United States
Environmental Protection
Agency
Office of Water
(WH-550)
EPA/570-9-91-035
[December 1991
v>EPA Restructuring Manual
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Restructuring Manual
Table of Contents
Introduction: You Can Make a Difference 5
A Case Study: North Lakeport, California 5
The Role of Restructuring 7
Part 1: Defining the Problem 9
Small Systems, Non-Viable Systems 9
Part 2: What is Restructuring? 13
Definition of Restructuring 13
Variations in Terminology 14
Benefits of Restructuring 15
Part 3: How to Do It 17
Step 1: Define the Problem 17
Step 2. Conduct a Feasibility Study 17
Step3. Find a "Champion" 19
Step 4. Choose a Restructuring Option 20
Step 5. Develop a Plan to Sell the Concept 23
Part 4: Role of the Drinking Water Regulator 27
Step 1. Analyze the Nature of Compliance Problems to
Determine Which Restructuring Options Might Be
Effective 27
Step 2. Use Your Influence to Have a Feasibility
Study Conducted 28
Step 3. Use Your Enforcement Authority to Promote
Restructuring Options 29
Step 4. If You Need More Authority to Promote
Restructuring, Ask for It 30
Step 5. Discuss Restructuring with System Owners,
Boards of Directors, and Citizens' Groups 31
Step 6. Work with the PUC to Promote Restructuring 31
Step 7. Implement the Change 32
Part 5: Trouble Shooting 33
Where to Go for Help 39
References 39
Risk Communication 40
Appendix A 41
Appendix B 55
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Restructuring Manual
A Training Manual for State Drinking Water Personnel
as They Meet the Challenges of the
1986 Safe Drinking Water Act Amendments
Introduction: You Can Make a Difference
You can do
something
about
non-viable
water systems.
Non-viable systems lack the technical, financial or manage-
rial capabilities to comply with drinking water regulations. You
know these systems. They cause you continual distress. They take
up much of your time, yet their problems are never really solved.
State drinking water personnel often feel that they don't
have the resources or the authority to resolve the problems of non-
viable drinking water systems. But, you can do something about
them. You can start today, but you must be willing to take enforce-
ment actions that will give the non-viable system an incentive to
consider major changes in the way it does business. You have to
make it clear that compliance is not optional; doing nothing is not
an alternative for non-viable, non-compliant systems. You also
must be willing to work with local citizens' groups and other
organizations to plan and implement changes. Consider the fol-
lowing case study.
A Case Study: North Lakeport, California
Just north of the City of Lakeport, California, in 1985,80
percent of the small systems in the area were having problems
meeting water quality standards.1 Both the ground water and the
lake were poor sources of supply. The ground water contained
iron, manganese, and high levels of dissolved solids. In some wells
the concentrations of arsenic and barium also were high. Clear
Lake, the local surface water source, is eutrophic; periodic algae
blooms can last as long as seven months and cause serious taste
and odor problems. In addition, turbidity in the lake ranges from 3
NTU to more than 90 NTU during whiter storms.
JAs cited in North Lakeport Water Supply Feasibility Study, Gulp, Wesner.
& Gulp, June 1985. K
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Restructuring Manual
The county became interested in the area's water problems
because: '
[
1. The county wanted to build a jail in that area and was deciding
how to obtain safe water for it. They couldn't build if the water
was unsafe or if there wasn't an adequate supply.
2. A juvenile hall in the area was having severe water quality
problems.
3. A developer began a subdivision for 100 homes, but the well
went dry after only 8 houses were completed. Development
would stop if a solution to the dry well couldn't be found.
i
4. People in the area were complaining about their water.
The result of the county's interest was a feasibility study,
which examined 8 major options to solve the area's water prob-
lems. The study defined the proposed service area; surveyed
existing, planned, and proposed developments to determine inter-
est in the area-wide project; examined alternative sources of sup-
ply; examined financing options; and investigated water supply
plans ranging from developing a basic system capable of serving
just the proposed jail and the juvenile hall (equivalent to 240 resi-
dential connections) to developing a large system for the entire area
(equivalent to 3,300 residential connections). In the end, Lake
County voters approved the formation of a County Service Area
(CSA) and decided to build a new treatment facility. A total of 51
small water systems and approximately 500 individual connections
were joined together into a single water system in December 1990.
The new treatment facility used coagulation and sedimentation,
and for the taste and odor problems, ozonation and granular acti-
vated carbon. :
One system that merged into the newly formed CSA is
Countrywood Mobile Home Park. Countrywood drew its water
from Clear Lake and had 24 connections. In 1988 and 1989, the
system experienced multiple turbidity and coliform MCL viola-
tions. Very few of the required analyses were submitted; for ex-
ample, according to FRDS, turbidity sampling violations totaled 6
in 1987 and 3 in 1988. There is only one record of public notifica-
tion in the file: a boil water notice dated October 5,1989. There is
no record of chlorine residual levels, or chemical and radiological
tests (other than those mentioned). Before becoming part of North
Lakeport, the system was issued a Notice of Violation (NOV) by
EPA Region IX, and a citation by Lake County Department of
Health.
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Restructuring Manual
Regulators
play a special
role in
promoting
restructuring.
Restructuring
benefits
regulators and
consumers.
The regulators in California did not play a large role in
initiating the solution; however, they had documented incidences
of non-compliance so well that they could help the county's case for
receiving funding through the 1986 Safe Drinking Water Act
(SDWA) Bond Law. When the State prioritized areas to receive
assistance through the SDWA Bond Law, North Lakeport ranked
approximately 5 out of 1,500 cases. In addition to making a strong
plea for funding, the regulators used enforcement to convince
systems that they had to make a change. And, once the feasibility
study was conducted, they offered their assistance in implementing
a solution.
Most people, including regulators, community residents,
and developers, supported the decision to form a CSA. Because
residents had experienced the effects of poor water quality, there
was heightened public awareness about the issue. Even though
some residents were told that they may have to pay $10-12 more a
month, they agreed to the solution.
The entire process took nearly 5 years. Most of this time was
for preliminary planning. The feasibility study was completed;
there were many meetings to discuss how the CSA would be
implemented; and there were several discussions about how to
finance the project. Once plans and specifications were approved,
however, it took slightly longer than a year to complete construc-
tion.
The benefits of this restructuring are numerous. Regulators
are pleased because there are fewer systems to worry about: in-
stead of having fifty regulated systems in the area, they now have
one. They also are guaranteed that the new CSA system will pro-
vide better quality water, thereby reducing the burden of answer-
ing citizen complaints and taking enforcement action against non-
compliers. Customers are satisfied because they now have a safe,
reliable supply of water, and, in some cases, are paying lower
water bills. The county is able to build its jail and maintain the
juvenile hall. The developer can complete the housing project.
And, the system will provide high quality water for all future
development in the area.
The Role of Restructuring
Although many States have used restructuring successfully, few
have adopted aggressive regulatory policies to encourage it. Re-
structuring will not work for all non-viable systems, but it can
work for many of them. Restructuring should be viewed as an
option that can provide a permanent solution to small systems
problems. It can ensure that these systems will come into compli-
ance and stay in compliance for the long term.
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Restructuring Manual
s
This manual will show you how to accomplish small system
restructuring. Part 2 of this report defines restructuring options
and describes the benefits of various types of restructuring. Part 3
explains, step by step, how to implement restructuring. Part 4 is
specifically tailored for drinking water staff and describes the role
of the drinking water regulator in restructuring. And Part 5 is a
trouble-shooting guide to overcoming barriers to restructuring.2
Appendix A provides additional case studies of restructuring.
2This is not a policy document for State drinking water administrators.
There are, however, three reports that provide an excellent policy background
on solutions to the problem of non-viable systems; See U.S. Environmental
Protection Agency, Ensuring the Viability of New, Small Drinking Water Systems,
EPA-570/9-89-004, April 1989 and Improving the Viability of Existing Small
Drinking Water Systems, EPA 570/9-90-004, June 1990. Also see State Initiatives to
Address Non-Viable Small Water Systems in Pennsylvania, prepared by Wade Miller
Associates, Inc.
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Restructuring Manual
Part 1: Defining the Problem
Small systems
represent 90
percent of all
CWSs in
violation and
88 percent of
all SNCs.
Some small
systems are
non-viable,
and most
non-viable
systems are
small.
Small Systems. Non-Viable Systems
Nearly 90 percent of all community water systems (CWSs)
are small (defined by the U.S. Environmental Protection Agency
[EPA] as those serving fewer than 3,300 people). Often character-
ized by low revenues, lack of technical and management expertise,
and inability to obtain capital, small systems frequently violate
State and Federal drinking water regulations. In FY1990, small
systems represented more than 90 percent of all CWSs in violation
and 88 percent of all significant non-compliers (SNCs). Implemen-
tation of the 1986 Safe Drinking Water Act (SDWA) Amendments
will only make the problems of small systems worse. National
compliance costs for the new drinking water regulations are esti-
mated at $1.8 billion per year; over 69 percent of these costs are
estimated to be for small systems. Installing new treatment equip-
ment, while complying with increased monitoring and reporting
requirements, will be terribly difficult for these systems.
It should be noted that although EPA defines a small system
as one that serves fewer than 3,300 people, most small systems
actually serve fewer than 500 people (or roughly 100 connections).
These systems, considered to be "very small" by EPA, represent 63
percent of all CWSs. (See Exhibit 1.) Not only do these systems
make up the bulk of small systems, they also account for over half
of all drinking water violations. (See Exhibit 2.) This is not to say
that all small systems are non-viable; some small systems are non-
viable and most non-viable systems are small.
The problems that small systems cause for regulators are
evident in Washington state. A small water system in Washington
is defined as having fewer than 1,000 service connections, but 95
percent of these have fewer than 100 service connections. Small
water systems account for over 60 percent of all monitoring/report-
ing violations.
Regulators are
concerned that
with implementa-
tion of the SDWA
Amendments,
these violations
will only increase.
The problem is
made worse
because of the
enormous costs
associated with
ensuring small
system compli-
Exhibit 1
Distribution of CWSs by Size
Total Systems = 59,182
Very Small
63%
Medium, Large,
It Very Large
13%
Source: FY 19M Compliance Report, March 1991
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Restructuring Manual
ance. As Exhibit 3 illustrates, the Washington Department of
Health (WA DOH) has estimated the cost of implementing the
SDWA Amendments for small systems at $130 million. This places
an enormous burden on DOH. The department has estimated that
it will need to hire 43 new staff, most of whom will be devoted to
small system problems. |
Not only will ensuring compliance for small systems create a
burden on WA DOH, but it will have a tremendous impact on
small water system customers in Washington. For a typical
ground water system serving fewer than 100 connections, the an-
nual per household cost for drinking water is expected to increase
between $117 and $245.3 For systems requiring more sophisticated
treatment, the cost could rise to over $500 more per household.
And, the annual cost for a typical surface water system with fewer
than 100 connections could rise to more than $1,100 per household.4
WA's estimated
cost of
implementing
SDWA for
small systems
is $130 million.
Exhibit 2
CWS Violators of M/R and MCL Requirements
FY1990*
14,000
12,000 -
10,000 -
12,495
3,638
Very Small Small Medium Large Very Large
•The number ol CWSs in violation equals 15795. The chart shows the number
to equal 17,816 (whan adding the violations tor the five size categories)
because soma systems are both Mm and MCL violators. i
Source; PROS 198 (1/15/91). '
*This estimate assumes costs for additional monitoring and disinfection.
*Small Water Systems: Problems and Proposed Solutions. A Report to the
Legislature. Washington State Department of Health. January 1991.
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Restructuring Manual
The bottom line is that small systems, particularly those
serving fewer than 500 people, tend to be non-viable. Non-viable
systems have the following characteristics:
• they are not self-sustaining;
• they do not have the necessary financial, managerial, and tech-
nical capabilities.
These systems have the most difficulty complying with drinking
water regulations; consequently, they are the black hole into which
State drinking water program resources disappear.
SD\
Exhibit 3
Total Projected Costs For Small System
Compliance with 1986 SDWA Requirements
in Washington
A/A Elements
Organics/lnorganics
Bacteriological
Surface Water Filtration
Filtration Alternatives
Corrosion;
Radionuclides
Disinfection; By-Products
Administration
Group B Systems
^^1,2.34
i-
XXXXXX-KXXXX >C X X_xCX s\. X ,
r- 4 r
^J^J^J^j^j^jcyjCXjcxScScV^P o5. 1 ti
lr»
1 43.37
i
0 10 20 30 40 50
Cost in Millions of 1 990 Dollars
Source: -Small Water Systems,' A Report to the Legislature, January 1 99 1 .
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Restructuring Manual
Part 2: What is Restructuring?
Restructuring
refers to
solutions that
address
non-viable
systems' lack
of economies
of scale.
Definition of Restructuring
Central to the problem of non-viable small systems is their
lack of economies of scale. All systems incur costs for O&M,
management, and investment in plant and equipment. Because
small systems cannot purchase goods or services in large amounts,
they must pay relatively high unit prices.
Restructuring refers to solutions for non-viable systems that
address their lack of economies of scale. The three major categories
of restructuring are:
• contracting for O&M services, with or without capital infusion,
• mergers and acquisitions, and
• creation of a new water system.
By contracting for O&M services, a small water system may take
advantage of the economies of scale already achieved by a large
firm that provides O&M services to many clients. Contracting for
O&M with capital infusion is similar, except a firm provides work-
ing capital for daily operations or for facility improvements or
construction. In a merger or acquisition, a small system (or group
of small systems) becomes part of a larger system, automatically
taking advantage of the acquiring system's economies of scale. A
new water system usually is created when a government entity,
such as a county, decides to enter the water business. This is what
happened in the North Lakeport example used in the introduction.
It is critical to note that mergers and acquisitions and the
formation of a new system involve a transfer of the assets of the
entities involved; contract O&M, with or without capital infusion,
does not.
Contract O&M may be provided by:
• a private firm that specializes in these services, or
•, a large water utility that provides these services as an ancillary
business function.
Contract O&M with capital infusion usually is provided only by
specialized private firms. Because this type of service is relatively
new, few such firms are currently in operation. Also, these firms'
clients tend to be medium-sized systems. This could change, how-
ever; demand for O&M with capital infusion is expected to grow
rapidly.
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Restructuring Manual
There are two categories of mergers and acquisitions and of
created water systems. The distinction depends on the ownership
of the acquiring or new system. The system, can be:
• a privately owned utility, or
i
• a publicly owned utility.
in Terminology
Industry professionals may use many terms to describe the
restructuring options described above. While regional usage varies
substantially and many different "terms of art" have developed,
the underlying concepts usually are the same. For example:
• Contract O&M may be referred to as satellite management,
third-party operator, service contract, turn-key operation, and
privatization.
• Contract O&M with "capital infusion" generally refers to the
provision of O&M services with working capital or new capital
investment. Capital infusion involving working capital may be
called "affermage." Under this approach, an operator performs
routine O&M and provides working capital required for a
system's daily operation. Capital infusion requiring new capital
investment may be called "concession." Under this approach,
an operator finances all costs for the installation of the system
(new works and renewal) as well as the working capital for
daily operations.
• A "big brother" arrangement is contract O&M provided by
civic-minded large water systems that may, or may not, charge
for these services.
• Acquisitions and mergers may be called satellite ownership,
takeovers, buyouts, consolidations, regionalization,
privatization, spaghetti systems, or consecutive /secondary
systems.
Pay particular attention to some subtle distinctions in
terminology. [
Satellite management is a form of contract O&M
where the contractor is a large water utility. Satellite
ownership refers to an asset transfer: a large utility
acquires a small utility, but does not interconnect the
two systems. I
Many terms
are used to
descibe
restructuring
options.
Some
differences in
terminology are
subtle.
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Restructuring Manual
Privatization can refer to either contract O&M or to
mergers and acquisitions, so long as the provider of
services or the acquiring entity is privately owned.
Restructuring
enables
systems to
provide safe
water and to
comply with
drinking water
regulations.
Restructuring
eliminates
non-viable
water systems.
Benefits of Restructuring
Restructuring can be used to benefit drinking water systems,
their customers, and State drinking water programs. (See Exhibit
4.) By increasing economies of scale, restructuring enables systems
to improve compliance with drinking water regulations and
provide better quality water to their customers. For example, in a
merger or acquisition, a small system, or group of systems,
becomes part of a larger one, thereby gaining the acquiring entity's
economies of scale. The small system's problems are solved more
easily by the larger system, which can afford to make necessary
improvements.
Restructuring is often the lowest-cost route to compliance
and safe water for system customers. Restructuring can reduce
systems' long-term operation costs and can save State resources
used for monitoring, inspection, and enforcement.
From your standpoint, the most important benefit of
restructuring is that it eliminates a non-viable water system. Non-
viable systems are
persistent
compliance
problems.
Enforcement may
bring them back
into compliance;
but before long,
they are out of
compliance again.
For example,
enforcement of
operator
certification may
ensure that a
certified operator is
in charge of a non-
viable system, but
there may be
turnover in that
position soon
thereafter.
1
(
Fe
cu
CO
Exhibit 4 I
Benefits of Restructuring 1
Benefits to
the system
ncreased Potential Improved Improved
economies long-term customer planning
jf scale savings service for future
operations
Benefits to
the State Regulator
wer Improved Resource Potential
stomer compliance savings reduction
mplalnts with In number
regulations of regulated
systems
Benefits to
the consumer
Improved Reduced Increased
water long-term reliability
quality cost of supply
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Restructuring Manual
Non-viable systems drain State drinking water program
resources year after year. Their problems are never completely
solved. The Washington State example illustrates how time-
consuming and difficult it is to ensure small system compliance.
Restructuring can remove non-viable systems from your inventory.
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Restructuring Manual
Part 3: How to Do It
State drinking water regulators can encourage and facilitate
restructuring, but usually do not actually implement it. Instead,
regulators rely on a local "champion" of restructuring (e.g., a utility,
a citizens group, etc.) to promote it. Nevertheless, regulators must
understand how restructuring works, so we have prepared the
following step-by-step guide.
Define the
problem as
broadly as
possible.
Stepl: Define the Problem
Everyone knows there is a problem. A system is not
complying with Federal and State drinking water regulations. It is
useful, however, to define the problem as broadly as possible, since
this often stimulates more creative solutions.
For example, assume that the immediate problem is a system
serving fewer than 100 customers that has an inadequate or
contaminated source. In many areas, there may be nearby systems
that have similar problems. Their problems may not be as severe;
they may not require immediate attention; but in the long run, a
solution that encompasses all of the potential problems in a region
is more likely to be successful and win widespread public support.
A feasibility
study should
examine all
possible
solutions to an
area's water
problems.
Step 2. Conduct a Feasibility Study
A feasibility study may be called many different names (e.g.,
"preliminary engineering report"). It is more than just the plans
and specifications for a system's design, however. A feasibility
study should include an examination of all possible solutions to an
area's water problems. It also should include estimates of what
each solution would cost. The impetus for a feasibility study varies
from State to State. In general, these studies are funded by the
State, FmHA, technical assistance providers such as RCAPs, and
local agencies.
Feasibility studies examine many issues such as:
• Physical condition of a facility. If a facility is substandard in
design or otherwise inadequate, physical interconnection or
acquisition without interconnection may be needed.
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• Geography. Interconnection of a non-viable system with a
viable neighbor may be unlikely if the distance between
systems is too great and interconnection too costly.
• Adequacy of supply. If the current source is not providing an
adequate water supply, some other source must be found. This
might require substantial investment or an interconnection with
a neighboring water system.
• Availability of contract O&M. Depending on the nature of the
problem, contract O&M may be a desired restructuring option.
• Availability of systems that might acquire! or merge with the
problem system. A feasibility study may determine whether
there are utilities that would merge with, or acquire, a problem
system.
• Prospects for the formation of a new water system. The
feasibility study may determine that nobody in the area is
willing to take over a non-viable water system. The study
might investigate the possibility of forming a new publicly
owned system. This can mean that a county decides to enter
into the water business or that the community decides to form a
public service district or its equivalent.
A typical feasibility study, such as the one done for North
Lakeport, will discuss:
• the boundaries and population of the service area;
• water supply requirements for existing populations and
possible new developments; ;
• adequacy of existing systems, including treatment, storage and
distribution;
• adequacy of supply and alternatives for new sources, including
the potential for interconnection;
• financing alternatives, such as grants, low-interest loans, and
opportunities for merger; and ;
• a recommended water supply plan.
i
Feasibility studies are useful for many reasons. First, they
compare the costs for a system to comply with regulations by
remaining independent with the costs of restructuring. A system
can be presented with the hard facts: either the system looks at
restructuring options, or it pays. The system will do what is in its
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best interest. Second, feasibility studies can determine which
restructuring option would be most effective. For example, the
study can indicate whether contract O&M or a merger or
acquisition should be promoted.
A champion is
a person or
organization
who proposes,
endorses,
pushes, and
defends a
restructuring
proposal.
StepS. Find a "Champion"
It is often difficult for the State regulatory agency to be the
major force behind a restructuring proposal. It is far better (if
possible) to find another person or organization who can become
the proposal's "champion." This person, preferably a local
representative, can propose, endorse, push, and defend the
restructuring proposal.
A natural champion, such as a citizens' committee, may emerge out
of the problem that created the need for restructuring. If not, the
State regulator can encourage the emergence of another person or
group as the champion. This could be a technical assistance
provider, a county government, or a system interested in
acquisition. Possible champions include:
• The owner/operator of the local system in trouble. This person
has a clear interest in the solution if the system is in trouble.
The more serious the enforcement pressure, the more likely this
person will emerge as a champion of restructuring.
• The owner/operator of the acquiring system (in the case of a
merger of acquisition). This is a second-best alternative since
the owner/operator of an acquiring system may be seen as an
outsider. Nevertheless, it may be an asset to have this person
actively supporting the change.
• A county or regional government. In States with strong county
or regional governments, a non-viable small system may be
seen as a threat to a whole region. In such cases, the county or
regional government may step forward as a champion of
reform. This occurred in the North Lakeport example.
• A citizens' committee. If the problems with the non-viable
system are severe, citizens may organize for change. This is an
ideal source of support for restructuring.
• Volunteer support groups. These groups, which can be
effective advocates, include: the League of Women Voters;
service organizations such as the Rotary Club; and economic
organizations such as the Chamber of Commerce.
• A technical assistance provider. Examples are State Rural
Water Associations or Rural Community Assistance Program
affiliates. These groups understand water system problems. If
they are convinced that restructuring is required to cure the
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problems of a non-viable system, they can be effective
advocates for change.
A financial aid program. Money talks. State loan programs and
the State Farmers jHome Administration (FmHA) do not like to
lend to non-viabte systems. They will withhold support unless
a more permanen^ solution to a system's problems is found.
Thus, they can be effective allies in promoting restructuring.
Choosing a
restructuring
option has
technical,
administrative,
and political
dimensions.
Technical
Dimensions
relate to the
physical
characteristics
of the system.
Step 4. Choose a Restructuring Option
I
The most appropriate restructuring solution should come
out of the feasibility study. (If no feasibility study has been
conducted, this section will help you decide which options might
be most effective.) Choosing the most appropriate restructuring
option has technical, administrative, and political dimensions.
Each situation is unique, and this manual can only provide general
guidelines to help you think through the choices in each case.
Often, options will be chosen with the full participation of the
"champion" and other local officials. (See Exhibit 5 for a list of
advantages and disadvantages for each option.)
Technical Dimensions relate to the physical characteristics of
the system. For example, if the problem simply is a lack of a
qualified operator (while the physical condition of system is
adequate), then contract O&M is the logical choice. The remaining
issue would then be to locate an appropriate provider of contract
O&M services and to determine whether the non-viable system can
afford these services:.
If the problem is greater than the lack of a qualified
operator, then the issues become more complicated. In general, as
the problems becomje more severe—a water supply of inadequate
quantity or quality, k deteriorated physical plant, significant lack of
managerial or technical capability—some form of merger or
acquisition becomes more likely. Once merger or acquisition is
chosen, the questions are:
i
• What form of merger or acquisition is most appropriate?
• Is interconnection feasible?
• If interconnection is not feasible, will managerial consolidation
be successful?
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Restructuring Manual
Contract O&M
Contract O&M with
Capital Infusion
Satellite Management
Public Mergers/
Acquisitions
Private Mergers/
Acquisitions
Exhibit 5
Advantages and Disadvantages
to Each Restructuring Option
Increases economies of scale
Allows for local control
Increases level of technical expertise
Allows for flexibility of service
Solves more severe system problems
Increases access to capital
Allows for some local control
Increases economies of scale
Allows for some local control
Increases level of technical expertise
Allows for flexibility of service
Increases economies of scale
Increases level of technical expertise
Solves more severe system problems
Increases access to capital
May increase eligibility for public funding
Reduces size of regulated community
Increases economies of scale
Increases level of technical expertise
Solves more severe system problems
Increases access to capital
Reduces size of regulated community
DISADVANTAGES
May be expensive
Cannot remedy severe system problems
Availability of service companies varies
May be expensive
Availability of service companies varies
May be expensive
May not remedy severe system problems
Availability of service companies varies
Communities may fear loss of local control
Loss of local control
Formation of new system can be complex
Financial disincentives may deter
Existing franchises and service areas may
impede
Compensation for acquisitions may be
inadequate
Loss of local control
Formation of new system can be complex
Financial disincentives may deter
Ineligible for public funding
Existing franchises and service areas may
impede
Compensation for acquisitions may be
inadequate
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Making these decisions often requires that you refer to
studies that may have been done by or for the problem system. For
example, you may be interested in recent engineering studies that
identify the design and operational problems facing the system.
Other data that may be useful include:
• local land use plans and studies,
• analysis of water quantity (particularly if you are in one of the
Western States), and l
• agreements between systems that may bear on the choice of a
solution (e.g., a joint service agreement between this system and
a neighboring system or a franchise or exclusive service area
agreement). '
Administrative Dimensions refer to your authority and
ability to influence the outcome of restructuring. As we
emphasized earlier, your enforcement capabilities give you great
power to get a system's attention. At a minimum, you can get them
to listen to alternatives. In some cases, you can make continued
operation of a system so uncomfortable that jthe owner/operator
will willingly entertain restructuring alternatives.
Other types of authority vary by State. Connecticut, for
example, can compel the takeover of systems that have persistently
failed to comply with drinking water regulations. Washington
State can ask a county water district to provide satellite
management or satellite ownership solutions.
Political Dimensions refer to the willingness of an
independent water system to consider alternatives that might
threaten its independence. Contracting for O&M services is a fairly
minor change, and most systems will not view this type of
restructuring as a threat to their autonomy.
In a recent EPA-sponsored survey of State officials'
experience with restructuring, 79 percent of the respondents cited
"ideological/political opposition" as the greatest impediment to
restructuring. (See Exhibit 6.) Seventy-five {percent of the
respondents cited "concern over loss of control" as an impediment.5
State officials all know stories of situations yhere local autonomy is
so important that some systems will not accept help from a
neighboring system even when this help is offered free of charge.
In Western States, loss of autonomy is also often linked to the loss
of water rights that may attach to a system. |
Administrative
Dimensions
refer to your
authority and
ablility to
influence the
outcome of
restructuring.
Political
Dimensions
refer to the
willingness of
an independent
water system to
consider
alternatives
that might
threaten it's
independence.
SMary Ann Hill, A Study of Managerial and Operational Changes for Small
Water Systems to Improve Long-Tenn Compliance with Drinking Water Regulations, a
paper submitted to the U.S. EPA, Office of Drinking'Water, April 9,1991, p. 24.
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Restructuring Manual
Another political dimension is inertia. Most citizens do not
perceive the need to take action to improve their water systems.
Safe drinking water is often taken for granted. If there are no
serious outbreaks of acute illness, and if there are no problems with
taste, odor, or color, most citizens feel that no action is needed. In
the survey of State officials cited above, 67 percent cited "no
perception of problems now" as an impediment to restructuring.
The importance of these impediments means that your role
in promoting restructuring is not limited to presenting options.
You also must be able to understand and analyze the barriers to
change so that you can develop a plan to overcome them.
You must
understand
and analyze
barriers to
change,so
you can
develop and
plan to
overcome
them.
Step 5. Develop a Plan to Sell the Concept
Once an option has been chosen, there must be a plan to get
the change adopted. Inevitably you will encounter some resistance
to the restructuring solution. This resistance can be overcome by a
thoughtful plan that is carefully implemented by a local
"champion" with the State drinking water program's support.
Impediment
Ideological/political
opposition
Concern over loss of
control
No perception of
problems now
Lack of information
on restructuring
Lack of adequate
financial resources
No apparent cost
savings or benefits
Lack of enabling
legislation
Exhibit 6
Impediments
to Small System Restructuring
Y///////////////////////* 79
V///////////////7/7/1 67
75
y///////////////*
28
54
_L
20 40 60 80
Percent responding
100
Source: Report prepared by Ms. Mary Ann Hill, April 9, 1991.
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There are generic strategies for dealing iwith three of the
most common barriers: ;
I
• political or ideological opposition, i
• concern over loss of control, and
* lack of concern about the problem.
The first step is to convince the system owners, operators,
and customers that there is a problem. ;
1. There is a serious public health problem. Mergers or
acquisitions are not proposed unless there !are serious problems
with the water system. The system must be a persistent violator
of State regulations. Even if this has not resulted in outages, or
in problems of taste, odor, or color, there must be a serious
public health problem. That problem must be communicated to
the public in terms of concrete, tangible issues that citizens can
understand. The State drinking water program could help by
designing a risk communication program for the system.
2. Failure to act has costs. Compliance is not| optional. Fines and
penalties might be imposed for persistent violations of State
regulations. Also, there are costs of inaction—e.g., loss of grants
or loans that might be forthcoming or a higher cost for fire
insurance if restructuring is not adopted. These costs may be
passed on to consumers in the form of higher water bills.
i
3. Failure to act can affect homeowners and buyers. Most real
estate loans require a review of the status of the water supply as
a condition of loan approval. A home that is served by an
inadequate water system may have to be sold at a reduced
price, and the purchaser may be restricted in obtaining
financing. This concern is particularly relevant to homeowners
served by small water systems. Frequently, they discover their
system is out of compliance when their houses are put up for
sale.
The second step is convincing the owners, operators, and
consumers that restructuring has benefits.
1. Restructuring mav result in a long-term cost reduction.
Restructuring almost always means that non-viable systems are
able to increase their economies of scale. For this reason,
restructuring is often the most cost-effective way to meet new
and existing requirements. It should be stated again that
compliance with State and Federal regulations is mandatory;
therefore, the question is how can a system comply without a
severe increase in costs. Customers might face higher water
Convince
system owners,
operators, and
customers that
a problem
exists.
Convince
system owners,
operators, and
customers that
restructuring
has benefits.
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Restructuring Manual
bills, but the bills will be less than if restructuring had not
occurred. Some customer costs that could be reduced because
of restructuring are the cost of fire insurance and, in some cases,
the expense of bottled water.
2. Restructuring results in safer drinking water. Tell the public
about the safer drinking water. Explain the reduction in risk.
(See the discussion of risk communication, above.)
3. Restructuring increases the reliability of service. For people
who have experienced water leaks or outages, this is especially
important. Restructuring can enhance customer service and
ensure a dependable supply of water.
The third step is addressing the concerns over local political
differences or loss of autonomy.
Address
concerns over
political
differences or
loss of
autonomy.
1. If these concerns are significant, take steps to address them. Get
the local officials to define the problem—to explain what a loss
of autonomy means.
• Is it loss of jobs? Often a guarantee by the acquiring entity to
retain personnel will solve the problem.
• Is it a loss of control over rates? A rate agreement with the
acquiring entity may help to ease these concerns.
• Is it fear of a loss of political control? Sometimes a seat (or
seats) on the board of directors of the acquiring entity will
assure citizens that their locality will still have a voice in the
future of their water system.
2. Make the loss of autonomy more acceptable through grants.
loans, and other tangible benefits. Some loss of control is
inevitable in a merger or acquisition. The trade-off, however, is
dear. Control is exchanged for a better, more professionally
managed water system, often at lower cost.
• If your State has a grant or loan fund, try to persuade the fund
directors to offer grants or low-interest loans to the system.
These grants or loans should be contingent on successful
adoption of the restructuring options being proposed.
• If the acquiring entity is privately owned, and if the existing
water system has any value, there may be a one-time payment
for the existing system.
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There are benefits for when a community has a reliable source
of safe drinking water. As previously mentioned, some
mortgage companies (particularly Federally insured lenders)
require proof of a system's compliance With all applicable State
and Federal regulations. A viable water supply system
therefore can make it easier to buy and sell property.
Consequently, homeowners may provide valuable support.
Restructuring may result in long-term savings for system
customers. The new rates, however, must be compared with
the rate increases that would have occurred if the restructuring
had not taken place. Again, stress that compliance is not
optional. In most cases, rates would increase as a result of the
1986 SDWA Amendments. The initial rate may go up, but in
the long-term, the increase will be far less than if there had been
no restructuring. This argument needs to be refined and
carefully communicated to the public by the advocates for
restructuring.
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Restructuring Manual
The drinking
water
regulator
plays an
important role
in restructing.
Part 4: Role of the Drinking Water Regulator
The drinking water regulator plays an important role in
encouraging restructuring. Generally, the regulator will not act as
the "champion," who proposes a restructuring, endorses it, pushes
it, and defends it. However, the regulator can assist the champion
in a number of ways. By examining the PWSS inventory, for
example, the regulator can rank the systems that need restructuring
and determine which restructuring options would be most
effective. The regulator also can suggest that a feasibility study be
conducted and can, in most cases, set the specifications for the
study (e.g., determine the most cost-effective way to interconnect
system X with system Y). And probably the most important job of
the regulator is to aggressively enforce drinking water regulations.
When non-viable systems are told that non-compliance is simply
not an option, they will be more likely to consider restructuring.
The following are some specific ways that regulators can
encourage restructuring.
Look at
compliance
trends and
determine
which
restructuring
options might
solve your
problems.
Step 1. Analyze the Nature of Compliance Problems to
Determine Which Restructuring Options Might Be Effective.
We assume that, as a regulator, you are responsible for some
group of water systems in a county, district, or region of your State.
You need to look at the systems in your jurisdiction and analyze
their problems. Look at compliance trends and ask the following
types of questions:
• Are there areas where many systems violate State drinking
water regulations?
• Are there clusters of systems with problems?
• What are the most common types of violations?
• What types of violations are of most concern to you?
Monitoring and reporting? MCL? Public health or sanitary
code violations?
• Is non-compliance higher for ground-water systems or for
surface-water systems?
• How many systems are publicly owned? How many are
privately owned? Are compliance problems associated with
ownership type?
• What percentage of small systems are mobile home parks?
What percentage are homeowners associations or cooperatives?
Are compliance problems associated with either type of system?
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Restructuring Manual
• Are non-compliance problems concentrated in rural areas, or
suburban areas? !
• What causes non-compliance? Inadequate system design?
Inadequate maintenance? A lack of qualified operators?
• Which systems will be most affected by implementation of the
SDWA Amendments?
The answers to these questions will, in part, determine which
restructuring options are best suited to your area.
Step 2. Use Your Influence to Have a Feasibility Study
Conducted.
As discussed in Part 3, a feasibility study may be crucial to
the success of restructuring. You can suggest that a feasibility
study be conducted and you can help determine what information
will be included in the study. Be sure the geographic area covered
by the study is broad enough; you will want to look at more than a
few systems. You also can work to obtain funding for a study;
funds may come from the State, FmHA, or groups such as RCAPs
orNRWA.
You will need to consider several factors to determine what
type of restructuring would work best in a particular situation.
Some of these factors will be examined in a feasibility study. They
include:
• Physical condition of the facility,
• Geography,
• Adequacy of supply,
• Technical expertise,
• Grants and Loans6,
• Availability of contract O&M,
• Availability of systems that might acquire or merge with the
problem system,
'If fixing the system's problems will require major capital investment,
and if grants or loans would facilitate the system's viability, check Federal grant
programs and your State grant or loan program (if one exists). Most grant and
loan programs fund publicly owned systems. If this is the case in your State,
acquisition by a publicly owned system or the formation of a new publicly
owned system would enhance the prospects of success. Contract O&M with
capital infusion is another option you might explore in this case.
28 i
Help promote
and shape a
feasibility study.
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Restructuring Manual
Prospects for the formation of a new water system, and
Existence of franchises or exclusive service areas7.
Be prepared to
use
enforcement to
encourage
restructuring.
Step 3. Use Your Enforcement Authority to Promote
Restructuring Options.
In general, the authority to promote restructuring is basic to
your role as a regulator. You have the authority to make it clear to
systems that non-compliance with State and Federal regulations is
not an option. You must be willing to use enforcement. The threat
of enforcement can be a powerful incentive to the system to
consider new ways of doing business. The success of the State
depends, in part, on its willingness to enforce against a non-viable
system.
Promoting restructuring requires the use of incentives and
penalties (often called the "carrot and stick" approach). Incentives
could be the benefits of restructuring described in Part 3. An
important penalty is the threat of enforcement. This threat has to
be made credible by a willingness to use enforcement when
necessary.
Types of actions that you can use to persuade the system and
its customers of the need to consider a restructuring option include:
• Notices of violation. This is the first step in the formal
enforcement process. It should get the attention of the system,
and if it is pursued in conjunction with public notification
(where applicable), it can also get the attention of the
community that is served by the system.
• Fines and penalties. This is the result of any formal
enforcement process. They are easier to impose if your State
has an administrative penalty authority, but even if authority is
not available, there still are ways to impose fines and other
penalties. (This should be used only after proper notification
and time to correct violations.)
• Other enforcement measures. One enforcement action,
commonly used in areas of rapid growth, is a ban on new hook-
ups. This mechanism is usually available to all State drinking
water personnel. One of the most common weaknesses of non-
viable systems is inadequate source of Supply. If the source or
distribution system is inadequate, it certainly will not support
new hook-ups. This measure should not be used unnecessarily
'If there is an existing franchise or exclusive service area where the non-
viable system operates, the PUC may need to determine if it is necessary to
transfer the rights to provide service to the new entity.
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to coerce a system; however, once action is taken, promoting
restructuring may become easier.
Maintaining enforcement pressure is likely to make a system
more willing to consider various restructuring options.
Step 4. If You Need More Authority to Promote Restructuring,
Ask for It. i
There may be types of authority that would be useful to
promote certain types of restructuring. Most States, for example,
do not have explicit authority to order a merger or acquisition
when a system is non-viable. Most States do not have the financial
incentives to encourage counties or other sub-State governments to
provide satellite management or satellite ownership services. Most
States do not have public utility commissions (PUCs) that have
established legislation to ensure privately owned water systems an
adequate return on their investment if they acquire a non-viable
system. (Such legislation should be considered to provide the
proper authority.)
Other components of State drinking water programs may
help promote restructuring, even though that is not their primary
purpose. For example, operator certification regulations that
extend to all public water systems will promote the use of contract
O&M. Small systems that heretofore did not need a certified
operator will suddenly find that they need one. Since they can't
afford one full time, they are likely to contract for O&M services.
Another example is administrative penalties. Systems that must
pay administrative penalties may take enforcement more seriously
and may consider restructuring sooner than those that do not face
such penalties. :
How to get the authority you may need is beyond the scope
of this report.8 Remember, however, that while these types of
additional authority may be useful, they are not always necessary.
Much can be accomplished while you are waiting for additional
authority. I
The bottom line here is simple: be creative. Don't assume
that you don't have the authority. Many of your counterparts in
other States, with no more authority than you, have achieved
substantial results for the systems in their jurisdictions. Try it.
Various types
of authority will
help you
promote
restructuring.
•For more information on State authority to promote restructuring, see
Ensuring the Viability of New, Small Drinking Water Systems, (EPA-570/9-89-004)
Improving the Viability of Existing Small Drinking Water Systems, (EPA-570/9-90-
004). !
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Restructuring Manual
Promote
Restructuring
among local
officials,
citizens, and
water systems.
Step 5. Discuss Restructuring with System Owners, Boards of
Directors, and Citizens' Groups
As a State regulator, it is appropriate for you to meet with
different groups to build support for actions that will improve
compliance. This may require that you meet with the owner(s) of
the system, boards of directors, town councils, or citizens' groups.
Any one of these may be the critical group that will lead the fight
for restructuring.
At these meetings, you can discuss the benefits of
restructuring. Be sure to emphasize the effects of poor water
quality on real estate. Most real estate loans require a review of the
status of the water supply as a condition of loan approval. A home
that is served by a troubled water system may have to be sold at a
reduced price and the purchaser may be restricted in obtaining
financing. Discussing this may create enough public support to
evoke a change, which could come in the form of restructuring.
The PUC can
be a strong ally
in promoting
restructuring.
Step 6. Work with the PUC to Promote Restructuring.
You should work closely with your State PUC to encourage
restructuring. Most PUCs have jurisdiction over investor-owned
systems and publicly owned systems serving outside their
municipal boundaries. The number of PWSs under PUC
jurisdiction varies by State.
PUCs have different methods of convincing systems to
restructure. The threat that they will not grant rate relief (i.e., grant
petitions for rate increases) and, in some cases, the threat of
certificate revocation is their form of "enforcement." PUC audits
are a powerful force to drive systems to restructuring, particularly
contract O&M.
PUCs also can make mergers or acquisitions more attractive.
Privately owned systems might consider this option if they feel
they can earn the necessary return on their investment. The PUC
should consider an acquisition adjustment or a slightly greater rate
of return as an incentive for privately owned water systems to
acquire other troubled systems.
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Step 7. Implement the Change.
The final step is implementation. It consists of the standard
tasks used in implementing any new facility plan. These include:
• Obtaining the necessary approvals. If any of the systems
involved hi the restructuring are privately owned, State PUC
approval may be required. Also, if construction is required, the
State drinking water program will requite approval of the
engineering plans and specifications.
• Obtaining financing. Restructuring may be facilitated by grants
or loans. An important step in the process is investigating all
financing sources to minimize the impact on the local ratepayer.
• Helping systems approach funding sources. As a State official,
you are more likely to know the procedures for approaching
funding sources. If an important funding source is a State grant
or loan program, you may be able to influence funding
decisions by explaining how restructuring promotes
compliance. ;
• Approving plans and specifications. If part of the restructuring
involves engineering changes—e.g., securing a new source,
making changes to plant or equipment, and so forth—a plan
review is usually required. Facilitating this review will enhance
the probability of success for the restructuring.
. Finding sources of technical assistance. The technical assistance
providers in your State (such as the NRWA and RCAPs) may be
willing to help in the restructuring effort.
• Supporting regional planning activities. As a State official, your
presence at community meetings to resolve small system
problems will be greatly appreciated and might persuade
people that restructuring is an attractive option.
You can be a
great help to a
system when it
comes to
implementing
the solution.
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Restructuring Manual
Part 5: Trouble Shooting
Each system is unique. Each State is unique. Given these
conditions, this how-to manual must necessarily be general in
scope. We cannot anticipate every problem that might arise.
Nevertheless, we can consider several issues that have been faced
by your counterparts in other States. For each, we will present
suggested solutions.
Barrier
Liability Issues. For example, the available O&M service
providers fear that they will be held liable for non-
compliance if their customers do not implement their
recommendations.
Solution
Because tort law is different in each State, liability issues will
vary; every case is different. Some O&M service providers
have a standard indemnification clause. This clause, when
inserted into their contract with all customers, will mitigate
or remove the threat of liability. For a sample clause, see
Appendix B. O&M service providers who remain concerned
about this issue should seek legal counsel.
Barrier
Historical Antagonisms. Tiny Rock has a publicly owned
non-viable system. The optimal solution is a hook-up to the
publicly owned system in Big Rock. Tiny Rock and Big
Rock are historical football rivals. Their teams play each
other on Thanksgiving. The towns dislike each other.
Solution
This is not a trivial problem. It can be a substantial barrier.
Explore the extent of the dislike. Would each town prefer to
spend substantial additional resources just to maintain their
independence? If so, is there an alternative for Tiny Rock
that does not involve Big Rock? Perhaps Huge Rock could
consolidate with Tiny Rock. Huge Rock may not be the best
solution, but it may be better than having Tiny Rock remain
independent.
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Restructuring Manual
Barrier
Fear of Losing Local Control. A community may be
interested in restructuring, but fears losing local control.
People in the community are reluctant to allow an
"outsider'7 to run their water system.
Solution
Sometimes a system's problem can be corrected by using
contract O&M, or other options that d
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Restructuring Manual
customers, but not for additional hook-ups.
Barrier
Rate Increases: Public Reaction. A system may be non-
viable because its owners or managers kept rates so low that
they could not afford necessary improvements or
maintenance. In such a case, restructuring may lead to a rate
increase.
Solution
Compliance is not optional. The system is in violation of
Federal and State regulations. Explain that the system must
comply and that the question is how to do so most cost
effectively. Then explain the benefits of restructuring.
(Usually, it is the least costly option.)
Barrier
Rate Increases: PUC Resistance. If a non-viable system
requires substantial investment to make it viable, and if the
previous owner was not using full-cost pricing, the privately
owned acquiring entity may need a substantial rate increase.
Most PUCs have concern over "rate shock"; they are
concerned about the magnitude of the increase (i.e., the
percentage), rather than the actual size of the water bill.
Solution
This is a complex issue for PUCs. For example, should the
existing customers of the acquiring system be forced to
subsidize the investment required to fix the acquired
system? Drinking water regulators should work with the
PUC to find an equitable solution. From the standpoint of
the regulator, subsidy by existing customers of the acquiring
system may be reasonable and could be encouraged.
Alternatively, the PUC might be encouraged to agree with
the acquiring entity on a long-term phase-in for large rate
increases. Such a phase-in would avoid rate shock while
ensuring the acquiring system an adequate revenue stream
to fund its debt service for the improvements.
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Restructuring Manual
Barrier
Valuation of a System for Acquisition and the Rate Problem.
If the acquiring entity is privately ownbd, its procedures for
valuing the assets of an acquired entity are probably
regulated by the PUC. For a variety of reasons which are too
complicated to discuss here, the acquisition may result in a
rate base that will not support the necessary investment in
the non-viable acquired system. Alternatively, if the
acquiring system is allowed to recover the costs of the
necessary capital investments, this may be seen as being
inequitable for old or new customers. I
Solution i
This is a complicated issue. There are many types of
solutions. In general, the PUC should be encouraged to
enable the acquiring entity to recover the costs of repairing a
non-viable, acquired system.9
Barrier
Valuation of a System for Acquisition: Paying Too Much. If
the acquiring entity is a publicly owned system and the non-
viable system is privately owned, most acquiring systems
are unwilling to pay high prices to an owner who clearly has
shirked his responsibility.
Solution
State drinking water regulators can help to solve the
problem. Enforcement pressure on the non-viable system
will enhance the bargaining power of ^he acquiring system.
'For more information on the problem and potential solutions see
Patrick C. Mann, G. Richard Dreese, and Miriam A. Tucker, Commission
Regulation of Small Wafer Utilities: Mergers and Acquisitions (Columbus, Ohio:
The National Regulatory Research Institute, October,; 1986), pp. 4-9.
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Restructuring Manual
Barrier
Resistance from Consulting Engineers. Some consulting
engineers are professionally oriented toward structural
solutions and may not be familiar with restructuring
options. Consequently, they may be inclined to recommend
technical solutions involving construction. Also, they may
not be paid enough to examine institutional alternatives
such as restructuring.
Solution
State drinking water regulators must be aware of this
potential problem. Many systems see their consulting
engineer as a trusted advisor on a variety of issues. The
perspective of the consulting engineer must be explained to
the system. In rare cases, you may want to recommend
changes in contracting procedures whereby work on a
feasibility study renders the consultant ineligible for work
on design or construction work, on the grounds of conflict of
interest.
Barrier
Bankruptcy. Most State regulators are unfamiliar with
bankruptcy proceedings. Nevertheless, the solution to a
non-viable system problem may lie in participation in these
proceedings.
Solution
Seek assistance from the U:S. Trustee in your jurisdiction.
The U.S. Trustee is a Department of Justice official who is
responsible for bankruptcy administration. He has a legal
obligation to protect the public interest, and there is a clear
public interest in creating and maintaining a viable system
that will provide safe drinking water. He can explain
bankruptcy proceedings to you, and he has standing to
petition the bankruptcy court on behalf of the public.
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Restructuring Manual
Barrier
Loss of Municipal Revenue. Some towns use the revenues
from their water systems for other town services. If the
municipally owned system is non-viable, and if the only
solution is acquisition by another system, the town will lose
the revenue from that system. ;
Solution
First, if the system is non-viable, the town may be convinced
that the system is a headache. In such a case, the loss of
revenues is offset by the loss of a problem. Second, if the
acquiring system offers to pay for the assets of the non-
viable system, there may be a substantial one-time payment
to the town, converting a liability into a liquid asset.
Barrier
Fear of Land Use Planning or Annexation by County.
Residents served by non-viable systems often are very
independent. Their systems are non-viable, in part, because
they are opposed to government interference in their affairs.
One of the most common forms of acquisition—
regionalization by a county or regional government—is an
anathema to these people.
Solution
This is a difficult case. First, you can look for alternatives
that avoid the threat of regional planning or annexation. For
example, you can suggest the combination of two or more
small, non-viable systems into a single, larger, viable system.
Second, you can point out the enormous cost if a non-viable
system tries to go it alone. i
In this case, there may be no restructuring. Some citizens are
willing to pay a high price for their independence. If they
are willing to spend what is necessary to create a viable
system, the problem is solved.
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Where to Go for Help
References
If you get a start on restructuring and run into problems,
you may wish to telephone someone with more experience. What
follows is a list of people experienced with restructuring who have
agreed to share this experience with you. For general information
about restructuring, you should call the EPA Mobilization Manager
in the Enforcement & Program Implementation Division of
OGWDW, Roger Barnes, at 202-260-4194. Other people to call are:
Mr. Rick Albani
Director of Rates/Engineering
General Waterworks
2004 Renaissance Blvd.
King of Prussia, PA 19406
215-278-6000
Specialty: Contract services for water
systems and PUC restructuring efforts
in Connecticut.
Mr. John Squires
Director
Community Resource Group
2705 Chapman Road
Springdale, AR
501-756-2900
Specialty: A technical assistance
provider's perspective on
restructuring.
Mr. Gary Brown
Utilities Director
County of Lake
255 N. Forbes
Lakeport, CA 95453
707-263-2273
Specialty: Restructuring efforts in
California, particularly Lake County.
Mr. Dick Coddington
Consultant
4850 Riva Ridge Road
Rapid City, SD 57702
605-348-7905
Specialty: A State regulator's
perspective on restructuring.
Mr. Steve Schmidt
Vice President
American Commonwealth
Management Services Company
P.O. Box 460
Hershey, PA 17033
717-531-2721
Specialty: Contract services for water
systems and restructuring efforts in
Pennsylvania.
Mr. Bill Thatcher
Utilities Director
Utilities Department
212 W. Main St.
Inverness, FL 32650
904-726-2777
Specialty: Restructuring efforts in
Florida from a system operator's
perspective.
Mr. Steve Walden
Chief, Surveillance and Technical
Assistance Branch
Texas DOH
Division of Water Hygiene
1100 West 49th Street
Austin, TX 78756
512-458-7497
Specialty: A State regulator's
perspective on restructuring,
particularly efforts in Texas.
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Risk Communication
One of the issues that arose many times in this manual is
risk communication. Several EPA programs have already
established a substantial body of literature on this subject. For
more information, call the EPA Risk Communication Hotline at
202-260-5606. !
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Restructuring Manual
Appendix A
Ramifications of Annexation
By Larry Brown
INTRODUCTION
Consolidation is the buzz-word heard
throughout the country as the ready answer
to compliance and management related
problems of rural water systems. This is
particularly true of the federally financed,
nonprofit rural water systems created to
provide water service to rural communities
under the Consolidated Farm and Rural
Development Act Due to tow population
density, expansive irrfrastructure, current and
impending regulation, and diminishing sources
of financing, consolidation seems to be the
answer to providing a central water system
for improving efficiency and economy of water
service in rural areas. And while small system
mergers typify the consolidation concept,
annexation of small systems by municipal
corporations might seem to be the ultimate
means of centralizing operations to overcome
deficiencies in rural water operations. The
purpose of this article is to analyze the
feasibility and ramifications of municipal
annexation of rural water systems.
DEVELOPMENT OF PROBLEMS
IN RURAL WATER SYSTEMS
In 1961, Congress authorized the Fanners
Home Administration to extend low interest
water facilities loans and grants to non-farm
rural residents. One purpose of this legislation
was to lower the costs per user by establishing
a larger customer base per system, thereby
further securing federal loans. The primary
vehicle for such rural water development was
the nonprofit water system which includes
member owned associations, corporations and
cooperatives. Once such funding was autho-
rized, a proliferation of rural nonprofit, member
owned water systems followed
Although the customer density of these
expansive rural systems was generally not
conducive to good economy, tow interest loans
and grants were available to make up the
difference. Subdivision of rural lands into
housing and commercial/industrial develop-
ments further enhanced financial manage-
ment, making the rural water system a viable
means of meeting the service needs of the
rural community throughout the 1%0's and
70's. Then times began to change. The federal
government began to realize the severity of
the national budget deficit problem. Federal
loan and grant programs for rural development
were among those programs targeted for cuts
in order to reduce the federal deficit.
Consequently, loan and grant allocations were
reduced, and toan interest rates were increased
for rural community development projects,
thereby further reducing the economic feasi-
bility of many rural water systems. These
funding problems were compounded by the
enactment of the Safe Drinking Water Act
Amendments of 1986. These amendments
came with the promise of increased regulations
certain to impose higher administrative, capital,
and operational costs on rural water customers.
Aside from spreading problems on the
national level, local issues continue to offer
challenges to the integrity of rural water system
economics. One of the most significant
challenges to rural water systems continues
to be municipal encroachment
ANNEXATION
Annexation is a term used to describe the
process by which municipal corporations
acquire additional tax base. The process of
annexation involves the extension of municipal
territorial boundaries into outlying rural areas.
Due to economic considerations, municipal
corporations usually only annex areas where
there is sufficient financial support for services
to be provided, ie. more densely populated
residential or commercial/industrial areas. This
financial support is generally provided by the
additional tax and utility rate base acquired
as a result of annexation
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Restructuring Manual
Rural development was greatly stimulated
by the provision of water and electricity. And
because people living in urban areas have
sought a better quality of life, many have
moved to the rural areas to escape the hustle
and bustle of urban living. Most of the move-
ment into the rural areas occurs adjacent to the
urban work centers, creating significant growth
and development for rural water systems. This
growth provided many rural water systems
with improved economies of scale, the same
type of growth and development that ulti-
mately attracts municipal annexation. So the
conflict exists. Rural water systems have devel-
oped higher density service areas proximate to
municipal boundaries, thereby enhancing the
rural system's economy. Municipal systems
recognize these areas proximate to their
boundaries as a beneficial supplement to their
existing tax and utility customer base. There-
fore, municipal encroachment became a poten-
tial problem as municipal corporations took
prime service areas from rural water systems
thereby reversing the systems' efforts to
enhance their economic viability.
ENCROACHMENT -vs-
TOTAL ACQUISITION
In order to analyze the effects of annexation
upon rural water systems we must first recog-
nize that annexation generally occurs in one of
two ways. A municipal corporation may take
only parts of a rural system through the annexa-
tion process or may acquire the entire system
by annexation or some other similar control
measure. This imparts similar benefits or prob-
lems to the rural system as does total annexa-
tion. For the purposes of this article, the term
used to describe partial annexation is
encroachment and total annexation/control is
acquisition.
CASE STUDIES
The following examples were selected as a
means of demonstrating the effects of:
1) Total acquisition of a rural system by a large
municipality as opposed to total annex-
ation;
Each of these cases are unique. They do,
however, demonstrate the affects of annexation
in terms of typical benefits and detriment.
Case Study No. 1
Municipal corporation: population approx-
imately 50,000
Rural water system: approximately 300
connections
Area of contention: total system
Method of valuation: outstanding indebtedness
Results: Due to lack of quality water supplies
and extensive costs of supply alternatives, the
rural water system sold its system to the munic-
ipal corporation.
Analysis: The rural water system's initial alter-
natives included extensive treatment of existing
groundwater sources, participation in a
regional wholesale surface water supply corpo-
ration, or the sale of its system to the large
neighboring municipality. Prior to acquisition,
the municipality was not willing to sell water to
the rural water system because of the munici-
pality's desire to control growth and develop-
ment on its boundaries. The rural water system
chose to sell its entire system and turn its opera-
tion over to the municipality. The advantages
gained by the rural system were as follows:
a. The rural system avoided significant delays
in obtaining alternative sources or treatment
of water.
b. The system gained the benefit of a larger and
better qualified personnel resource and
maintenance support facility.
c. The system gained the advantage of a large,
highly rated financing program, which
included low interest rate tax exempt bond
packages.
d. The system gained the consistency of supply
provided by a stable surface water supply
and elevated storage.
2) Encroachment of a large municipality on a
rural water system where no compensation
was provided.
e. Although the system is operated indepen-
dently of the municipal system, rates were
immediately stabilized by pooled resources,
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Restructuring Manual
such as supply facilities, maintenance facili-
ties, administrative overhead, etc.
Disadvantages of this acquisition were:
a. Loss of control.
b. Uncertainty about long-term stabilization of
rates as the system is annexed piecemeal.
If total annexation had occurred in this
example instead of the system acquisition, the
rural water system customers would have
immediately become municipal constituents,
gaining representation in the municipal
government. However, the rural service
area would have also been subject to new facili-
ties standards, requiring provision of fireflow
• capability.
Annexation would have also made the rural
customers subject to municipal taxes. Costs
would have increased slightly to all municipal
water customers to meet new facility standards
with gain of no significant benefit in domestic
water service to the rural community. The
independent acquisition and operation of this
rural water system by the municipality actually
provided a tangible benefit to the rural custo-
mers who would have been slightly negatively
affected by total annexation.
Case Study No. 2
Municipal corporation: population approx-
imately 50,000
Rural water system: approximately 400 con-
nections
Area of contention: 31 connections, densely
associated
Methods of valuation: two alternatives offered
for system appraisal:
a. First cost method — total original cost of
facility in question, plus 10 percent admini-
strative add-on, plus the value of the debt
interest paid over the expended life of the
facilities in question.
b. Replacement cost method — cost of facili-
ty's installation at today's costs of labor and
materials, plus 10 percent administrative
add-on, minus today's cost of installation
depreciated (straight-line method over 40
year useful life) over expended life of exist-
ing facilities.
Results: The rural water system accepted
Method No. 1 for a cash settlement of approx-
imately $19,000.
Analysis: The system received $19,000 to
apply to outstanding debt or use for capital
improvements. The system lost a prime, dense-
ly populated service area which could not be
immediately replaced. The loss of a relatively
low maintenance per customer service area
raised the average cost of operations and main-
tenance per customer. The total revenue lost
from the 31 connections over the remaining 20
years of FmHA indebtedness was approxi-
mately $175,000 assuming no immediate
replacement of users in similar service condi-
tions. Future growth potential for the lost ser-
vice area was not considered in determining
lost revenues.
Case Study No. 3
Municipal corporation: population approxi-
mately 80,000
Rural water system: approximately 500 con-
nections
Area of contention: 105 connections, densely
populated
Methods of valuation: none
Results: The municipality and the rural water
system attempted to negotiate a settlement for
the loss of 105 rural customers to municipal
annexation. Due to local politics and extenuat-
ing circumstances, the municipal corporation
ultimately took the 105 rural customers with-
out compensating the rural system.
Analysis: Prior to annexation, the 105 custo-
mers lost were immediately adjacent to the
municipal boundaries. The service area for
these 105 customers constituted only 14 per-
cent of the system's distribution facilities and
were located such that pumping costs were
lower than for the rest of the system. Within
this low cost service area, 20 percent of the
rural system's customers purchased 25 percent
of total water produced by the system. The
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Restructuring Manual
effects of this municipal encroachment were as
follows:
a. The system's highest density, lowest cost and
highest revenue-producing service area was
lost. No appreciable reduction in operating
costs was realized from loss of facilities.
b. The rate impact on the remaining customers
based only on existing lost revenue was
S3.75 per month per customer projected
over the remaining debt term of 20 years.
c. Future growth revenues for this service area
were lost and indeterminable.
d. The rural system spent in excess of
5100,000 in legal fees in opposing this
annexation.
Because of these kinds of case studies, the
rural water industry has gained a more acute
sense of the severity of this problem, which
ultimately led to clarification and reinforce-
ment of federal statutes protecting federally
funded water systems. Such awareness also led
to state legislation in Texas which provides for
compensating factors in such cases. Because of
the significant impact municipal encroachment
can have on rural water systems, federal and
state statutes are worthy of discussion.
PROHIBITION OF IMPAIRMENT
The Consolidation Farm and Rural Devel-
opment Act provided for extension of funding
to non-farming rural residents in order to
improve the economy of rural water systems.
Congress also recognized that rural systems
would have to make significant investments in
facilities as rural areas developed and popu-
lated near municipal boundaries. At that time,
federal funding through the Farmers Home
Administration was the only feasible means of
financing such projects. And due to experience
with municipal encroachment into service terri-
tories of rural electric cooperatives as early as
the 1930's, Congress provided a curtailment or
limitation of service prohibition clause which
protects federally funded rural water systems
from competition. The Act provides this pro-
tection through 7 U.S.C. 1926 (b) and has been
tested in various district courts and upheld
through two recent Appellate Court cases, the
most significant of which is City of Madison,
Miss. v. Bear Creek Water Association, 812
F.2d 1057,1059 (5th Cir. 1987) District No. 2.
This federal protection prevents any public
body from encroaching on the service territory
of a rural system for as long as the rural system
is indebted to the federal government.
In 1987 state legislation in Texas was passed
which, in the absence of federal protection,
provided an administrative process whereby
municipalities could annex territory. Non-
profit water supply corporations could be ade-
quately compensated for the loss of territory as
such loss relates to the impact on the existing
indebtedness of the rural utility and its ability to
repay its debt. Also considered were:
1. the value of personal property and real
property of the rural utility located within
the area in question;
2. the impact on future revenues;
3. expenses of the retail public utility;
4. other relevant factors.
Following the Bear Creek decision, the
National League of Cities began to seek support
for amending federal law to follow language
similar to the Texas law as a compromise to the
restrictions imposed by 7 U.S.C. 1926 (b).
CONCLUSIONS
Congress recognized the need to provide
federal protection against annexation for feder-
ally funded non-profit rural water systems.
Without this protection, annexation of prime
service areas could impair the rural water sys-
tem's ability to meet its federal debt obligations.
Although any small system will generally
benefit from association with larger systems,
careful consideration must be given to the
impact of such an association. Each rural water
system maintains an obligation to represent its
consumer's interests to ensure that the short and
long term effects are beneficial. We may con-
clude from experience that total annexation or
acquisition of small systems by larger munici-
pal systems is usually beneficial. However, par-
tial annexation of prime service areas can be
detrimental if the compensation is not adequate
to offset all potential losses.
Larry Brown is Program Manager for
Texas Rural Water Association.
Reprinted from the Summer 1990 issue of the
Rural Water magazine,d quarterly publication of the
National Rural Water Association.
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Restructuring Manual
Boone County, MO
By Bill Robinson
Boone County, Missouri, is shaped somewhat like
the State of Illinois and located in the central part
of the state. Columbia, Missouri, is located in the
center of Boone County with Interstate 70 dividing
the county and running east and west Boone County
is an extremely fast growing area. The population
of Boone County is now in excess of 100,000.
Several Small Districts
Organized In Boone County
Public Water Supply Districts were first organized
in Boone County in the mid 1960's. By 1968 there
were nine districts in operation and the tenth Public
Water Supply District was in the formation stage.
Five of the ten districts border the city limits of
Columbia, Missouri. Each water district started out
small, usually in the 200 to 300 customer range,
and often started operation out of the water district
clerk's home or a small office located within another
business. This worked for a while, but it soon became
more difficult to maintain these offices on a part-
time bask As the water districts grew in numbers
of customers, the need for a full time office became
evident
Finding An
Alternate Method
The Farmers Home Administration supervisor for
Boone County was Charlie Baldwin. He had a desire
to see Public Water Supply Districts established
throughout the county. Mr. Baldwin soon became
aware of the office and management problems facing
the water districts and the need to work together
to solve these problems. Mr. Baldwin was already
working with all the water districts on an individual
bask He brought several of them together to discuss
the idea of establishing a central service company
office for the water districts of Boone County.
In June of 1968 thk concept became a reality.
The Boone County Public Water Supply Service, Inc.
was formed as a Missouri nonprofit corporatioa There
were four Public Water Supply Districts that initially
joined. The President of each water district became
a board member of Boone County Public Water
Supply Service, Inc. Mr. Baldwin served as the
organization's first treasurer. The purpose of the
organization, as stated in the original incorporation
papers, is as follows to provide billing, collection,
bookkeeping and other administrative duties. This
benefits water districts through the unified manage-
ment in the reduction of overhead expenses.
How It Works
A manager and an office staff were hired to conduct
the day-to-day operations. The manager k responsible
to the Board of Directors of the service company.
The Board of Directors is composed of the presidents
of the participating water districts. The Board of
Directors is organized each year and a president, vice-
president, secretary, and treasurer arc elected. The
service company currently provides services to Public
Water Supply District No. 2 and Consolidated Public
Water Supply District No. 1 (formerly Public Water
Supply Districts No. 5, No. 6 and No. 8). There are
approximately 5,700 customers being serviced by the
service company.
The service company is operated on a nonprofit
bask A monthly customer user tee is established each
year to cover the operating expenses. The current
monthly operating fee is $1.80 per customer.
In 1986, a multi-user computer system was
installed by the service company. Each of the
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Restructuring Manual
participating water districts contributed toward fee
purchase of the computer system on a per user bask
The computer system has improved the efficiency
of the service company's operation.
How Has It Worked?
The service company concept has worked well
The participating water districts have been pleased
with the arrangement of the cost effective service
obtained. There is a staff of four to handle the work
load. If each District had to maintain a separate office
it is estimated that a minimum of six employees would
be required to maintain similar functions.
Each District
Maintains Autonomy
Even as the water districts join together for office
and business management functions, each district
maintains its own autonomy. Each district has its
own Board of Directors and operates under separate
rules and regulations and bylaws. Public Water Supply
District No. 2 (650 customers) uses all contract labor
for maintenance and installation work Consolidated
Public Water Supply District No. 1 (5,050 customers)
has its own crew to handle repairs and installations.
As far as we know the Boone County Water Service
Company, Inc. is the only service company
performing a combined service of this kind in the
state of Missouri. There is not reason why several
small systems could not join together to set up a
similar organization in order to have a larger and
more efficient operation.
Bill Robinson is the manager of
Boone County Water Service Company, Inc.
in Columbia, Missouri
Reprinted from the Summer 1990 issue of the
Rural Water magazine, a quarterly publication of
the National Rural Water Association.
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Restructuring Manual
Texas Style!
By Alton Dockrey
The Lamar County Water Supply District has
grown from an original service population of 4,400
people in 1969 to approximately 18,000 today. This
growth can be attributed to a combination of
population growth in the county and mergers with
other water corporations.
The Lamar County Water Supply system was
originally created in 1967 as two separate entities.
The "Lamar County Water Supply District" was
created to sell wholesale water to existing water
systems. The "Lamar County Water Supply
Corporation" was created as a not-for-profit
corporation to sell retail water to individual customers
throughout the rural areas of the county. This dual
arrangement was utilized because it maximized the
possibilities for grant and loan funding available at
that time and in die particular circumstances that
existed in Lamar County.
In 1967 there were 10 small water systems
operating in Lamar County outside of the city of
Paris, Texas. None of these systems had over 300
customers. Several additional rural systems were
proposed at that time, which would also have been
very small, single community-type systems. It became
apparent to County leaders mat a proliferation of
these small systems would not be the best solution
to the County's water needs. The systems were not
large enough to support a full-time operator or any
type of professional staff and were forced to rely
on volunteer help. They also were not financially
capable of maintaining the systems or of expanding
to serve other areas of the county. Even with all
of these systems operating, over 65% of the County's
area would have been without water service. Local
leaders decided that a master plan and a master system
for the county were the answer. Thus, the two systems
were created At that time, die city of Paris provided
its own water supply and continues to do so to this
day, also acting as supplier for the Lamar County
system There were five small outlying communities
in the county which became the initial wholesale
purchasers from the Lamar County Water Supply
District Because these cities also offered sewer service
and had existing water distribution systems, they
continue to this date to operate. At the same time,
there were several corporations around the County,
six of which were FmHA financed rural water
corporations. The six existing corporations were the
Petty Water Supply Corporation, the Forest Mil Water
Supply Corporation, die Marvin, Jennings and Clardy
Water Supply Corporation, the Cunningham Water
Supply Corporation, the Pattonville Water Supply
Corporation, and the Brookston Water Supply
Corporation who became an initial wholesale
customer of the District The other corporations
elected to remain totally independent, serving their
own existing service areas and utilizing groundwater
as their source. Groundwater in Lamar County is
limited in quantity and of a less man desirable quality,
generally failing to meet several of the Texas
Department of Health's secondary drinking water
standards.
The initial merger actually occurred with the
beginning of the project when die Chicota-Forest
Chapel Water Supply Corporation gave up trying
to develop a well and redirected tiieir efforts towards
die county wide entity. The corporation and district
were created, die system was constructed, and was
placed on-line in 1969. Because of die size of die
overall system in relation to die amount of funding
available through FmHA and other sources,
construction was done in five phases, during die
1970's and early 1980's. Several years passed wifli
no merger activity.
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Restructuring Manual
The next and largest merger occurred in 1984,
when the Lamar County Water Supply Corporation
was merged into the District The factors which had
initially required two separate entities were no longer
present, and it became apparent that a significant
reduction could be made in office and overhead costs
by merging the two. As with all mergers by the District
to date, the District assumed all outstanding
corporation liabilities in exchange for all corporation
assets.
As the 1980's progressed, the problems associated
with running a small system began to compound
In addition to regulatory requirements and environ-
mental regulations, the systems were beginning to
age, and repairs were becoming more and more
commoa Many of the rural customers who had
relocated from urban areas were desiring a higher
quality of service. In 1986, the Cunningham Water
Supply Corporation became the next system to merge
LAMAR COUNTY WATER SUPPLY
DISTRICT
RT. T, BflOOKSTON. TX. 75421
(2M> 785-5505
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Restructuring Manual
with the Lamar County Water Supply District The
merger was generally prompted by the conditions
outlined above and specifically by a desire for a better
quality of water.
Later, in 1986, the Brookston Water Supply
Corporation became the second system to merge.
In 1987, the Forest Hill Water Supply Corporation
merged and in 1988, the Pattonville Water Supply
Corporation began to purchase wholesale water from
the Lamar County Water Supply District, although
it did not merge. Twenty years after the District's
formation, only the Marvin, Jennings and Clardy
Water Supply Corporation, with about 80 meters,
continues to operate independently.
All parties have benefitted from mis merger-type
growth. Despite the feet mat construction projects
have been required for some of the mergers, and
despite the fact that the District incurred some debt
tor these expansions, the Lamar County Water Supply
District rates are lower than rates for any other simUar
systems in our area. Each of the merged systems
has obtained a quality of water which meets Texas
Department of Health standards. They are now
operated by a full-time professional staflF, on call 24
hours per day. Construction of relief lines and
standpipes has improved reliability and quality of
service. Finally, they don't have to scramble to find
licensed operators and worry about the paperwork
required by regulatory agencies.
The creation of the Lamar County Water Supply
District has proved to be beneficial to both the
corporations who merged and the people these
corporations service.
Alton Dockrey is the manager of
Lamar County Water Supply District
in Brookston, Texas.
Reprinted from the Summer 1990 issue of the
Rural Water magazine, a quarterly publication of
the National Rural Water Association.
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REGIONALIZATION
By Rodney M. Tart
When our forefathers began
their vigil of exploring and set-
tling America, they started out
living in separate colonies.
Geographically, their sep-
aration by distance was an
attribute to their territorial
claim, but also proved to be a
barrier in time of need and
emergency. Life was simpler
then. An important issue in
their daily lives was providing
the bare essentials for human
survival. As time progressed
and additional territories were
claimed, a sense of inter-
dependence between the colo-
nies became more important.
After our country won final
independence from its Mother
Country change occurred
much more swiftly. And so it
was; discovery, inventions,
industrial revolution, and mod-
em technology brought man
from earthly travel by foot, to
supersonic flight into space.
Man has conquered many
barriers in his quest for higher
learning and understanding,
but he has not learned how to
produce additional water. He
has learned, just as our fore-
fathers, that pollution only
lessens this precious resource.
With continued pollution
water has become endangered
both in quahtity and quality.
Man continues to look for ways
to abate water source prob-
lems. Just as in the colonial
times when I interdependence
became essential for protection
and survival, so have water
issues of today become an issue
of interdependence. Water
rights, impoundments, diver-
sions, and interbasin transfer
are all 21st Century "buzz"
words in the industry. With the
co-operative efforts of local
government^ along with the
assistance of State and Federal
financial support, regionalize- ;
tion has created a new vehicle '
for the provision of drinking
water.
North Carolina has been
most supportive to regionaliza-
tion. In 1972 a state wide bond
referendum ;was held in the
amount of $300 million dollars
and the citizens approved the
first clean wjater bond issue in
history. This funding mecha-
nism provided construction
funds in the form of a grant
with 25% project eligibility.
Many projects were developed
that never icould have been
without this additional revenue
source. Subsequent to this bond
issue, the State has developed
two special grant programs,
sales tax levies and currently a
revolving loan program. In
Hamett County, North Carol-
ina, where I am from, regional-
ization is the basic concept
from which our rural water sys-
tem began. As a result of a State
Statute, the Metropolitan
Water District Act gave Har-
nett County the political vehi-
cle to pursue the development
of a rural water system.
In 1975 a county wide bond
referendum was defeated
simply because only the main
areas that were initially being
served voted for the issue.
Three small towns with less
than 500 connections each had
voted in favor of the bond. The
remaining two larger towns in
the county with an aggregate of
over 6,500 connections voted
against the issue. Other rural
areas in the county defeated the
bond by only a small margin.
The two larger towns were not
interested in a county wide
regional system because they
had no immediate water prob-
lems. Failure to pass in the rural
areas has attributed to the fact
that they would be phased and
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Restructuring Manual
CUMMULAT1VE CUSTOMER GROWTH
PER YEAR
immediate service to their areas
was not assured in the foresee-
able future. In 1976 the Metro-
politan Water District Act was
implemented through a second
bond referendum in the areas
where the original service was
proposed. It passed by more
than a 4 to 1 margin. This was
the first regional bond referen-
dum ever passed in our county.
This project brought together
the three small rural towns and
the citizens along the intercon-
necting corridors which link
them together. Construction
began in 1977 and was com-
pleted and dedicated in Janu-
ary of 1980. This was the
beginning of a 10 year process
of bringing a county wide rural
water system to our area.
The second challenge occurred
in 1984 when the Metro Dis-
trict expanded its territory
through an annexation proce-
dure. After completing the pro-
cess and passing a $500,000
general obligation bond issue, it
was decided that there was a
better way to go. Because of the
numerous types of funds avail-
able, the county wanted to keep
control of the system operation
and take advantage of those
funds. Creating a non-profit
association would not allow
the correct political vehicle.
Our utility's attorney began
researching other political
means by which our county
could develop subsequent dis-
tricts. There still was not a
county wide commitment for a
total regional system. Many
who lived in the remote areas
ten years after the first referen-
dum felt there would never be
water service in their respective
areas. There was another sta-
tute in our state which provided
for the creation of a water and
sewer district. This concept
made the districts creation
move much more rapidly. Our
last water district bond referen-
dum will be held during the
1990 May primary. Since April
1976 there has never been
ESTIMATED CUSTOMER COUNT
by District
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Restructuring Manual
another water or sewer bond
issue to fafl.
Today, 14 years after the
passage of the first bond ref-
erendum, we have nine districts
created; five are operating, one
is under construction, one is
under design, and our final
district is awaiting bond ap-
proval and a loan commitment
from FmHA. The first water
district serves as a hub for our
entire county operation and
provides die water source and
treatment for the remaining
districts.
It took time, fortitude, and
perseverance to educate the
rural community on a planned
program of how our county
would develop. Unfortunately
for some it took the drought
of 1985-86 to prove that their
longtime independence would
be replaced with a new feeling
of interdependence. There is a
new sense of pride in our rural
county now with the creation
of a community water system
It has certainly done more to
bridge the gap of sectionalism
man anything else in our coun-
ty's history. Through this labor-
ious 14 years of developing
Hamett County, it took the salt
of the earth type of men and
women to make mis county
wide regional system a reality
with the aggressive leadership
of our elected officials. Only less
that 2% of the remaining
population in our county will
not have public water by 1995.
And so, it is our quest to
continue improving the quality
of life for rural Americans. Just
as our forefathers enjoyed their
independence, there always
exists the necessity for interde-
pendence. Developing a
regional water system is a true
testimony of our mutual
interdependence.
Rodney M. Tan is the
Director of Hamett County
Public Utilities in LUlington,
North Carolina.
Reprinted from the Summer 1990 issue of the
Rural Water magazine,a quarterly publication of the
National Rural Water Association.
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Restructuring Manual
Castle Valley
By Darrel V. Leamaster, P.E.
In Utah's Emery County an innovative type of
consolidated system has been operating since 1976.
The Castle Valley Special Service District was set up
under Utah's Special Service District Legislation to
provide culinary water, sewer systems, pressurized
irrigation water and roads to seven small incorpor-
ated communities. These rural towns range in size
from 300 to 3,400 people and have a combined
population of about 9,000 people.
The towns in this District are located in rough, hilly
country on the foothills of the Manti-Lasal Mountain
range. The towns are each separated by about 10
miles, and it is about 60 miles from the north to the
south end of the District. The water systems in each of
these towns are operated and maintained by the
regional District. The District operates five surface
water treatment plants, two wells, three springs, 120
miles of pipeline and 2,750 connections. The terrain
and the distance between towns have created many
difficult operational problems for a combined system.
However, they have been able to overcome the prob-
lems, and have run a consolidated system for the past
13 years.
The initial reason for forming the District was
related to growth from energy development in the
area. Emery County holds some of the nation's largest
low sulfur coal reserves. Energy development of these
local coal fields and the construction of two large
steam electric generating plants by Utah Power &
Light Company resulted in dramatic population
increases in the area. The growth and service demands
created by the population increase, caused more prob-
lems than the towns could handle. The mayors and
city councils soon realized that they didn't have the
resources available to solve the energy impacts. They
joined together with the Utah Power & Light proper-
ties to form the Castle Valley Special Service District.
This provided the legal mechanism by which the
communities could utilize the large tax base of the
industry. This industry created the growth problems
and the District was the mechanism used to help
lessen the impact of the growth and operational con-
cerns in the communities.
The financial resources provided by this Special
Service District, allowed them to sell General Obliga-
tion Bonds and obtain state and federal grants to
upgrade and construct new facilities. They have spent
$25 million in capital improvements since 1977.
The District is presided over by an Administrative
Control Board of ten members. Each of the seven
communities appoints one representative and the
other three are appointed at random by the County
Commissioners. This Board is the governing author-
ity of the District, setting policy, hiring personnel,
establishing budgets, etc.
The benefits to these communities derived from the
Special Service District are numerous and varied. It
has provided shared management with professional
staff, certified operators to operate the plants, com-
bined purchasing, combined equipment usage, addi-
tional financial resources (tax revenue), uniformity of
services, better planning, and a common forum for the
setting of policy and making decisions. In short, it has
provided a more efficient and effective system to
bring public service to customers.
The District utilizes a centralized management sys-
tem. The District Manager is a full time, professional
engineer, and oversees the day to day operations at all
of the systems. He is qualified to assist with many
routine tasks faced by the District such as; calculating
chemical dosages, trouble shooting instrumentation
and control problems, monitoring the Safe Drinking
Water Act requirements and planning extensions to
the system. The District also has available on a con-
tractual basis; financial consultants, engineering con-
sultants, attorneys and auditors.
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The District has been divided into three areas for
organization of the work force. Each area has a fore-
man, who is also a certified operator, and a work
crew. They generally work within their own area, but
alot of flexibility exists and when an emergency or
large work project occurs in one area, crews from the
other areas can be brought in to assist. For example, a
few years ago a pressure reducing valve failed in the
middle of the night and put a pressure surge on the
distribution system. The next morning more than 25
leaks were discovered. Crews from other areas in the
District were called in to help and within an hour
three backhoes and crews were at work repairing
leaks.
The plants are staffed by certified operators. These
operators may work in two or more plants and they
take turns with holiday and weekend coverage to
prevent a single operator from being on call or work-
ing seven days a week all year long.
One of the main advantages of the District has been
its combined use of equipment and facilities. The
District has been able to purchase expensive equip-
ment and use it in several towns throughout its area.
Some examples are laboratory equipment, road bor-
ing equipment, asphalt repair equipment, backhoes,
and loaders.
The same shop warehouse facility can be used for
two or more towns, and in some cases common
treatment systems can be utilized for two or three
towns. Rather than each community developing its
own water treatment facility, the district can now
develop such facilities capable of servicing two or
more towns. The cost of purchasing these items is
spread over a broader base, and duplication in terms
of equipment and facilities is minimized. This has
been an efficient way to reduce costs for providing
public services.
The purchasing function can also be accomplished
more efficiently in the District than in the individual
towns. Common supplies such as water meters, pipe
and fittings, chlorine and chemicals for the water
plants can be purchased in large quantities at reduced
costs. Vendors can now deal with one entity instead of
seven individual towns. This has also allowed the
District to standardize on its purchasing so that inter-
changeability of parts from one town to another is
achieved.
Undoubtedly, the greatest benefit of the District
has been financial. The combination of the seven
towns and the industrial property into one district has
equipped it with the necessary power to issue bonds
for capital improvements, and to retire these bonds
from collected taxes. Many improvements have been
provided that the individual communities could not
have afforded. The District has also been able to
present unified proposals to State and Federal loaning
agencies that have allowed it to obtain grants and low
interest loans that otherwise would have been impos-
sible to obtain. The regional taxing district concept
has added an additional revenue source to the
member communities' rate structures. An operational
and maintenance tax has been levied to augment the
fee structure and provide a second source of funding.
Most of this revenue is used for road and street main-
tenance, but some is used in the operation of the water
and sewer systems.
A common forum or foundation for policy consid-
eration and decision making is now available to each
participating town in the district. Information con-
cerning cooperative undertaking can be disseminated
to all communities, thereby increasing the likelihood
of mutual understanding and cooperation.
In summary, many challenges face small rural
water systems in todays world. In many cases these
systems can combine into a single cooperative entity
and provide a more efficient and effective operation
for providing water to the public. The Castle Valley
Special Service District in Utah's Emery County has
proved that it can be successfully done. They have
provided a common management and operational
system for seven individual towns. In the process they
have found that some of the advantages are: profes-
sional management, certified plant operator staff,
combined equipment usage, less expensive purchas-
ing, uniformity of services, better planning for future
activities and a common forum to disseminate infor-
mation and make decisions.
Darrel V. Leamaster is the manager of The Castle
Valley Special Service District in Castle Dale, Utah.
Reprinted from the Summer 1990 issue of the
Rural Water magazine,a quarterly publication of the
National Rural Water Association.
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Restructuring Manual
Appendix B
Selections from Memorandum of Agreement between a
Contract O&M Company and a Water System
Responsibilities
The Contract O&M Company ["the Company"] will provide and supervise the
services of an operator who possesses a valid Class I certificate of competency issued by
the State. The Operator will perform or provide for the performance of water system
services as mutually agreed upon and authorized under State Class I Water Distribution
certification. Such services are limited to those necessary to consistently satisfy the mini-
mum health standards of the State for community water systems. The services will be
provided on a mutually agreed-upon schedule. Additional services may be added to this
Agreement from time to time by written consent of the Company, and the System. The
owner of the water system will provide guidance and direction to the Operator to the
extent necessary for timely decisions and direction on any action, expenditure or work
needed to keep the system in compliance with State health standards for community water
systems.
The System agrees to take whatever steps are required by federal and State law and
regulations to keep the system in compliance with all current and future community water
system minimum standards.
The System agrees that the physical plant, assets, liabilities and legal allegations
connected with the ownership and operation of the system are its exclusive responsibility
and not that of the Company or the operator.
The System acknowledges that insurance coverage desired by the System in connec-
tion with this Agreement, including but not limited to errors and omissions coverage, will
be the responsibility of the Sys'tem.
Hold Harmless Agreement
Indemnification. The System will hold harmless and indemnify the Company and
its officers, agents, and employees against any claim, liability, or expense incurred by the
Company arising out of its work under this agreement, except to the extent that the claim,
liability or expense arises out of alleged negligent or intentionally wrongful actions or
failures to act of the Company or its officers, agents or employees.
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