How Regionalization & Consolidation of Water Utilities Creates New Projects
The main benefit of regionalization is that it better leverages the resources of two or more water systems. Water utilities can use five major structures to pool their resources, and five major considerations must be addressed. The result is a matrix of projects that must be planned and executed to gain the desired economies of scale.
Regionalization and Consolidation Are The Same
Merriman-Websters Dictionary defines regionalization as “to divide into regions or administrative districts.” Consolidation means “the process of uniting.” By definition, regionalization (decentralization) and consolidation (centralization) have different meanings. In the water utility space, the words mean the same thing.
Since 1983, the USEPA has defined regionalization as “involving the cooperation of system owners and, perhaps, the consolidation of financial resources, physical plants, and/or personnel.” The perspective is from the small utility (less than 10,000 connections) and the ‘region’ is a subdivision of the state or federal government.
Benefits and Challenges
According to USEPA, “the main benefit of regionalization is that it pools individual resources of two or more water systems to obtain services or facilities that one or both systems may not have been capable of obtaining by themselves.”
Infrastructure is the most obvious thing that can be leveraged in a regionalization structure. Less obvious things include people (certified operators or licensed engineers), billing systems, geographic information systems, equipment, and maintenance resources.
The primary challenge is regionalization is often viewed as a means to create a larger entity that results in a loss of local policy control. In some cases, one entity is financially distressed and seeking a larger customer base to spread the pain – either in the long-term or short-term. In other cases, one community simply does not like the other.
Six Aspects That Must Be Considered
1. Infrastructure. The primary issues are related to the practicality of connections, the condition of existing infrastructure, and long-term needs/expansions.
2. Financial. The current debt amount, cost of deferred needs, current rates, and current rate structure are primary considerations.
3. Human Resources. Every employee contemplates whether they will lose their job, lose power and respect in the new organization, and lose pay or benefits.
4. Organizational (governance). The primary consideration usually relates to decision-making based on proportional size or equal governance based on the number of entities (regardless of size).
5. Legal. All regionalization and consolidation agreements should be in writing. Most require approval by the state legislature.
6. Political (social). Some communities do not see eye-to-eye, whether related to Friday night football or something that has nothing to do with water and sewer. More commonly, their elected officials do not like each other. Trust is an essential part of regionalization and consolidation.
Five Structures Are Available
1. Basic service contracts are the most widely used method of regional cooperation. Specific functions such as wholesale (or retail) water supply and wastewater treatment volumes, emergency services, operations and maintenance (O&M), or billing services may be contracted. While a form of regional cooperation, basic service contracts are a very low form of getting economies of scale from one system or the other.
2. Joint service (partnering) agreements establish the participating systems as partners in the provision of a particular activity. This commonly includes a shared partnership for building a new water supply source, a water treatment plant, or a wastewater treatment plant. These agreements are long-term in nature, detailed and legal in nature, and usually require some form of special legislation from the state-elected assembly.
3. Merger occurs when one system agrees to become part of another system legally. In most cases, a smaller system is absorbed by a larger one. In some cases, the smaller system may continue to provide monthly bills to its customers to maintain its local brand.
4. Local Special-Purpose Districts are generally units of local government that provide a specific service to a defined geographic (service) area. This structure was more common in the 1970s when federal dollars were available to create utilities in low and moderate-population areas. Over the past 30 years, many smaller special-purpose districts have merged into larger ones or regional authorities.
5. Regional Authorities are distinguished from the local special districts by the size of the area affected, a larger scope of services provided (e.g., water and wastewater), and independent autonomy. However, most US states do not allow taxation authority or issuing general obligation bonds to authorities. Regional authorities usually require legislative approval and governmental restrictions; however, regional authorities are considered the most similar structure to a private entity.
Regionalization and consolidation of water utilities involve many interrelated parts. The main benefit is regionalization provides better leverage for the resources of two or more water systems. A matrix of projects must be planned and executed to gain the desired economies of scale. Regionalization and consolidation require time, money, and political capital to achieve a result that improves a community for many generations.
JD Solomon Inc provides program development, asset management, and facilitation at the nexus of facilities, infrastructure, and the natural environment. Over his career, JD Solomon has led water utility regionalization assessments and implementations in fourteen US states.