share
information, ideas and current knowledge of approaching change in the funding priorities
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and goals of each agency represented. In sharing information, it has been established that
projects seeking funding have been able to secure the combination of funds available for
their project with less time investment than through meeting with each funder individually.
To this end, the Funder’s Forum has sponsored a series of “Funding Fairs” regionally across
the State.
As a result of the Program Evaluation Divisions Report on Infrastructure Funding, the
Funders Forum submitted a letter to the Co-Chairs of the Joint Legislative Program
Evaluation Oversight Committee outlining five strategies to increase coordination among the
water and wastewater agencies. One strategy was the development of a “common
application” that all appropriate state funding agencies will use as a part of their application
process. The Funders Forum reviewed the different applications used by state funding
agencies and pulled out the common information requested by all of the agencies to
become a new Section 1 for all funding applications. The use of the “common application”
will improve project coordination among agencies and will enable agencies to provide more
comprehensive reporting on all the water and wastewater projects in the state. The Funders
letter that outlines five specific ways to increase coordination among agencies is attached to
this report as Appendix 3.
The SWIC has supported the work of the Funder’s Forum and sought the advice of the group
on a number of matters under its consideration.
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d. Water Efficiency
With the Droughts of 2002 and 2007 and newly released population estimates for the State
as a backdrop, the SWIC committed to develop a set of recommendations for the State
decision-makers on enhancement of Water Efficiency.
As the State Water Infrastructure Commission released its Annual Report in November of
2007, the consequences of the ongoing drought were brought into clear focus. By the end of
December 2007, 67 counties were designated as under “exceptional drought”, the most
severe of the drought designations. Another 20 were in extreme drought and 13 in severe
drought. 1
This drought of 2007 was more remarkable than the recent drought of 2002, not only
because all 100 counties in the State of North Carolina were affected, but because of the
speed with which the drought progressed. Within four months, as shown by the graphics
below, the drought had spread across the State, engulfing 55 additional counties in
exceptional drought conditions. The maps below, taken from the NC Drought Advisory
Council website illustrate the speed at which this drought accelerated.
Comparison of Extent of 2007 Drought August to December 2007
Source: NC Drought Council Website
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For most systems, this drought amplified the already apparent challenge of meeting the
water demands for a growing population. Population growth in North Carolina has
exceeded population growth in the nation as a whole since the year 2000. In the twenty
year period between 1985 and 2005, North Carolina’s population grew by 39 percent.
Growth through 2030 calculated by the State Data Center shows an expected 30 percent
increase in population between 2010 and 2030, bringing the State’s population to more than
12 million people (see below).
NC Population 1985-2030
Source: NC State Data Center
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
1985 1990 1995 2000 2005 2010 2020 2030
NC Population
In response to the severity of the 2007 drought, the Governor took unprecedented action on
behalf of the State by calling for supply side conservation. Prior responses had focused on
efforts to reduce consumption of water by the users. These new efforts focused attention
on how the water systems could become more efficient in their own use of water. For many
systems this was the first time attention was placed on the reduction of water use on the
supply side. Water audits, leak detection and conservation pricing became regular parts of
the conversation on how North Carolina would deal with its most severe drought.
Work of SWIC on Water Efficiency
 SWIC convened three separate panels of professionals representing agriculture, local
government water managers, industry, trade groups and State regulators to discuss
and debate the merits of enhanced water efficiency for the State.
 SWIC observed that being “water efficient” places a different lens on our water use.
It challenges us to reduce the waste of water, to find better, more effective ways of
doing things and to make behavioral changes in the way we use water.
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 SWIC observed that we have distinct choices how we meet both current and future
demand. Water systems across the State are making choices today regarding where
their next increment of water will be found. Population growth and concentration,
increasing regulation of drinking water, wastewater and stormwater and
unpredictable variations in weather and climate all serve to drive up the cost of
water and push us forward into developing new supplies. When local water systems
respond to these conditions by finding ways within their own operation to reduce
waste, it can help stabilize costs and defer the development of new supplies further
into the future. By using water more efficiently, both drinking water systems and
customers can help preserve water supplies for future generations, save money, and
protect the environment.
 SWIC served as a forum for discussion and debate on the proposed 2008 drought
legislation. In its final, adopted version (Session Law 2008-143), the Drought Rules
contained eligibility requirements as recommended and supported by SWIC for local
government water systems desiring to secure state financial assistance.
Efficiency Tools Examined by SWIC
SWIC examined three water efficiency tools: Water Audits and Leak Detection, Reclaimed
Water, Asset Management and Water Rates/Rate Structures. Each alone has the potential
to increase water efficiency. Together, as part of an overarching policy shift by the State on
water efficiency, they have potential to change the way we think about and value our water
resources. A summary of work and recommendations of SWIC on each follows.
a. Water Conservation Rates
The drought bill also directed SWIC to develop guidelines for water utilities to encourage
water conservation. The research was designed to study the relationships between water
usage for specific utilities and the following: pricing signals, rate structures, billing periods,
the application of voluntary and/or mandatory watering restrictions, utility demographic
data, climate data and other factors that are likely to influence usage. Work on these
guidelines has begun and will be completed in the 2009-2010 fiscal year if funds are
available.
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b. Water Audits
With newly defined emphasis by the State on water efficiency from the system or “supply
side”, the SWIC held discussion on how to best support water systems in becoming more
efficient. The SWIC convened a Water Audit Sub-Committee which included members from
the State agencies, trade groups, consulting engineers, and local water systems. The group
was charged with determining the best methods/tools available to estimate water efficiency
in local systems and evaluating those to make certain they apply equitably to all systems.
Recommendation of the Sub-Committee adopted by the SWIC: The Sub-Committee
reported and the SWIC subsequently adopted the recommendation that the while the audit
standard developed by the American Water Works Association was the new “industry
standard” that it may be too complex for small systems to utilize. Therefore, a modified
version of the standard was recommended. The full AWWA standard is shown below:
AWWA Water Audit Format:
System Input
Volume
(corrected for
known errors)
Authorized
Consumption
Billed Authorized
Consumption
Billed Metered Consumption
(including water exported) Revenue
Water
Billed Unmetered Consumption
Unbilled
Authorized
Consumption
Unbilled Metered Consumption
Non-
Revenue
Water (NRW)
Unbilled Unmetered
Consumption
Water Losses
Apparent Losses
Unauthorized Consumption
Customer Metering
Inaccuracies
Data Handling Errors
Real Losses
Leakage on Transmission and
Distribution Mains
Leakage and Overflows at
Utility's Storage Tanks
Leakage on Service
Connections up to point of
Customer metering
Rationale for Recommendation: It is notable in that this new methodology moves thinking
away from calculating how much water is “lost” to developing a greater understanding of
the end points of water use. It is also notable that it provides a way to calculate the value of
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water that fails to produce revenue and a greater understanding of costs and benefits – the
economic value – of making various repairs to the system
Following discussion, the SWIC adopted a position of support for the use of a standardized
water audit format in North Carolina. SWIC determined that having a format adopted for
use North Carolina in conjunction with the Local Water Supply Plans would increase the
utility of the information gathered by the Division of Water Resources. SWIC found that no
policy barriers currently existed to deter this modification. The SWIC recognized the utility
of the updated IWA/AWWA model but acknowledged that the model was developed for
most useful application in large water systems, and required information that many of the
State’s smaller systems likely would not be able to produce. Thus, the SWIC recommends
adoption of the IWA/AWWA model as a guideline for development of a North Carolina water
audit format and requested that the State Department of Environment and Natural
Resources develop the modified document in consultation with other interested parties.
c. Leak Detection and Repair
The growing emphasis on efficient management of our State’s water resources spurred
particularly by the droughts and growing water demand took root most effectively in leak
detection in drinking water systems. Both detecting water leaks and the follow-up repairs
are supply-side management strategies- those which can be employed by the water system
owner to enhance the efficiency of operations.
Many municipal and county water systems have moved forward with water audits which
provide a basis for understanding the volume of unaccounted for water and the impact that
water “loss” has on the finances of the system. Leak detection and repair are the next
logical step, providing the system owner with a precise location of leaks, and when coupled
with information from the water audit, the priority order for repair that achieves the
greatest cost and water savings.
The SWIC worked with NCDENR in developing a State approach to water audits and to
introducing leak detection technology and process to local water systems. Attached in
Appendix 5 is a copy of the State guidance developed for local systems to follow when
addressing the Leak Detection Requirement now attached to State funding for drinking
water projects.
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d. Reclaimed Water
Water Reuse – also known as reclaimed water - involves the use of highly-treated
wastewater as a substitute for treated drinking water for end uses that do not require
potable water quality. In accordance with State and Federal regulation, drinking water
systems must be sized to meet peak demand. Meeting the peak demand often drives the
development of new supplies and infrastructure investments. If peak demand can be
reduced through increasing the efficiency of use, the sustainability of the system and the
resources is supported.
To gain an understanding of the current policy and practice of water reuse, the SWIC
conducted its own research and also invited professionals in the water industry to provide
their perspectives. SWIC sponsored a series of three panel discussions on water reuse and
reclamation which were open to the public and drew significant attendance. The interests
represented in the panels included Public Health, Agriculture, Industry, Local Governments
already employing water reuse as part of their water management programs, the State of
North Carolina represented by officials from the Department of Environment and Natural
Resources (DENR) and members and Chair of the North Carolina American Water Works
Association (AWWA) Water Reuse Committee.
These panel discussions provided key support to the Department of Environment in
proposing expansion of the water reuse law in North Carolina. The SWIC 2008 Annual
Report focused on the value of and impediments to expanded use of reclaimed water and
other water efficiency measures in the State.
To date, the DENR staff have received approval of the fiscal note attached to the proposed
rule changes for water reclamation. Staff is currently working on establishing the dates for
the required public hearings and anticipates holding the hearings starting in late February
2010.
Recommendation of the SWIC on Reclaimed Water: The members of the State Water
Infrastructure Commission support the expanded use of reclaimed water, gray water,
harvested rain water and stormwater subject to adequate provisions to protect public
health. The SWIC has adopted a resolution in support of the use of reclaimed water which it
has distributed to the Governor, members of the North Carolina General Assembly and
others. The SWIC supports the proposed rule enhancements for reclaimed water which are
currently being considered by the EMC. SWIC notes with concern the inconsistencies in
regulatory treatment of gray water, harvested rainwater, stormwater and reclaimed water
and supports the timely reconciliation of these differences.
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e. Regionalization
In the United States and abroad, regional cooperation among utility providers is used to
increase efficiency of system operations, join systems together to enjoy economies of scale
that otherwise might not be enjoyed by those members, and to provide service to areas
that would not otherwise receive service. Regionalization, regional collaborations and
partnerships take many forms and provide a variety of services to North Carolina drinking
water and wastewater systems.
In keeping with its charge to provide recommendations on the role of the State government
in the development and funding of wastewater, drinking water, and storm water
infrastructure, the State Water Infrastructure Commission (SWIC) examined the concept and
practice of regionalization in North Carolina. Through panel discussions and individual
presentations, SWIC members heard from a variety of presenters including those that fund
infrastructure in North Carolina and owners/operators of several of our largest regional
systems.
Given the confluence of factors placing pressure on the safe operation of our state’s
infrastructure systems and highlighting our need for water resource planning and
management statewide, the Commission sees regional collaboration as an important
strategy/practice that may offer near-term benefit to the State. Without exception, funders
and those that manage these regional systems see regional collaboration as an essential
component of our State’s strategy for enhanced resource management. A common thread
running through all discussions and presentations was that State policy could do more to
support regional collaborations. The graphics below show the extent of physical
interconnection between drinking water and wastewater systems as of 2003.
Source: NC Rural Center, Water 2030 Report
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Source: NC Rural Center, Water 2030 Report
Outcomes of SWIC work on Regionalization:
DENR through the Public Water Supply Section contracted with the UNC Environmental
Finance Center to provide public water system capacity development support. One of the
deliverables from this contract was to provide an inventory of water system partnerships,
interconnections and the institutional agreements that control their usage. This information
is available from the Environmental Finance Center’s Web site at the following Uniform
Resource Locator (URL). Information can be found at the following location:
http://www.efc.unc.edu/projects/partnerships.htm#inventory.
Recommendations of SWIC on Regionalization: Support the development of regional
infrastructure partnerships through direct State investment in policy development, funding,
and technical assistance through the following:
 Develop and implement a set of criteria for evaluating system “readiness” for
regionalization. This may prevent bringing systems that are not ready i.e., not yet
managing their systems efficiently and effectively, into a regional configuration
where they cannot participate as an equal.
 Fund a study to identify the most promising regions for water regionalization that
could then inform local decision makers, funders and the public.
 Provide Start-Up funding for regional projects to match local investments for the
engineering, planning and legal work associated with forming a regional entity.
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f. Asset Management
The Environmental Protection Agency defines asset management as “managing
infrastructure capital assets to minimize the total cost of owning and operating them, while
delivering the service levels customer's desire. Each utility is responsible for making sure that
its system stays in good working order-regardless of the age of components or the
availability of additional funds. Asset management programs with long-range planning, life-cycle
costing, proactive operations and maintenance, and capital replacement plans based
on cost-benefit analyses can be the most efficient method of meeting this challenge.” (EPA
website)
Asset Management entails maintaining an up-to-date inventory of water and wastewater
assets and planning for the repair and replacement of those assets. It makes good sense and
provides a means by which local systems can stay ahead of the “aging infrastructure” game.
However, as discovered in the Water 2030 Initiative, few North Carolina systems –
particularly smaller systems- have an active inventory or an Asset Management Plan.
Following logically along with the work on water audits and leak detection and repair, the
SWIC supports Asset Management as a strategic water efficiency practice. SWIC appointed a
sub-committee (Task Force) to begin an assessment of the current educational and technical
assistance efforts at the State level and a look at gaps in education and technical assistance
specific to asset management.
Attached in Appendix 4 is a copy of the meeting summary of the Asset Management Task
Force.
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e. Program Evaluation Division Report on Infrastructure Funding
In January 2009 the Program Evaluation Division of the NC General Assembly released its
report assessing the focus and coordination of State funding for water, wastewater and
stormwater infrastructure. The Program Evaluation Division is a central, non-partisan staff
unit of the Legislative Services Commission of the North Carolina General Assembly which
assists the General Assembly in fulfilling its responsibility to oversee government functions.
The mission of the Program Evaluation Division is to evaluate whether public services are
delivered in an effective and efficient manner and in accordance with the law. (Website) The
report entitled, Report No. 2008-12-07: NC’s Water and Wastewater Infrastructure Funding
Lacks Strategic Focus and Coordination, can be found on the NCGA website at
http://www.ncga.state.nc.us/PED/Reports/RecentReports.html.
Directed by the North Carolina General Assembly’s Legislative Program Evaluation Oversight
Committee, the Program Evaluation Division (PED) conducted research on the six (6) State
funding programs for infrastructure, “to determine the effectiveness of the current
allocation system and to identify funding alternatives for infrastructure improvements.”
(Executive Summary, PED Report) In addition to the six State funders, the State Water
Infrastructure Commission was also evaluated to determine how well it had met its intended
mission.
The PED Report concluded that the system for funding was duplicative and uncoordinated
and that without an oversight agency or a strategic plan to guide activities, water and
wastewater funding was provided in a complex and fragmented manner. (PED Report)
The PED Report also concluded that the State Water Infrastructure Commission, had fallen
short of achieving its mission of identifying the state’s water infrastructure needs and
developing a plan to meet those needs. The PED Report stated that this was attributable to
the fact that the SWIC did not have the necessary funding or authority to deliver on the
legislative charge.
The PED Report recommended that the General Assembly should consider the following
actions:
 Direct the State Water Infrastructure Commission to develop a statewide strategic
plan and needs assessment for water and wastewater infrastructure by May 1, 2010;
 Require better oversight of water and wastewater funding by either authorizing the
State Water Infrastructure Commission to coordinate and oversee the system or by
establishing a single water and wastewater authority;
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 Using state loan program and relying less on grants when determining state
appropriations for water and wastewater infrastructure. (Executive Summary – PED
Report)
SWIC Response to PED Report
Since the spring of 2006 when it was appointed and organized the SWIC has provided a
monthly forum for communication, collaboration, and cooperation for state and federal
funders of water infrastructure, local governments and other interested parties. I believe the
SWIC has successfully increased the communication, cooperation and collaboration among
funders and other agencies.
With its limited resources and authority SWIC has chosen to focus on increasing cooperation
rather than developing a strategic water infrastructure financing plan. In order to develop a
strategic water infrastructure financing plan SWIC or any other agency would need clearer
goals and objectives from the Governor and/or General Assembly. SWIC does not have the
authority and has not sought the authority to require funders or other agencies to comply
with what it considers best practices.
In a letter to the Joint Legislative Committee Chairs in January 2009, the Chairman
responded on behalf of SWIC to state, “I believe that inconsistent funding has resulted in the
lack of a statewide strategic plan more than the lack of a plan has caused inconsistent
funding. State and local roles in planning, financing, constructing, operating and maintaining
other significant infrastructure, including public schools, community colleges, universities,
transportation and even parks, is relatively well defined. The State role in water
infrastructure is not well defined. In good economic times the General Assembly has been
generous in its funding for water infrastructure. The General Assembly’s support has been
important because national funding for EPA’s drinking water and wastewater programs has
decreased. The SWIC has advocated for a dedicated source of state funding for water
infrastructure to be matched with local water, wastewater and stormwater revenues.”
(SWIC Response Letter to PED Report, January 2009)
In that correspondence, three recommendations were offered:
1) SWIC would appreciate the opportunity to develop a statewide strategic plan and
needs assessment for water and wastewater infrastructure funding by May 2010. The
General Assembly should set the goals that it desires the plan to achieve. The plan
should include stormwater and other “new” sources of water such as that found with
reclaimed water. SWIC would also appreciate the opportunity to assist in the
development of regional strategic plans based on river basins. Further, SWIC would
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oppose transferring funds from the Rural Center and CWMTF to pay for planning and
would support an appropriation from the General Assembly instead.
2) Over time the General Assembly has created a decentralized system of meeting
different water and wastewater needs. SWIC believes that it is appropriate and
timely to discuss, debate, and consider alternatives to our current system. SWIC
would welcome an opportunity to consider improving oversight and coordination.
3) EPA and USDA primarily provide low interest loans for water finance. SWIC could
work with funders, the Local Government Commission, and the General Assembly to
establish clearer state policies regarding the investment of state funds. Specifically,
the state would benefit from clearly defined state policy on the funding of
infrastructure improvements. Specifically, this should include guidance on the level
of state assistance when the high unit cost threshold now established in NCGS 159G-
20 is exceeded. Related to this topic, the SWIC would decide whether to recommend
the existing high unit cost threshold of 1.5% of median household income be
increased to the 2009 General Assembly.
General Assembly Action Following Release of PED Report
Although bills to implement the recommendations of the PED Report were introduced, the
2009 General Assembly did not act upon them.
The General Assembly appropriated no funds for SWIC to operate in 2009-2011.
The General Assembly authorized a legislative study committee on water and wastewater
infrastructure in the Studies Act of 2009 (Part XLIII of SL 2009-574).
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Appendices
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Appendix 1
Rate Design Guidelines per Drought Bill
Draft Presented to SWIC by UNC Environmental Finance Center
6/19/09
Cost Recovery
1. Data sources
a. Last available audited financial report from the Local Government
Commission database
b. Last approved annual budget
c. Approved multi-year capital investment plan and/or budget
d. Multi-year financial plan
2. Definitions
a. Annual operating expenditures
b. Annual operating revenue
c. Annual interest payment
d. Annual principal payment
e. Depreciation
f. Fund transfer
g. Reserves
h. Fixed cost
i. Variable costs
j. Asset management
3. Revenue tests
a. Operating revenues less than operating expenditures
b. Operating revenues less than operating expenditures and debt service
(principle and interest payment)
c. Operating revenues more than operating expenditures
i. Less than 50% of depreciation funded
ii. 50-99% depreciation funded
4. Corrective measures/justification
a. Immediate rate increase
b. Documentation showing future revenue projections
c. Plan showing steps being taken to assure water system is sustainable
i. Approved rate increase program
ii. Approved multi-year financial plan
iii. Existence of reserve funds
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Conservation Oriented Rates
1. Data sources
a. Rate structures
b. Water shortage vulnerability
i. Drought status
ii. Safe yield
iii. Unused water treatment capacity
iv. Unused wastewater treatment capacity
2. Definitions
a. Fixed charge
b. Commodity charge
c. Block structure
i. Decreasing
ii. Uniform
iii. Simple Increasing
iv. Seasonal
v. Water budget
d. Marginal price
e. Average price
f. Average bill
g. Temporary water shortage rates (drought surcharge)
3. Anticipated conservation impact of rates tests
a. Block structure
b. Average price (5 K, 15 K for water only and combined water and wastewater)
c. Price of next 1,000 gallons (marginal price) (5 K, 10K, 15 K)
d. Percentage change in bill of next 1,000 gallons (5K, 10K, 15K)
e. Price of next 5,000 gallons (5K to 10 K)
f. Percentage change in bill of next 5,000 gallons (5K)
g. Billing period
h. Bill information
4. Measures
a. Increase rates
b. Reduce water productions
c. Rate structure change
d. Adoption of water shortage rate program
5. Conservation revenue vulnerability test
a. Historic usage analysis
b. Historic revenue analysis
c. Percentage of revenues generated from fixed charge component
d. Days cash on hand/fund reserve
e. Operating Revenue/Operating Expenditure
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Appendix 2
Resolution by State Water Infrastructure Commission
Increasing the Median Household Income/High Unit Cost Threshold
In Order to Apply for Water Infrastructure Grants
Whereas the 1998 General Assembly enacted SL 1998-132, Clean Water and Natural Gas
Critical Needs Bond Act of 1998, by Senator John Kerr and others, and established 1.5% of
median household income as the high unit cost threshold in order for combined water and
wastewater systems or 0.75% of median household income for water or wastewater systems
to apply for water infrastructure grants; and
Whereas many water and wastewater systems raised their rates in order to compete for
high unit cost grants and to raise revenues to operate and maintain their systems; and
Whereas the 2005 General Assembly codified the high unit cost threshold at 1.5% for
combined water and wastewater systems and 0.75% for water or wastewater systems in SL
2005-454, Clarify Clean Water Funding; and
Whereas the State Water Infrastructure Commission in its 2008 Annual Report to the
Governor and General Assembly committed itself to determining whether and if so, how
much to increase the median household income threshold used for determining grant
eligibility; and
Whereas with assistance from the Environmental Finance Center at UNC-Chapel Hill the
SWIC determined that 67% of NC water systems would qualify for high unit cost grants if the
threshold remains at 1.5% for combined water and wastewater systems and that 56% of NC
water systems would qualify for high unit cost grants if the threshold was increased to 2.0%
for combined water and wastewater systems with a poverty rate of less than 12.3% and the
threshold was maintained at 1.5% for combined water and wastewater systems with a
poverty rate of 12.3% or greater; and
Whereas the SWIC recognizes that it is difficult for local elected officials to increase water
and wastewater rates and that high unit cost threshold is a strong incentive for local elected
officials and water systems to raise their rates to cover their operating and maintenance
costs; and
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Whereas according to audit data submitted by water systems to the NC Local Government
Commission almost half (48 percent) operated with expenses greater than revenues in 2008;
and
Whereas state policy should support local elected officials and water systems that are
willing to raise their water rates to sustain their water systems.
Now, therefore be it resolved by the State Water Infrastructure Commission meeting in
Raleigh, North Carolina on May 15, 2009:
The General Assembly of North Carolina should increase the high unit cost threshold to 2.0%
for combined water and wastewater systems and 1.0% for water or wastewater systems
with a poverty index of less than 12.3% and should retain the high unit cost threshold at
1.5% for combined water and wastewater systems and 0.75% for water or wastewater
systems with statewide individual poverty index or greater as determined by the last
decennial census index (currently 12.3% poverty ), effective July 1, 2010.
The SWIC will work to develop other criteria to determine affordability and to identify
troubled or unsustainable water systems and will report to a future session of the General
Assembly.
This resolution does not apply to the economic development programs administered by the
NC Department of Commerce and the NC Rural Economic Development Center which are
intended to create and retain jobs.
Bill Holman
Chairman
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Appendix 3
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Cc: Representative Joe Hackney, Speaker of the House
Senator Marc Basnight, President Pro Tempore of the Senate
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Appendix 4
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Appendix 5