Dividing the costs of shared water infrastructure equitably among many potential users may not be as straightforward as it seems. In particular, infrastructure designed to meet future demands in a growing region will not operate at full capacity for significant periods of time while demands catch up with projections. In a previous installment, we wrote about how reservations can be made on this excess capacity by individual entities when ownership is shared. These reservations can be used to split the costs of development, operation, and maintenance based on projections of future growth. Agreements can also include provisions for redistributing capacity reservations when actual growth differs significantly from initial projections. In some cases, these provisions call for retroactive payments between the partners to make the distribution of cost sharing in previous years reflect the new capacity reservations.
However, shared infrastructure capacity is not always directly owned by the end-users. In many circumstances, it is instead owned by a regional entity such as water management authority (WMA). These entities may issue debt, operate facilities, and provide maintenance for regional water and wastewater systems components (reservoirs, treatment facilities, major transmission lines). They can act as wholesalers, recovering their costs through fees charged to member utilities that in turn directly sell water services to retail (individual) customers. Under this arrangement, individual members do not need to take ownership over excess capacity, instead paying only for the water services they use in a given year. However, these systems may still operate with excess capacity, and the cost of that capacity is passed along implicitly in the fees charged to utilities. Under this structure, the costs of excess capacity are not always borne by the members that end up using it. This post profiles two different approaches used by regional authorities, the Karengnodi Water Authority and the Tampa Bay Water Authority, to examine the different ways in which water authorities pass their costs to member utilities.
The Tampa Bay Water Authority
Until 1998, a series of interconnected groundwater aquifers served as the primary municipal water supply for the independent water utilities operating in the Tampa Bay region. To combat overpumping, the independent utilities sold their interest in nine wellfields to the newly formed Tampa Bay Water Authority (Tampa Bay). Five municipalities, including the cities of St. Petersberg, Hillsborough, and New Port Richey, as well as Pinellas and Pasco Counties, agreed to exclusively purchase water from Tampa Bay at a uniform wholesale rate. Tampa Bay Water Authority is required by Florida statute 313.715(d) to charge a uniform rate when acting as a water wholesaler. Further, all capital, operation, maintenance, and administrative costs for existing and acquired facilities, authority master water plan facilities, and other future projects must be allocated to member governments based on water usage at a uniform rate. The City of Tampa also can purchase water when its own surface water supplies are insufficient to meet demand. In return, Tampa Bay was charged with reducing groundwater pumping to a sustainable rate by developing a network of alternative storage and distribution resources that maintains a total permitted yield of at least 133% of the annual regional water demand.
In order to meet this target (supplies greater than or equal to 133% of the annual regional water demand) under continued regional growth, the authority must develop new, often more expensive water sources. Designed for future growth, new sources will often initially contain significant excess capacity, the costs of which are split between the municipalities via the authority’s uniform wholesale rate. In contrast to a ‘capacity reservation’ structure, in which the cost of new infrastructure is paid by members who reserve capacity for future growth, the uniform wholesale rate distributes the costs of future growth based on current usage rates. This cost sharing arrangement can make it difficult to incentivize the individual municipalities to engage in conservation measures that would help to delay or avoid the costs associated with new sources. Retail rates are typically 66-150% higher than the uniform wholesale rate charged by Tampa Bay, so conservation measures taken by individual utilities result in revenue losses accruing to that utility which are only partially offset by reduced wholesale costs. However, growth in areas serviced by other utilities may still require Tampa Bay to build new, more expensive sources. The costs of these sources are passed on to all utility members through increases to the uniform wholesale rate. Utility managers run the risk of experiencing reduced revenues due to their individual conservation efforts while simultaneously paying higher wholesale rates because of development caused by growth in other utilities.
For nearly 40 years, the City of Flint and its neighbors along the I-69 corridor in Southeast Michigan have purchased treated water wholesale from the Detroit Water and Sewer District, which has been reorganized after the Detroit bankruptcy proceedings into the Great Lakes Water Authority (GLWA). After mounting concerns about rising water rates, Flint and the surrounding Genesse County formed the Karengnodi Water Authority (KWA) as an alternative to the DWSD. In 2014, the KWA began construction on a 67-mile, 85 MGD pipeline that would give a number of additional communities in the region an alternative method to access water from Lake Huron, including Lapeer County, Sanilac County, and the City of Lapeer. Unlike the members of the Tampa Bay Water Authority, none of these communities (including Flint and Genesse County) are obligated to purchase water from the KWA. Without any guaranteed revenues, the $220 million project was financed through a bond backed by general obligation limited tax pledges from Flint and Genesse County. Bond payments (and operating and maintenance costs for the Lake Huron intake, pumps, and pipeline) are expected to be covered through wholesale water sales.
The KWA will charge its wholesale customers a constant volumetric rate to reserve capacity in the pipeline. There is no guarantee that the entire 85 MGD will be reserved, meaning that the cost of any excess capacity will be rolled into fees for the initial capacity reservations. Additional capacity can be reserved at a later date, giving members little incentive to reserve capacity for expected future growth early on. Because a large portion of the KWA’s costs are fixed debt service payments, the less capacity that is reserved, the higher the resulting volumetric rate. As a practical matter, there is a ceiling on the volumetric fees the KWA can charge, as the GLWA still operates in the region and effectively serves as wholesale competition to the KWA. In contrast to Tampa Bay, the KWA is primarily concerned with attracting customers to generate enough revenue to meet their debt service payments. Flint and Genesse County must cover any missed debt payments because of their pledges on the KWA’s bond offering. Genesse County was able to use the high credit rating of its own debt to attract lower interest rates on the KWA bond by pledging to cover any missed debt payments by Flint, which has a much lower credit rating because of the city’s own solvency issues. By essentially insuring the debt against insufficient KWA revenues and missed payments by Flint, Genesse County has assumed a large portion of the risk for this $220 million project, without the additional benefit of infrastructure ownership and the right to determine rates (the subject of part 3 of our series on unused capacity in shared water systems).
These approaches show the diversity of approaches for allocating costs. As more utilities turn to partnerships to take advantage of economies of scale, the need to develop customized cost sharing approaches will increase. When evaluating different approaches, utilities often have to predict the future to understand future financial impacts. Predicting the future has proven to be particularly challenging in the utility sector. Prudent utilities will want to assess the financial impacts of these agreements under a variety of situations to truly understand the risks and rewards they offer. Future blog posts will look at how different future scenarios impact different overarching cost allocation approaches.
Harrison “HB” Zeff joined the EFC as a Post Doc Research Fellow in February of 2016. His research focus is on adaptive drought management planning and the hidden risks in jointly developed water resources infrastructure. He received his PhD from UNC’s School of Public health in January of 2016.