ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Joanne Throwe, Chair
Brent Anderson
Aurel Arndt
Lori Beary
Janice Beecher
Theodore Chapman
Rudolph Chow
Edwin Crooks
Hope Cup it
Lisa Daniel
Marie De La Parra
Yvette Downs
Heather Himmelberger
Ted Henifin
Craig Holland
Jeffrey Hughes
Daniel Kaplan
Suzanne Kim
Pamela Lemoine
James McGoff
Chris Meister
Tony Parrott
Eric Rothstein
Bill Stannard
Linda Sullivan
Carl Thompson
Angie Virnoche
Jeffrey Walker
Jennifer Wasinger
Richard Weiss
David Zimmer
Designated
Federal Officer
Edward H. Chu
April 5, 2019
The Honorable Andrew Wheeler
Acting Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Acting Administrator Wheeler:
The Environmental Finance Advisory Board (EFAB) is pleased to submit our report,
"Financing Strategies to Promote System Regionalization." We offer our
recommendations on strategies that EPA might undertake to support local decision-
makers' consideration and implementation of beneficial regionalization or
consolidation options.
EFAB was issued a charge from EPA's Office of Water in January 2018 to
"identify and evaluate financing strategies that have been designed to assist and or
incentivize systems to implement governance strategies that may include system
consolidation, regional projects and/or shared service arrangements."
To address this charge, a workgroup convened a series of conference calls as well as
participated in a day-long in-person workshop to discuss and formulate our findings
and recommendations. Our dialogues highlighted the following:
•	There are multiple forms of regionalization and consolidation, each with
distinct advantages and disadvantages depending on local circumstances and
conditions.
•	There are critically important differences between urban, suburban and rural
systems in terms of opportunities for, and implications of, regionalization or
consolidation.
•	There are likely differences in the extent to which many water service
providers and decision-makers have access to, or familiarity with, sound and
objective information related to regionalization and consolidation
opportunities.
The workgroup's discussions were supported by EPA staff who offered key insights
into the scope of EPA authority, program operations, and available tools and
techniques to disseminate information and engage key stakeholders.
Our diverse perspectives on the structure and dynamics of the water sector provided
context for our recommendations. In particular, we find that:
• The large number and configuration of water, wastewater and stormwater utility
service systems present opportunities to enhance efficiencies and improve both
the accessibility and quality of services. While communities developed systems to
serve their own best interests, in many cases regionalization or consolidation may
Creative Approaches to Funding En vironmentai Programs, Projects, and A ctivities

-------
facilitate more effective water service delivery prospectively.
•	The water services sector faces several imperatives to invest in critical infrastructure and service
delivery capacity that may be facilitated by regionalization and consolidation initiatives that are
oriented toward protecting the public health and economic interests of customers and
communities.
•	Address prevailing water quality issues, as well as new regulatory initiatives including
contaminants of emerging concern, will amplify economic, labor resource and service delivery
challenges facing the water services sector.
•	Water utility service systems represent major community assets about which information and
decision-making authority generally rests with local/community decision-makers.
•	The availability and accessibility of sound and objective information about the relative
advantages and disadvantages of different regionalization and consolidation options for building
system capacity and improving service delivery may be limited.
•	Though credit rating agencies are precluded from structuring or advising, their respective
criteria capture potential benefits to credit quality by way of economies of scale.
•	EPA-sponsored funding programs may incrementally impact the financial landscape with respect
to supporting beneficial regionalization and consolidation options; the Agency's capacity
development and information dissemination efforts may provide sound and objective
information to local decision-makers.
Both our characterization of sector attributes with respect to regionalization and consolidation
opportunities, as well as our findings largely align with several noteworthy related studies. Our effort is
distinct insofar as our recommendations focus on EPA's prospective roles.
The workgroup believes that EPA-sponsored funding programs may incrementally impact the financial
landscape supporting beneficial regionalization / consolidation options; its capacity development and
information dissemination efforts may provide important, objective information to local decision-
makers.
Specific recommendations to EPA:
1. Promote and incentivize consideration of beneficial regionalization and consolidation
alternatives through the Safe Drinking Water Act and Clean Water Act permitting processes, and
through EPA controlled funding programs including the state revolving funds, Water
Infrastructure Finance and Innovation Act, and other grant programs. Facilitate funding for
projects that address new or expanded drinking water and wastewater management needs
through regionalization and consolidation alternatives.
2.	Promote the use of "Safe Harbor" provisions to protect systems that absorb troubled systems
from regulatory penalties for a reasonable period of time, consistent with existing statutes and
regulations.
3.	Examine the impact EPA's Public Water System Supervision grant allocation formula has on
creating disincentives for state governments that actively promote beneficial consolidation of
water systems to determine if the formula should be changed.

-------
4.	Review capacity development policies and programs at the state level to ensure consideration of
cost-effective and beneficial regionalization and consolidation options.
5.	Enhance the scope and structure of EPA's guidance and support for objective evaluation of
regionalization options through EPA's information tools (e.g., the Water System Partnership
website) and active engagement of key stakeholders.
6.	EPA should facilitate informed decision-making by providing state and local officials, as well as
other stakeholders, with objective information resources about legislative and regulatory
initiatives and policy tools related to potentially beneficial regionalization or consolidation of
water and wastewater systems.
We are pleased to provide you our review and recommendations in the enclosed report on a subject
that we collectively believe to be of heightening relevance to the water sector, particularly given system
reinvestment, water quality and water affordability challenges.
We hope that you and the Agency find our review and recommendations valuable. Thank you for the
opportunity to assist EPA through our work on this important charge. Finally, we again acknowledge the
extraordinary support of EPA Office of Water staff for their insights and tireless efforts.
Sincerely,
Joanne Throwe, Chair
Environmental Finance Advisory Board
Enclosure

-------
Environmental Financial Advisory Board
EFAB
Members
Joanne Tlirowe, Chan-
Brent Anderson
Aurel Arndt
Lori Beary
Janice Beecher
Theodore Chapman
Rudolph Chow
Edwin Crooks
Hope Cupit
Lisa Daniel
Marie De La Parra
Yvette Downs
Heather Himmelberger
Ted Henifin
Craig Holland
Jeffrey Hughes
Daniel Kaplan
Suzanne Kim
Pamela Lemoine
James McGoff
Chris Meister
Tony Parrott
Eric Rothstein
Bill Stannard
Linda Sullivan
Carl Thompson
Angie Virnoche
Jeffrey Walker
Jennifer Wasinger
Richard Weiss
David Zimmer
FINANCING STRATEGIES TO
PROMOTE SYSTEM
REGIONALIZATION
April 2019
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government.
Designated
Federal Officer
Edward H. Chu
Printed on Recycled Paper

-------
April 2019
r	*
FINANCING STRATEGIES TO PROMOTE
SYSTEM REGIONALIZATION
Environmental Finance Advisory Board

-------
Contributing Work Group Members
Aurel M. Arndt
Janice Beecher
Theodore Chapman
Rudolph Chow
Ted Henifin
Heather Himmelberger
Jeffrey Hughes
James McGoff
John Padalino
James (Tony) Parrott
Michele Pugh
Eric Rothstein*
William Stannard
Linda Sullivan*
Richard Weiss
David Zimmer
* Co-Chair
Ed Chu, Designated Federal Officer
Joanne Throwe, EFAB Chair
EPA Staff
Sonia Brubaker
John Covington
Alecia Crichlow
Jim Gebhardt
Adrienne Harris
James Home
Timothy McProuty
Dan-Tam Nguyen
Ellen Tarquinio
Administrative Support-American Water
Alison Bibb-Carson

-------
Table of Contents
Environmental Finance Advisory Board Charge and Primary Concerns	1
Regionalization and Consolidation Structural Options	4
Key Stakeholders	9
Key Findings	9
Recommendation #1	11
Recommendation #2	15
Recommendation #3	17
Recommendation #4	18
Recommendation #5	19
Recommendation #6	20
Conclusions	21
Appendix I: EFAB Charge	22
Appendix II: Structural Options	24
Appendix III: Structural Profile of Community Water Systems in the U.S	30
Appendix IV: Capacity Development - SDWA Provisions and Elements	32
Case Study #1: Regionalization Achievements Under the Pennsylvania Municipality Authorities Act	34
Case Study #2: Great Lakes Water Authority	36
Case Study #3: McLean County Regional Water Commission	38
Case Study #4: Clean Water Solutions	40
Case Study #5: Pennsylvania American Water Acquisition of Scranton Sewer Authority	43
Case Study #6: Florida Governmental Utility Authority	44

-------
Financing Strategies to Promote System
Regionalization
Environmental Finance Advisory Board Charge
Environmental Finance Advisory Board Charge and Primary Concerns
The U.S. Environmental Protection Agency (EPA) has charged1 its Environmental Finance Advisory Board
(EFAB) to address "Financing Strategies to Promote System Regionalization" with designated goals to:
•	Identify and evaluate the various financing options developed to support regionalization.
•	Investigate the value of shared governance or alternative governance strategies as potentially
effective tools to address deferred investment and maintenance.
•	Examine different governance models (public or private) and how they can be used to improve
system management, including centralized management of dispersed systems and decentralized
systems.
•	Through examples, highlight potential advantages and disadvantages of shared governance or
alternative governance strategies to drinking water and
wastewater utilities of increased operational efficiencies in
reducing capital and operating costs.
Regionalization and
Consolidation Defined:
These goals reflect a number of primary concerns regarding the
effectiveness, efficiency and sustainability of the U.S. water sector in
terms of providing universal access to safe, reliable service that is
compliant with regulatory requirements designed to protect public health
and safeguard the environment.
These concerns derive from the demographic characteristics of the sector
noted, concerns about compliance and prevailing economic trends that
challenge the affordability of service. Sector restructuring2 may be
needed to address:
• Industry structure - The sector is characterized by many smaller
utilities with too few customers to safely and cost-effectively
deliver services in compliance with applicable regulations.
Regionalization of water and
wastewater services involves
structural and non-structural
methods of capturing scale
economies and improving
operational performance
among geographically
proximate systems.
Consolidation does not require
geographic proximity, but is
also oriented toward
performance improvements.
All forms of regionalization are
consolidations; not all forms of
consolidation are
regionalization.
• Utility resistance - Voluntary acceptance and pursuit of
structural options that may advance sector restructuring is
limited, often despite evidence of potential cost savings, service
improvements, improved capacity utilization and other benefits. This resistance may derive from
1	A copy of the full text of the EFAB charge: "Financing Strategies to Promote System Regionalization" is provided as Appendix I.
2	"Restructuring" refers to the reorganization of system populations to promote efficiency, effectiveness and sustainability of services and is
agnostic as to the specific structural options employed to advance this outcome.
EFAB Financing Strategies to Promote System Regionalization • 1

-------
vested interests, use of utility enterprise funds to subsidize other governmental services or simply a
predilection for local control.
•	Multiplicity of responsibilities - Development and expansion of the sector is characterized by a
broad array of actors involved in siting, permitting, developing and operating utility facilities to
support economic development. This disparate group, often with competing objectives and business
processes, has the potential to sub-optimize system development and confound realization of
efficiencies.
•	Economies of scope - Integrated planning and One Water3 management initiatives underscore the
sector's realization that efficiency and effectiveness improvements may be achieved by integrating
management of water, wastewater, stormwater and reuse functions. These functions may be more
readily effectuated through sector restructuring.
•	Regulatory incentives - The regulatory agencies overseeing the sector, through permitting
programs, funding measures and enforcement activities may motivate utilities to consider regional
options as a means of achieving compliance and improving technical, managerial, and financial
capacity.
U.S. Water Sector Demographics and Challenges
The United States has approximately 50,000 community water systems (CWSs), but just 8.7 percent of the
systems serve 84.8 percent of the population. Approximately 81.3 percent of CWSs serve fewer than 3,300
people, and half of all CWSs (54.5 percent) serve fewer than 500 people.4 Note that multiple systems may be
owned by a utility company or managed by a common entity. From a financial perspective, the median
annual revenue of systems serving fewer than 500 people is about $25,000.
There are approximately 14,500 permitted wastewater systems in the U.S. Many systems exist in
communities that face challenges of low income, high unemployment and loss of population — all
characteristics that can challenge sustainability.5
The large number of EPA-regulated CWSs (shown in the map) presents a significant administrative burden on
regulators at both the state and federal level. Many small systems have problems maintaining technical,
managerial and financial capacity to provide safe drinking water on a sustained basis.6
While the number of wastewater systems is significantly less than the number of drinking water systems,
many of the same problems apply. In addition, many small wastewater systems face greater technical
challenges than drinking water systems without a support system like the Safe Drinking Water Act's Capacity
Development Program.
3	The One Water approach envisions managing all water in an integrated, inclusive, and sustainable manner to secure a bright, prosperous future for our
children, our communities, and our country. One Water is a transformative approach to how we view, value, and manage water—from local
communities to states, regions, and the national scale, http://ysw3ter3lliarice.ore/orie-w3ter
4	See Appendix III: Structural Profile of Community Water Systems in the U.S. based on EPASDWIS data for 4th Quarter 2018.
5	Non-sustainable water systems are water resource utility systems that are not able to provide potable water or wastewater services in
compliance with applicable regulations under a viable economic model that enables continued compliant, reliable, service delivery.
6	The data cited in this paragraph comes from an EPA preliminary report Compendium of Full-Cost Pricing Issue Papers: Covering the Basics
2009. This report was not finalized.
EFAB Financing Strategies to Promote System Regionalization • 2

-------
The large number of water and wastewater systems in the U.S. also complicates responding to a number of
acute challenges facing the industry, including aging infrastructure7, emerging water quality issues8 and
workforce development needs. The scale and diversity of system configurations preclude simple, uniformly
applicable solutions. At the same time, the inherent economic inefficiencies of the sector make system
restructuring (through regionalization, consolidation and other measures) all the more essential as the sector
faces enormous reinvestment needs9 and associated concerns regarding low income customer impacts and
water affordability. Many small systems, both public- and privately-owned, struggle with capacity and
compliance.
Local Decision-Making
The large number and diversity of water and wastewater systems throughout the U.S. reflects the character
and history of individual communities' development. These systems, perhaps more so than any other utility
service, are fundamental to the character and vitality of the areas they serve, impacting public health,
environmental conditions and economic development.
Decisions regarding ownership, governance, rate-setting authority and other aspects of utility management
must therefore honor and respect local values and concerns while addressing the challenges of ensuring safe,
reliable and affordable service delivery. Effective engagement of diverse, local stakeholder interests—based
on objective information—will be imperative to secure politically acceptable and sustainable sector
restructuring. In so doing, each of the industry's primary governance structures for service delivery (and
various derivatives thereof) may be customized to underwrite regionalization or consolidation of service
providers.
However, local decision-makers may lack objective information regarding both the sustainability of their
current systems, as well as the range of viable options to transition to a different structural and governance
model. Without objective information, local decision-makers will be unprepared to make decisions regarding
new structural options for water resource management.
Supported by this information, local decision-makers tasked with evaluating new structural options for water
resource utility management may identify opportunities to engage with historically disenfranchised
community stakeholders, many of whom have been economically or environmentally disaffected by prior
capital and operating decisions. Potential incentives to advance beneficial restructuring may thereby also
support efforts to enhance inclusiveness in utility system governance.
7 In the U.S., there are more than one million miles of pipe that convey water. Each year, about 20 percent of treated water is lost due to leaks
and main breaks generally caused by infrastructure well beyond its useful life. There are approximately 700,000 miles of wastewater pipes in the
U.S. Each year about 900 billion gallons of untreated sewage makes its way into rivers and streams. The American Society of Civil Engineers'
(ASCE) latest Report Card for America's Infrastructure recently gave the nation's drinking water systems a D grade and wastewater systems a D+
grade.
8There are more than 146 million identified chemicals registered with the American Chemical Society. Emerging contaminants research, solutions and
collaboration is critical to water treatment and management.
9 According to the American Water Works Association, as much as $1 trillion is needed from 2011 to 2035 to upgrade existing water systems and
meet the drinking water infrastructure needs of a growing population. Published in March 2018, EPA's 6th Drinking Water Infrastructure Needs
Survey and Assessment shows $472.6 billion is needed to maintain and improve the nation's drinking water infrastructure over the next 20 years.
EFAB Financing Strategies to Promote System Regionalization • 3

-------
Regionalization and Consolidation Structural Options10
Structural options for regionalization or consolidation and associated forms of governance might yield
benefits to many smaller and potentially non-sustainable water utilities. Changing structures typically
involves tradeoffs and may have intended and unintended consequences. The predominant structural
options for water utilities are summarized and compared here, and fuller descriptions are provided in
Appendix II.
Regional Public Authorities and Districts
Public authorities are typically established by local, state or federal action, whereupon they may become
separate and independent governmental entities that serve a region. Approval actions will convey
powers required for water resource utility asset development and operation, and will typically define the
entity's scope and governance structure. Authorities and districts operate autonomously and may have
the ability to make tax assessments subject to voter approval. They are subject to laws, rules and
regulations applicable to local government finance.
Municipal Services (Wholesale & Retail)
Urban communities have developed water infrastructure to serve their citizens and businesses. Many
municipalities also provide water service to suburban communities, leveraging their engineering, capacity
development, operations and management capabilities. Service to these suburban areas is typically
structured on either a wholesale basis, with the suburban community maintaining responsibility for its
local distribution network, or on a retail basis with the core city having singular responsibility for service
to end-use customers throughout its service area. Municipal service rates within the local government
jurisdiction are typically approved by the local municipal government; outside jurisdictional rates may be
appealed to public utility commissions or local district courts.
Private and Investor-Owned Companies
Private and investor-owned utilities are generally subject to economic regulation and oversight by a
state's public utility commission. Larger water utilities (including multi-state holding companies) have
access to capital (debt and equity) and may be able to achieve economies of scale by supplying and
treating water for multiple communities on a regional basis. In fully owning, managing and operating a
water system or in working with municipalities via contractual public-private partnerships, these utilities
can help meet local needs by designing, building rebuilding system facilities and infrastructure and
operating community water and wastewater systems.
Member Cooperatives
Cooperative water systems (like electric cooperatives) are member-owned and usually serve local
regions in rural areas, including agricultural communities. Members own the utility assets and will
typically elect a governing board and retain a management team. Cooperatives are subject to laws, rules
and regulations applicable to not-for-profit organizations. Cooperative systems are sometimes subject to
state public utility commission regulation.
These regionalization and consolidation options are distinguished by different assignments of responsibilities
for critical utility service roles that can have substantial implications for the communities served.
10 In addition, inter-system cooperation, either by formal written contracts or by informal agreements, provides a practical way of addressing
problems when regionalization or consolidation is not feasible. Inter-system arrangements are of two major types: (1) provision of a service
from one system to another; and (2) a joint action agreement between two or more systems for a specific function.
EFAB Financing Strategies to Promote System Regionalization • 4

-------
Responsibility assignments deemed to be of particular importance for local decision-makers to understand
and appreciate include:
•	Governance - The structure of decision-making authority including how the applicable board or
commission is selected, how voting rights are exercised and how customers are represented.
•	Compliance Management-The responsibility to ensure that all system operations and construction
programs are in full compliance with all applicable laws and regulations. These responsibilities are
incorporated into applicable permits and contract documents, are critical for the protection of public
health and the environment and carry important liabilities.
•	Rate Setting Authority - The parties are assigned responsibility for setting or approving revenue
requirements and retail and wholesale rates within and outside individual communities' jurisdictions
as well as mechanisms for rate or service challenges.
•	O&M Expense Management-The assignment of responsibility for managing system operations
across the spectrum of individual utility systems and functions where options may differ in terms of
who performs operating functions, how responsibilities may be shared regionally and how
efficiencies and scale economies may be realized.
•	Capital Improvement Planning/Asset Management - The assignment of responsibility for planning
system investments and reinvestments across individual utility systems in which options may differ
in terms of who conducts system planning and asset management, how responsibilities may be
shared regionally and how efficiencies and scale economies may be realized.
•	Capital Financing - The party or parties that are responsible for structuring financing of
infrastructure investments through combinations of debt issues and use of equity (including current
system revenues). The respective parties are typically required to pledge revenue streams and make
other covenants in applicable indentures. Different structural options may contemplate different
credit issuers and borrowing terms.
Provided on the following page is a comparison of the primary structural options with respect to these key
responsibilities.
EFAB Financing Strategies to Promote System Regionaiization • 5

-------
Structural Option Governance
Regional Public
Authorities and
Districts
Independent
board with
local
governmental
authority
Compliance
Management
Singular
permit/
compliance
responsibility
Rate Setting
Authority
Authority
governing
board
O&M Expense
Management
Direct
authority and
control
CIP Planning/
Asset
Management
Direct
authority and
control
Capital Financing
Credit ratings
and access to
tax-exempt
financing and
governmental
loans
Municipal
Services
(Wholesale and
Retail)
:• Service
provider as
defined in the
utility service
agreements
!• Service
provider and in
some cases the
local entity
;• Local
government
approval
subject to PUC
or district
court review
for outside
rates
i* Designated !• Designated ;• Designated
municipal
public utility
municipal
public utility
municipal
public utility
Access to tax-
exempt
financing and
governmental
loans
Private and
Investor-Owned
Companies
Member
Cooperatives
Independent
board elected
by the
shareholders
of publicly
traded
companies
Governance
varies for
private
companies
Member
designated
board
Full
compliance
management,
subject to EPA
regional
Integrated
systems may
employ
centralized
compliance
management
tools
Singular
responsibility-
multiple
permits
• Economic
regulation by
state PUCs
Governing
board
Designated
private entity
with incentives
for cost control
and potential
to leverage
economies of
scale
Direct board
control
For larger
systems,
greater
capacity and
incentives,
subject to PUC
review of
prudence
Direct board
control
For larger
systems,
access to debt
and equity,
with capital
structure
subject to PUC
approval
Need
assistance by
government
agency
Access to tax-
exempt
financing and
eligible for
government
loan program
funding
These differences underscore that different attributes of regionalization or consolidation options may be
employed in response to a broad spectrum of circumstances. Local decision-makers have considerable
EFAB Financing Strategies to Promote System Regionalization • 6

-------
discretion in tailoring their approaches to their unique situations, and options continue to evolve as technical,
social and environmental challenges develop.
Structural Options Evaluation Criteria
For local decision-makers that are interested in pursuing regionalization or consolidation options for their
communities, several criteria for evaluating which attributes best fit local circumstances may be employed to
effect sound decision-making consistent with goals related to:
•	Water quality compliance - As protection of public health and the environment is of paramount
concern, the extent to which the options may facilitate compliance with applicable water quality
regulations is central—and not uniform across options. For some communities, local retention of
authority and responsibility for system operations and facility development may help ensure
attention to local water quality concerns, while in other communities necessary expertise may not be
resident.
•	Financial transparency and rate setting-The composition, responsibilities and authorities, as well as
related oversight of respective governing boards across structural options hold the potential for
substantial differences in financial transparency and rate setting practices. For example, under
regional wholesale configurations, suburban users typically have more limited opportunities to
challenge rates imposed by a municipal utility delivering service by contract, whereas they might hold
seats on the governing board of a regional authority. Privatization transfers rate-setting authority
from the local government to state PUCs. These differences in decision-making authority over rate
setting have historically been a primary determinant in the selection or structuring of forms of
regionalization.
•	Operational efficiency - Different operational challenges and system configurations across
geographical expanses mean different structural options lend economic advantage. Where one group
of systems may achieve efficiencies through relatively simple cooperative agreements, others may
require system investments and expertise that call for more formal and substantial forms of
regionalization or consolidation.
•	Asset management and infrastructure reinvestment - Similarly, the extent to which capital
investment and infrastructure reinvestment may be optimized over the long term may be as much a
function of the line of sight of the regional system, and bases for collaboration across its component
parts, than the physical attributes of individual systems and facilities.
•	Environmental and resource management - These opportunities for optimization also translate to
the potential to achieve improved environmental and resource management outcomes under
alternative forms of regionalization or consolidation.
•	Access to financing on favorable terms - Common potential benefits of regionalization or
consolidation of systems are the capture of economies of scale, leveraging of system optimization
opportunities and dedicated governance. Across local circumstances, different structural options may
provide more or less assurance of these outcomes, and more or less risk of failure.
•	Customer affordability - Structural options have different implications for rates and affordability;
some options might improve performance but increase rates. Different options may be more or less
EFAB Financing Strategies to Promote System Regionalization • 7

-------
feasible in terms of legal constraints, administrative capacities, cost of service, and economic
regulation to advance water affordability through both rate and customer assistance programs.
• Stakeholder engagement - As suggested with the criteria related to financial transparency, the
different structural options may operate under entirely different protocols with respect to customer
communications and stakeholder engagement, particularly across non-owners of the regional system.
Relative Advantages and Disadvantages
The performance of specific regionalization or consolidation options with respect to evaluation criteria is, in
many respects, a matter or subjective judgment across local decision-makers. Opportunities for economic
gain may overwhelm some loss of autonomy under one structural option yet may be insufficient under
another option. While these perceptions are unique across local decision-makers, some of the more
commonly cited relative advantages and disadvantages of the primary structural options are highlighted in
the table below:
Structural Option
Relative Advantages
Relative Disadvantages
Notes
Regional Public
Authorities and
Districts
Municipal Services
(Wholesale and
Retail)
Private or Investor-
Owned Companies
Independent governmental entity
and debt issuer may optimize O&M
and capital spending, with singular
responsibility for compliance.
Direct governmental control and
accountability to customers;
services provided at cost; access to
; SRFs and other funding
mechanisms with potential for low-
or no-interest rates based on
distressed community status.
For larger systems, shareholder
board governance and
transparency; investment
incentives. Access to private capital;
water quality management
capabilities; ability to leverage scale
and oversight by PUCs.
Involves establishing a separate layer
of government, ceding of existing
authorities and defining new
stakeholder engagement processes.
Susceptible to political pressures
which may influence rate setting or
delay needed capital investment;
borrowing capacity will vary
depending on the size of municipality.
Limited access to clean water state
revolving funds; transfers local
ownership to private sector subject to
PUC regulation. Costs include taxes
and returns to equity shareholders;
reliance on effective state regulation.
May involve wholesale only,
or full-service delivery for
regional or consolidated
service areas.
There are several different
ways to organize municipal
systems that can benefit
from regionalization,
although they may impact
the pros and cons outlined
herein; may involve public-
public partnerships.
May involve contractual
arrangements (public-private
partnerships).
Member	Regional not-for-profit corporation
Cooperatives	with board elected by members.
Singular responsibility for
compliance.
EFAB Financing Strategies to Promote System Regionalization • 8

-------
As local decision-makers consider these relative advantages and disadvantages of given structural options to
effect cost-effective, beneficial regionalization or consolidations, it is important to note that those decisions
and the decision-making process potentially impact a wide array of stakeholders.
Key Stakeholders
In developing findings and recommendations for EPA programs and procedures, EFAB identified the
stakeholder listing below as those primarily and directly impacted by potential changes to its programs and
policies.
•	Environmental Finance Centers
•	Local and regional chambers of commerce
•	Non-governmental organizations
o National offices for broad recommendation implication
o Local for specific consolidation examples
•	National Governors Association
•	National water associations
•	Regional planning authorities
•	Rural Utilities Service (USDA)
•	State public utility commissions
•	State water quality regulators (primacy agencies)
•	State water quantity regulators (permitting agencies)
•	State SRF administrators
•	U.S. Conference of Mayors
•	Water and wastewater customers
•	Water utility operators and managers
•	Water contractors and consultants
This listing does not account for the even broader array of additional stakeholders impacted by EPA policies
and programs that might become engaged in the exploration of beneficial regionalization initiatives.
Key Findings
Given the importance and breadth of potential stakeholder impacts, EFAB workgroup members concluded
that outlining a set of key findings would be important to provide appropriate context for its
recommendations. These key findings include that:
•	The large number and configuration of water, wastewater and stormwater utility service systems
present opportunities to enhance efficiencies and improve both the accessibility and quality of
services. While communities developed systems to serve their own best interests, in many cases
regionalization or consolidation may facilitate more effective water service delivery prospectively.
•	The water services sector faces several imperatives to invest in critical infrastructure and service
delivery capacity that may be facilitated by regionalization and consolidation initiatives that are
oriented toward protecting the public health and economic interests of customers and communities.
EFAB Financing Strategies to Promote System Regionalization • 9

-------
Address prevailing water quality issues, as well as new regulatory initiatives including contaminants
of emerging concern, will amplify economic, labor resource, and service delivery challenges facing
the water services sector.
Utility Size and Credit Profile
•	Credit rating agencies
(CRAs) are precluded from
structuring or advising.
•	CRAs recognize efficiencies,
declining marginal operating
costs and economies of scale
in their respective
assessments. CRAs'
determinations of credit
quality may have a material
impact on the costs of
borrowing and thereby the
economic impacts of
regionalization or
consolidation options.
•	Water utility service systems represent major community assets
about which information and decision-making authority generally
rests with local/community decision-makers.
•	The availability and accessibility of sound and objective
information about the relative advantages and disadvantages of
different regionalization and consolidation options for building
system capacity and improving service delivery may be limited.
•	Though credit rating agencies are precluded from structuring or
advising, their respective criteria capture potential benefits to
credit quality by way of economies of scale.
•	EPA-sponsored funding programs may incrementally impact the
financial landscape with respect to supporting beneficial
regionalization and consolidation options; the Agency's capacity
development and information dissemination efforts may provide
sound and objective information to local decision-makers.
These findings underscore a general assessment that EPA specifically, and more generally federal regulatory
and funding programs, have a limited role in state and local decision-making regarding water systems
regionalization and consolidation.
How, and by whom, a community chooses to receive water-related services is partly a function of history,
circumstances and culture. EPA does, however, serve an important role through a number of its policies and
programs. The EFAB workgroup's recommendations are oriented toward enhancing and amplifying EPA's
role in advancing beneficial regionalization and consolidation initiatives.
EFAB Financing Strategies to Promote System Regionalization • 10

-------
Recommendations
Recommendation #1
Promote and incentivize consideration of regionalization and consolidation alternatives through the Safe
Drinking Water Act (SDWA) and Clean Water Act (CWA) permitting processes, and through EPA-controlled
funding programs including the state revolving funds (SRF), Water Infrastructure Finance and Innovation Act
(WIFIA) and other grant programs. Facilitate funding for projects that address new or expanded drinking
water and wastewater management needs through regionalization or consolidation alternatives.
Description
New and expanded drinking water and wastewater facilities are often permitted and ultimately constructed
when viable alternatives exist within the area but are not within the control of the permittee. The result is
excess capacity is constructed, often with the financial assistance of EPA through the SRF or WIFIA,
potentially wasting valuable federal resources. Ultimately the decision to pursue new or expanded
water/wastewater capacity is a local decision. However, it is recommended that federal funding should not
be applied to projects where viable alternatives exist—even when the applicant has received all required
permits.
The proposed measures are grouped in two categories: those related to both permitting and funding, and
those related exclusively to funding.
Permitting and Funding Measures
1.	EPA should develop guidance that will clearly authorize, promote and allow funding for purchase and
use of existing capacity in water/wastewater systems where such purchase would eliminate the
need to expand or build new water/wastewater facilities. The guidance should allow a broad suite of
eligible costs including the funding of required interconnections as well as required modifications to
the existing facilities (not owned or operated by the applicant) in addition to the purchased capacity.
2.	EPA should work with the state permitting agencies and the SRF program administrators to develop
guidelines for applicants that require submittal of an Analysis of Regional Alternatives (ARA) with all
permit applications and funding requests for new or expanded water/wastewater facilities. The ARA
should address whether the objectives of an applicant's project could be met through a partnership
or contract to use existing capacity at another facility as well as restructuring ownership and
operational responsibility. This analysis should include a triple bottom line benefit analysis to
compare all aspects of the alternatives considered. All ARAs should be certified as true, complete
and accurate by a licensed professional engineer.
3.	EPA should require all SRFs' Intended Use Plan (IUP) submissions include a condition that any non-
compliant system seeking SRF funding must prepare and submit an ARA.
Discussion
Permitting regulations are focused on the specific environmental impact of the new or expanded
facility and cannot typically be withheld to force a permittee to use available capacity outside of
their control. Incorporating ARA requirements in permit applications would provide permitting
authorities with additional information to discuss and explore as part of the permitting process.
EFAB Financing Strategies to Promote System Regionalization • 11

-------
Additionally, SRF administrators are often under pressure to fund permitted projects and have
limited tools to address consideration of existing capacity that is not under the applicant's
control. The ARA process would provide supplemental information to the SRF administrators,
beyond the permit, that may facilitate leveraging the SRF funding to achieve a more effective and
efficient regional solution.
Funding Measures
State Revolving Funds
1.	EPA should authorize an interest rate incentive discount (50 basis points) for SRF projects that
meet the applicant's objectives through the use of existing capacity within the applicant's region.
In addition, each state may propose in the IUP, additional incentives for such projects
recognizing that each state is different and the type of incentive(s) offered must fit individual
state circumstances.
2.	Where the funding applicant and the regional existing capacity owner have different economic
characteristics and financial stress factors, the lowest applicable interest rate should be applied
to all SRF funds, regardless of which system the funds are applied.
Water Infrastructure Finance and Innovation Act
1. EPA should modify WIFIA project selection criteria within existing legal authority to add greater
priority to projects that meet the applicants' needs through use of existing capacity within the
applicants' service area or achieve consolidation or regionalization. Specifically, EPA should apply
a project ranking multiplier to projects that promote regionalization and other forms of
consolidation or coordination between systems and watersheds. This ranking multiplier, relative
to other project ranking categories, recognizes that promoting regionalization is a priority in the
WIFIA legislation and will ensure that regionalization projects continue to be ranked near the top
of projects submitted during the application ranking and funding allocation process.
External Grant Programs
1. Grant Program Coordination - EPA should develop a template, possibly in the form of an
memorandum of agreement between the affected departments within the agency, that
facilitates notice to and execution of grant applications/receipts and SRF funding for projects
that promote efficiency and optimize the delivery of water services through regionalization and
other forms of consolidation and/or coordination. In this way, EPA will be able to maximize the
impact of the annual grant funds appropriated by Congress.
Discussion
In addition to the direct WIFIA and indirect SRF programs, EPA receives annual
appropriations for and oversees several other grant programs. Some of these programs are
long-standing programs, like the SRF. Some programs are appropriated to EPA as temporary
"pilot" programs or even one-time grant programs. Leveraging separate sources of funds for
a particular project is almost always a net positive for the separate programs that are
providing the funds. The incentives provided by each program can combine to produce an
all-in, lower cost of funds for the project sponsor, thereby increasing the probability that the
project sponsor will undertake and complete the project.
EFAB Financing Strategies to Promote System Regionalization • 12

-------
Much like the EPA's current initiative to provide a framework for SRFs to work with FEMA to
expedite and facilitate the financing of critical environmental infrastructure in the aftermath
of a disaster, EPA should consider developing a framework that facilitates combining its
grant programs with the SRF program. Given that such a framework regarding EPA's various
grant programs and the SRF program would be solely within the jurisdiction of EPA given
existing legislative constraints, EPA could develop a framework that leverages its grant
program appropriations to prioritize the efficient and optimal operation of the nation's
water systems including regionalization and consolidation.
2. Grant Program Promotion through the Water Infrastructure & Resiliency Finance Center
(WIRFC) - EPA's Clean Water SRF and Drinking Water SRF programs should each develop
annually a synopsis of all available grant programs received by EPA and make the synopsis
broadly available through EPA's WIRFC system. The synopsis should identify opportunities within
each grant for systems to utilize the grant funds to partially finance projects
Discussion
Broad promotion of EPA's annual grant appropriations to eligible systems should be a
primary objective of the Administrator. Providing information on the grants (e.g. availability
of funds, project and recipient qualifications, deadlines) to the broadest number of qualified
recipients is critical to ensuring that EPA successfully administers each grant program in a
fair and expeditious manner.
To the extent that EPA grant funds are eligible to be combined with SRF financing as part of
an individual project's funding stack, and that such a project promotes system optimization
through regionalization or other forms of consolidation and/or coordination as
recommended in the previous paragraph, financing coordination between the SRF and the
grant program should be encouraged.
Implementation Considerations
The permitting and funding measure contemplates EPA's formalization and distribution of a policy to the
state DWSRF and CWSRF programs clarifying that all one-time fees related to accessing available service
and/or capacity be considered allowable - as well as any expenses that would otherwise be considered
ineligible. This policy should be promoted through EPA's regional offices, specifically through the liaisons that
represent the agency's administration of the SRFs and the individual SRFs.
EPA should include USDA in the development of the ARA guidelines and encourage the use of the ARAor
similar process in the USDA RD funding process.
Guidance should be developed under an expeditious schedule. The schedule outlined below reflects the
approximate time frames required:
•	Develop guidance that allows the use of SRF and/or WIFIA to fund purchased capacity by October 1,
2020.
•	Develop the Analysis of Regional Alternatives Guidelines by October 1, 2020 subject to EPA approval.
•	Develop permitting guidance that requires an ARA with all permit applications for new or expanded
facilities by October 1, 2021.
EFAB Financing Strategies to Promote System Regionalization • 13

-------
• Two new or expanded water/wastewater projects are replaced by use of regional capacity through
the ARA process and funding incentives by 2025.
WIFIA Program Concerns
During our review concerns regarding the WIFIA program surfaced and are addressed below:
a.	Transparent Allocation Process - The methodology which the EPA Administrator employs to
allocate the available WIFIA funds is neither a public nor transparent process, in contrast to two
of EPA's successful funding programs, the SRF program for Clean Water and Drinking Water
respectively. Under each of these programs, states are required to propose a ranking
methodology for project applications, notice to the public of the opportunity to provide
comment on the proposed methodology and then submit the proposed methodology to EPA for
final approval as a prerequisite to receipt of the annual SRF grant funds. Allowing the public to
comment on the methodology as well as the state's policy priorities can provide invaluable
feedback regarding the methodology policy as well as logistics in the implementation of the
program. EPA should seek formal public comment on its WIFIA ranking methodology prior to
final adoption.
b.	Reporting-The WIFIA statutory authority requires that EPA report to Congress on the program
during the 2019 fiscal year. The WIFIA program and EPA might benefit from having an outside,
independent review of that report. Such review would offer objective insights and feedback and
make non-binding recommendations to WIFIA and EPA as to Program improvements.
EFAB Financing Strategies to Promote System Regionaiization • 14

-------
swas?ฎ,!,!,


Recommendation #2
Promote the use of "Safe Harbor" provisions to protect systems that absorb troubled systems from
regulatory penalties for a reasonable period of time, consistent with existing statutes and regulations.
Description
Healthy utility systems may be hesitant to consolidate with non-healthy systems out of concern that the
system to be absorbed may have existing regulatory issues related to meeting permits or existing
enforcement obligations that would transfer to the absorbing utility upon consolidation. Additionally, the
absorbing system may discover compliance issues that were not disclosed or enforced prior to consolidation.
Provision of some protection from enforcement penalties and existing compliance cost obligations through a
"safe harbor" (hold harmless) mechanism is needed to encourage consideration of consolidation by healthy,
viable systems through a reasonable transition period.
Two of the challenges to regionalization/consolidation are the unwillingness of a larger system to assume the
regulatory liabilities of other systems and the lack of financial resources to address both immediate and
longer term corrective actions. Utilities that have consolidated and absorbed troubled systems highlight
consolidations where they were immediately held to higher standards and subjected to stringent
enforcement with short compliance periods and no relief from existing permit limits that could not be
achieved by the existing system. This recommendation addresses both issues by establishing standard
guidelines for regulatory transition and a pool of funding to address corrective actions.
Implementation Considerations
1. EPA should work with the state water/wastewater permitting authorities to develop guidelines for a
consolidation Regulatory Transition Program. The focus of these guidelines is to provide a standard
approach to address the assumption of regulatory liability by a utility assisting with consolidation.
Existing permit(s) should be revised or a friendly consent order/decree entered to provide a
reasonable, cooperative structure for the assisting utility to resolve new or existing compliance
issues associated with the troubled utility to be consolidated in a reasonable period of time.
The regulatory transition program guidelines should at a minimum address these key elements:
a.	Existing permits: Should be revised or a friendly consent order/decree put in place to resolve
new or existing compliance issues associated with the system to be consolidated.
b.	Interim permit limits: Where the consolidated system is not capable of meeting permit limits
when operated in a professional and workmanlike manner, interim limits should be established
to reflect the capability of the system to be consolidated.
c.	Existing orders -consolidatedsystem: Orders should be reviewed and terminated or revised as
appropriate to avoid any successor liability or for new liability post-consolidation for the assisting
utility.
d.	Existing orders - assisting utility: Orders should be reviewed and consideration given to
collaborative revisions in recognition of the additional compliance efforts being assumed by the
assisting utility (reopener in Consent Decree terminology).
e.	Time: Regulatory transition should be allowed a reasonable period of time to complete
corrective action and achieve compliance without risk of enforcement.
EFAB Financing Strategies to Promote System Regionaiization • 15

-------
f. Protection from third party actions: Appropriate regulatory tools should be employed to
provide shielding from third party actions with a commitment from EPA to assist with the
defense of assisting utilities.
2. EPA should work with state SRF program administrators and a broad range of stakeholders to
develop a defined funding pool under the SRF in each state for corrective actions required by the
regulatory transition program.
a.	Immediate corrective actions: To the extent corrective actions are required immediately for
protection of public health and/or the environment, funds should be provided in the form of
grants or principal forgiveness loans to the assisting utility.
b.	Longer-term corrective actions: Where corrective actions can be planned and programed by
the assisting utility and the compliance period provides adequate time to minimize financial
impact to the assisting utility, funds should be provided at the appropriate interest rate based
solely on the financial capability of the troubled utility's customer base, restricted to use by the
assisting utility for compliance actions at the troubled utility.
EFAB Financing Strategies to Promote System Regionaiization • 16

-------
Recommendation #3
Examine the impact EPA's Public Water System Supervision (PWSS) grant allocation formula has on creating
disincentives for state governments that actively promote beneficial consolidation of water systems to
determine if the formula should be changed.
Description
States rely on EPA's PWSS grants to cover a significant portion of their water system regulatory and oversight
responsibilities. In 2017, EPA distributed approximately $100 million in grants to tribes and states following
an allocation formula that has been in place since at least 2008.
The amount of funds each state receives is based on the total annual appropriation for a particular year and
on four factors. For each of the factors, a state's allocation is dependent on how the state compares to the
rest of the country as follows:
•	Number of community water systems and non-transient non-community water systems in the state
relative to the total nationwide (56 percent of total)
•	Number of transient non-community water systems in the state relative to total nationwide (14
percent of total)
•	Population of state relative to national population (20 percent of total)
•	Geographic area relative to national area (10 percent of total)
The number of different types of systems and the state's population may change from year to year, resulting
in a different percent of allocation. For example, if a state's population and number of systems increases
faster than other states, they will see their allocation increase. Conversely, if a state encouraging
consolidation successfully reduces the number of systems, their allocation may decline relative to states that
have not promoted consolidation.
The fact that 70 percent of what a state receives is directly proportional to the number of systems they have
relative to other states could provide an unintended disincentive for a state to actively support beneficial
consolidation. Such an approach could lead to a reduction in funding.
It is important to note that the formula is also designed to allocate funds in proportion to the costs different
states incur in running their programs, so an analysis should also examine whether a reduction in number of
systems substantially reduces the costs of a state supervision program.
Implementation Considerations
•	Study the impact of the current PWSS grant allocation formula on states that have implemented (e.g.
Alabama and Kentucky) or are in the process of implementing a major beneficial consolidation
initiative (California or North Carolina).
•	If the current allocation formula is determined to have a significant negative impact on states that
have reduced or would like to reduce the number of their systems, consider modifying the formula.
•	Carry out a similar assessment for other EPA allocations such as funds allocated for supervision of
wastewater systems and facilities.
EFAB Financing Strategies to Promote System Regionaiization • 17

-------
Recommendation #4
Review capacity development policies and programs at the state level to ensure consideration of
beneficial regionalization and consolidation options.
Description
The 1996 Amendments to the federal Safe Drinking Water Act (SDWA) require states to (1) ensure that all
new community water systems have adequate technical, managerial, and financial capacity, and (2) develop
a capacity development strategy for existing water systems. The fundamental goal of capacity development
under the SDWA is to ensure consistent compliance with drinking water standards. Water system capacity is
widely understood to be, at least partly, a function of scale. Regionalization offers scale opportunities that are
especially beneficial to very small systems (those serving fewer than 1,000 connections or 3,300 people).
With the SDWA mandated capacity development framework, each state has a ready policy and toolset with
which to consider regionalization options. Some states have used these tools very effectively. Despite
progress, the full potential of the capacity development framework has not necessarily been realized.
Revisiting and revising capacity development strategies could be a means to promoting beneficial
regionalization.
Capacity (or "capability") development aims to address deficiencies in and make improvements to system
performance. The capacity development provisions are found in ง1420 of the
SDWA (as detailed in Appendix IV, Part II). States are required to ensure that
new systems have adequate technical, managerial, and financial capacity and
to develop capacity development strategies for existing systems.
Technical, managerial and financial capacity are understood as highly
interrelated and interdependent. In other words, strength or weakness in one
area has implications for the others. The particular elements of capacity
(provided in Appendix IV, Part III) were defined through an EPA-led and
stakeholder-based process. They can be used for evaluation and planning
purposes.
Strategies for capacity development include methods or criteria to identify and prioritize: water systems that
lack capacity; factors that encourage or impede capacity; and the authority and resources needed to
promote training and certification; provide assistance for compliance and encourage partnerships. States
may withhold SRF funding to ensure that public funds are well invested and, ideally, leveraged to build
adequate system capacity.
Implementation Considerations
EPA could provide specialized assistance to support state programs that are interested in strengthening how
their state capacity development program addresses regionalization. A first step would be to develop an
inventory of policies and programs (original and updated) and an evaluation of their use and impact based on
compliance and consolidation criteria. A second would be to develop guidance on means of integrating
regionalization into state policies and programs, focusing on opportunities and barriers as well as tools and
incentives allowed for by law.
Even within the capacity development framework, the role of the federal and state government in requiring
or even encouraging consolidation is limited. Authority in this area is mainly to cases of noncompliance with
Technical
Managerial
Financial
EFAB Financing Strategies to Promote System Regionalization • 18

-------
the SDWA. Economic considerations are generally under the purview of state public utility commissions,
whose jurisdiction is mainly limited to privately-owned utilities.
Recommendation #5
Enhance the scope and structure of EPA's guidance and support for objective, well-informed evaluation of
regionalization options through EPA's information tools (e.g. Water System Partnership website) and active
engagement of key stakeholders.
Description
Utilities and local governments lack a well-recognized, centralized repository for information and guidance on
regionalization and consolidation opportunities and experiences. At the same time, EPA has a familiar and
established framework to gather information, educate stakeholders regarding regionalization and
consolidation opportunities, and disseminate objective, factual information. This recommendation calls on
EPA to enhance and amplify its resources, tools and activities to help inform and educate the water sector.
Implementation Considerations
•	EPA should establish a single landing page on its website that would provide information on
regionalization for water and wastewater utilities. The information could be organized by subject
matter and presented in a searchable database. Currently, EPA's website has useful information,
however, the information is scattered across various landing pages.
•	EPA should consider engaging in an information gathering exercise to obtain information about best
practices regarding regionalization strategies. This information should be provided on the subject
landing page. The information gathering exercise will also serve as an initial outreach effort to inform
local jurisdictions, utilities and consultants of EPA's efforts to provide guidance regarding
regionalization (EPA routinely engages in a similar process when preparing Effluent Limitation
Guidelines applicable to industry categories).
•	EPA should develop a strategy for promoting regionalization and consolidation options through state
revolving fund requirements. Information gathered by EPA should help to shape those requirements.
•	EPA should include information on best practices for both water and wastewater utilities. Whereas
decisions by local utilities to regionalize, or how to regionalize, will be based upon the unique
conditions they face, best practices implemented by other utilities can inform local decisions.
Information may include both technical and financial practices.
•	EPA should also consider providing information regarding state or local legislation that has impacted
regionalization strategies. This helps to provide local governments information as to legislative tools
to advance their strategies.
•	EPA should develop an outreach program to inform stakeholders of the information made available
on its website. EPA could engage in "train the trainer" sessions with state officials, local governments
or consultants.
EFAB Financing Strategies to Promote System Regionalization • 19

-------
Recommendation #6
EPA should facilitate informed decision-making by providing states and local officials, as well as other
stakeholders, with objective information about legislative and regulatory initiatives and policy tools related to
potentially beneficial regionalization or consolidation of water and wastewater systems.
Description
Increased knowledge of state legislation, regulations and other policies related to regionalization and
consolidation will allow states and water and wastewater system managers to make informed decisions and
policy development. A repository of legislative and regulations will allow governmental decision-makers to be
able to evaluate and compare policy options and adopt approaches consistent with their mandates and
priorities. Water and wastewater system managers will be better positioned to evaluate and compare
structural options for their systems. The repository could be integrated with EPA resources on capacity
development. Utilities and other water and wastewater managers with this information may also be able to
make more informed decisions around regionalization/consolidation and obtain greater access to financial
assistance.
Implementation Considerations
EPA should create an information repository regarding state water sector policy related to regionalization
and consolidation, possibly through the Water Infrastructure and Resiliency Finance Center, and integrated
with available resources on capacity development, to facilitate evaluation and comparison of regionalization
and consolidation policies.
States would be able to use this information to enhance their enforcement, financing and capacity
development programs by including consideration of structural options and related incentives that are
consistent with the goals of compliance with federal and state drinking water and clean water standards.
States might also use this information to examine legislative and regulatory actions used by other states to
bring non-compliant systems into compliance and examine financial incentives offered through these state
actions to assist regionalization efforts.
The repository could include legislation, regulations, rules or other policies from governmental sources, such
as drinking water and resource agencies, public service commissions and regional and local governing bodies.
Legislative topics in the repository should be linked to EPA guidance, reports and trainings. This includes asset
management, capital investment, security, operations and maintenance and accountability.
Resources in the repository could relate to such areas as:
•	Regionalization options for promoting technical, managerial and financial capacity.
•	Regional approaches to asset evaluation, management and planning.
•	Regional approaches to water resource management and protection.
•	Review and approval of mergers and acquisitions, including privatization.
•	Asset valuation and ratemaking treatment of utility acquisition costs.
•	Consolidated rates (single tariff) for multi-system regional utilities.
•	State fair market value legislation and regulations on utility asset valuation and acquisition
•	Methods for evaluating customer impacts, public benefits and tradeoffs.
EFAB Financing Strategies to Promote System Regionalization • 20

-------
•	State-ordered (mandatory) takeovers in the context of system failures.
•	Regional collaboration and mutual aid for security and resilience.
•	Enforcement and financing incentives tied to regional solutions.
•	Rules and incentives connecting regionalization to SRF and state loan and grant programs financing
eligibility and use.
•	Case studies in regionalization including public-public and public-private partnerships.
Conclusions
The recommendations for EPA policies and programs are grounded in the recognition that decisions
regarding water system governance are generally local and influenced by subjective factors as well objective
information. The recommendations also reflect recognition that many systems, including many small and
rural systems, have established records of fully compliant and efficient service delivery. Conversely, there is
potential for implementation of regionalization and consolidation options to go awry, resulting in poor
service delivery or higher cost outcomes. From a broad policy perspective, there is no question that the
water sector could benefit greatly from sound regionalization or consolidation initiatives. Collaborative and
mutually beneficial models may be implemented using any one of a number of structural options ranging
from formal creation of a regional public authority to simple cooperative agreements across systems.
Mutual benefits may derive in a number of forms related to technical, financial and managerial and capacity.
Technical benefits may include enhanced capacity to ensure compliance with all applicable regulatory
requirements and to optimize system operations (using regionally deployed advanced technologies).
Managerial benefits may derive from enhanced capacity to attract, develop and retain highly qualified
personnel, to organize and staff with singular accountability to regional system owners (under any one
alternative structural option). Financial benefits may derive from realizing operating efficiencies, regional
optimization and development of built infrastructure and more favorable terms for capital financing.
Nevertheless, EFAB workgroup members noted that there are substantial barriers to regionalization that
have historically impeded beneficial sector consolidation and persist today. Paramount are political concerns
about changes in governance that may alter or diminish local control over infrastructure development,
service delivery and rates for services. While opportunities exist for structure regionalization or consolidation
options to allay these concerns (and obtain objective information on potential public health and economic
gains), neither federal nor state regulatory or funding programs have focused specifically on incentivizing
regionalization or consolidation initiatives. Other barriers include state and community specific legal
frameworks that limit options to spread costs regionally or divest system assets.
Insofar as the potential economic and public health protection gains that may be realized through
consolidations will be all the more important in the face of new challenges (including, for example, financing
of full lead service line replacements) and continuing infrastructure reinvestment needs, it is critically
important that EPA help advance beneficial, cost-effective regionalization and consolidation initiatives. EFAB
recommends that EPA do so by modifying its permitting and funding programs to incentivize local and state
decision-makers and by enhancing and amplifying its information services and support programs to help
ensure that key decision-makers are guided by complete, accurate, and unbiased information.
EFAB Financing Strategies to Promote System Regionalization • 21

-------
Appendices
Appendix I: EFAB Charge
Title: Financing Strategies to Promote System Regionalization
Client: Office of Water
The Office of Water (OW) requests that the Environmental Finance Advisory Board (EFAB) identify and
evaluate financing strategies that have been designed to assist and or incentivize systems to implement
governance strategies that may include system consolidation, regional projects and/or shared service
arrangements.
Goals:
•	Identify and evaluate the various financing options developed to underwrite regionalization.
•	Investigate the value of shared governance or alternative governance strategies as effective tools to
address deferred maintenance.
•	Examine different governance models (public or private) and how they can be used to improve
system management including centralized management of dispersed systems and decentralized
systems.
•	Through examples, highlight potential benefits and/or disadvantages of shared governance or
alternative governance strategies to drinking water and wastewater utilities of increased
operational efficiencies in reducing cost, maintaining rates and increasing funds available for capital
projects.
Problem to Be Addressed:
Small and mid-size water systems face unique challenges in providing affordable drinking water and
wastewater services that meet federal and state regulations. These challenges include aging infrastructure,
increasing costs and declining rate bases, and limited technical and managerial capabilities. Water systems
may overcome these challenges by developing partnerships with other systems.
A defining characteristic of the United States' water sector is its size. The U.S. has approximately 52,000
community water systems (CWSs), but just 8 percent of the systems serve 82 percent of the population.
Approximately 83 percent of CWSs serve fewer than 3,300 people. Over half of all CWSs (56 percent) serve
fewer than 500 people. From a financial perspective, the median annual revenue of systems serving fewer
than 500 people is about $25,000. This large number of regulated CWSs presents a significant administrative
burden on regulators at both the State and Federal level. Over half of the regulated entities have limited
annual incomes and are likely to have problems maintaining financial, managerial and technical capacity to
provide safe drinking water on a sustained basis.11
There are approximately 14,500 permitted wastewater systems in the United States. While the number of
wastewater systems is significantly less than the number of drinking water systems many of the same
11 The data cited in this paragraph comes from an EPA preliminary report Compendium of Full-Cost Pricing Issue Papers: Covering the Basics
2009. This report was not finalized.
EFAB Financing Strategies to Promote System Regionalization • 22

-------
problems apply. In addition, many small wastewater systems face greater technical challenges than drinking
water systems without a support system like the Safe Drinking Water Act's Capacity Development Program.
Regionalization, cooperation, and differing governance models could potentially yield benefits to many
communities. Alternatively, some of these models could have unintended impacts within some communities
and must be appropriately understood before implementation. Systems must be able to able to quantify the
real benefits or lack there-of, of cooperative agreements and how they impact each individual system or the
combined systems' technical, managerial and financial capacity. Identifying the specific areas where
improvement can be expected and developing ways to quantify improvement are critical steps in helping
systems evaluate alternative governance structures. For example, when two or more systems partner, the
individual utilities sometimes have different rates that are driven by each utility's individual operating
expenses and debt structures. Resolving rate structure issues will be a significant problem that must be
addressed for shared governance to be successful. In particular, small systems merging with larger systems
are concerned about adverse rate impacts.
Many systems exist in communities that face challenges of low income, high unemployment, and loss of
population - all characteristics associated with non-sustainable system operations. These communities
deserve adequate water and sewer services. Regionalization and cooperation have the potential to help
these communities provide needed water services
Charge Questions:
1.	What are some examples of alternative governance within and outside the United States and their
potential impacts (if quantifiable)?
2.	What financial incentives have been used or have the potential to successfully incentivize utilities to
adopt or participate in regional solutions?
3.	Do alternative governance approaches help utilities provide the same if not better services?
4.	Can we measure a linkage between funding/financing options used and combined utilities ability to
address outstanding deferred maintenance deficits?
5.	How have different governance models impacted the ability of utilities in meeting compliance
requirements, achieving operational efficiencies and financial viability?
6.	How does alternative governance influence rate structures?
7.	Does alternative governance help water utilities address affordability issues? Are there lessons
learned that can be identified and shared?
8.	How can co-funding be successfully used to spur successful alternative governance including capital
projects needed to support regional solutions?
EFAB Financing Strategies to Promote System Regionalization • 23

-------
Appendix II: Structural Options
Public Authorities and Districts
Public authorities are typically established by local, state or federal action, whereupon they act as separate
and independent governmental entities. Approval actions will convey powers required for water resource
utility asset development and operation and will typically define the entity's scope and governance structure.
•	Governance Structure: Public authorities are distinct governmental entities requiring legislative
authorization that will typically prescribe a governance structure defining community
representation and decision-making powers.
•	O&M Expense Management: Public authorities have singular responsibility to efficiently
manage O&M expenses across a prescribed area with or without regard to political jurisdiction.
•	Capital Financing: Public authorities tend to enjoy unfettered access to credit based primarily, if
not solely, on the attributes of the system, customer base and utility operating conditions within
their control.
•	Workforce Management: Public authorities as independent entities are employers with direct
responsibility to attract, develop and retain personnel. They establish compensation and
employee incentive systems, training and safety
programs and have direct connectivity to organized
labor.
•	Water Affordability: Public authorities may address
water affordability challenges across service area(s),
potentially providing for universal access to service as a
"common-to-all" expense that may be spread and
shared regionally as a component of system revenue
requirements. As regional utilities, public authorities may
leverage the operations of component systems and
social service agencies.
•	Regulatory Compliance Responsibility: Public authorities
that are responsible for service delivery in a given region
will have responsibility for regulatory compliance. If a
wholesale provider, these responsibilities align to
wholesale service functions. In general, creation of a
public authority will involve assignment of permits to the
newly designated utility services provider.
Potential Incentives: Because public authorities require legislative action granting governmental authorities,
processes are state-specific and often politically charged. Flexible legislative authority would clearly facilitate
establishment of such authorities where such legislation is not in place. More generally, providing access to
capital on relatively favorable terms, through the municipal debt markets, governmental lending and explicit
recognition of relative advantages in municipal credit ratings could accelerate establishment of regional
public authorities.
Supporting EPA Initiative Options: EPA could help accelerate the creation of regional public authorities
through both incentives and enforcement actions.
GREAT LAKES WATER AUTHORITY
•	Federal mediated agreement in
conjunction with Detroit bankruptcy
filing. GLWA provides wholesale
water and sewer services to
communities in SE Michigan.
•	6 member governing board with
supermajority voting provisions for
key decisions.
•	GLWA leases regional system
assets from the City of Detroit for
$50 million per year.
•	Regionally funded low-income
customer assistance program.
•	Cost savings derived from GLWA
re-financing of Detroit Water and
Sewerage Department debt and
system optimization.
EFAB Financing Strategies to Promote System Regionalization • 24

-------
Municipal Services (Wholesale & Retail)
Suburban communities surrounding core cities began to grow and develop in the 1960s. Since most core
cities had developed the water infrastructure to serve citizens and businesses, it was common for core cities
to provide water service to the growing suburban communities, leveraging their engineering, capacity
development, operations and management capabilities. Service to these suburban areas were structured on
either a wholesale basis with the suburban community maintaining responsibility for its local distribution
network or on a retail basis with the core city having singular responsibility for service to the individual
customers.
With the enactment of the Clean Water Act and the associated Construction Grant Program in the mid
1970s, development of wastewater treatment systems providing regional service was promoted by EPA. As
such, many core cities became the regional provider of wastewater, treatment and disposal and sometimes
collection service.
•	Governance Structure: The authority for municipalities to provide regional water and/or
wastewater services may be subject to state legislative actions. Municipalities in home rule
states are typically granted wide-ranging authority and the provision of utility service beyond its
municipal boundaries are not subject to state
legislative approval. Municipalities in Dillon's Rule
states, however, require legislative or regulatory
authorization to provide services beyond municipal
boundaries. Utility service agreements between the
service provider and the political entity receiving
service are sometimes necessary.
•	O&M Expense Management: In situations in which a
municipality provides wholesale regional service, the
municipality is responsible for the management of the
backbone elements of the utility system. Entities
receiving the wholesale service are responsible for the
management of their local distribution and/or
collection system operations. When a municipality
provides retail service outside its boundaries, the
municipality is responsible for the management of all
aspects of the utility system to the individual retail
customer.
•	Capital Financing: Providers of either wholesale or
retail regional service are responsible for capital financing. The economic strengths of the region
can be considered by credit rating agencies and the investment community. Municipal utilities
tend to enjoy unfettered access to the credit based primarily on the attributes and performance
of the enterprise funds used for regional system financing. The entities receiving wholesale
utility service will be responsible for the financing of their individual local systems.
BALTIMORE METROPOLITAN
WATER AND WASTEWATER
•	Authorized by actions of the
Maryland General Assembly.
•	Baltimore provides retail service
in the city and Baltimore County
and wholesale services regionally
under service agreements.
•	Baltimore manages the systems
through enterprise funds
established in 1979.
•	Funds are supported solely by
system ratepayers without profit
or loss to other funds of the city.
Funds cannot be siphoned to the
city's general fund.
•	Partnering counties contribute
their fair share of capital
investments based on their
percentage of usage of these
facilities and systems.
EFAB Financing Strategies to Promote System Regionalization • 25

-------
•	Workforce Management: The municipality providing the regional service has direct
responsibility for attracting, developing and retaining personnel. The municipality establishes
compensation and employee incentive systems, training and safety programs, and has direct
connectivity to organized labor.
•	Water Affordability: Typically, water affordability challenges for systems providing or receiving
wholesale service are addressed at the local level rather than through a shared cost to all users.
•	Regulatory Compliance Responsibility: The individual municipal utility that is responsible for
service delivery in a given region has responsibility for regulatory compliance. If a wholesale
provider, the municipality will typically hold responsibility for wholesale service functions and be
entitled to returns for assumption of associated risks. In general, compliance liabilities are
aligned to the municipality's enterprise funds without recourse to the community's general
fund.
Private and Investor-Owned Companies
Larger private and investor-owned companies are able to take advantage of access to capital and economies
of scale and are subject to state public utility commission (PUC) oversight. In fully owning, managing and
operating a water system or in working with municipalities via public-private partnerships, some utilities can
meet regional needs by designing, rebuilding and operating local water and wastewater systems. Privately
owned systems may also offer strong accountability in water management, particularly if subject to state
regulatory oversight and review.
Large investor owned companies are similar to many electric and gas utilities with contiguous service
territories. Electric and gas utilities have experienced consolidation over the last two to three decades, mainly
in geographical regions. Privately owned utilities have incentives to make investments to remediate aging
infrastructure build resiliency and meet safety, environmental and renewable resource requirements while
leveraging synergies obtained from consolidation.
•	Governance Structure: Private and investor-owned water and wastewater utilities are generally
governed by boards of directors elected by the shareholders that work to ensure proper
governance and accountability at various levels of the organization. Publicly traded utility
companies must comply with Securities & Exchange Commission requirements over corporate
governance and disclosures.
•	Rate Setting Authority: Most private, investor-owned utilities are regulated by state PUCs and
are required to take part in formal, public hearings and proceedings to set rates. Whereas
publicly owned systems generally set their own rates, most private utilities must undergo state
PUC approval processes that allow the ability to recover prudently incurred investments and
operating costs. Rate oversight by PUCs is intended to assure that customer rates are as low as
possible, consistent with high-quality and reliable service, while also allowing the utility to attract
the capital necessary to invest in infrastructure.
EFAB Financing Strategies to Promote System Regionaiization • 26

-------
swas?ฎ,!,!,


•	O&M Expense Management: By operating on a larger scope and serving multiple communities,
regional water and wastewater providers can take advantage of economies of scale, utilizing a
central staff for billing, engineering, operations, water quality research and administrative needs.
This provides bargaining power when it comes to paying for goods and services. Reduction of
administrative costs may help to preserve customer-generated revenue headroom for much-
needed infrastructure investments.
•	Capital Financing: The majority of publicly traded water
and wastewater utilities have strong credit ratings and
balance sheets, allowing access to capital from lenders
on relatively favorable terms. These entities' costs of
capital are impacted by their capital structures, allowed
rates of return on internal equity, and interest rates on
borrowings.
•	Workforce Management: Privately owned systems
carry responsibilities for attracting, retaining and
developing utility staffs. This includes providing the
training necessary to meet increasingly complex
regulations. Partnership agreements and acquisitions
may be structured to prioritize hiring of incumbent
utility staff. Private companies' regional or consolidated
area operations may help address challenges in staffing
related to smaller systems.
•	Low-Income Affordability: Private water systems'
potential ability to spread infrastructure costs over
large service areas (particularly in states that allow
single-tariff pricing) and obtain approvals for customer assistance programs (without the same
constraints on use of rate revenues that apply to publicly owned systems in many states) may
help ensure access to services. Public utility commission approval is required for all rate-related
matters.
•	Regulatory Compliance Responsibility: Contracting with a private water service provider may,
subject to permitting provisions, enable communities to transfer primary responsibility for
regulatory compliance to the private service provider. In partnering with large private water and
wastewater utilities, municipalities can benefit from the companies' expertise12 and compliance
monitoring resources.
Privately owned systems face a fundamentally different system financing landscape relative to publicly
owned systems. While requirements to earn returns for private shareholders are an inherent financing
obligation, some changes in access to financing resources could help level the playing field in support of
private investment in regional or consolidated systems, for example, by:
12 Many large private water and wastewater service companies have developed expertise of scientists, engineers and public health professionals
to address multiple regulatory compliance challenges. For example, they have developed capacity to identify and develop solutions for new
threats to source water quality. Communities can also benefit from collaborations with governmental entities, including EPA, consultants,
universities, other utilities and national water research agencies.
DANA / LONG POINT / READING I
ANCONA PUBLIC WATER DISTRICT
IS
•	District obtained $1.2 million loan to
construct 21 miles of pipeline
•	Customers charged $45/month to
pay off loan. Average water bill $90,
twice that of surrounding
communities
•	District discussed benefits of
acquisition with Illinois American I
Water
•	Illinois Water System Viability Act
utilized to set value of system
•	District received $1,075 million,	j
enough to retire loan
•	Customer bills cut 50% by eliminating j
debt service
•	Customers placed on Illinois America
Water rate structure	(
•	Customers receive high-quality	[
service at no additional cost
EFAB Financing Strategies to Promote System Regionalization • 27

-------
•	Ensuring municipalities' access to private activity bonds to facilitate public-private partnership
financing.
•	Expanding privately owned systems access to Clean Water State Revolving Funds for wastewater
system investments when acquiring non-compliant municipal systems.
Supporting EPA Initiative Options:
•	EPA support is needed for privately owned utilities to gain expanded access to Clean Water State
Revolving Funds for wastewater.
•	EPA should impose and ensure consistent standards and enforcement of regulations, including, for
example, source water monitoring for contaminants, such that compliance mandates include
consideration or public-private partnership options that could facilitate sharing of expertise and
knowledge.
Member Cooperatives
Cooperatives are typically created by individuals desiring to join together to meet their common needs
through a jointly owned and democratically controlled entity. Typically, not-for-profit cooperatives are
member-owned. Membership is required to receive service and is by individual customer with a single vote.
Cooperatives are formed under state statutes, usually not specific to water, that define incorporation
procedures, powers and limitations.
•	Governance Structure: Cooperatives are distinct corporations governed by a board elected by the
membership. The incorporation documents require by-laws (or similar self-governing policies) that
define purpose, membership eligibility as well as governance process. These typically require member
approval to establish and amend. Cooperative board members are most often uncompensated
volunteers.
•	O&M Expense Management: Shared responsibility among members to deliver services at cost (not-for
profit). The board determines budget and rates required to recover costs.
•	Capital Financing: Cooperatives in the U.S. are generally distributed among rural and suburban
communities and usually access capital through USDA Rural Development program as well as tax-
exempt financing
•	Workforce Management: Cooperatives as independent entities are employers with direct
responsibility for attracting, developing and retaining personnel. They establish compensation and
employee incentive systems, training and safety programs. Very small cooperatives may not have
employees, relying on contracted services or "volunteer" labor by board members.
•	Water Affordability: The cooperative model is based on people helping people. To that extent,
cooperatives may address water affordability challenges across their membership through their cost
recovery model, building in "low-income" assistance. The cooperative model is more flexible in
developing such programs as they are member-owned and member-governed and can avoid some of
legal equity-based restrictions placed upon traditional public utilities.
Potential Incentives: Creating or joining existing cooperatives may be challenging for an established utility
based on the entity joining. State laws governing creation of cooperatives need to be explored and some
EFAB Financing Strategies to Promote System Regionaiization • 28

-------
grant dollars may be needed to navigate the legal issues may assist in getting existing utilities to consider the
cooperative model. Access to capital may be the greatest incentive.
Supporting EPA Initiative Options: EPA could help accelerate creation of cooperatives through both
incentives and enforcement actions.
ser Options
Inter-System Cooperation Agreements
Inter-system cooperation, either by formal written contracts or by informal agreements, provides a practical
way of addressing problems when regionalization or consolidation is not feasible. Intra-system arrangements
are of two major types: (1) provision of a service from one system to another; and (2) a joint action
agreement between two or more systems for a specific function. Examples of intra-system cooperation
agreements include:
•	Contract Management and Operations: Contracts for management, operation or maintenance are
used between systems when one system has the technical, financial and managerial capacity to
provide services to other systems. Some contracts are limited to specific services such as sampling or
meter reading, while others are more extensive to include the complete operation, maintenance and
management of a system.
•	Mutual Aid and Assistance Agreements: A mutual aid and assistance agreement provides a method
for systems affected by natural or human-caused incidents to provide and receive emergency aid and
assistance in the form of personnel, equipment, materials and other services.
•	Cooperative Purchasing: A cooperative purchasing agreement allows systems to conduct
procurement activities for each other. Systems can increase their purchasing power by pooling their
needs for common goods and services.
Potential Incentives: Formal and informal arrangements to cooperate have been around for many years,
however, there are little to no incentives from public funding authorities at the federal or state level. When
systems decide to cooperate formally, they can be recognized for taking advantage of economies of scale
through more favorable terms in governmental lending programs.
Supporting EPA Initiative Options: Federal funding agencies for water and wastewater systems could
encourage consideration of cooperative arrangements as part of the feasibility review for projects.
EFAB Financing Strategies to Promote System Regionalization • 29

-------
Appendix III:
Structural Profile of Community Water Systems in the U.S. based on EPA
SDWIS data, 2018 Q4
U.S. Community Water Systems by Size and Ownership
Based on USEPA SDWIS 2018 Q4 data
System Type
Governmental
Non-Governmental
Population Served
Greater than 100,000
10,001 to 100,000
3,301 to 10,000
501 to 3,300
Less than 500
*Finest level of geographic resolution is within the county served
Source: Institute of Public Utilites (MSU) 2019
http://ipu.msu.edu/
EFAB Financing Strategies to Promote System Regionalizatiori • 30

-------
swas?ฎ,!,!,



Number
% of Total
Pop. (mil.)
% of Total
Total community water systems
49,711
100.0%
310.1
100.0%
Governmental systems
25,764
51.8%
269.2
86.8%
Local government (municipal, townships, counties,
districts, authorities)
24,227
48.7%
261.0
84.2%
Tribal government
716
1.4%
1.0
.3%
State government
454
0.9%
4.7
1.5%
Federal government
367
.7%
2.5
.8%
Nongovernmental systems
22,718
45.7%
36.4
11.7%
Private companies
Not-for-profit (associations, cooperatives, mutual
companies)
Ancillary (mobile home parks, schools, hospitals)
Not classified (recorded as "public-private")
1,229
2.5%
4.5
1.4%

Wholesale water sales
Wholesale own water
938
1.9%
27.4
8.8%
Wholesale purchased water
238
0.5%
3.8
1.2%
Do not wholesale
48,535
97.6%
279.0
90.0%

Production or purchase
Produce own water
40,351
81.2%
237.4
76.6%
Purchase water
9,335
18.8%
72.7
23.4%
Not reported
25
.1%
9,690
.0%
Community water systems by size
<=100 (included in <500)
11,174
22.5%
0.7
0.2%
<=500
27,045
54.4%
4.6
1.5%
501-3,300
13,339
26.8%
19.2
6.2%
3,301-10,000
4,992
10.0%
29.3
9.5%
10,001-100,000
3,901
7.8%
112.5
36.3%
>100,000
434
0.9%
144.6
46.6%
Top 50 systems (included in >100,000)
50
0.1%
65.8
21.2%
Source: Compiled by the Institute of Public Utilities, Michigan State University based on unverified data reported in
the U.S. Environmental Protection Agency, Safe Drinking Water Information System (SDWIS).
EFAB Financing Strategies to Promote System Regionalization • 31

-------
Appendix IV: Capacity Development - SDWA Provisions an J Elements
I.	SDWA (1996)
The following provisions of the 1996 Amendments of the Safe Drinking Water Act suggest consideration of
structural solutions to improve compliance with standards:
ฆ	Capacity development (ง1420)
ฆ	Consolidation Incentive - Enforcement (ง1455)
ฆ	Variances (ง1415)
ฆ	Exemptions (ง1416)
ฆ	State Revolving Fund (ง1452)
ฆ	Research (ง1420)
II.	Capacity Development Provisions of the SDWA (1996)
The Capacity Development Program was created under the Safe Drinking Water Act (SDWA) Amendments of
1996. The three major components of the Capacity Development Program are:
1. Section 1420(a) New Systems
Under penalty of Drinking Water State Revolving Fund (DWSRF) withholding, states must have a program
established to:
"ensure that all new community water systems and non-transient, non-community water systems
commencing operations after October 1,1999 demonstrate technical, managerial, and financial capacity with
respect to each national primary drinking water regulation in effect, or likely to be in effect, on the date of
commencement of operations."
1.	Section 1420(c) State Capacity Development Strategies
2.	Under penalty of DWSRF withholding, the State must develop and implement a:
"strategy to assist public water systems in acquiring and maintaining technical, managerial, and financial
capacity."
3.	Section 1452(a)(3) Assessment of Capacity
States may not provide DWSRF loan assistance to systems
•	Which lack the technical, managerial, and financial capability to ensure compliance; or
•	If the system is in significant noncompliance with any drinking water standard or variance.
However, states may provide assistance if the:
•	Use of such assistance will ensure compliance; and
•	System has agreed to make the necessary changes in operation to ensure that it has the technical,
managerial, and financial capacity to comply over the long term.
Source: U.S. Environmental Protection Agency accessible at www.epa.gov/dwcapacity/information-states-
about-building-capacity-drinking-water-systems
EFAB Financing Strategies to Promote System Regionaiization • 32

-------
III. Elements of Water System Capacity
Technical capacity is defined as the physical and operational ability of a water system to meet SDWA
requirements, including the adequacy of physical infrastructure and the technical knowledge and capability
of personnel.
The key elements of technical capacity are:
ฆ	Source-water adequacy and protection
ฆ	Infrastructure adequacy and improvement
ฆ	Technical knowledge and implementation
Managerial capacity is defined as the ability of a water system to conduct its affairs in a manner enabling
the system to achieve and maintain compliance with SDWA requirements, including institutional and
administrative capabilities.
The key elements of managerial capacity are:
ฆ	Ownership accountability
ฆ	Staffing and organization
ฆ	Effective external linkages
Financial capacity is defined as the ability of a water system to acquire and manage sufficient financial
resources to allow the system to achieve and maintain compliance with SDWA requirements.
The key elements of financial capacity are:
ฆ	Revenue sufficiency
ฆ	Credit worthiness
ฆ	Fiscal controls
EFAB Financing Strategies to Promote System Regionaiization • 33

-------
Case Studies
Case Study #1: Regionalization Achievements Under the
Pennsylvania Municipality Authorities Act
A primary barrier to regionalization and consolidation of water systems (collectively, entities providing
drinking water, wastewater, stormwater, water reuse and other water related services) has been the focus
on maintaining local control of such services by local governments, municipalities and communities. Having
thousands of local government units, second in number only to Illinois, Pennsylvania has been a bastion of
local control. Despite that widely held view, the Pennsylvania Municipality Authorities Act (MAA) has become
a primary vehicle to create regional water approaches in the commonwealth.
The MAA allows one or more municipalities to create an "authority" to provide one or more specified public
services in a designated area, which area can be broadly or narrowly defined. Although there is no
comprehensive registry, the Pennsylvania Municipal Authorities Association estimates that as many 1,900
authorities have been created, however many of these are inactive because the authority project debt
financing has been retired, the authority responsibility has been assumed by the parent municipality or the
authority has been consolidated, merged or acquired by another entity. Authorities can be structured as "full
service" providers, be limited to only a subpart of the public service or a combination of the two approaches.
For example, an authority might provide only regional wastewater treatment, only wastewater collection in a
single municipality and/or drinking water supply both to retail and wholesale customers. Two features of the
MAA, coupled with the multiple layers of Pennsylvania local government units have produced regional water
systems and facilitated consolidation of existing systems.
The first feature of MAA allows two or more municipalities to jointly create an authority, known as a "joint
authority" to provide some specified function. Under this structure, each participating municipality is a
partner in creating the authority and is represented on the governing board of the authority. Once created,
the authority owns all of the assets including all of the facilities, obtains financing and is responsible for
operation of the system and providing service to the customers.
A joint authority avoids duplication of effort, captures economies of scale, assures consistent service across a
region, achieves a larger and more diversified customer base and captures higher level technical, managerial
and financial capacity than would occur if each municipality acted independently. Among the joint authorities
in Pennsylvania are the North Penn Water Authority, Lancaster Area Sewer Authority, Wyoming Valley Sewer
Authority, Greater Hazleton Joint Sewer Authority, University Area Joint Authority and Wilkinsburg-Penn
Joint Water Authority.
The second feature of MAA capitalizes on the nature of Pennsylvania's local government structure. There are
four basic local government units - cities, boroughs, first class townships and townships of the second class.
These units provide many of the governmental services needed by residents, however all units are located
within a county, not as a subservient unit of government but to allow provision of more effective services to
all municipalities and residents within the larger area of a county. Historically, these services included the
courts system, maintaining public records and other functions delegated by the Commonwealth. As time has
passed, the mix of county services has grown and has expanded significantly legislatively and has even gone
EFAB Financing Strategies to Promote System Regionalization • 34

-------
beyond the legislated county code as a result of counties adopting "Home Rule" charters. This growth of the
counties' role has led to the creation of dozens of authorities by counties, many for environmental purposes.
Several of these county authorities have been tasked with providing one or more of the water services
needed by the public, often to areas of a county where those services were unavailable and where growth
and development drove the need for those services. Municipalities in those areas, for the most part, had no
established entity to provide service nor any similar service or environmental responsibility upon which to
build. Moreover, because the residents and local officials are not only citizens of the local municipality, but
also the county, they have a sense of ownership and control that would otherwise be absent with an entity
from outside the community.
As time has passed, these county authorities have grown by expanding service to areas adjacent to or nearby
the initial or current service area, sometimes in adjacent counties, and acquiring, upgrading and
interconnecting preexisting systems within and outside the service area. An important element of this has
often been to be integrated into the development processes of the local municipality so the system planning
for current and future needs can be reflected in land use planning decisions, effectively creating a
partnership with local municipalities.
Examples:
•	Westmoreland County Authority
•	Delaware County Regional Authority
•	Bucks County Water and Sewer Authority
•	Lehigh County Authority*
•	Lycoming County Water and Sewer Authority
•	Schuylkill County Municipal Authority*
•	Indiana County Authority *
*Systems serve multiple separate service areas that are remote from the core service area or system; in such
case economies related to capital assets may be unavailable, but operational and administrative economies
are still realized.
EFAB Financing Strategies to Promote System Regionaiization • 35

-------
C'a;.e Study #2: Great Lakes Water Authority
Overview;
The Great Lakes Water Authority (GLWA) provides wholesale potable water and wastewater services to
communities throughout southeast Michigan. The GLWA was established through U.S. federal court
mediation conducted as part of the negotiation of the City of Detroit bankruptcy plan of adjustment. The
GLWA leases regional treatment and transmission assets of the Detroit Water and Sewerage Department
(DWSD) to provide wholesale services for communities serving four million retail users.
Governance Structure
GLWA involved the bifurcation of DWSD, which prior to January 2016 served as the regional wholesale
service provider as well as retail service provider in the City of Detroit, into separate entities. GLWA assumed
responsibility for wholesale operations and system development under a public authority established
pursuant to State of Michigan legislation (Act 233 of 1955) that provides for the incorporation of authorities
by municipalities. The process involved U.S. federal bankruptcy court sponsored mediation of an agreement
between the City of Detroit, State of Michigan, Detroit's Emergency Manager, and Macomb, Oakland and
Wayne counties (in which most of DWSD's wholesale customers were located.) Subsequent to the filing of a
memorandum of understanding between these parties, asset lease and water and sewer service agreements
were negotiated and executed between GLWA and the City of Detroit, and plans for GLWA's operational
effectiveness completed.
GLWA is governed by a six-member board of directors appointed by the mayor of the City of Detroit (two
seats), county executives (one seat each for Macomb, Oakland and Wayne Counties) and Michigan's
governor (one seat). A five-sixths super-majority vote is required for appointment of GLWA's Chief Executive
Officer, approvals of operating budgets and capital improvement plans, adoption of service rates and
issuance of debt obligations.
System Demographics and History
GLWA includes 127 communities served through 87 wholesale water service contracts as well as DWSD that
now has responsibility solely for retail operations within the City of Detroit. GLWA's wholesale water
customers now include the City of Flint, Mich. The GLWA potable water system service area is approximately
1,760 square miles and serves a population of approximately 3.8 million. The GLWA wastewater system
includes 76 communities served through 18 wholesale sewer service contracts as well as DWSD. Its
wastewater service area is 944 square miles and serves an estimated population of nearly 2.8 million.
GLWA is a co-permittee with DWSD with respect to the regional system treatment plants and combined
sewer overflow facilities - and has a strong history of compliance since its January 1, 2016 operational
effectiveness date. As with other public entities in the State of Michigan, regulatory oversight is largely with
respect to permit compliance; rate setting is the purview of GLWA's Board of Directors.
Prior to the establishment of GLWA, several enforcement actions underscored DWSD's difficult relationships
with its suburban customer communities and regulators. DWSD was subject to a federal wastewater consent
decree between 1977 and 2014, and was a party to water and wastewater service rate litigation resulting in a
1999 settlement agreement.
EFAB Financing Strategies to Promote System Regionaiization • 36

-------
Financial Performance
Prior to the establishment of GLWA, in part as a result of regulatory compliance requirements, DWSD
imposed annual service rate increases averaging approximately 9 percent over the preceding 20 years.
GLWA's originating agreements contemplate a 4 percent per annum limitation on increases to system
revenue requirements. Operating budgets and capital plans approved by the GLWA Board since inception
have been consistent with these provisions. GLWA's financial performance metrics reflect financial strength
notwithstanding the origination of the authority in the wake of Detroit's historic bankruptcy.
Capital Financing
The relative strength of GLWA's financial performance, institutional structure and governance was
recognized by the credit markets with the financial transactions involved in the authority's creation. In 2016,
GLWA completed a $1.3 billion bond issue to refinance outstanding DWSD debt obligations assigned to
GLWA under the system lease agreements. The transaction yielded present value savings of an estimated
$309 million.
By effectively assuming DWSD's debt portfolio, GLWA is relatively highly leveraged as is characteristic of
many communities placed under federal wastewater consent decrees. GLWA's capital structure after 2 years
since its operational effective date of January 1, 2016 was over $5.7 billion in long-term debt relative to total
assets of just under $7 billion, which has prompted financial planning for less reliance on bonded
indebtedness
Low-Income Affordability
GLWA's originating documents provided for the establishment of the Water Residential Assistance Program
(WRAP) funded at 0.5% of the revenues of the combined GLWA-DWSD system. The WRAP program is a
"common-to-all" expense included in GLWA system revenue requirements and available to low-income
customers in participating communities' retail service areas.
iegional System Optimization
GLWA has demonstrated the benefits of a regional perspective in system planning. Water system master
planning has identified opportunities to decommission one of its water treatment facilities and reconfigure
how other assets will be employed to meet changing regional water demand patterns. Similarly, wastewater
system master planning is to examine opportunities to manage wet weather flows using regionally integrated
facilities.
iesources
On its website, GLWA posts organizational documents including its Articles of Incorporation, water and
sewer facilities leases, and water and sewer services agreements; information on the WRAP program; and
a wide array of other documents. GLWA is a model of transparency and stakeholder engagement in the
water and wastewater industry.
•	http://www.glwater.org/board/organizational-documents/
•	http://www.glwater.org/wholesale-customers/water-residential-assistance-program-wrap/
EFAB Financing Strategies to Promote System Regionaiization • 37

-------
Case Study #3: McLean County Regional Water Commission
Project Background
McLean County Regional Water Commission (MCRWC) in Kentucky is a unique partnership between McLean
County Fiscal Court, the county's four cities (Calhoun, Island, Livermore and Sacramento), and the North
McLean Water District. The county's 9,500 residents are currently served by five separate water systems with
aging facilities that struggle to meet EPA operating standards. Some of those plants must also rely on
adjacent counties to provide their water, placing residents at the mercy of price fluctuations outside of their
control. In 2009, an interlocal task force came together to plan the future of McLean County's potable water
supply.
The biggest initial challenge: Finding funding for project design. Thus, the Fiscal Court and communities
enlisted the assistance of the Kentucky Infrastructure Authority (KIA). KIA granted the group $150,000 to pay
for engineering services. The small grant enabled the project design to be completed. Additionally, it was
critical to securing the needed funding and advancing the project.
After aggressively pursuing and securing $10.9 million in state and federal funding, MCRWC is now
constructing a centralized regional water system that will allow the county to control the production,
capacity, and cost of their drinking water.
In 2009, McLean County's judge/executive and mayors from the county's four cities (Calhoun, Island,
Livermore and Sacramento) began meeting regularly to discuss the county's drinking water needs as a whole.
Most of the individual systems' water plants are approaching their functional life expectancies, including
Livermore whose facility is more than 80 years old. Rather than addressing needs in a piecemeal fashion,
MCRWC decided to unleash the power of regional collaboration. They contracted with an engineering firm to
help develop a comprehensive plan and then set about the work of acquiring necessary funding—speaking
with one voice to officials in Frankfort and Washington.
Project Funding
$7.4 million U.S. Dept. of Agriculture (USDA) Rural Development (RD) grant/loan	(68%)
$2.5 million Kentucky Infrastructure Authority (KIA) loan	(23%)
$1 million	Community Development Block Grant (CDBG)	(9%)
$10.9 million TOTAL
Project Impact
MCRWC will positively impact McLean County residents for generations to come. It will help absolve
individual systems of their outstanding debt and prevent them from having to plan expensive upgrades (or
even replacement facilities). The new 2 million-gallon capacity centralized plant and its accompanying
infrastructure will allow water rates to remain low—a vital consideration in a county with a median
household income 10 percent below the Kentucky average (and more than 25 percent below the national
average). Additionally, the success of MCRWC has infused a renewed spirit of cooperation and pride among
the citizenry of McLean County, setting the table for collaborative, creative problem solving on other
common challenges that may arise.
One of the exciting aspects of this project is that it can be duplicated virtually anywhere. The Green River
flows through the heart of McLean County, providing a reliable and accessible source from which to draw
EFAB Financing Strategies to Promote System Regionalization • 38

-------
drinking water. Kentucky has more miles of running water than any other state except Alaska. So, if a region
has a sufficient raw water supply and individual communities have a sufficient desire to partner with their
neighbors, projects like this are possible. In an era of constrained public funding, MCRWC representatives
have been told consistently by state and federal decision makers that their interlocal teamwork was the key
to their success.
MCRWC is a true regional success story! Rather than having a parochial, myopic focus upon their individual
communities, elected officials across McLean County chose to engage in an open dialogue and to join forces
to advocate for a comprehensive solution that was best for the entire county. As a result, they are now in the
process of constructing new state-of-the-art infrastructure that will provide the 9,500 residents of McLean
County with a safe, reliable, and cost-effective water supply for decades to come.
Entities involved in the effort:
•	McLean County Fiscal Court
•	City of Calhoun
•	City of Island
•	City of Livermore
•	City of Sacramento
•	North McLean Water District
EFAB Financing Strategies to Promote System Regionaiization • 39

-------
C'a;.e Study #4: Cle-irt V\ Mm solutions
Background
From July 2015 to July 2016, representatives from a wide variety of funders, non-profits and government
agencies met, under the aegis of USDA to discuss an on-going problem in Delaware - failing septic "cluster"
wastewater systems in private communities not served by a government-owned system. Lot assessments,
the annual charges paid by each property owner, are usually the only source of funding for these utility
operations and it often takes all the revenue collected just to run the utility, while other common areas may
suffer. As the group continued to meet, it came to be known as the Larger Committee.
Eight systems had originally been identified as having problems that threatened their sustainability,
endangered the environment and public health. Most of these communities are comprised of low or
moderate income (LMI) residents. They are usually governed by a Homeowners' Association (HOA), and are
often ineligible for funding programs that would help to upgrade their systems, so issuing debt is their main
option for repairs and upgrades. The Larger Committee's consensus was that some form of system takeover
would relieve the HOA's of the responsibility for operating the systems, reduce their debt liability and help
keep the systems in compliance and protect the environment. USDA issued a Request for Information (RFI) to
non-profits to gauge interest and capabilities. The committee chose three entities whose expertise related to
one or more aspects of the problem. Thus was born the Clean Water Solutions (CWS) partnership consisting
of Eden-Delmarva, Diamond State Sustainability Corporation (DSSC) and the Southeast Rural Community
Assistance Project (SERCAP).
The goal of this partnership is to identify failing "cluster" systems, evaluate their needs, and negotiate a
turnover of their assets to the non-profit for operation, then to improve the systems to make them
compliant and sustainable. Operating as a non-profit with grants as the primary funding source will allow
user rates to be kept affordable, and the technical expertise of DSSC will keep the systems compliant. The
first eight systems identified by the Larger Committee are all located in Sussex County, which has
experienced an enormous growth spurt in the past several years. The population has grown an average of 38
percent vs. the statewide average of 21 percent. The need to keep utility rates affordable is clear, given
Sussex County's average salary of $37,339 vs. the state average of $53,991. Also, the number of county
residents over the age of 60 has risen by 60 percent in the same period, giving a clear picture of LMI and fixed
income communities overall. The primary objective of this collaboration is to enable the operation of these
cluster systems in a compliant, sustainable fashion at affordable user rates. Concurrent objectives are to
ensure sustainability of the systems and to protect the environment, groundwater and drinking water.
Strategies
Conceptually, the CWS partnership has never been done before. A non-profit takeover of failing utility
systems is unusual for Delaware, but a partnership of three non-profits, spurred by government agencies is
even more unusual. This is a combined effort to bring the best available services and sometimes, best
available technology to distressed areas, while keeping the user rates as low as possible. CWS strategy is
embodied by a vision of how the process might work. A step-by-step protocol for asset assumption has been
developed. In essence, the process starts with an evaluation of needs. Then discussions with the HOA Board
will include the option of assigning assets and responsibilities to DSSC, and terms and conditions will be
negotiated. DSSC will apply for planning grants from USDA or the Delaware State Revolving Fund as
applicable. These grants will fund the Preliminary Engineering Reports precedent to grant applications for
capital upgrades.
EFAB Financing Strategies to Promote System Regionaiization • 40

-------
As improvements are made the system can be brought back into compliance and become self-supporting
through its own user fees as asset management practices are put into place. Lack of debt service will result in
more affordable rates than takeover by a for-profit utility.
Target Population and Locations
The initial eight systems identified are all in Sussex County, which has the largest proliferation of these
"cluster" systems. Of the initial eight, four will be targeted in the first year - Grants Way, Pintail Pointe,
Morningside Village and Country Glen. These systems serve a total of 183 homes. The Sussex County MHI is
about 11 percent below the state average and its average salary is about 30 percent lower than the
statewide figure. That data alone makes Sussex County the most likely target for CWS efforts.
Benefits:
Each community will benefit by having licensed professional operators run their wastewater utilities,
relieving their homeowners' associations of the associated financial and management burdens.
Improvements will be made as they are identified and funding is available, and at the least cost possible
passed on to the residents and property owners. Property assessments can be used to make other
improvements to the community such as paving streets, rather than using every penny collected on the
operation of the utility. Given the demographics of Sussex County, keeping user rates affordable is essential.
Growth in population, in the population over 60 and the below average salaries and MHI indicate that
charges levied by a for-profit operator would not be affordable. The systems will be more sustainable, and
more environmentally sound if run by a non-profit professional, thereby protecting the groundwater and
drinking water in the areas.
Partners' ioles
Eden-Delmarva, Inc.:
•	Identify sources of funding
•	Meet with funding resources
•	General Financial Management of the partnership
Southeast Rural Community Assistance Project:
•	Technical assistance and advice to the HOA's, promoting transfer of system assets
•	Advise CWS on operations, maintenance, asset management and sustainability
Diamond State Sustainability Corporation:
•	Acquire system assets and implement sustainable solutions
•	Secure planning and capital project funding
•	Provide for customer billing, collections, operational costs, and debt service
•	Conduct long term infrastructure planning and coordination with local regulatory agencies
•	Operate cluster systems on a non-profit basis until such time that public system connection is
available and economically feasible (if ever)
The Larger Committee will use its connections and influence to promote and help secure the maximum grant
funding possible to keep rates affordable.
EFAB Financing Strategies to Promote System Regionaiization • 41

-------
Evaluation Methods
Success can be measured by the number of utility systems assumed by DSSC, their return to compliance and
the affordability of end user rates. Affordability is measured by the percentage of household income
expended per year by an average customer, usually 5,000 gallons of water use monthly, and generally
considered to be from 1.5 percent to 3 percent of household income. Maximum grant funds and minimum
debt service should keep rates in that range. The "Larger Committee" is also expected to weigh in on the
success of CWS efforts in its advisory capacity. Regulatory inspection reports can be compared to evaluate
operations improvements. The quality of effluent discharged may be tested and measures such as number of
breakthroughs in the drain field, number of gallons pumped, gallons of inflow or infiltration, or increase in
flow during wet weather can be measured before and after CWS gets involved. Success can also be
evaluated using the form SERCAP uses to assess a system's technical, managerial, and financial (TMF) needs.
This proprietary tool identifies critical concerns and is used to measure capacities initially, identify the most
critical needs, and can measure progress as CWS takes over. The same tool can be used to measure TMF
capacities at any point during a project and to prioritize activities according to greatest or most critical need.
Other measures would be number of people served, amount of funding obtained, dollars saved by the
system and residents, and amount of funds in reserve.
Sustainability Plan
The CWS sustainability plan is based on the idea of building on success. For user rates to be affordable, yet
sufficient to recover costs and reserves, grants rather than loans will be critical. The ability to secure
subsequent grants will be highly dependent on success with the first systems addressed. As systems are
assumed and returned to sustainable, compliant operations, user rate revenue and reserves will help to fund
takeover of other cluster systems, and successful operation of the previous systems will help to demonstrate
a track record for this innovative business model. CWS expects to address four cluster systems in the first
year. As those systems are returned to compliance, CWS will identify additional systems that need help, in
consultation with DNREC, USDA-Rural Development and the Larger Committee. Judicious use of planning
grant programs through USDA will help make the most efficient use of capital program funding when
improvements are needed. Grant funding for upgrades and process improvements will be more accessible
with the plan of action and recommendations produced during the planning stage. Grants again will be
critical to keeping the user rates affordable. If a publicly-owned system connection ever becomes available at
rates favorable to the LMI communities, a public system connection may be the final, sustainable answer. If,
however, this cannot be done without considerable cost to the customers, DSSC can continue to operate the
systems indefinitely.
Current funding for the program is $200,000 and is provided through Discover Bank CRA funding in the
amount of $100,000 and in-kind donations from SERCAP and Tidewater Utilities, Inc. totaling $100,000. It is
expected that USDA will contribute as the project moves along and private foundation grants will be sought
as the project evolves. The initiative is so new that all funding sources have not been fully explored.
EFAB Financing Strategies to Promote System Regionaiization • 42

-------
swas?ฎ,!,!,


Case Study #5: Pennsylvania American Water Acquisition of
Scranton Sewer Authority
In late 2016, Pennsylvania American Water completed the acquisition of the wastewater system assets of the
Scranton Sewer Authority (SSA). The system provided wastewater service to approximately 31,000
customers in Scranton and Dunmore. Pennsylvania American Water already provided drinking water service
to residents and businesses in both communities.
Pennsylvania American Water offered long-term rate stabilization by applying the provisions of Act 11,
legislation enacted in 2012 that enables regulated utilities to combine water and wastewater revenue for
rate-making purposes.
Previously, costly wastewater system improvements would have fallen entirely on SSA customers. In
contrast, Pennsylvania American Water's purchase of SSA enables the company, due to Act 11, to spread
capital investments among its more than 720,000 customers throughout the state. Like single tariff pricing
for water service where rates are based on capital investments and expenses spread equally among water
customers, the benefit of Act 11 is the long-term rate balance it provides for Scranton and Dunmore
customers.
SSA's debt of approximately $70 million was eliminated following Pennsylvania American Water's
approximately $195 million purchase. Additionally, Scranton and Dunmore realized a new source of tax
revenue generated from property that was previously tax-exempt. The company's customers are paying
additional taxes (approximately $400,000 annually) to the municipalities, school district, and county,
providing some relief for stressed public budgets.
Pennsylvania American Water brought both the technical expertise and financial resources to meet the
communities' challenges and provide a long-term wastewater solution, while establishing a plan to maintain
reasonable rates for the customers, which was approved by the regulator. The millions of dollars in net
proceeds from the sale will make a significant impact on Scranton's financial recovery efforts, including the
opportunity to potentially mitigate future tax increases on its homeowners and businesses.
EFAB Financing Strategies to Promote System Regionaiization • 43

-------
swas?ฎ,!,!,


Case Study #6: Florida Governmental Utility Authority
Overview
The term co-operative (co-op) in the context of water and wastewater utilities often refers to non-profit,
community-based associations established by customers to own, operate and maintain utility systems. A
broader interpretation of the term could be defined as a combination of governmental entities within
multiple jurisdictions to form a co-op by an interlocal agreement. Potential advantages of non-profit co-op
(and municipal systems) over investor-owned utilities (lOUs) is the avoidance of certain taxes, corporate
overhead and profit upstreaming, and greater local control.
In Florida, certain counties joined together in 1999 to create a unique interlocal utility authority, the
statewide Florida Governmental Utility Authority (FGUA). The FGUA was formed under a newly adopted
Florida State Statute (Chap 163.01) to address an interest of individual counties to support the purchase of a
private IOU which wished to sell its Florida utility systems in multiple jurisdictions together.
Governance Structure
FGUA is managed by a six-member board of directors, with six alternates. Like other co-ops, the FGUA is
subject to state environmental regulatory oversight, including facility and groundwater withdrawal
permitting. Consistent with many other co-ops, rate and fee setting for the association and municipal
systems is not state regulated but rather left to the co-op's governing board. Specific to FGUA, its initial
(1999) interlocal cooperation agreement between the participating governmental units (Brevard, Lee, Polk
and Sarasota counties) contained the following significant features:
o FGUA's sole focus is water and sewer services;
o FGUA is locally governed and controlled - providing "home rule" control among voluntary participants
with no ongoing State involvement;
o Participating governments maintain control over the utilities with a seat on the governing Board;
o Member governments do not incur any financial liability for the acquired systems;
o Members may re-acquire the FGUA utility systems within their jurisdiction at any time for the
value of outstanding debt;
o Formerly private systems now become subject to higher municipal facility, operating and
customer service standards;
o FGUA is eligible for the same federal, state and local district grants and loans as local
governments. In addition, they can issue tax-exempt debt and may impose special assessments;
o FGUA is subject to the same transparency and public accountability standards as local
governments.
EFAB Financing Strategies to Promote System Regionaiization • 44

-------
System Demographics / Regulatory History
The FGUA currently consists of 80 individual utility
systems in 13 Florida counties and serves
approximately 120,000 customer connections. The
FGUA has no employees of its own instead
contracting for all services. Full range management
services are provided by Government Services
Group Inc., a Florida-based governmental
consulting firm which oversees operations and
maintenance contract services provided by U.S.
Water Services Corporation.
The FGUA is a special purpose unit of local government currently consisting of numerous small systems,
many geographically isolated lacking adjacent municipal infrastructure support. Yet, because of its large
scale, and the fact that FGUA is a collaborative extension of local governments with similar utility powers and
duties, the FGUA brings substantial economies of scale and resource capability to smaller systems.
Operations / Financials
The FGUA systems are aggregated within several separate enterprise funds for financing, accounting and
reporting requirements as provided by each bond indenture. For FY2017 (most recent audit) the FGUA Utility
Systems included the following separate systems (with bond ratings):
mi III
. <*-	i.h	fO
Jp ^
A-
	2mi	
by a fixed price five-year operations, maintenance and customer service contract. The contract limits annual
price adjustments to specific Consumer Price Index levels and customer growth throughout the contract
term. The five-year capital budget for Fiscal Years 2019 - 2023 is $65 million. Total assets of the FGUA as of
fiscal year end 2017 are over $538 million and growing.
Capital Financing
The FGUA funds its capital through a combination of sources, including tax-exempt bond proceeds, impact
fees, government grants and loans and operating revenue (cash-on-hand). For example, the Dunnellon
transaction included the innovative use of low-interest loan funding from the USDA Rural Development
Program.
FGUA Dunnellon System
FGUA MacDill AFB System
o Lehigh Acres (A1/A+/A) (M/S&P/F)
o North Fort Myers (A2/ - / -)
o Lindrick(Al/A-/-)
o Pasco Aloha (A2/ - / -)
o Consolidated (A2/ - /A-)
o Aqua Lake (Baal/ - /A-)
o Aqua Pasco (A3/ - /A-)
o Aqua Unified (A3/ - /A-)
o MacDill AFB Utility System (N/A)
o Dunnellon Utility System (N/A)
The annual operating budget for Fiscal Year
2019 is $86 million. O&M costs are limited
O&M Expense
$10
$9
$8
$7
$6
$5
Si
S3
$2
$1
$0





II
1 III
1II


v?
ฆ7114
ฆ ^ms
1 201 fi
EFAB Financing Strategies to Promote System Regionalization • 45

-------
Overall debt levels have historically been high due to amortization of the purchase price and capital
improvement needed upon acquisition. As of September 30, 2017, total outstanding debt and unamortized
premium stood at $421.27 million. Annual debt service levels are relatively stable with minor changes due to
refunding or reductions in federal
subsidies as provided through certain
Build America Bond (BAB) programs.
Rate Affordability
The combined water and sewer
residential rates for certain systems
within FGUA are regarded as high
relative to nearby utilities due to the
high debt service associated with the
acquisition cost of the systems. A large
majority of customers supported the
FGUA acquisitions and higher
associated rates for the benefits of improved, consistent service levels. After acquisition, major rate increases
are limited and in certain systems, rate decreases have been implemented. The four (4) year average
combined Water and Sewer Monthly Bill for FGUA's systems ranges from $62 per month (North Fort Myers
System) to $114 per month (Aqua Unified System).
Regional System Optimization / Conclusion
For public infrastructure, collaboration can offer substantial long-term benefits to a system and its rate
payers. When water systems, which are predominately local, operate with a provincial approach to
governance and control, they limit the potential for economies of scale, sharing of best practices and sharing
of critical resources, all to the detriment of those being served by their systems. This approach can and does
lead to regulatory noncompliance, infrastructure failure and severe customer backlash. Co-ops break down
these barriers and provide opportunities for efficiency, cost savings, optimal operational management and
greater public and environmental safety.
•	Because of its scale and private contract model, FGUA's O&M cost per connection is typically lower.
•	Because of its singular focus on water and sewer, FGUA's capital project delivery is typically faster and
less expensive.
•	Because of the partnership nature of the acquisition agreement, FGUA and its participating local
government systems have limited disputes about infrastructure capacity sharing to save customers
money in rates.
Since FGUA's inception, and with limited exceptions, the majority of FGUA's systems have continued to rely
on the partnership to leverage FGUA's resources, to benefit from its expertise, to serve their residents and
avoid further strain on their local community's resources. For example, for seven years the federal
government has found the FGUA to be a vital mission partner supporting MacDill Air Force Base. More
recently, the City of Dunnellon saw a relief of rate pressure for customers, service significantly improved, and
their long-term debt eliminated by divesting their utility to the FGUA.
In summary, intergovernmental collaboration as structured through co-ops can yield enormous benefits to
the public and make limited government funding go farther. There is clear empirical evidence at FGUA that
demonstrates higher benefits per dollar spent within the collaborative versus what was previously achieved
Lindrick North Fori Myers
EFAB Financing Strategies to Promote System Regionalization • 46

-------
by the participating systems independently. Co-ops can serve as a major force to achieve more strategic and
smarter returns on the nation's investments in infrastructure.
Resources
FGUA's website posts its annual strategic plans and financial statements. These can be found at:
•	https://www.fgua.com/about-us/strategic-plans/
•	https://www.fgua.com/about-us/finance/reports/
EFAB Financing Strategies to Promote System Regionaiization • 47

-------