Water & Sewer: Rates are skyrocketing as municipal officials and customers are demanding fairness in the way these local services are regulated
(from Maine Townsman, May 1993)
By Michael L. Starn, Editor

You read about it every day in the newspapers—water and sewer rates going up. In some cases, rates are expected to double or even triple over the next couple of years. Why? The answers may differ slightly from community to community, but basically they all boil down to the one predominant reason—federal mandates.

The Safe Drinking Water Act and the Clean Water Act are the two major culprits. These two federal laws, passed by Congress in the early 1970's and reauthorized a couple times since, will cost Maine's cities and towns millions, perhaps billions, of dollars. Requirements for surface water filtration and stormwater separation have the largest dollar figures attached to them—estimates run as high as $1.5 billion—and are principally what is driving up water and sewer rates around the state.

With higher rates has come greater municipal official and public scrutiny of the water and sewer ratemaking process and the operation and maintenance of the facilities. In previous years, water and sewer services were provided at a relatively low cost due to less stringent treatment and disinfection requirements (or in some cases a lack of enforcement of these regulations) and the federal and state subsidization of the capital costs of water and sewer systems. The federal and state governments, according to Steve Levy of Maine Rural Water Association, spent about $500 million in Maine over the last 20 years to help build wastewater treatment facilities.

State and federal funding, however, has dried up. Most of the existing wastewater plants in Maine, as well as the rest of the nation, were funded mostly with federal dollars—75 percent of the cost. In Maine, the state government chipped in 15 percent leaving local governments needing to cover only 10 percent of the wastewater treatment facility's cost. Public water systems, at significantly less cost than wastewater plants, were built through a combination of grants and low interest loans from the Farmer's Home Administration (FmHA), Economic Development Administration (EDA), Housing & Urban Development (HUD), and Maine Municipal Bond Bank (MMBB).

Upgrading and expansion of water and sewer systems has now become the responsibility of the municipality or district, with some help from state bonding. Although the federal dollars have been reduced, the number and magnitude of the mandates have not. Unfortunately, Maine cities and towns are not financially prepared to deal with the new regulations or the impending deteoriation of their water and sewer facilities.

SKYROCKETING RATES

Recent Maine newspaper headlines have read: "Water Utility Asks for 218 Percent Hike"; "Sewer District May Seek 75% Rate Increase In '93"; "Cleaner Water Could Hike Rates 40 Percent"; and "Sewer Plant Will Likely Double the Rate Users Now Pay".

No question about it, rates for both sewer and water are going up fast and will continue climbing. Yet, there are some people who don't think rates are high enough.

"Communities are underfunding capitalization (setting money aside for future capital improvements)," says Harry Henderson, municipal services manager with Dufresne-Henry consulting engineers. On the present rates for water and sewer service, Henderson says, "if you're paying under $700 a year, you're getting a deal."

DEMAND FOR EQUITY

With subsidized capital costs and up til now minimal treatment regulations, water and sewer rates have been held very low in comparision to other utility costs, such as electricity, telephone or cable. Today with rates sky rocketing, more attention is being given to how water and sewer users are being charged. Equity and fairness are being demanded by water and sewer customers and the municipal officials who represent them.

Water and sewer rates are not regulated the same way. Both private and public water systems are regulated by the Maine Public Utilities Commission, but perhaps not for long (see below). Municipal sewer departments and sanitary districts, on the other hand, are self-regulated.

Both water and sewer rate schedules usually involve a minimum charge plus a consumption charge. The consumption charge is generally based on water usage where public water systems are operating; where metering is not available, an annual flat fee is most often levied. For sewers, if water metering is not available, charges are sometimes based on the number of plumbing fixtures, i.e., faucets, toilets, drains.

There are still a handful of communities that provide for water and/or sewer from general taxation, meaning from property taxes. Drawbacks to this approach are evident, customers are not being charged based on consumption but instead based on the value of their property; heavy users may pay the same or less than light users.

The federal government is not keen on the idea of funding water and sewer from general taxation. As a matter of fact, there are specific EPA regulations prohibiting such a funding mechanism, but they haven't been enforced. However, user fee financing is often contingent on obtaining federal funds to upgrade systems.

With any rate structure there are bound to be some inequities. User fees are often thought of as regressive in that payment is not based on a person's ability to pay. Some communities have set a circuit breaker on utility charges providing rebates where the fee exceeds two percent of a family's income. Also, there are situations where rebates may be warranted, particularly for a metered water-based sewer fees, when it can be demonstrated that the water does not end up in the sewer system (an example might be a swimming pool that is not drained into the sewer system). Connection fees, sometimes called impact fees, have been used for some time by both water and sewer departments/districts to pay for expansion or upgrading of a system necessitated by the additional customers.

Unlike water where the quality of the product is the same for every customer, discharges into the sewer system are not all equal. Some types of waste requires much greater, and hence more expensive treatment. This type of waste is called "extra strength".

Dufresne-Henry's Henderson says, "In some communities it may be necessary to increase the cost of treatment for a special class of user based on the strength of their waste going into the system."

Henderson knows of an ice cream manufacturer in New England whose BOD (Biochemical Oxidation Demand) is 10-20 times the strength of domestic wastewater, but pays the same rate per gallon for disposal as a regular residential household customer. DEP's Richard Darling, who is staffing the Municipal Pollution Prevention Program (see below), is also concerned that sanitary departments/districts may be undercharging the true disposal cost of "extra strength" waste that's being discharged into their systems.

Henderson reports that his experience has been that "more and more communities are dealing with the issue of "extra strength" in rate classification.

WATER REGULATION

According to Charles Jacobs, PUC administrative director, a bill will be introduced in this session of the Maine Legislature to take away the PUC's responsibility for regulating public water systems—municipal departments and districts. PUC is pushing the bill because of resource constraints. "We believe we have to direct our efforts to higher priorities, such as electricity," says Jacobs.

With furlough and shutdown days, says Jacobs, the PUC has lost 10 percent of its available resources. He also notes that Maine is only one of a handful of states that regulates public water districts.

By the time this article is printed, it is likely that the bill will have been reported out of its legislative committee. It is expected that with all the other issues the legislature must deal with this session, the bill will be carried over to the next session.

Malcolm Horton of Horton, McFarland & Veysey, public accountants in Ellsworth, is one person who disapproves of the bill. Horton, who has been in public accounting since 1957, has about 60 water and sewer utilities that are clients.

"I think the PUC provides some stability," he says. "Their role is critical," adding that he has found their staff to be highly trained and professional.

Horton even believes that the PUC should be regulating municipal sewer departments and districts, but admits that this is unlikely to happen.

The Maine Rural Water Association's membership, made up of the private, municipal and district water systems in the state, is split on the issue of continued PUC regulation of public water utilities, according to its director Steve Levy.

WATER RATES

According to the Maine Rural Water Association there are 152 water systems in Maine of sufficient size to be regulated by the PUC—85 are districts, 29 are municipal and 38 are private systems.

Water utilities can have any rate structure they want, says Ray Hammond of the PUC. The most common structure involves a minimum charge with declining rates for blocks of water. The minimum charge generally includes recovered fixed costs, customer billing and accounting. Standard blocks of water consumption are measured in cubic feet. A typical blocking pattern might include declining rates for 1200, 2,000, 4000, 50,000 and 150,000 cubic feet.

From reports gathered by the PUC, an average metered water customer pays on a quarterly basis anywhere from a low of $20.15 in Yarmouth (Water District) to a high of $102.00 to the Passamaquoddy Water District for 2000 cu.ft., or 15,000 gallons, of water. The average quarterly cost for a metered customer is $44.23. That would mean the typical homeowner might expect to pay about $177 annually for public water on a metered system.

Water systems that are not metered charge a flat rate. Some metered systems have customers who haven't been equipped with a meter and are therefore charged a flat rate. Annual flat rates range from a low of $12.00 at Hebron Water Company to a high of $259.26 at Bridgton Water District (for its unmetered customers). The highest for a purely flat rate water system is $196.00 by Small Point Water Company (near Phippsburg). The average flat rate being charged, including those systems who have some unmetered customers, is $115 annually.

Combining the user charge for metered customers with the flat rate for unmetered customers, the average charge for a typical household in Maine serviced by a regulated water system is $40.64 per quarter, or $162.57 per year. (Figures provided by the Maine Rural Water Association from PUC reports issued June 30, 1992).

SEWER RATES

Rate setting for municipal wastewater facilities has been handled much differently than water. The principal difference is that a third party regulator, such as the PUC, is not involved. For sanitary districts, rates are set by the board of trustees; where you have a municipal sewer department, rates are set by the city or town council.

Another major difference between water and sewer is that sewer systems were much more expensive to build and are technically more complex than water, primarily because of the treatment requirements.

Comparing the cost to build a water system versus a sanitary system serving roughly the same population, Dufresne-Henry's Harry Henderson says, "a typical water system has about one-third the cost of a wastewater system."

Maine's Department of Environmental Protection at the urging of the federal Environmental Protection Agency is undertaking a Municipal Water Pollution Prevention Program to see how well wastewater facilities are holding up.

Many of the wastewater treatment plants in Maine were built in the 1970's largely with federal monies. According to Dick Darling, DEP environmental engineer who is staffing the project, many of those plants were built using a 20-year design life.

"We need to find out if they are still meeting the needs of the community," says Darling. Collecting financial and rate data from the wastewater departments and districts is just one of the components of the project.

A questionnaire has been finalized and will soon be pilot tested by eight wastewater treatment facilities. Once the results of the pilot testing are finished, all the wastewater facilities in the state will be surveyed to find out current rates, levels of indebtedness, type of rate structure, and the available plant and equipment reserves, in order to get an overall financial profile on the facility.

According to Darling, this EPAmandated program has been conducted in other states where results showed the potential for serious financial problems at their wastewater facilities. "Other states with less rigorous data collection than us found a lot of financial management problems," said Darling.

Anticipating that financial mismanagement may be a problem in Maine as well, Darling says the DEP formulated its questionnaire to find this out. If the need exists, DEP will provide training and technical assistance in wastewater financial management. Another purpose of the program is to foster "better communications between the 'nuts & bolts' treatment plant operators and the municipal officials or district trustees who are trying to oversee the operation," says Darling.

DEP is hoping to have the data collected and analyzed by this fall. The TOWNSMAN will report on the findings when they are released.

FUTURE TRENDS

Privatization

Privatization of the operation of water and sewer facilities is something that has taken hold in other states and has just recently made its way to Maine.

In Rockland and Lisbon, the consulting engineering firm of Whitman & Howard with headquarters in Wellesley, Massachusetts, has taken over the operation of the wastewater treatment facility. About two years ago, the financially troubled Biddeford sewer plant turned its operation over to Operations Management International (OMI).

According to David Phillips, director of the Operations and Management division of Whitman & Howard, the company has a full contract to take on complete responsibility for labor and operation of the facilities in Rockland and Lisbon. Phillips noted that Whitman & Howard has for a number of years provided partial contracts for limited aspects of the operation of wastewater facilities.

According to a report in the Bath-Brunswick Times Record about Whitman & Howard's contract to operate the Lisbon wastewater facility, Phillips explained the company's role in utility management this way. "There's no magic to it. It's just that that's what we do—run water and wastewater treatment plants."

In addition to its Maine contracts, Whitman and Howard has full contracts with a number of wastewater facilities throughout New England, including Massachusetts, New Hampshire and Vermont.

Phillips says, "We believe that private companies can do the job more efficiently and at less cost." He says that his company is uniquely positioned to stay current on state and federal regulations that water and wastewater managers, operator and employees must comply with. Other advantages of privatization, says Phillips, are the ability to save on labor costs by sharing employees among contracted plants, the bulk purchasing of supplies, computerization capabilities, and in-house expertise.

On the other side of privatization, Gaeton Lamontagne, one of three operators at the Lisbon plant, voiced his concerns in that same newspaper article. "We've lost money, we've lost free time and most importantly we've lost job security."

And, there are others who oppose privatization including Malcolm Horton, the Ellsworth public accountant. Horton says, "I don't understand why they (Lisbon and Rockland) did that (privatize). If you privatize you are at the mercy of whom you are doing business with and they have to make a profit."

Conversely, private companies argue they can do it cheaper. According to the article in the Times Record, the Town of Lisbon stands to gain about $100,000 annually in savings from its contract with Whitman & Howard.

The contracting out of the management and operation of of water or sewer facility does not abdicate the proprietary responsibilities of the municipality or district. Municipal officials or district trustees are still the governing body of the facility.

Municipal or District?

Another area where there seems to be some disagreement is over ownership. Will water and/or sewer be a municipal department or a quasi-municipal district? Is private ownership of water and sewer facilities an option?

On the issue of which operates better the municipal department or district, most of those interviewed for this article believe a district is generally more focused.

"As municipal departments, water and sewer are lumped in with all the other concerns of the town," says Horton. "With a district you have the governing body that comes to a meeting and sewer or water is all they are going to talk about."

"Towns don't have the administrative time to devote to these issues," Horton adds.

Regarding water utilities, PUC's Hammond says from a ratepayer's standpoint ownership shouldn't matter. He agrees with Horton that municipal officials may not be able to focus as well (as trustees) on the issues of the water department, but adds, "This is not to ay that one is run better than the other."

For a number of years, the issue of municipal or district ownership of the South Berwick Water District, formed in the early 1960's, has been debated. Last fall, the issue came to a head when the South Berwick town councilors requested their state legislator to introduce a bill dissolving the district and placing the ownership, operation and management in the hands of the town government.

Following some public dissent over the idea, the council appointed a committee to study the situation and come back to the council with recommendations, prior to taking legislative action. The committee recommended to keep the water district intact, and the council decided to back off its legislative initiative.

Former South Berwick Town Councilor Robert Brackett says the debate over ownership and governance of the district was healthy and had a "positive effect on the operation and management of the water district." The district trustees are now taking more seriously some of the concerns that have been voiced about the water district over the years, according to Brackett.

Maine Rural Water Association's Levy takes even more of a middle of the road approach to the issue of municipal or district ownership. "As far as municipal department or district is concerned, different people will have different solutions to the same problem."

Levy says that he has worked successfully on both sides of the issue with different results. In Ft. Kent, a decision was made to separate the municipal water department from the town and setup a district. In Castine, the Castine Water District was abolished because the trustees wanted to turn the operations over to the town. In Belfast, mediation was used to resolve issue of municipal or district ownership and operation. "Rural Water has experience working out institutional solutions, while not playing favorites; there is no best way," says Levy.

Dufresne-Henry's Henderson believes that regionalization should be considered. Whether as a district or interlocal agreement, Henderson says there are economies of scale to be gained from larger water and sewer operations. "It's expensive for a utility (water or sewer) to serve less than a thousand customers."

"There will be more regionalization in the future—three or four communities joining together on the ownership, operation and maintenance of facilities," he says.

He discourages single-community ownership and contracting out to other communities saying its politically volatile. The question might come up: "Why should we allow water and sewer for a shopping center that is going to compete with our downtown businesses?"

Private ownership of water and wastewater facilities has yet to be realized in Maine and while there are a few isolated cases across the country where it has happened, it is not widespread. However, according to a report from the Reason Foundation, "Privatization 1993", the pace of water and wastewater privatization increased significantly in 1992 and has several cities, including Indianapolis, Petaluma (California), Baltimore and Philadelphia, will be exploring the idea in 1993.

Conservation

A final issue, or perhaps future trend, that water and wastewater governing bodies must deal with is resource conservation. Will water and sewer rates follow the state policies for electric utilities where high volume users are charged more, not less than low volume users.

Given the high cost of treating water and sewage and contraints on increasing the size of facilities without federal funding, those who set the rates for water and sewer services may want to start backing away from the historical pattern of giving discounts to volume users.