Co-authored by Liz Harvell
Across North Carolina, population shifts, flooding and drought, changes in industry and manufacturing, and the continuous move toward a reduction in overall water use has continued to create partnership opportunities for large and small water and wastewater systems alike. For large systems anticipating future growth, increased and more economically-savvy water supply may be accomplished through partnering with surrounding communities; smaller systems struggling with increasing costs and decreasing revenues may look towards partnerships with other systems to increase access to capital and reap the benefits of economies of scale. Systems that find themselves with excess capacity due to the loss of large industrial customers may view selling water or wastewater services to neighboring communities as the only realistic way of plugging revenue holes. And while general economic downturns and natural disasters continue to drive water and wastewater customers to relocate, making their systems no longer financially sustainable without some type of intervention, various partnership models are appearing more and more appealing.
While the number of models for creating water partnerships is as numerous as the number of reasons systems have for pursuing them, the most common tool for creating water partnerships in North Carolina is the interlocal agreement.
There are hundreds, if not thousands, of these agreements in place throughout the state, ranging from simple agreements intended to cover sale of water by Community A to Community B, to a complex series of individual agreements that when taken together can be used to create a consolidated regional utility model.
Earlier this summer, the Environmental Finance Center at the University of North Carolina at Chapel Hill (EFC) published Crafting Interlocal Water and Wastewater Agreements, a guide laying out important considerations for communities contemplating how a local agreement might benefit their community. Using the EFC experience of providing direct assistance to communities developing partnerships over the last 20 years, this guide identifies 21 key topics of governance, financial, and technical issues that are integral to the success of these agreements. Below are 10 key topics, but be sure to see the full guide complete, with examples:
1. Ambiguities Related to Current and Future Service Areas
It is extremely important to remove as much ambiguity as possible about current and future service areas when two or more service providers agree to buy or sell water services to one another, as ambiguity concerning unserved areas can lead to a range of problems, such as competition to serve new growth. Ambiguity in the agreement can be removed via language explicitly defining service areas, outlining who can serve unserved areas, and clarifying the process for changing or expanding service areas in the future.
2. Precisely Defined Key Usage Thresholds and Limits
Interlocal agreements are often constructed during a time when the seller has excess capacity and the purchaser does not need all the water or wastewater capacity it purchases. For this reason, there is often a lack of urgency related to setting time defined or maximum thresholds in the contracts. However, clearly defining thresholds and limits is essential to a successful long-term agreement as ambiguities in maximum thresholds and limits can lead to disputes between contracting entities. Key
usage limits can be defined in four steps:
3. Water Quality Concerns
Water quality problems for these systems can range from large scale issues that pose immediate threats to public health to small scale concerns related to taste and odor issues. At a minimum, all contracts should lay out a basic communication requirement between the purchaser and seller that articulates a process for how water quality concerns should be communicated. Given the variation in the types of problems, the agreement should include different policies to address different types of problems (e.g the concentration of disinfection by-products (DBPs).
4. Compliance of Wastewater Agreements with State and Local Ordinances and Regulations
Entities in the agreement should define what the limits will be on what is considered acceptable waste and there should be language requiring compliance with the sewer use ordinance for the jurisdiction which will be treating the wastewater. In addition, a) methods for ensuring compliance with regulations and b) how to handle situations when compliance is violated should both be included in the agreement with as much specificity as possible.
5. Calculation and Modification of Commodity Charges
While a temptation may exist to link price increases to inflation (normally relying on Consumer Price Index (CPI) or other indexes), there is no guarantee that the costs related to providing water service will vary at the same rate as inflation. In fact, the cost of water provision for many utilities has risen much faster than inflation due to 1) construction increases and 2) the need to add additional treatment systems to meet regulatory requirements.
This part of the agreement should include:
- Specific distinctions for bulk versus retail charges
- Language addressing inside/outside rate variations
- Language specifying notice requirements or other processes related to when/how rates will change
- If applicable, how capital costs will be included in commodity charges
6. Reselling Water or Capacity
Why is this important? Consider the situation of a county with a water system that spends years developing a land use development plan to accommodate the future growth of their area. The county may not be willing to enter into a water contract without some guarantee that their own water will not be used by others to hinder implementation of their plans for growth.
Language should be included specifying limits on where water can be resold or parameters for how much can be sold/at what rate. This provides the seller some guarantee that their own water will not be used by others to hinder implementation of their plans for future growth.
7. Communicating and Handling Supply Interruptions or Shortages
This section of the agreement is imperative as it minimizes (as much as possible) the effects of an interruption or shortage in water supply due to a variety of reasons (emergencies, routine maintenance issues, increased water demand, etc.). This should include:
- How interruptions or shortages should be handled
- Specifics as to what notification process is required
- Notice requirements to provide purchaser with ample time to make (for expected interruptions)
- Language requiring purchaser to provide seller with notice as soon as possible, so seller can fix the problem
8. Variations Due to Emergencies
This information adds an element of stability in the event of an emergency or crisis. Specifics to lay out include processes for modifying key contractual requirements during times of emergency, a non-exclusive list of what constitutes an “emergency, and any specific limits on what seller can or must do in an emergency. More examples are included in the full report.
9. Addressing Failure to Pay for Wastewater Systems
When there is nonpayment under a contractual arrangement for sale of water, the selling entity can shut off water to the purchaser until payment is received. However, wastewater service providers who do not also provide water service face a unique predicament: the inability to guarantee payment without that same shut-off option. As a result, agreements should include language that covers what the seller should do in the event that a purchaser of wastewater treatment services fails to pay.
10. Looking Ahead—Leaving Open the Potential for Consolidation
In some situations, utilities may be considering multiple partnership options and weigh the advantages and disadvantages of full consolidation as opposed to retiring treatment facilities and relying on neighbors solely for treatment functions. Conventional wisdom often promotes a one step at a time approach—utilities could consider an interlocal agreement as a stepping stone to a later consolidation agreement. This sentiment may be driven more by political necessity or reluctance to address the even larger list of considerations that must be addressed in full consolidation and less by economics.
Later in 2019 the EFC will release a publication similar to this one but one but specifically for consolidation—Consolidated Water and Wastewater Systems in North Carolina: Options and Considerations. Check back here in August for its release and more regionalization work from the EFC.
Consolidated Water and Wastewater Systems in North Carolina: Options and Considerations
Erin Riggs is a Senior Project Director at the EFC and conducts applied research surrounding legal, policy, and accounting framework that influences environmental finance issues around the country. She graduated from the University of Florida’s Levin College of Law where she pursued a law degree with a specialization in Environmental and Land Use issues. She spent her third year of law school as a visiting student at UNC’s School of Law, where she worked as a legal intern with the Environmental Finance Center on sustainability issues in both North Carolina and Georgia. After law school, Erin worked as the Assistant Executive Director of Waterkeepers Carolina, a statewide organization representing the interests of the Riverkeepers across the state. She then spent three years working in Florida as a staff attorney for state court judges in the areas of both criminal and family law.