The Clean Water and Drinking Water Infrastructure
                    Gap Analysis
     With the aging of the nation's infrastructure, the
     clean water and drinking water industries face
a significant challenge to sustain and advance their
achievements in protecting public health and the
environment. To gain a better understanding of
the future challenges facing these industries, the
U.S. Environmental Protection Agency (EPA) has
conducted a study, The Clean Water and Drinking
Water Infrastructure Gap Analysis, to identify whether
a funding gap will develop between projected
investment needs and projected spending.  The
study provides an important empirical basis for
discussions addressing the critical needs of our
water infrastructure.

What Does the  Study Cover?

The Gap Analysis covers a 20-year period from
2000 to 2019 and includes estimates of the funding
gap for both capital and operations and
maintenance (O&M). The report discusses the
methods for calculating the capital and O&M gaps,
but does not address  the policy implications of the
results.

For clean water, the estimates of investment needs
and spending used to calculate the gaps cover all of
the approximately 16,000 publicly owned treatment
works (POTWs). The drinking water analysis covers
the approximately 54,000 community water systems
and the 21,400 not-for-profit noncommunity water
systems in the 50 states, U.S. Territories, and Tribal
areas.
How was the Study Conducted?

EPA conducts surveys of the nation's clean water
and drinking water infrastructure needs every four
years. These  surveys formed the starting point for
calculating the capital and O&M investment needs.
EPA adjusted the surveys' estimates to account for
the under-reporting  of needs, particularly for
capital replacement.  The Gap Analysis used several
alternative assumptions to generate a number of
scenarios for estimating the capital and O&M gaps.
The estimates represent the average of these
scenarios.

What Are the Findings?

The Gap Analysis presents the projected funding
gap over the 20-year period in two ways: a "no
revenue growth" scenario that compares the
projected need to current spending levels; and a
"revenue growth" scenario that assumes spending
will increase by 3 percent per year. This annual
increase represents a real rate of growth of 3
No Revenue
Growth Scenario:
2000 - 2019
Capital:
O&M:
Total:
Total Payment Gap (20 years)
(Average in Billions of Dollars)
Clean Water
$122
$148
$271
Drinking Water
$102
$161
$263
Revenue
Growth Scenario:
2000 - 2019
Capital:
O&M:
Total:
Total Payment Gap (20 years)
(Average in Millions of Dollars)
Clean Water
$21
$10
$31
Drinking Water
$45
$0
$45

-------
 percent over and above the rate of inflation—a
 projection which is consistent with long-term
 growth estimates of the economy.

 The "no revenue growth" scenario is useful for
 understanding the extent to which spending might
 need to increase relative to the status quo. This
 analysis estimates a total capital payments gap of
 $122 billion, or about $6 billion per year, for clean
 water and $102 billion, or about $5 billion per year,
 for drinking water.  The O&M gap is estimated at
 $148 billion, or $7 billion per year, for clean water
 and $161 billion, or $8 billion per year, for drinking
 water.

 Under the "revenue growth"  scenario, the capital
 gap is $21 billion, or about $1 billion per year for
 clean water  and $45 billion, or about  $2 billion per
 year, for drinking water. The O&M gap is
 estimated at $10 billion, or $0.5 billion per year, for
 clean water, while no O&M funding gap would
 occur for drinking water.

 Each of these numbers represents an average
 within a range of estimates.  Under the
 assumptions used to calculate the funding gaps,
 some of the models predict that total spending will
 exceed the total  need over the next 20 years.
 Therefore, this range of estimates may include
 negative numbers. The full report provides a
 detailed explanation of the methods  and the gap
 estimates.
       How Credible Are the Findings?

       A diverse panel of external peer reviewers drawn
       from academia, think tanks, consulting firms, and
       industry commented on the methods and data used
       in this study. Overall, the reviewers commended
       the report as a reasonable effort to quantify the
       gap, particularly given the limitations of the
       available data.  EPA revised projections and
       approaches to incorporate the comments of the
       peer reviewers.

       Is a Funding Gap Inevitable?

       No. It is important to recognize that the funding
       gaps would occur only if capital and O&M
       spending do not increase from present levels. This
       assumption understates future spending and
       ignores other measures that can be taken. These
       can include, but are not limited to, asset
       management to reduce capital and O&M costs and
       rate structures that better reflect the cost of
       service.  In reality, increasing needs will likely
       prompt increased spending and thus a smaller
       funding gap, as is captured by the "revenue
       growth" scenario. However, the analysis presents
       an indication of the funding gap that will result if
       we ignore the challenges posed by an aging
       infrastructure network—a significant portion of
       which is beginning to reach the end of its useful
       design life.

       Where Can I Obtain More Information?

       Copies of the Gap Analysis and the Needs Surveys
       are available from the Safe Drinking Water  Hotline
       at 1(800) 426-4791, the Office of Water Resource
       Center at 1(800) 832-7828, and on the Internet at
       www.epa.gov/ow
Office of Water
September 2002
EPA816-F-02-017

-------