Consolidation

When Is Bigger Better?

Louis Funk, PE

How do you know when consolidation of water systems is a good idea? There are signs. Small systems with a few hundred customers, increased difficulty in complying with regulations, water source issues, an aging management team and the inability to offer managers, operators, and office staff competitive salaries are all indications that it might be time to consider consolidation with one or more other systems.

Of course, there are pros and cons to consolidating, depending on the particular circumstances of the systems involved. One important issue is staffing, both volunteer, consultants, and paid staff. The dynamics involved in getting a new system off the ground can differ from those needed to keep it functioning efficiently decades later. Both are significant undertakings requiring time effort and perseverance.  It takes a team of special, dedicated individuals to form a board of directors to preside over the birth of a system. Often those team members remain involved with the management of the system for many years. But, sadly, they sometimes discover when they want to step down there is no one available to take their place. The pool of management talent may simply be not large enough from which to draw good leaders. It may be time to combine management forces with another system and rejuvenate the systems.

Similarly, it may be hard for a small system to pay a competitive salary to managers, operators, and office staff, particularly after a long-time employee leaves. The cost of attracting, training, and retaining a replacement may be simply too high for the system to bear.

Cost efficiencies and economies of scale figure largely in the consolidation equation. Systems have fixed costs—management, for example—and variable, like water production. A given management team might very well be able to handle a larger system for the same costs. There would be no need to bear the overhead of duplicated offices or employees. Reducing fixed costs can result in lower rates for customers or added capital for necessary enhancements.

Sometimes, consolidation is the best solution to water supply problems. Quality, changes in regulations, reliability or cost may be the driving factors in the decision. A thorough analysis will be necessary to determine if consolidation is the best answer to these supply questions.  Factors to be considered include affect of regulations (near and long-term), stability of costs, and stability of supply, water quality, treatment, and distribution.

An example of a successful consolidation is three adjacent systems in Kansas that consolidated to form what is now the largest water district in the state with about 4,200 customers. By consolidating, they were able to maximize the use of the capacity in one system’s existing treatment plant, which in turn reduced the cost of water for those in another, who was buying from a nearby municipality at a much higher rate. The patrons of the third system saw a dramatic savings due to the elimination of management and bookkeeping staff. With only 265 patrons, they were absorbed into the existing management team without any additional costs. The monthly savings to the customers of the two smaller systems ranged from $10 to $15, reducing water bills from about $40 per month to about $28. The largest system did not have their rates reduced, but they enjoyed the stability of a larger customer base, helping ensure the likelihood long-term reasonable rates.

So when is consolidation NOT a good idea?

From a technical perspective, consolidation may not be advisable for any of the following reasons: the cost of infrastructure to tie the distribution systems more than offsets the benefits achieved, the water qualities of the systems are incompatible, and the consolidation results in a negative impact due to the impact of regulations or other technical issues are too costly to overcome. Systems would be well-advised to have their engineer perform a feasibility study before proceeding with any consolidation.

There are also other non-technical issues that stand in the way of consolidation.  Some systems are reluctant to consolidate because they fear they will lose control of their system and the protection of their long-time customers.  There may be old political issues that separate the communities or regions that are unrelated to water. That’s understandable, but it should not stand in the way of a well-reasoned discussion of the pros and cons of a consolidation.  There are becoming more and more consolidation and cooperative success stories.  Several of our clients have experienced positive results and may be available for reference.