Consolidation of Utilities or Utility Services: How to Evaluate the Pros and Cons

Many utilities are becoming more efficient and effective by optimizing the individual components of their existing operations. Some utilities have pursued the consolidation of selected services as an optimization technique while a limited number of utilities have pursued outright consolidation to enhance service quality and efficiency.While many wastewater utilities utilize the billing services of a water utility and may share some equipment on occasion, in a large number of communities the wastewater system is owned and managed by an organization that is relatively separate from the entity that owns and manages the water system. In many situations, the service areas of these separate utilities overlap. Given the desire of utilities to be competitive, it may be appropriate to ask whether efficiencies and service improvements can be achieved if part or all of the utility services are consolidated in common service areas. Alternatively, an outright merger of assets, organizations and services could be considered. While the circumstances and reasons may be very different from overlapping utilities, a similar question can be asked with regard to adjacent water or wastewater utilities.If mergers and acquisitions are successful in enhancing competitiveness in many corporate endeavors, under what circumstances do they make sense in the water and wastewater business?This paper identifies the significant issues that should be considered in evaluating whether or not mergers and/or acquisitions are appropriate. It begins by assessing the available options for utility consolidation ranging from the simple sharing of vehicles and equipment to creating a new organizational and financing structure for a consolidated entity. Potential organizational, operational, financial and other related opportunities and impediments are identified. A sample cost/benefit analysis is presented to assist in evaluating the economics of consolidation.The paper concludes by identifying examples of water and wastewater mergers and acquisitions (ranging from service consolidations to asset mergers) that have taken place with “lessons learned” from the perspective of different participants in the process. The examples and lessons learned will be used to support the pros and cons of the options that are presented in the paper.