Author: Harrison Zeff

Environment Sciences & Engi

A Tale of Two Water Authorities: Paying for excess capacity in shared water and wastewater systems

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.

Continue reading

Paying for Unused Capacity: Interlocal Agreements using Capacity Allocations

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.

Continue reading