Open to Opportunities: Making Consolidation Work

Central Arkansas Water uses consolidation as a winning solution for both sides

Central Arkansas Water (CAW) provides water service to a population of about 450,000 people in the Little Rock and North Little Rock greater metropolitan areas. Maumelle Water Management (MWM) is an improvement district providing water and wastewater services to the City of Maumelle (Maumelle). MWM’s system was surrounded on three sides by CAW’s water system, and CAW looked at this as an opportunity to fill this void in its service territory.

In 2015, MWM was experiencing some significant capital costs for repair and replacement to the water system that would be particularly burdensome to their customer base. CAW convinced MWM’s governing Board to allow CAW to evaluate the feasibility of consolidating the two water systems and considering options for the wastewater system.

Raftelis was tasked with conducting the financial feasibility analysis for CAW, as part of the larger feasibility analysis team, which included CAW executive management, community relations, and engineering staff and consultants. Raftelis developed a financial model that reflected the various assumptions that were made about the systems, as well as the capital needs, operational changes, and other considerations, which helped determine the rates needed to fully fund potential operations and debt service.

The feasibility study considered and presented several system ownership options including:

  • MWM retaining system ownership and operations and implementing rate increases to meet their capital needs.
  • MWM consolidating their water system into CAW’s water system, implementing consolidation surcharges, CAW assuming ownership and operation of the water system, and MWM continuing to operate its own wastewater system.
  • Consolidating MWM’s water system into CAW’s water system, implementing consolidation surcharges, CAW assuming ownership and operation of the water system, and consolidating MWM’s wastewater system into North Little Rock’s wastewater (now water reclamation) system.

The fundamental underlying consideration of the consolidation was that MWM customers, not CAW customers, would bear the transition costs of consolidating with CAW. The feasibility assessment assumed that a transition period of approximately two years would be necessary to complete the capital infrastructure improvements necessary to consolidate MWM with CAW. The specific capital infrastructure expenses identified for the water consolidation would be paid for by debt that would be repaid by MWM customers. However, there were also O&M increases during the two-year transition period as well as capital infrastructure expenses that, according to financial best practices, should not be financed over a 30-year period (a meter with a 10- to 20-year life, for example, should not be financed over 30 years). As such, the assessment contemplated a series of three surcharges that were used to achieve the intent of the consolidation in the most fiscally responsible manner. These surcharges and when they would stop being assessed (expire) are shown in Figure 1 and graphically over a 30-year timeframe in Figure 2.

Figure 1. Monthly Water Surcharges and Fees for Transition and Capital Needs (shown for a 5/8” meter)

Figure 2. Monthly Surcharge Comparison for 2014 – 2047 (5/8” Meter)

The results of rate modeling for the water system consolidation analysis are shown in Figure 3 for the anticipated change in customer monthly water and wastewater bills. Figure 3 shows that after a forecast 5-year timeframe, MWM customers would see lower monthly bills under the consolidation than if MWM retains ownership and operation.

Figure 3. Combined Average Monthly Utility Bill for 2015-2020 (5/8” Meter with 4,400 Gallons)

In less than three months, the project team evaluated the financial and operational feasibility of a consolidation plan. Additionally, Raftelis and the team investigated the necessary fees to assess MWM’s customers, in addition to CAW’s standard water rates to finance the transition costs, cost of debt, and capital projects needed to physically connect MWM’s system to CAW’s system. The analysis helped CAW executive staff and Board of Commissioners attain comfort and confidence in the proposal. Three months later, CAW and MWM signed a consolidation agreement that became effective March 1, 2016, and beginning in FY 2018, MWM customers were successfully integrated into CAW’s system and customer base.