Constructing, maintaining, and upgrading water infrastructure entails large costs for local governments that can end up impacting budgets for years. The long lifespan of these projects often require development to be based on needs projected decades into the future, leaving significant excess capacity that must be paid for, but not used, in the interim.
Communities looking to help cut costs and reduce risk may be able to capitalize on this excess capacity by partnering with their neighbors via interlocal agreements to share infrastructure. These agreements can take many forms – joint ownership, interruptible purchase agreements, the formation of new semi-governmental entities – but their ultimate function is to spread the costs of unused capacity across a broader base of users, making them easier to finance. In order to develop equitable cost sharing agreements, interlocal agreements often rely on estimates of growth to determine who will use capacity in the future. It can be difficult to make longterm projections, and when the assumptions that form the foundation for an interlocal agreement turn out to be incorrect, one or more partners could be stuck with unanticipated liabilities.
This implicit risk could be a disincentive for communities to enter into interlocal agreements. As with any risk, managing it requires understanding it as much as possible. This is the first in a series of posts that examines how the allocation of unused capacity distributes risk among the partners in different types of interlocal agreements. Here we look at two examples of how unused capacity is paid for when infrastructure is shared through capacity allocations.
Western Wake Wastewater Reclamation Facility
Joint ownership with fixed capacity allocations
The Raleigh metropolitan region is comprised of many independent but geographically concentrated suburban communities, providing ample opportunities to realize the benefits of shared infrastructure. In 2014, the towns of Cary and Apex jointly opened the Western Wake Water Reclamation Facility (WWWRF). Cary took responsibility for operating the plant, but all the costs, including debt financing, maintenance, and the fixed operating costs (those not directly related to the volume of water treated) were designed to be shared based on the ownership of ‘capacity shares’. Apex owns 34% of the capacity shares, meaning that they are entitled to 6 of the plant’s 18 million gallon per day (MGD) capacity and obligated to 1/3 of all the costs.
In 2015, the partners used only a small fraction of their allotted capacity, but they are projected to grow into the plant’s full capacity by 2030. During the interim, each utility pays for the unused portion of their capacity allocation. This type of agreement is fairly common and works well when growth patterns are relatively easy to predict. If growth patterns are significantly different than predicted, one or both parties could make a case for a different allocation. This change would give one utility access to unused capacity that had previously been financed by the other. If a compensation mechanism is not explicitly included in an interlocal agreement, it may make it difficult for partners to successfully negotiate changes to the capacity allocations of shared infrastructure.
Water and Sewer Authority of Cabarrus County
Regional water authority with continually modified capacity allocations
The Water and Sewer Authority of Cabarrus County (WSACC) uses a slightly modified method of allocating capital costs that works when growth is difficult to predict or when parties want to maintain a high degree of flexibility in their agreement. WSACC operates a system of wastewater collection and treatment infrastructure that is accessed by multiple member utilities. Similar to the WWWRF, member utilities request a ‘capacity reservation’ to each piece of infrastructure, with the total costs of constructing, operating, and maintaining that infrastructure allocated proportionally to the members.
These capacity reservations are not fixed through time, and when growth projections change, utilities can request new capacity reservations. The capacity sharing agreement also includes a formal mechanism for compensation when capacity reservations are changed, called the Square One Adjustment. With each change in capacity reservations, a new cost allocation is applied to each member. New annual payments are made based on this updated cost allocation, but it is also used to determine a retroactive payment as if all members had been paying this new share since the beginning of the agreement. The cumulative difference between the original payments and the payments that would have occurred under the new capacity shares are applied to each member utility as a one-time fee (or reimbursement). These retroactive payments are cost-neutral, so that with each change to capacity reservation, the fees paid by the member utilities requesting more capacity reservations are received as reimbursements by the remaining utilities. These fees make capacity usage payments more equitable, but they also give utilities an incentive to accurately account for growth when requesting allocations to new infrastructure (payments distributed over time are often preferable to a large one-time fee).
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.