Drinking water and wastewater utilities are facing potentially significant investments over the next 20 years to upgrade an aging and deteriorated infrastructure, including underground pipelines, treatment, and storage facilities; meet new regulatory requirements; serve a growing population; and improve security. Adding to the problem is that many utilities have not been generating enough revenues from user charges and other local sources to cover their full cost of service. As a result, utilities have deferred maintenance and postponed needed capital improvements. To address these problems and help ensure that utilities can manage their needs cost-effectively, some water industry and government officials advocate the use of comprehensive asset management. Asset management is a systematic approach to managing capital assets in order to minimize costs over the useful life of the assets while maintaining adequate service to customers. While the approach is relatively new to the U.S. water industry, it has been used by water utilities in other countries for as long as 10 years. Each year, the federal government makes available billions of dollars to help local communities finance drinking water and wastewater infrastructure projects. Concerns about the condition of existing infrastructure have prompted calls to increase financial assistance and, at the same time, ensure that the federal government’s investment is protected. In recent years the Congress has been considering a number of proposals that would promote the use of comprehensive asset management by requiring utilities to develop and implement plans for maintaining, rehabilitating, and replacing capital assets, often as a condition of obtaining loans or other financial assistance. The federal government has had a significant impact on the nation’s drinking water and wastewater infrastructure by (1) providing financial assistance to build new facilities and (2) establishing regulatory requirements that affect the technology, maintenance, and operation of utility infrastructure. As we reported in 2001, nine federal agencies made available about $46.6 billion for capital improvements at water utilities from fiscal years 1991 through 2000. The Environmental Protection Agency (EPA) and the Department of Agriculture alone accounted for over 85 percent of the assistance, providing $26.4 billion and $13.3 billion, respectively, during the 10-year period; since then, the funding from these two agencies has totaled nearly $15 billion. EPA’s financial assistance is primarily in the form of grants to the states to capitalize the Drinking Water and Clean Water State Revolving Funds, which are used to finance improvements at local drinking water and wastewater treatment facilities, respectively. As part of the Rural Community Advancement Program, Agriculture’s Rural Utilities Service provides direct loans, loan guarantees, and grants to construct or improve drinking water, sanitary sewer, solid waste, and storm drainage facilities in rural communities. In addition to its financial investment, EPA has promulgated regulations to implement the Safe Drinking Water Act and Clean Water Act, which have been key factors in shaping utilities’ capital needs and management practices. For example, under the Safe Drinking Water Act, EPA has set standards for the quality of drinking water and identified effective technologies for treating contaminated water. Similarly, under the Clean Water Act, EPA has issued national minimum technology requirements for municipal wastewater utilities and criteria that states use to establish water quality standards that affect the level of pollutants that such utilities are permitted to discharge. Thus, the federal government has a major stake in protecting its existing investment in water infrastructure and ensuring that future investments go to utilities that are built and managed to meet key regulatory requirements. Drinking water and wastewater utilities will need to invest hundreds of billions of dollars in their capital infrastructure over the next two decades, according to EPA; the Congressional Budget Office; and the Water Infrastructure Network, a consortium of industry, municipal, state, and nonprofit associations. As table 1 shows, the projected needs range from $485 billion to nearly $1.2 trillion. The estimates vary considerably, depending on assumptions about the nature of existing capital stock, replacement rates, and financing costs. Given the magnitude of the projected needs, it is important that utilities adopt a strategy to manage the repair and replacement of key assets as cost-effectively as possible and to plan to sustain their infrastructure over the long term. Local drinking water and wastewater utilities rely primarily on revenues from user rates to pay for infrastructure improvements. According to EPA’s gap analysis, maintaining utility spending at current levels could result in a funding gap of up to $444 billion between projected infrastructure needs and available resources. However, EPA also estimates that if utilities’ infrastructure spending grows at a rate of 3 percent annually over and above inflation, the gap will narrow considerably and may even disappear. EPA’s report concludes that utilities will need to use some combination of increased spending and innovative management practices to meet the projected needs. The nation’s largest utilities—those serving populations of at least 10,000— account for most of the projected infrastructure needs. For example, according to EPA data, large drinking water systems represent about 7 percent of the total number of community water systems, but account for about 65 percent of the estimated infrastructure needs. Similarly, about 29 percent of the wastewater treatment and collection systems are estimated to serve populations of 10,000 or more, and such systems account for approximately 89 percent of projected infrastructure needs for wastewater utilities. Most of the U.S. population is served by large drinking water and wastewater utilities; for example, systems serving at least 10,000 people provide drinking water to over 80 percent of the population. Pipeline rehabilitation and replacement represents a significant portion of the projected infrastructure needs. According to the American Society of Civil Engineers, U.S. drinking water and wastewater utilities are responsible for an estimated 800,000 miles of water delivery pipelines and between 600,000 and 800,000 miles of sewer pipelines, respectively. According to the most recent EPA needs surveys, the investment needed for these pipelines from 1999 through 2019 could be as much as $137 billion. Several recent studies have raised concerns about the condition of the existing pipeline network. For example, in August 2002, we reported the results of a nationwide survey of large drinking water and wastewater utilities. Based on the survey, more than one-third of the utilities had 20 percent or more of their pipelines nearing the end of their useful life; and for 1 in 10 utilities, 50 percent or more of their pipelines were nearing the end of their useful life. In 2001, a major water industry association predicted that drinking water utilities will face significant repair and replacement costs over the next three decades, given the average life estimates for different types of pipelines and the years since their original installation. Other studies have made similar predictions for the pipelines owned by wastewater utilities. EPA and water industry officials cite a variety of factors that have played a role in the deterioration of utility infrastructure; most of these factors are linked to the officials’ belief that the level of ongoing investment in the infrastructure has not been sufficient to sustain it. For example, according to EPA’s Assistant Administrator for Water, the pipelines and plants that make up the nation’s water infrastructure are aging, and maintenance is too often deferred. He predicted that consumers will face sharply rising costs to repair and replace the infrastructure. Similarly, as the Water Environment Research Foundation reported in 2000, “years of reactive maintenance and minimal expenditures on sewers have left a huge backlog of repair and renewal work.” Our nationwide survey of large drinking water and wastewater utilities identified problems with the level of revenues generated from user rates and decisions on investing these revenues. For example: Many drinking water and wastewater utilities do not cover the full cost of service—including needed capital investments and operation and maintenance costs—through their user charges. Specifically, a significant percentage of the utilities serving populations of 10,000 or more—29 percent of the drinking water utilities and 41 percent of the wastewater utilities—were not generating enough revenue from user charges and other local sources to cover their costs. Many drinking water and wastewater utilities defer maintenance and needed capital improvements because of insufficient funding. About one-third of the utilities deferred maintenance expenditures in their most recent fiscal year; similar percentages of utilities reported deferring minor capital improvements and major capital improvements. About 20 percent of the utilities had deferred expenditures in all three categories. For many utilities, a significant disparity exists between the actual rehabilitation and replacement of their pipelines and the rate at which utility managers believe rehabilitation and replacement should occur. We found that only about 40 percent of the drinking water utilities and 35 percent of the wastewater utilities met or exceeded their desired rate of pipeline rehabilitation and replacement. The remaining utilities did not meet their desired rates. Roughly half of the utilities actually rehabilitated or replaced 1 percent or less of their pipelines annually. Utility managers also lack the information they need to manage their existing capital assets. According to our survey, many drinking water and wastewater utilities either do not have plans for managing their assets or have plans that may not be adequate in scope or content. Specifically, nearly one-third of the utilities did not have plans for managing their existing capital assets. Moreover, for the utilities that did have such plans, the plans in many instances did not cover all assets or did not contain one or more key elements, such as an inventory of assets, assessment criteria, information on the assets’ condition, and the planned and actual expenditures to maintain the assets. Comprehensive asset management has gained increasing recognition within the water industry as an approach that could give utilities the information and analytical tools they need to manage existing assets more effectively and plan for future needs. Using asset management concepts, utilities and other organizations responsible for managing capital infrastructure can minimize the total cost of designing, acquiring, operating, maintaining, replacing, and disposing of capital assets over their useful lives, while achieving desired service levels. Figure 1 shows some of the basic elements of comprehensive asset management and how the elements build on and complement each other to form an integrated management system. Experts within and outside the water industry have published manuals and handbooks on asset management practices and how to apply them. While the specific terminology differs, some fundamental elements of implementing asset management appear consistently in the literature. Collecting and organizing detailed information on assets. Collecting basic information about capital assets helps managers identify their infrastructure needs and make informed decisions about the assets.