By Kevin Westerling,
When utilities hook up, good (financial) things happen.
It can be hard to go it alone, especially when times get tough. Many utilities are seeking support, as they deal with failing infrastructure, escalating contamination threats, extreme weather, and a retiring, difficult-to-replace workforce. These challenges could be overcome with a full set of resources — money, people, equipment, expertise — but many utilities, especially small-community systems, are not so complete.
That’s where consolidation comes in. Partnering with one or even multiple(!) utilities can be a benefit to everyone, including the public.
This approach was studied by the US Water Alliance and the University of North Carolina’s Environmental Finance Center and detailed in a recent report, Strengthening Utilities Through Consolidation: The Financial Impact.
Here are some reasons utilities should consider shacking up together, based on a financial analysis of several different forms of utility consolidation around the U.S.
Am I Your Type?
First, let’s understand the levels of consolidation, whereby two or more legal entities become one. A direct acquisition is when the entirety of a utility’s operation is taken over by a utility with stronger assets, giving the latter full control over governance, operations, and finances. A joint merger involves two or more utilities that are closer to equal status, requiring the separate frameworks of the partnering entities to coalesce into a single, new entity. Finally, a balanced merger splits the difference, as the more well-equipped utility assumes a larger role, but affords some decision-making to those brought into the fold.
What’s In It For Me?
The most obvious financial benefit of consolidation is the ability to leverage economies of scale. The cost for equipment, chemicals, services, etc. is always lower at higher volumes. Money is also saved through operational efficiency, as scaling up can often be achieved with minimal extra expense.
Consolidated systems are candidates for cheaper money, in terms of interest rates on bonds and loans for capital improvement projects. With a larger rate base, the big utility becomes a more reliable investment. Additionally, subsidized public funding such as State Revolving Fund loans may be newly available due to regional consolidation.
The financial concerns related to customer rates can be thorny post-consolidation — a short-term increase is not uncommon, implemented to address the cost of the consolidation process as well as past-due obligations — but customers will be spared large rate hikes in the future thanks to the savings earned elsewhere over the long term. Rate control, sometimes reductions, and rate parity are characteristics of the consolidated utility.
In this rebuilding era for the water sector, significant capital expenditure is often required, leaving the utility with a revenue shortfall. Consolidation offers a path to revenue stability, with the ability to spread out the cost of filling the shortfall over a larger customer base. And if new treatment is needed to handle a regional problem, consolidation allows utilities to share the burden and optimize capacity.
A consolidated utility can also spread out the cost of regulatory compliance. This provides short-term financial relief by eliminating penalties, medium-term relief by streamlining regulatory approvals, and longterm relief by installing cost-effective systems. Moreover, the region’s water quality is adequately protected.
Increasingly, areas will also need their supplies protected — part of risk management. Persistent drought, along with a growing and shifting population, is putting a strain on water resources. A long-term and comprehensive plan is advisable for these at-risk communities, who will need to work together — perhaps as a single entity — to ensure a sustainable future.
Lastly, the report indicates that opportunities for economic development may be improved when utilities pool their resources for the betterment of the entire region. When systems are inadequate, businesses stay away — or move away. The inverse is also true: Healthy systems invite development, helping to build stronger communities.
A Second Date?
If this sort of match-making sparks your interest, visit uswateralliance.org to read the report in full, as well as the accompanying report, Utility Strengthening Through Consolidation: Guiding Principles for the Water Sector, which focuses more on how to consolidate rather than why. It’s the next step in a potentially beautiful relationship.