Reversing the Decline of Utilities: A P4 Alternative

Rainbow River

By Robert Sheets


Water and wastewater utilities are more often than not self-supporting revenue enterprises (and sometimes revenue generators) for communities. However, even with the best of intentions, good utilities can go bad. In general, the smaller the utility, the greater the struggle, though there are exceptions. For decades, Florida developers building outside urban service areas either installed wells and added septic tanks for entire communities or they constructed small plants to provide services to their developments. Both approaches were ubiquitous; each had and still present unique challenges to the local government. However, whichever approach was used, they do share this: old septic tanks and small package plants that have been poorly maintained pose a threat to the environment. While a private well can be replaced, a water treatment package plant that hasn’t been maintained can have major delivery and product quality issues.

Developers often sold the package plants to residents or private water companies. In either case, the cost of water and wastewater services were substantially greater than the rates of government utility customers. Residents complained to their local government about the cost and water quality, as well. They wanted to be government utility customers. They wanted to feel safe, to be treated fairly. However, expanding the urban service area, catching up on capital improvement projects and dealing with potential regulatory issues was often more than the local government could absorb.

By 1999, the problem was recognized and spreading. Local governments were looking for a solution beyond absorbing the package plants or expanding the service area. Private utility regulation was managed through the Public Service Commission, located in Tallahassee, the state capital. The answer lay in a Florida Statute from 1969. The Florida Interlocal Cooperation Act created the means through which local governments could work together without creating additional liability. The idea was that this new entity would acquire the facilities, bring them up to government standards and transfer them to the member government on request.

Marion County Florida

As a result, the Florida Governmental Utility Authority (FGUA) was created through an Interlocal Agreement with Brevard, Lee, Polk and Sarasota counties to acquire Avatar Utilities which had systems in each community. Here’s the big twist: The FGUA wasn’t structured like other water authorities in Florida. It had no employees. Since the beginning, 20 years ago, it has never had employees, using a private contracting model for flexibility to adapt to changing conditions. Every service is provided by private contractors. From accounting and billing to planning, construction and maintenance, FGUA can easily expand and contract with acquisition and transfer decisions. Today, FGUA has roughly 131,000 customer connections in 14 counties and 86 communities across Florida. The latest acquisition is the water and sewer utility previously owned by the City of Dunnellon.

It Seemed Like A Good Idea at the Time

Located in rural Marion County, Florida, the City of Dunnellon is a small, quiet community located between two spring-fed rivers: the Withlacoochee and the Rainbow. Water flowing through Rainbow River is as clear as the springs that provide its source water. Think glass-bottom boat. The population is about 1,800 with median household income under $28,000 and a per capita close to $18,000. It’s the bass capital of Florida and is recognized as a great place to retire — roughly one-third of the population is over 65.

So, it was with great ambition and good intentions that the city council began to acquire small utilities outside of their primary service area. The original customer base for the city included 1,110 customer connections. By 2012 customer connects swelled by 2,095. Of those new customers, 65 percent were outside the city. To meet capital improvement needs, system maintenance and regulatory compliance demands, the city planned to add a surcharge to out-of-city customer bills. That plan was challenged, and in settlement negotiations, it was dropped, leaving the city with increasing costs, high debt, significant infrastructure needs, some of the highest rates in the region and customer dissatisfaction. To make matters worse, there were significant environmental compliance issues that needed to be fixed.

By 2016, the utility was failing.

When a new city council was seated, they decided that it was time to make some changes. They hired a utility analyst to review the system, the outliers and the finances and asked for consideration of three alternatives:

  • Rebuild the city utility;
  • Outsource operations; or
  • Sell to an investor-owned utility.

The city council began to debate the merits of outsourcing or selling the facilities. The city had already offered a buy-out to Marion County, which declined. Many municipalities contract for services. There were significant issues with either choice, not the least of which was a significant rate increase. Contracting for services is sometimes considered a public-private-partnership (P3) depending on how responsibilities and roles are divided. While used in many public sectors, P3s receive decidedly mixed reviews from the water sector. Beyond costs to the city, there was risk, accountability, transparency and customer rates to consider. Contracting is common, P3s much less so. Still, absent an outsourcing solution, the city was looking at rate increases approaching 18 percent over the next couple of years.

The city needed an alternative. They found it — a P4 solution: a public-public-private partnership. FGUA already had operations in Marion County, so they were not strangers. FGUA enjoys a stellar reputation with local governments because they are a single-purpose government, subject to all the accountability and transparency of every local government. FGUA is government, FGUA employees are not. It’s all still contracted. For a year, FGUA conducted due diligence with added complications of ensuring existing grants could be transferred while designing an entire financing package. Ratings vary for each of the FGUA systems which has, over 20 years, bonded more than $1 billion for various utilities.

Dunnellon is not the first government utility acquired by or contracted to FGUA. Currently, FGUA also has a 50-year contract with the federal government to operate water and wastewater facilities for MacDill Air Force Base in Tampa.

As FGUA was evaluating the Dunnellon utility, they began discussions with the U.S. Department of Agriculture (USDA) about their new Rural Development Loan. This low-cost financing was sought to provide rate stability for customers for a couple of years. FGUA wanted to give the city (and the county) everything they needed to ensure a win-win-win outcome. This acquisition turned out to be the first of its kind for USDA.

Over months, the city, county and FGUA boards met and incrementally approved the agreement. Notably, there was no public opposition. FGUA’s board is comprised of people (non-elected) appointed by member governments. When FGUA acquires a facility, the “host” government is invited to join the board of directors. In this case, Marion County already sat on the board, so they were well-briefed throughout the process. 

Terms for the city included being able to pay off existing debt and return dollars to the general fund — with a promise of future payments based on additional system capacity. The terms of the sale included:

  • With FGUA and city concessions no rate increase required for acquisition; potential for CPI index adjustment at 2020 but will seek to avoid.
  • City budget for FY18 requires 7.5 percent increase for WW and 3.5 percent increase for water; Rate consultant report estimates potential 17.45 percent rate increase required over forecast period under continued city ownership.
  • The negotiated purchase and sale agreement provides for a $12.2 million purchase price
  • After payoff of $10.8 million, existing city debt, transaction costs and required cash deposits, net cash to city is $1.323 million.
  • FGUA to receive all existing utility cash balances including $1.309 million in bond construction fund to complete priority capital projects.
  • City eligible for “Futures” payments of 50 percent of capacity charges for city invested capacity available (beyond reserved capacity) for new connections for up to 10 years from new capacity availability.
  • Financing of the acquisition is from an approved USDA Rural Development Loan at 2.75 percent interest, 40 years amortized over 30 years; this defeases high cost existing city debt saving customers over $250,000.
  • $2.2 million existing State Springs grant to be reassigned to FGUA by DEP/WMD for priority environmental project.
  • Under a negotiated three (3) party interlocal agreement (city, county, FGUA), the service area is reduced for the FGUA but expandable as needed.
  • By the same agreement, the FGUA will have a minimum 5-year ownership period, and the city has the right of first purchase and if not exercised, flows to the county.

There were some concessions:

City

  • $500,000 lower net proceeds from system net equity by foregoing pre-approved rate increase
  • Reduced service area for FGUA than what city had previously established

County

  • Five-year holding period for FGUA ownership
  • Assignment of “Right of First Purchase” to city in the event of FGUA sale

FGUA

  • Capacity “Futures” payment
  • Capital grant and fee (Rio Vista) reimbursement

With a laser focus on the public interest, the choice was made to find a way to make make the utility work for the customers and communities.


Robert Sheets
CEO | Government Services Group

Robert Sheets is the CEO of Government Services Group. His areas of expertise include service delivery resolution, revenue enhancement, long-range strategic planning, cost allocation planning, indirect cost rate proposals, and reimbursement filing from federal entitlement programs.

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