A Watershed Moment for Regionalization

A Watershed Moment for Regionalization Kevin H. Gibson, Wesley C. Sydnor Louisville MSD, Louisville, KY Email: Kevin.gibson@louisvillemsd.org Email: Wesley.sydnor@louisvillemsd.org ABSTRACT A Watershed Moment for Regionalization will outline the process for evaluation of regional partnerships performed by MSD and others in the Louisville Metro area, lessons learned, and benefits. KEYWORDS watersheds, regionalization, utility management INTRODUCTION | BACKGROUND In 1993, MSD entered into an inter-local agreement (ILA) to provide sewer service to the City of Crestwood, and their approximately 1500 customers in Oldham County, Kentucky. Over the course of 18 years this partnership has produced productive benefits to the interested parties. For the Commonwealth of Kentucky, this partnership has created a sustainable and environmentally friendly regional solution for clean water. For MSD, there is the ability to serve additional customers. Finally, Residents in Crestwood, have been provided sewer service at a competitive rate. Flows from Crestwood are currently treated at the Hite Creek Water Quality Treatment Center (WQTC), and this system is included in the NPDES permit for this facility. The Consent Decree, Hite Creek WQTC permit, and Integrated Overflow Abatement Plan (IOAP) included projects and provisions for the City of Crestwood system and flows. From a regulatory perspective, they are considered part of the MSD system as a whole, and would require approval from the EPA, Kentucky Division of Water, and the Department of Justice in order to modify this existing construct. As part of the Consent Decree work, MSD has invested and provided support to build projects to meet regulatory commitments. This investment would need to be recouped in scenarios outside of the status quo, or MSD acquisition of Crestwood. In 2016, high profile failures of 'package' treatment plants led to the passage of Kentucky House Joint Resolution 56, to initiate a study of regionalization opportunities to limit the risk of future failures. The study that was performed in 2017, as a result of this Joint Resolution, provided an inventory of small 'package' facilities and emergency risk mitigation. Legislative jurisdictional boundaries created a limitation on efforts to regionalize. For example, Louisville MSD was created by state statute to own assets in Jefferson County, KY (ONLY). During the 2018 Legislative Session in Kentucky, Senate Bill 151 (SB151) was filed to enable utility ownership of sewer assets outside of jurisdictional boundaries through inter-local agreements. House Bill 513 (HB513) was filed to require additional insurance, as well as regulatory and financial accountability for small 'package' treatment facility operators/builders. The Kentucky Legislature approved HB 513 in 2018, and with it the ability for districts and utilities that are limited by statutory jurisdictional boundaries to acquire, lease, and purchase assets outside of those jurisdictional boundaries. METHODOLOGY The City of Crestwood was a main supporter of the HB 513 legislation, in order to allow the city to sell these assets to Louisville MSD to offset debt held by Crestwood related to this system. Once an entity expresses interest in a partnership with MSD, the following process is followed: Due Diligence Effort The assessment of the system begins with a due diligence effort, including the following highlights: Build initial assumptions of assets, debt, regulatory orders, contractual liabilities, customer base, and operational expenses.Evaluate existing rates. Documentation (or authority) that the system is not subject to Kentucky Public Commission's jurisdiction Legal description of the service area As-Built plans for the system Facilities Plans Inspect major facilities, pump stations, treatment plants. Run financial models to determine needed rate levels to meet capital and operational needs for regulatory compliance and related debt service. Determine capital needs above and beyond the regulatory requirements. Memorandum of Understanding After the initiation of due diligence efforts, MSD would develop a memorandum of understanding (MOU). This document would line out the responsibilities on both sides to get to the development of an interlocal agreement. Items would include business continuity, payment of obligations, and cooperation with due diligence efforts. Interlocal Agreement Development The interlocal agreement would outline, in detail the following items: Specific debt transition details. Rate schedules Service area/easement records Employee transitional information benefits, salaries, and positions Property transfers Service area delineation Description of closing Once the ILA was accepted by both sides, the Kentucky Attorney General, local officials, and the Kentucky Division of Water would need to approve prior to closing. This process could take up to 60 days. Asset Purchase Agreement and Closing Concurrent with the ILA approvals, an asset purchase agreement is developed and approved. This document provides an inventory of assets and liabilities for the party being acquired, and lines out the documents and signatures needed for closing. RESULTS As stated the Kentucky Legislature approved HB 513 in 2018, and with it the ability for districts and utilities that are limited by statutory jurisdictional boundaries to acquire, lease, and purchase assets outside of those jurisdictional boundaries. The City of Crestwood was a main supporter of this legislation, in order to allow the city to sell these assets to Louisville MSD to offset debt held by Crestwood related to this system. The conditions of the sale are outlined in the 2018 Interlocal Agreement, as well as the 2018 purchase agreement between Crestwood and Louisville MSD. In general terms, Louisville MSD would acquire the assets as outlined in these agreements, would assume the debt service from Crestwood, would help codify the city boundary, and would maintain rates consistent with MSD's Rates, Rentals, and Charges. On the heels of the Crestwood acquisition, Oldham County Environmental Authority and Oldham County Fiscal Court, Bullitt County Fiscal Court and a small private provider requested MSD to submit a proposal to acquire their systems. In 2019, a task force was formed to evaluate and make recommendations for regional water and wastewater solutions, and as a result there has been additional interest in regional partnerships with MSD. As a result of the Crestwood acquisition in 2019, Oldham County Environmental Authority began negotiations in earnest for MSD to acquire that system in 2020. In 2020, there was immediately interest from Bullitt County from the south to perform a due diligence effort for Acquisition. This acquisition was completed in December 2021. And immediately on the heels of the Bullitt County acquisition, a small private system in Spencer County, Kentucky reached out to inquire about MSD Purchase. This due diligence and ILA process was on-going in 2022. CONCLUSIONS Regionalization has proven to be an effective strategy to stabilize rates across jurisdictions, provide more buying power, enable economies of scale, and provide enhanced water quality across watersheds that might be bisected by political boundaries. While this is not a one size fits all approach, there continue to be trends toward partnerships between entities to alleve rate and regulatory stresses.