February 2010, Vol. 22, No. 2

Small Communities

Decentralized Wastewater Utility Management Not for the Faint-Hearted

Robert Pickney

As acceptance of decentralized wastewater management concepts grows, so has the creativity of the management structures associated with it. Many, if not most, of these structures follow Management Model 5 — a management entity owns, operates, and maintains the individual treatment units — as described in the U.S. Environmental Protection Agency’s Voluntary National Guidelines for Management of Onsite and Clustered (Decentralized) Wastewater Treatment Systems. While some of these Management Model 5 utilities are government entities, most are privately owned.

To be successful, privately owned utilities must overcome obstacles in three main areas: financial viability, regulatory control, and technical competence. These obstacles look much different to privately owned companies than to government-owned utilities.

Financial Obstacles

Before a private utility can progress beyond the conceptual stage, the following financial issues must be resolved:

  • Who will pay for the infrastructure?
  • How will sufficient revenue be generated to pay for system operations and maintenance (O&M) during the years leading to customer build-out (revenue - expenses balance point)?
  • How will the future costs of system replacement be ensured?

Privately owned systems generally are constructed by land developers with ownership transferred to the private utility that then will be responsible for all life-cycle costs of the system. Most private utilities do not have access to grants or low-cost loans. Therefore, financing new infrastructure must access conventional sources. As recovery of the financing costs must be added to the life-cycle costs of the system, the resulting customer service fees would be prohibitive.

The most viable financing option for construction is for another entity with vested interest to provide the funding. In new development projects, that person is the developer who is going to reap the monetary benefit through selling the properties. Few private utility projects involve retrofitting existing residential developments — there is simply no one to finance the project.

Even when developers pay for construction, the customer base of a privately owned utility is usually nonexistent at startup and grows slowly over time, but full operation of the system must begin with the first customer. The utility must be able to absorb the O&M costs until the customer base reaches a critical mass that generates as much or more revenue than it costs to manage the system. The time to reach this critical mass can be years. During this period, the utility owners — personal, corporate, stockholder, etc. — have to subsidize the utility.

Government-owned utility operations, on the other hand, usually have a significant customer base at system startup, and while the system grows to build-out, O&M costs often are subsidized by other units of the government.

Another difference is that governmental utility entities generally are free to set their own rate structure, whereas most state public service commissions regulate the allowable fees that private utilities can charge.

Most public service commissions require that the private utility rates generate sufficient revenue to cover all life-cycle costs, including system replacement. Few, if any, government-owned wastewater systems are required to generate sufficient revenue to pay for all life-cycle costs.

Regulatory Obstacles

In many states, privately owned public utilities are regulated by both environmental and public service agencies. Public service commissions historically authorize such utilities to provide some sort of public utility service within a noncompetitive territory. In return for granting that authorization, the public service commission tightly controls the customer service fees that the utility can charge.

In order to obtain rate approval from public service commissions, utilities must generate and defend extensive cost and revenue information. Public service commissions strive to balance fiscal viability of the utility with reasonable charges to the residential customers. Often, these efforts err on the side of the customer, leaving the utility with revenue streams insufficient to fund more than marginal O&M.

In many states, consumer advocacy programs within the attorney general’s office exacerbate this problem by imposing requirements that further reduce revenues. Considerable and expensive legal, financial, and negotiation skills are required simply to get a rate approved by the bureaucratic processes.

Once authorized to provide service within a territory, the private utility must obtain all required environmental permits and approvals from appropriate state environmental agencies. Fees charged for these permits and approvals generally impose a much higher per-customer cost that those imposed on customers of government-owned systems. The absence of strong political action representation for private utilities has hampered the ability to achieve parity with the level of regulatory controls affecting government-owned utility operations.

Technical Competence

With few exceptions, technologies used in decentralized utility sewerage systems are as complex and sophisticated as those used in any government-owned systems.

However, decentralized wastewater system utilities are generally small compared to government utility entities, and less likely to be able to support significant numbers of technical experts in various disciplines. In the early years of a utility’s operation, the only viable option may be to use part-time contractors to provide routine O&M, as well as customer billing. In this situation, contractor selection is critical. Escaping a contract is difficult, even if the contractor is incapable of or unwilling to perform to utility specifications.

Good contractors cost money, maybe more than a utility can recover under its regulatory-agency-imposed rate structure. However, settling for lower-quality contractor services to save money only leads to damaging the utility’s image, profits, and standing with regulators.

Putting the Pieces Together

Regulatory constraints on private utilities often exceed — in detail and in chilling effect — the constraints imposed on government-owned utilities.

Any entity contemplating creating a decentralized wastewater utility should study and understand these issues. Luckily, guidance in such deliberations is available from the Water Environment Research Foundation (Alexandria, Va.) in its publication Guidance for Establishing Successful Responsible Management Entities – DEC5R06 (June 2009).

Robert Pickney is the chief technical officer for the Adenus Solutions Group (Nashville, Tenn.).


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