National Drinking Water Clearinghouse
West Virginia University
PO Box 6893
In the Bluegrass State
Water System Consolidation Works
By Kathy Jesperson • On Tap Associate Editor
“Consolidation is both inevitable and desirable,” said C. Meyrick Payne, senior partner, Management Practice Inc., a New York-based consulting firm. “There are too many small water systems, both investor-owned and municipal. Of the 58,000 water systems, only 2.5 percent serve more than 25,000 people; many small systems are, or will shortly become, non-viable.”
Payne made those observations nearly a decade ago. Today, the community water systems (CWS) count comes in at about 54,000. What happened? The count could be a little off. Some systems may have folded. Many have consolidated.
Adding fuel to the already burning consolidation fire, Mo Ying W. Seto, senior vice president, Moody’s Investment Service, says: “Within the next decade the water utility industry will likely be transformed into a few large water companies or systems on the national level.”
While consolidation may not happen that fast, it seems the future of drinking water systems has been foretold. And current evidence indicates that Payne and Seto’s predictions are not far from reality.
The situation in Kentucky mirrors what’s going on around the U.S. “In 1978, Kentucky had more than 1,700 public water systems (PWS), and today there are approximately 650,” says Gary Larimore, executive director, Kentucky Rural Water Association (KRWA).
Kentucky, like the other 49 states, had to abide by the 1996 reauthorized Safe Drinking Water Act (SDWA). The act made a lot of changes that affected small systems in particular. One major change was that it declared that states cannot provide assistance to any system that cannot prove its technical, financial, or managerial capacity to ensure compliance with SDWA over the long-term.
Further, the act tied the amount of funds a state could be eligible for directly to drinking water state revolving funds (DWSRF) and could penalize states for not complying with the capacity development standards.
Another problem is that many rural areas may no longer be considered rural. What was once farmland is now a bedroom community for a large city. As cities overflow, suburban areas grow quickly and rural areas become strip malls, fast food restaurants, and other urban wonders. And they all need water. To supply water to growing populations, communities have to find new, better raw water sources. One answer for states was system consolidation. (For more about sprawl and rural areas, see the Fall 2002 On Tap.)
What’s a consolidated system?
A consolidated water system is any combination of CWS operated or managed as a single unit, whether they are physically connected or not. Examples of consolidated systems include acquisition of one system by another, or forming a water authority. Typically, they maintain uniform water rates for all customers of the consolidated system.
“The most successful consolidations occur because people volunteer to do it,” says Larimore. “They know they don’t have the water or infrastructure and need to do what’s best for the community.” (See more about voluntary regionalization in the Spring 2001 On Tap.) Larimore stresses that system consolidation can work, but requires all members to be willing participants.
“Regrettably, some folks still believe ‘regionalism’ means forced mergers,” writes Ellen Miller of the Ellen Miller Group in the Spring 2001 On Tap. “They remember a few years back when some federal and state agencies touted mergers and consolidation as the best way to assure long-term viability.
“Occasionally bureaucratic zeal for achieving economies of scale ignored little details like miles between systems or what a board thought about being disbanded,” she notes. “Rural America’s economic and population downturns during the 1970s and 1980s both pushed and justified mergers and consolidation at almost any price. As this new century starts, things have changed drastically.”
“Unfortunately local water boards may be seen as a training gound for a future role in partisan politics,” says David Pask, an engineering scientist with the National Small Flows Clearinghouse. “Having this in mind, I am not sure that all candidates are able to concentrate on the best interests of the present and future customers of the utility. Good management may be better served if potential politicians would step aside for visionary volunteers with leadership qualities and no axe to grind. These special persons may be able to develop programs and strategies for efficient management—including, sometimes, consolidation—without interfering with, and micro-controlling, day-to-day operations.” (For more information about water boards, see the Winter 2003 On Tap.)
Larimore says that one of the best examples of regionalization is the Logan-Todd Regional Water Commission in Kentucky. This venture consolidated the water treatment needs of 12-small, Kentucky systems into one regional commission, which included Russellville, Auburn, Lewisburg, Adairville, the East Logan Water District, the North Logan Water District, the South Logan Water Association in Logan County, Elkton, Guthrie, Trenton, the Todd County Water District in Todd County, and Oak Grove in Christian County. The combined population is about 45,000 people.
According to Clay Kelly, P.E., an engineer with Strand Associates and its subsidiary PEH Engineering, the regional concept of this water commission is working better than ever. “The first discussions and meetings that eventually led to the formation of the Logan-Todd Regional Water Commission were held in the early 1990s,” Kelly explains. “The lack of capacity to serve new water customers hindered Logan County’s economic development. To address this problem, the Logan County Chamber of Commerce formed a study group to determine what the best course of action would be to solve the problem.
“Unbeknownst to the Logan County group, Todd County was starting a similar study. Informal discussions between residents and officials of the two counties revealed that they both faced essentially the same issues, so they started looking into the possibility of working together.
“Legislation was already in place for the formation of multi-county water commissions,” Kelly continues. “But there were problems with the statute that provided much of the legal mechanism for a successful joint water entity. It was very limiting as to who could serve as commissioners. The law said that an elected official, an employee of a water system, or a board member of a water district were ineligible to serve. In a rural area like Logan and Todd County, this essentially eliminated anyone who knew anything about water. We formed the commission under this law in 1996, but legislation did finally pass in 1998 that remedied the problems with the law.”
Once formed, the commission had the authority to build, own, and operate water supply and treatment facilities. There are also provisions for new entities to join as the need arises. The commission can issue bonds and has the power of eminent domain, but it has no taxing authority. The commission can wholesale water only and cannot sell water directly to any end user.
Members Retain Autonomy
Within the Logan-Todd commission, there are 12 autonomous water entities, and one commissioner represents each member. Each entity maintains ownership and operating and maintenance responsibility for its distribution system. The commission does not take on any debt or ownership for the individual members, nor do the individual systems incur Logan-Todd’s debt. Each system sets its own water rates.
The Logan-Todd Regional Water Commission concept has many advantages, it:
• provides economies of scale for efficient construction and operation;
• eliminates the duplication of services and provides for the efficient use of resources;
• ensures that each entity pays the same wholesale rate for water regardless of size or location;
• lowers overall water costs in the future when compared to other alternatives; and
• benefits of regional cooperation extend beyond areas besides water. As with any plan, there are also disadvantages to consider.
• the commission relies on one large water source now instead of eight smaller sources as in the past;
• each system has its unique issues to address, including how to decommission unneeded treatment plants, and decide how to retire any remaining debt on those facilities; and
• higher water costs in the short term are almost certain, as are political squabbles.
The Logan-Todd project came into being primarily to address a shortage of raw water in the region. Water shortages in several of the communities caused homeowners and industries to face water use restrictions. “Population growth, particularly in the rural areas also fueled demand for source water,” says Kelly. “The big problem, however, was that there was no abundant source of water in the two-county area. Effective economic recruitment was out of the question with the limited water supply.”
Raw Water Source Located
The engineers and community leaders set about to find a suitable water source. The Cumberland River at Clarksville, Tennessee, was eventually selected as the best alternative. Some reasons for this included the tremendous volume of water available, and the availability of the RJ Corman Railroad right-of-way as a direct corridor from the city of Guthrie to the river.
With the source decided, the preliminary layout of the treatment and distribution system followed. The treatment plant was placed in Guthrie to minimize pumping of untreated water, and to avoid having to “backtrack” with treated water. The distribution pipelines were laid out to directly connect to each of the 12 systems. Water is not required to pass through any member’s system to get to another. This avoids issues of water loss, transmission costs, and capacity utilization between the retail systems.
Logan-Todd created a design committee consisting of three licensed water treatment plant operators from the member entities to advise the engineers during the planning and design phase.
Strand Associates and their subsidiary, PEH Engineers, led the treatment plant effort, and considered conventional treatment technologies as well as some newer alternatives. The entire system includes an intake on the Cumberland River in Clarksville, a 36” raw water pipeline from Clarksville to Guthrie, a 10 million gallon per day (mgd) water treatment plant at Guthrie, 85 miles of transmission main tying the plant to the member systems, three water storage tanks totaling 3.5 million gallons, and 17 metering stations.
Funds From Everywhere
The project has grown from the original proposal to build a system to serve only one county in the region, to the current project that serves all 12 entities. The total budget for the project is $77.5 million, although it now looks like the final cost will be closer to $75 million.
Rural Development (RD) provided most of the long-term financing. The agency committed to provide $48.2 million in loan funds to the project—the largest RD loan ever made in the U.S. Logan-Todd also received the largest state grant awarded from the tobacco settlement funds.
The funds to build the project came from practically every source available for a public infrastructure project, including:
• the community development block grant program;
• direct, line-item appropriations from the federal budget;
• drinking water state revolving fund loans; and
• private bond issues.
In 1998 and 2000, Governor Paul E. Patton provided state budget surplus grants, which were an important source of funding early in the project. A series of bond anticipation notes issued over the course of construction provided interim financing.
The commission set the wholesale cost of water to each entity
at $2.91 per 1,000 gallons. Since Logan-Todd is building all of the facilities necessary to deliver 10 mgd as the demand increases, the wholesale rate should decrease. In addition, as growth occurs in any one of the entities, it benefits all 12 in reduced water cost.
Construction of the project started in the summer of 2000 with the raw water pipeline. Since then, there have been 17 contracts, totaling more than $60 million, awarded to 15 separate contractors. At the peak of construction, 16 of the contracts were underway simultaneously.
The RJ Corman Railroad Company constructed the raw water pipeline in their rail right-of-way. This approach avoided easement problems and provided a direct route from the river to the plant site through some highly developed parts of Clarksville.
Individuals Come Together
“We pumped our first water from Clarksville in September 2002, and began filling basins, and conducting performance tests,” says Kelly. “By early 2003, the plant was substantially complete and ready for service.“In looking back over the project, there were a number of landmark events that led to its successful implementation,” he explains. “First, and probably most important, was the realization that several water systems with common goals could work together. This sounds simple, but those of us in the water industry know what a leap of faith that sometimes requires.
“In 1998, Russellville had serious problems at their water plant,” he adds. “The Logan-Todd project was already well on its way to fruition at that point, but obviously the crisis in Russellville added a sense of urgency. Completing the agreement with RJ Corman Railroad provided access to the Cumberland River, and a significant portion of the right-of-way needed for the transmission lines.
“The timing of the project corresponded to the advent of membrane technology in the municipal water industry, allowing us to be one of the first to employ what we believe is the technology of the future in water filtration,” he concludes. “We were very fortunate to plan and build the project during a time of historically low interest rates, and state budget surpluses, which are now only fond memories. Having a 12-member commission provides a large customer base that benefits all members.”
For more information about the Logan-Todd Regional Water Commission, e-mail Kelly at clay.kelly@Strand.com or Larimore at email@example.com.
About the Author: Associate Editor Kathy Jesperson enjoys writing articles about rural water systems. If you have an article idea for her, please e-mail her at firstname.lastname@example.org.