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HomeMy WebLinkAboutNANA Regional Utility Feasibility Study, April 7, 1994RECEIVED APR 25 1994 & Reg. Affairs +. of Comm. we of Municipal & Reg. Asst. NANA Regional Utility Feasibility Study : Prepared for NANA and Village Safe Water Construction Grants Program Prepared by CHMHILL 2550 Denali Street Eighth Floor Anchorage, Alaska 99503 April 7, 1994 RECEIVED APR 25 1994 Reg. Affairs , of Comm. & pn of Municipal & Reg. Asst. NANA Regional Utility Feasibility Study Prepared for NANA and Village Safe Water Construction Grants Program Prepared by CHMHILL 2550 Denali Street Eighth Floor Anchorage, Alaska 99503 April 7, 1994 NANA (DiEVELOPIIENY CORPORATION 1001 E. BENSON BOULEVARD, ANCHORAGE, ALASKA 99508 TELEPHONE (907) 265-4100 March 23, 1994 Mr. Greg Jones CH2M Hill 2550 Denali Street Anchorage, AK 99503 Dear Greg: We at NANA have had an opportunity to review the NANA Regional Utility Feasibility Study which was done for NANA and<for the Village Safe Water Construction Grants Progran. The purpose of this study was to look at the feasibility of combining the sewer and water utilities into one regional operation. It seems clear from the information you developed in the study that regionalization of sewer and water utilities at this time would not be appropriate. Rather than saving money, it would appear that regionalization would increase costs. We believe these increased costs would improve efficiency and increase the training, and thus operations and maintenance capability of the village workers. However, the increased cost could not be justified for people who are already barely able to pay the current utility cost. Your report does point out the need to continue to try to improve the operation and maintenance of these very expensive utilities. It is clear that programs such as the Regional Maintenance Worker program, the Local Utility and Management program, and the Rural Utility Business Advisory program all are helping improve the operations of sewer and water systems in our region. Loss of one or more of these programs would cause a substantial decrease in the ability of sewer and water utilities in our region to continue to operate. Although we do not believe regionalization of the sewer and water utilities is appropriate at this time, it is not a subject that we believe is forever foreclosed from further study. We believe that as people are faced with trying to get more efficiency and lower costs, a combination of not only in sewer and water, but other utilities in a regional utility format might have some real viability. Such regionalization would require that the strong and 1 large utilities such as the sewer and water utilities in Kotzebue x and Red Dog be part of regionalization. o cl Member Villages: Amb/er, Buckland, Candle, Deering, Kiana, Kivalina, Kobuk, Kotzebue. Noatak, Noorvik, Selawik, Shungnak Nee Wo Aaa like to thank CH2M Hill for their efforts in putting We have enjoyed working with you. We would together this study. Senior Vice President and Chief Operating Officer JS/sb/2153 Contents Section Page Executive! SOMUMaNy) ii.)s (2) <i1s1s).<)[c).o)15) 5) els] cileicl efohelalele joie «Teel steleretetarclenetsis ii 1 EMErOCUCULOM le heleleelolietohelelcl elie cholic suoteheoviollelcleLeletelslisiohe lel shell olor e 1-1 BackerOunG Eee elec ee ere ieiereeieeieate aiid eleratabs 1-1 Cooperman Of the Steely 6) 15) )/-\15) 5) 5) (ofa) 22) sire slollyie) eiioite ol eileliat fol slo) +1 ok 1-1 Hie Resonalinntion Concept 2.1.0. c 5. e. ool eer ciene elects © late nett 1-1 Why Communities Consider Regionalization ............-..-+--- 1-2 Alternative Regional Utility Structures ......... 0-02. e ee eee eee 1-5 Will Communities Lose Control of Utilities? ...............-.4-. 1-7 Will Rates Change with Restructuring? ......... 2... eee eee eens 1-8 2 Utility Systems in the NANA Region ....... elfelelole (elle) s\la) <)/« spalehel kel (eek eee eee ele helokeleitalepeveten are malel miles laleiteial oalelte 2-1 Water and Sewer Utilities Within the NANA Region ............... 2-1 Operation and Maintenance in the Region ...........-.+--++----- 2-7 Community Utility Financial Performance ...........-.----45 SPU aeeo. Needed Capital Improvements for the Region’s Utilities ............ 2-15 Sources of Funding for Utilities Within the Region ............... 2-15 3 Should NANA Region Communities Consider Regionalization? ....... 3-1 Crier for |Consierntwon Paral eielale) sole iole erie) oiler onleyelel stele) eel eli clich aioli 3-1 Utility Performance/Viability Assessment ........---0-+e eee eee 3-1 Obstacles to Forming and Operating a Regional Utility .............. 3-2 Would Additional Funding Achieve Local Utility Viability? ........... 3-4 Should NANA Region Utilities Consider Regionalization? ............ 3-7 4 Implementing Regionalization .........seeeeeeeeeeeeecees - +1 Formation of an Ad Hoc Committee on Regionalization ............. 4-1 Addressing the Revenue Shortfall Issue... 1.2.2... eee eee ee eee 4-1 Selecting a Regional Utility Structure... 2.0... . ee eee eee eee eee 4-2 Building Consensus for Regionalization ..........-. 0+ eee ee eeee 4-4 Development of a Business Plan for the Utility ...............---- 4-7 Summary eee eee cere eee roi let ehelskeelledilot i-ilods 4-8 Tables Number Page 1 Community Utility Systems Within the NANA Region ............-. 2-1 2 Cami Blow for Existing Utilities) (0015 (51/0 (o1 516 1e fol + heel ee ob el iol sie lelei (els 2-10 3 Cost Comparison with Regional Contract Operations .............. 2-12 4 Cost Comparison with Regional Non-Profit Cooperative ............ 2-14 ANC10011EAC. WPS i Executive Summary The purpose of this study is to evaluate the feasibility of forming a regional water and sewer utility that would serve the communities within the NANA Region. Small rural utilities across the country are joining together to form regional utilities to take advantage of centralized administration, management, and billings; shared technical sup- port among local community utilities; standardization and sharing of equipment and spare parts; and bulk purchases of energy, supplies, and equipment. The savings in operations costs afforded by centralized administrative management and shared resources can be applied to operator training and acquisition of technical resources which improve the quality of utility operations and service. The objective of this study was to evaluate whether the benefits of a regional utility apply to the villages of the NANA Region. Three alternative structures for rural utility regionalization were considered for this study: ° Regional Contract Operations. Operations are provided by a utilities operations contractor under contract to a regional utility authority. The operations contractor may secure multiple service agreements with indi- vidual communities within the region or secure a single service agreement with a regional entity. ° Non-Profit Utility Cooperative. The membership of a utility cooperative is comprised of the utility customers served and is governed by a cooperative executive board. Representation of the communities on the executive board can be community leaders or individuals elected to represent their commun- ity. A charter is developed that defines the responsibilities and authority of the board, cooperative customers, and the individual communities served. e Privatization. A third alternative for the consolidation of the NANA Region community utilities is the purchase and operation of the individual utilities by a private corporation. This alternative was determined to be impractical for the region on the basis of the poor financial performance of the utilities and the inability of a private company to secure capital improve- ment grant funds. There are 11 villages in the NANA Region, each of which has its own independently operated water and sewer utility system. There are also water and sewer systems serving the Red Dog Port Site and Red Dog Mine Site. In all, approximately 6,800 people are served by these utility systems. ANC1001EA9.WPS ii All utilities in the region operate in remote locations under extremely cold climatic condi- tions. Failure to properly operate and maintain these utility systems can and has resulted in catastrophic freezeup and prolonged loss of utility service. The consequences of such circumstances pose serious health risks to the residents of the region. The individual financial performances of the outlying village utilities (excluding Kotzebue and Red Dog) operating independently have a cumulative net annual shortfall in operating revenues of about 28 percent of actual current operating expenses. Projections of a regional utility’s annual operating expenses were made on the basis of a utility consisting of the seven community utilities with the largest revenue base (not including Red Dog). Under either contract operations or a non-profit cooperative, the cost savings achieved with shared administrative costs and economies in operations are not large enough to offset payment of labor benefit packages, costs of regional management, administrative staff, and technical support. Coincidentally, under the assumptions made for the comparative analysis, both these regional utility structures would incur annual operating expenses approximately 28 percent higher than the cumulative annual expenses of the seven individual, independently operated, community village utilities. It appears that a regional utility would not improve the revenue shortfall for the region, but would improve the performances of the area utility systems. Of the water and sewer utilities evaluated, Kotzebue, Noorvik, and Red Dog have satisfac- tory utility performance. Operators are trained and certified, equipment is reasonably maintained, and the systems in these communities or organizations are operated effectively. Operating funds are available, and rates and collections are sufficient to cover operational expenses. Administrative support is provided, and planning is under way for future growth and system maintenance. The remaining community water and sewer utilities in the region have access to grant funding for improvements, but have performance problems with day-to-day system opera- tions. Operators are not adequately trained to effectively operate and maintain the sys- tems. Often, spare parts and equipment are not available. Sources of assistance (Manillaq and Public Health Service [PHS]) are inadequately funded to provide needed assistance in a timely manner. Service interruptions occur as the result of freezeups and boil-water notices. Administrative support and management are not adequately funded to collect monthly utility service bills or provide sufficient direction and planning for future improvements. On the basis of these shortcomings, the NANA communities should consider regionali- zation; however, there are several obstacles to forming a regional utility. One of the largest obstacles is the inability to collect sufficient revenues to eliminate the projected revenue shortfalls for the regional utility alternatives. Other issues include the initial reluctance of Kotzebue and Noorvik to participate in the regional utility, and a perception that belonging to a regional utility will mean loss of control in the operation of the local water and sewer service. ANC1001EA9.WPS iii The most direct way to make up a revenue shortfall is to increase customer service charges. However, most of the region’s residential utility customers have difficulty paying the current utility rates, much less supporting increased utility rates. Improving the collec- tion of monthly service charges for utility service would help reduce the regional utility’s revenue shortfall, but not eliminate it. A third option is the inclusion of other utilities (electric power, telephone, cable TV, bulk fuel) in regional utility organizations to expand the revenue base of the regional utility. Finally, there is the option of making up the revenue shortfalls with subsidies for rural utilities operations and maintenance costs. The Local Utility Matching Program (LUMP) is a 1-year state demonstration project to assess the effectiveness of an incentive-based utility subsidy program. Even though the program has proven to be very successful, it is not likely to receive further state funding. Federal legislation currently exists that authorizes the appropriation of operations funds for Native American water and sewer utility systems, but no appropriations have been made by Congress. If the revenue shortfall issue cannot be resolved through one or more means, the concept of regionalization for the communities of the NANA Region should be put aside until there is sufficient economic support for the operation of the region’s water and sewer utilities. ANC1001EA9.WP5S iv Section 1 Introduction Background In 1992, the State of Alaska, under the direction of John Sandor, Commissioner of the Alaska Department of Environmental Conservation (ADEC), formed the Rural Sanitation Task Force. The task force was composed primarily of representatives from state and federal agencies who routinely provide services to rural Alaska communities. The mission of the task force was to develop recommendations for improving sanitation in rural Alaska communities. One of the recommendations of the task force was to investigate the feasibility of operating several rural water and sewer utilities together in a regional utility; Phe formation of regional utility systems has been effective in improving utility service fOr many rural areas of the United States. An investigation was recommended to determine if similar action can be beneficial for rural Alaska villages. The NANA Regional Corporation, a member of the task force, supported this recommendation and agreed to assist in an investigation of regionalization feasibility for the communities in the NANA Region. Objective of the Study The purpose of this study is to determine whether operating the community water and sewer utilities within the NANA Region as a regional entity will improve services to the residents of the region. This report evaluates the feasibility of developing this regional structure. Section 1 reviews the concept of regionalization and some of the more general impli- cations. Sections 2, 3, and 4 address the feasibility of regionalization as it applies to the communities of the NANA Region. The Regionalization Concept The term “regionalization,” in this study, refers to the formation of an organization that has the responsibility of providing utility services for two or more neighboring communi- ties within a geographic region. It is a concept presently used in other areas of the country, including Oregon, Texas, Virginia, Iowa, and Pennsylvania. It is often imple- mented where it can be demonstrated that the regional utility can provide better and/or less expensive service than the individual utility systems operating on their own and where local political issues, such as management of the restructured utility and establishment of rates, can be satisfied. ANC10011E6C.WPS 1-1 Why Communities Consider Regionalization Most small, publicly owned community water and sewer systems across the country are under extreme pressure to provide an acceptable level of service, achieve regulatory com- pliance, and retain a financial condition to sustain operations over the long term. Increas- ing concerns for protecting public health through improved sanitation and stepped-up regu- latory compliance enforcement consume increasingly higher proportions of a community’s time and resources. Regionalization offers communities some alternatives for maintaining their financial viability while improving operations and reducing public health risks. Some of the reasons regional utility systems can improve utility service to communities are discussed below. Larger Revenue Base Small utilities are being affected by increased regulatory requirements that must be addressed by their limited rate base and smaller overall budgets. The need for technical, administrative, and legal support is not proportionately less for a small utility than for a large one. Small utilities still need to keep up with changing regulations, perform regula- tory reporting, evaluate rates and revenue sources, develop grant applications, and solve technical operating and maintenance problems. The resources in smaller communities for funding these activities are very limited. In Alaska, small community systems have only a single operator. That operator may be qualified to provide only routine operations tasks. Tasks that require technical skills beyond routine daily operations are often deferred until technical assistance is provided by either Public Health Service or the remote maintenance worker. Administrative support staff in small communities, such as city clerks or administrative managers, are not able to provide much help because of their limited resources and because their expertise is not focused specifically on supporting water and sewer systems. Community participation in a regional structure can provide some resolution to many of these problems. The regional structure can provide a larger revenue base than that generated by an individual community. This larger revenue base can support not only routine operations but also other technical assistance that individual communities could not otherwise afford. : The following describes the regional utility with a larger revenue base: ° Administrative costs of utility management and billing are distributed over a larger number of served customers. Consequently, a higher level of man- agement is justifiable and affordable, and costs savings are possible by eliminating duplication of effort among neighboring communities. ° Operations and maintenance staff can be used more effectively in multiple roles through cross training. This allows for more operations flexibility. ANC1001 1E6C. WPS 1-2 . Bulk purchases result in savings in the cost of chemicals, parts, materials laboratory services, and fuel oil. ° Technical capabilities can be expanded to include electricians, instrumenta- tion and control technicians, boiler technicians, engineers, and similar ser- vices. These additional staff can be justified because their work is distributed over many systems within the region. Whereas an individual community system could not justify hiring these types of technicians, a regional utility with multiple systems can justify this level of support. Improved Operations and Maintenance A regional utility structure can improve operations and maintenance by sharing resources in a number of ways. In the regional utility, the operations staff may be used interchange- ably within the region. Cross training among community utilities promotes development of different technical skills and allows utilization of staff between plants and communities. Where possible, part-time positions can be consolidated and filled by full-time workers, providing more effective use of manpower. Temporary needs can be satisfied by sharing operators or maintenance workers on a limited basis. If an operator becomes ilt or takes personal leave, another operator can fill in. Full-time specialized personnel, such as elec- tricians or instrument technicians, can be justified because the volume of work is spread out over multiple communities in the regional utility structure. Specialized equipment for operations and maintenance can be shared by communities under a regionalized approach. In many cases, this equipment provides better efficiency and the potential for cost savings, but it is too expensive for communities to buy on their own. For example, setting up computerized preventive maintenance schedules or remote process monitoring and control systems is possible under a regionalized system. The associated costs, effort, and expertise could be distributed over several community systems within the region. A single-community system, however, could not support this level of service. Portable pumps, welding and pipe-thawing equipment, diagnostic equipment, and special- ized laboratory equipment are examples of equipment that can be shared and would improve the operation of each community. The development of a common spare-parts inventory allows spare parts to be interchanged within the region and reduces duplication in inventories between communities. A regionalized utility allows development and implementation of a training plan that will benefit the communities, the overall utility, and the individuals. As mentioned above, cross training provides staffing flexibility and more effective use of manpower. In-house training can make use of the diversity of personnel by allowing operators to share their experiences. Productivity increases result from improved job skills and morale. Morale also increases with the realization that advancement opportunities exist that had not existed in the past. ANC10011 E6C. WPS 1-3 Increased Regulatory Compliance Improved operation and maintenance translates to reduced non-compliance events, safer water supplies, and better relationships between the communities and regulatory agencies. Improved maintenance eliminates regulatory violations resulting from equipment breakdown. Greater technical support in both operations and maintenance means that potential compliance problems can be resolved faster, before actual violations occur. With regulations rapidly changing, problems with violations sometimes occur because a community is not aware of regulatory requirements. This is often true of small rural com- munity utility systems. Regional utility systems can dedicate the staff resources needed to stay abreast of the growing number of regulations. A goal of a regional utility should be to develop open and frequent communications with regulatory agencies. This practice is invaluable in understanding and interpreting regulations; it is also very helpful in making the regulators aware of problems specific to the region and providing input from a rural, small-systems perspective on proposed draft regulations. Communications with regulatory agencies could be very important if the federal government becomes more active in enforcement actions in Alaska. : Improved Water and Sewer Utility Administration and Management In many small communities, there are no city government administrative resources dedi- cated solely to water and sewer utilities. Existing city administrative resources are obligated to address multiple public services and local government issues (education, health care, roads, police and fire protection, senior citizen support, and local economic develop- ment) in addition to water and sewer utilities. These local government functions are funded by shrinking State Municipal Revenue Sharing funds. The State Department of Community and Regional Affairs has developed the Rural Utility Business Advisor (RUBA) Program which, in accordance with the recommendations of the Rural Sanitation Task Force, provides training for city administrators in the administrative duties for rural water and sewer utilities. In a regionalized structure, the payroll, purchasing, billing, grant administration, and overall utility management can be consolidated into a centralized management structure. Higher levels of resources and expertise can be dedicated to the utility in a regionalized structure. Dedicated administrative resources for the region save money and free up city administrators for the many other responsibilities they face. A single regional administrative/management structure also improves performance of the combined utilities. Knowledgeable management can effectively coordinate and schedule operating personnel. Customer service should improve—fewer problems should exist with improved utility operations and technical resources should be available to resolve problems more quickly and effectively. ANC10011E6C.WPS 1-4 Computerized billing and accounting procedures can be developed with a regionalized utility. A centralized billing and collection system can provide consistent billing practices. It can also provide supporting data on delinquent payments for use in collections actions. Consolidating accounting procedures for revenues and expenditures also improves financial planning and budgeting for expenditures. Knowledgeable and skilled management become affordable in a regionalized system. Technically qualified management improves support to community systems by under- standing and handling the day-to-day needs of the utilities. Alternative Regional Utility Structures There are several alternative regional utility structures in current use. Several of these were not considered in this study. One alternative is the physical interconnection of neigh- boring community utilities. Because rural Alaskan communities are remote from one another, physical interconnection of utilities is impractical. Another regional structure not considered for this study was the option of havmg local, state, or federal government agencies assume the role of the regional utility. This was dropped from consideration for the following reasons: ° Staff of the Northwest Arctic Borough have indicated the Borough is not inclined to assume authority for water and sewer services within the Borough. e In the past, the State of Alaska has not assumed authority for water and sewer utility services. A proposal has been submitted to Congress suggest- ing states be responsible for regional operation of small systems that are not able to achieve regulatory compliance. It is believed that neither the residents of the NANA Region nor the State of Alaska support such a proposal. ° Another assumption was that neither the residents of the NANA Region nor the federal government support the intervention of the federal government as the regional utility authority for water and sewer services. For the last 12 years, the federal government has encouraged state and local government responsibility for local programs. The following alternative structures for rural utility regionalization within the NANA Region were considered for this study: Regional contract operations Non-profit utility cooperative ° Privatization ANC10011E6C.WPS 1-5 The three options are described in more detail below. Regional Contract Operations With regional contract operations, a private business provides utility contract operations to the utilities within a region. In addition to operating the water and sewer utilities, the contractor may also provide utility administrative services, such as billings and accounting, operator training, and construction of needed capital improvements. All water and sewer utility system employees are employed by the private contractor rather than being employed by the local community. Most contract operations companies hire utility staff from the local communities they are serving. Supplies, chemicals, fuel, electrical power, and other items required for operations are purchased by the contractor. The regional operations contractor is reimbursed for these expenses through a monthly billing to the individual communities served. One of the advantages of regional contract operations is that communities participating in a regional contract operations utility system retain their eligibility for both state and federal grant funding for capital improvement projects. Another advantage is that the contractor can develop personnel policies which allow flexibility in the award of employee compensation incentives to improve individual performance and motivate employees. Non-Profit Utility Cooperative A non-profit utility cooperative is another form of regional utility that can serve rural communities within a region. It can be formed from multiple-community utility systems that agree to be members of the cooperative. A cooperative is governed by a board of directors, typically a collection of local community members and utility personnel elected by customers served by the cooperative. This allows each community in the cooperative to be represented on the governing board and, therefore, have a voice in the operation and management of the cooperative. Many electric utilities in the state are members of a non- profit cooperative. Alaska Village Electric Cooperative (AVEC) is perhaps the most well known example in rural Alaska. However, the utility rates charged by a publicly owned utility, such as a cooperative, are not necessarily lower than those charged by a privately owned utility. Both are regulated by the Alaska Public Utilities Commission (APUC) which controls utility rate structures, and both must necessarily provide for return on capital investment. For the non-profit cooperative, this return is referred to as "Capital Debt Service"; for a privately owned utility, return on capital investment may be a combination of corporate dividend distributions and debt service on borrowed capital. As with regional contract operations, communities participating in a regional non-profit utility cooperative retain their eligibility for both state and federal grant funding for capital improvement projects. Under operations as a non-profit cooperative, however, the grant ANC10011E6C.WPS 1-6 applicant/recipient will most likely be the utility cooperative, not the individual community that receives the benefit from the improvement project. Privatization A third alternative for regionalization is privatization. A privatized regional utility is formed when a business or corporation purchases individual community utilities. In this regional structure, ownership of facilities is no longer with the villages but with a private business or company. Local communities would not have direct control or responsibility for the water and sewer utilities, as they do now. Privately owned and operated utilities are not eligible for either state or federal capital- improvement grant funding. They must pay taxes on revenues recovered through collec- tion of monthly utility bills. Tax incentives for the formation of privately owned regional utility systems were taken away with the tax revisions of 1986, although recent legislation has restored some of these incentives and a private utility is not eligible for certain regula- tory waivers such as the 301(h) waiver for wastewater discharge to marine waters. Will Communities Lose Control of Utilities? Many communities are concerned about losing of control of their utilities if they should decide to subscribe to a regionalized utility structure. Local utility customers are concerned about whether a regional utility will maintain or improve the quality of utility service, and whether a change to regional operation will result in loss of local jobs. Regional Contract Operations and Non-Profit Cooperatives Limited control is lost with the formation of either a regional contract operations utility or a non-profit utility cooperative. Regional Contract Operations Under regional contract operations, the contractor is authorized to exercise his judgment and direction in operating and maintaining the community system. The service contract negotiated with the individual communities within the region served defines the limits of the contractor’s authority. In exchange, the contractor guarantees certain levels of performance and a price for his services. The community retains ownership of the utilities and associated responsibility for regulatory compliance, but relinquishes to the contractor the authority to manage daily utility operations. The contractor guarantees payment of regulatory agency fines for operations permits that result from contractor negligence. The community can control the length of the contract and terms of termination. The contract can be stopped at any time, for any reason, if the community is not satisfied with the services provided. Other areas that can be addressed in the contract are hiring all existing employees with minimum pay levels and benefits, handling repairs and capital ANC10011E6C.WPS 1-7 improvements, safety and health provisions, handling complaint calls, and periodic reporting to community. Many times incentives are provided in the contracts to entice contractors to save money while providing a minimum level of service. Non-Profit Utility Cooperative Under operation as a regional non-profit utility cooperative, the charter of the cooperative and the governing documents defines the relationship of the member community utilities to the cooperative. A regional board is created for the cooperative to direct the activities of the cooperative in its operations. Communities relinquish ownership and operation of their utilities to the cooperative; in exchange, the communities participate on the board of directors and have direct input into the management and operation of the regional utility. This input can include all aspects of the regional utility, including labor and employment issues. The cooperative assumes the responsibility for the performance of the regional utility and answers to the regulatory agencies for any alleged violations of law or operating permits. Regional Privatization Of the three regionalization alternatives considered for this study, the alternative that poses the greatest loss of control for a community is regional privatization. As previously stated, this form of regionalization requires transfer of ownership of all utility assets and operations to a private company. The private company, in turn, has the responsibility to provide utility service in return for the revenues it collects for that service. Regulation by the APUC provides a forum for resolution of customer complaints. In this form of utility management, however, the individual communities have no authority to decide who will be hired to perform the work or what the pay scales will be, or to provide any other have input on the routine operations of the utility. Will Rates Change with Restructuring? The benefits of forming a regional utility have been outlined above. Other rural areas of the country that have restructured their utilities into regional organizations have found advantages measured in improved service and lower operating costs. Whether there are prospective reductions in monthly utility service charges under a regional utility will depend on the level of service offered by the regional utility. In some instances, a reduction in monthly utility service charges is realized when communities initiate operations under a regional utility structure. Two trends appear to be universal: ° Utility service costs will continue to increase with increasing regulatory requirements and increasing costs of labor and materials. Consolidating~j utilities provides a method to defer or offset these increases and reduce the effect on rates. ANC10011E6C.WPS 1-8 ANC10011E6C.WPS5S Consolidation of utilities helps stabilize rates and provides a better method of planning for financial needs. The regional structure can provide better financial information on utility performance, better cost controls, and better financial planning to prevent unforeseen budget shortfalls and the need for emergency rate-increase measures. 1-9 Section 2 Utility Systems in the NANA Region General Alternatives for restructuring water and sewer utilities into a regional utility were reviewed in Section 1. This section reviews the existing water and sewer systems within the NANA Region. Subsequent sections address the feasibility of regionalization in the NANA Region. Water and Sewer Utilities Within the NANA Region The resident population of communities with utility systems in the region are listed in Table 1. Table 1 Community Utility Systems in the NANA Region Resident Community Population E a 5 p Shungnak Red Dog Port Red Dog Mine Approximate Regional Population ANC10011E6E.WPS 2-1 With the exception of the Red Dog Mine, the sites listed above have community-owned water and sewer utility systems. Descriptions of Existing Utility Systems in the Region The following information was compiled from visits to the villages of Kotzebue, Norvik, Kiana, Ambler, and Shungnak in August of 1993; from visits to Red Dog Mine in Novem- ber of 1993; and from data provided by the Northwest Arctic Borough. This information is intended to provide background on the type of water and sewer utilities presently in use within the NANA Region. Ambler The Village of Ambler has a piped water and sewer system. Potable water is pumped from two wells to a 210,000-gallon storage tank. Chlorine and fluoride are added to the well water before entering storage. Water distribution system pumps pressurize and circu- late the treated water through a two-loop recirculation system. One recirculation pump was out of service for repairs in August 1993. Waste heat for the water system is pro- vided by AVEC electric power generators at a charge of $600 per month. Plans are being made for construction of a new washeteria. The sewer system consists of piped gravity sewers that convey residential wastewater to two lift stations. These lift stations operate in series and pump to a lagoon a significant distance from town. The primary operator was interviewed during a visit to the site in August 1993. He has been employed in his current position for about 1 year, has a positive attitude, and is interested in learning. The alternate operator has been at his job since 1990. Operators are paid for a 6-hour shift per day. Problems that have occurred include sewage force main freezeup and pump station breakdowns. Critical parts lists are being developed. The sewage lagoon is a natural lake that is nearly full. The state has given permission to drain the lake to provide capacity for spring rains. Onsite monitoring includes testing for potable water chlorine and fluoride residuals. The state tests bacteria samples. No operations logs are currently being maintained, except notes kept on a calendar. Chlorine residual is said to be maintained between 0.2 and 0.5 parts per million (ppm) with fluoride at 1.2 ppm. No significant problems occur with water line leaks. Most problems come in private services that the operator repairs at the customer’s expense. About 600 gallons of fuel oil are used per month at a cost of about $3.10 per gallon. Fuel for the school and power plant is shipped to the village by barge. ANC10011E6E.WPS 2-2 There are 83 houses in Ambler; 57 are provided with piped water and sewer service. Rates are $65 a month, and there is about a 90 percent success rate on the collection of utility bills. Although very interested and open to the concept of regional utility management, the coun- cil is also skeptical about the idea. The main concern is continued employment of people in Ambler. Kiana Kiana has a piped water system and gravity sewer system. Two wells supply potable water for the village with chlorination and fluoridation treatment. Treated water is stored in a 110,000-gallon reservoir. A heat exchanger captures waste heat from two boilers for use in freeze protection for the water system. Sewage is treated in an extended-aeration treatment plant. Two operators rotate their work shifts for the equivalent of one full-time person 7 days a week. One position was vacant at the time of the site visit. The current operator has a Class 1 state operator’s certification. As of the August 1993 site visit, the sewage treatment plant aeration system was not oper- ational. Diffusers will need to be installed and piping replaced. Airlift pumps in the package plant will need to be rebuilt; one of the two blowers is operable (but was not working at the time of the visit). The other blower motor needs to be rebuilt. At the time of the inspection, raw, untreated sewage was passing through the plant to the river. A meeting was held with the council to introduce the idea of contract operations. Council members said they would like to get community input on the subject. Collection rates (the percentage of monthly utility bills for which payment has been col- lected) have increased significantly over the last several months. Kotzebue Kotzebue is the largest community in the region, with a population of more than 3,000. Kotzebue residents have piped water and sewer service. Raw water is withdrawn from two surface water sources: Vortac Lake and Devil’s Lake, which are located several thousand feet from the treatment plant. Water treatment includes conventional filtration, chlorination, and fluoridation. Sewage is conveyed by a gravity collection system, which includes 12 lift stations. Treat- ment is provided by a facultative lagoon system. ANC10011 E6E.WPS 2-3 The city has had significant problems with its water utility system in the past but is taking action through a series of improvement projects to upgrade the water and sewer utility system. The supports for the aboveground, raw-water transmission pipeline are scheduled for upgrade in the near future. Modifications to the distribution system for treated water were being planned to provide adequate flows through all circulated loops. An electrical upgrade in the water treatment plant is under way. Eight personnel, including the public works director, operate the water plant and maintain distribution and collection systems and lift stations. Water and sewer monthly rates are $84 per month for residences and $150 per month for commercial customers. There is an additional charge (metered accounts) for large-volume users. The success rate for collecting utility bills is approximately 85 percent. Discussions were held with the city manager and public works director regarding how the concept of a regional water and sewer utility would be received by the City of Kotzebue. They expressed concerns that villages like Kotzebue would subsidize smaller communities in a regionalized utility organization and that the benefits would be mostly realized by smaller systems with fewer resources. Noorvik The Village of Noorvik pumps raw water from the Kobuk River and provides filtration, disinfection, and fluoridation. Potable water and sewage collection are provided by piped utilities. The sewage collection system is a recently constructed vacuum system consisting of seven vacuum areas approximately 1 year old. There are 84 connections to this piped system. The water and sewer utility operator is Class 1 state certified. He is assisted by a PHS project foreman who also helps construct water system improvements. Scheduled improvements include a 350,000-gallon storage tank, which will supplement the existing 100,000-gallon storage tank. The PHS project foreman provides a great deal of assistance to the village operations staff. Fuel oil consumption is approximately 17,000 gallons per year; the fuel is delivered by barge. Estimated water consumption is 8,500 gallons a day. Sewage is pumped from the vacuum system to a lagoon in town. The lagoon sometimes overflows in the spring. Water and sewer utility rates are $85 a month. The City reports relatively high success in collecting utility bill payments. The concept of regionalized contract operations was discussed at a council meeting during the visit to the site. Several questions were fielded and comments were received similar to those voiced in Kotzebue: a concern that villages that are doing well will subsidize those that have more needs. ANC10011E6E. WPS 2-4 Shungnak The village of Shungnak has piped water and sewer systems. An infiltration gallery in the river provides raw water for filtration, disinfection, and fluoridation. Sewage flows by gravity to a lagoon. The current operator is Class 1 state certified, although his skills are more hands-on than based on a good understanding of water treatment. An alternate operator was recently added. The water and sewer utility rates are $50 per month. The collection success rate is about 50 percent. The storage reservoir for potable water was recently cleaned, which caused some problems with water quality during this period. Citizens said there have been several boil-water orders and interruptions in the past. Last winter, problems occurred when river ice dam- aged the infiltration gallery piping. The following information on the Buckland, Deering, Kivalina, Kobuk, Noatak,‘ and Sela- wik utility systems is extracted from information provided by the Northwest Arctic Borough. Buckland Buckland’s utility system consists of a washeteria with laundry and showers, and water and sewer service to the clinic and school. Individual haul water to their homes and use honeybuckets for sewage disposal. A piped water and sewer system is being planned for the village. User fees for the washe- teria are prepaid. Operational needs identified include providing routine filter maintenance and developing of an adequate tool inventory. In the past, violations of sampling and analysis regulations have been cited. Deering Deering has a washeteria with laundry and showers. Water and sewer service is provided for the school. Access to the existing water source is difficult; a new water source is to be constructed in the near future, along with a piped water and sewer system to serve the entire village. The community has grant funds to proceed with this work. It also has an ambitious program for developing local business enterprises which, if successful, will generate the personal income needed to support the operation and maintenance costs of operating the water and sewer system. With these improvements in place, it is estimated that the monthly service charges for water and sewer service will be $133. An interim measure of truck-hauled water and sewer service will allow development of tourism while the community utility improvements are constructed. ANC10011E6E.WPS 2-5 The current utility operator has been working as an operator for the city for 4 years. The water treatment plant needs to be upgraded. Needed operation improvements include developing a spare parts inventory, providing increased training, complying with water testing requirements, and developing a preventive maintenance program. As with Buckland, water delivery is currently on a prepayment basis. Kivalina Kivalina has a community washeteria and water treatment system, but insufficient treated water-storage capacity. As with Buckland and Deering, water for residents is hauled from the community watering point to individual homes. Current plans are to provide treated- water storage capacity for the village that can be easily relocated. The village plans to relocate to higher ground to avoid property damage from wind-driven sea ice in the village. This relocation is expected to occur in 4 to 5 years. Sewage disposal is by honeybuckets emptied into bunkers throughout the village. Water- borne disease has been a significant problem in the past, as is the case in many tural Alaska villages that use honeybuckets for sewage disposal. The village has no water system operator because of a lack of revenue. Kobuk Kobuk has a small washeteria and piped service to the school and clinic. Sewage collected by the limited sewer system is directed to a subsurface drain field, which is no longer functional. Plans are in place to upgrade the drain field system. Several individuals share operational duties for the washeteria and piped system in Kobuk. Spare parts and tools for routine maintenance and repair are in short supply. There are noteworthy operations and maintenance (O&M) problems. Operator training needs to be expanded to improve the effectiveness of local operations. Noatak The Village of Noatak has a piped water and sewer system with a central washeteria. In the past, the water system has frozen up several times and has had to be replaced and upgraded. The village is presently replacing its sewer system, which consists of a gravity system and a single lift station that pumps sewage to a new lagoon. This major improvement project is now in progress. Success rates in the collection of water and sewer utility bills have been more than 80 per- cent. Monthly rates are $50. Improvements to local operations and maintenance, including development of scheduled maintenance plans, a spare parts and tools inventory, and operator training, are in progress. ANC10011E6E.WPS 2-6 Selawik The Village of Selawik has a piped water and sewer system that provides service to the school, washeteria, and clinic and intermittent service to 60 houses. Upgrades to this system are planned. Selawik has had significant O&M problems, which have resulted in a U.S. Environmental Protection Agency (EPA) Administrative Order. The planned improvements to the village utilities are being funded in part with federal funding. Problems in the past include poor housekeeping, insufficient tools and spare parts inventories, and improperly maintained equipment. Red Dog Port and Mine There are water and sewer utilities at both the mine site and the port site, which are approximately 50 miles apart. The port site water supply is seawater supplied by a well near the ocean. Pretreatment is provided by a filtration system and ion-exchange softening, followed by reverse-osmosis treatment. Treated water is stored in a steel tank and distributed to the camp facilities at the port through an insulated piped system. The camp is furnished with toilet, shower, kitchen, and laundry facilities. Wastewater generated in the camp is collected by a sewer system that conveys wastewater to a package extended-aeration wastewater treatment plant. Treated effluent is discharged to a permitted disposal area. The mine site draws water from an infiltration gallery near a surface-water impoundment. Water is treated in a filtration plant, disinfected, and stored in a reservoir before distribu- tion to the camp. As with the port site, the camp at the mine includes toilet, shower, kitchen, and laundry facilities. Wastewater from the mine camp facility is directed to the mine tailings pond for disposal. The water and wastewater operations staff consist of three individuals who rotate on and off. The lead operator is a state certified as a Class 4 operator who, with the authority of the mine management, has provided water and wastewater operations assistance to the villages of Kivalina and Selawik. Because the mine is a private enterprise, no service charges are assessed for use of the water and sewer systems. Operation and Maintenance in the Region Proper operation and maintenance of any utility system is critical to the success of that system, whether it be an individual, isolated, independent system or one of several systems in a regional utility. Utility maintenance and operations, both within the NANA Region ANC10011E6E.WPS 2-7 and in rural Alaska in general, are characterized by several particularly challenging factors. The remoteness of most Alaskan villages demands careful management of resources and self-sufficient operations. Utility operation costs can be minimized when the operations staff are well trained and capable of dealing with routine problems with limited outside assistance. This is especially true of small systems and even more so for small systems in remote locations. Transportation of materials and equipment to remote sites is expensive especially during winter months when waterways are frozen. Preventive maintenance work should be sched- uled to take advantage of cheaper barge transport (compared to air freight) and summer weather and daylight whenever possible. Climate extremes increase the need for diligent maintenance and care of equipment to reduce the occurrence of freezeup or related cold-weather problems that interrupt service. From an operational standpoint, this means keeping boilers and recirculation pumps (and backup equipment) operating, and responding quickly to equipment and power failures. Inattention to required operation and maintenance can cause catastrophic failure of major portions of the utility system. Such a failure recently occurred in Kotzebue. The income level of a typical household in the region is in the $10,000 to $20,000 per year range. If a major utility freezeup occurs, local funding is not available to repair or replace the defective infrastructure. State and federal funds must be sought for major capital improvements. Such funding is typically secured through years of grant application efforts. In the interim, the village is without utility service, and in some cases, public health is at risk because of the loss of basic sanitation services. For these reasons, effective operation and maintenance of the water and sewer systems is particularly important in rural Alaska villages. Without effective, properly funded opera- tion and maintenance, these systems will not be financially viable, and will have very short operations lines. The following paragraphs address the staffing and resources available to support utility operations and maintenance within the NANA Region. Operations and Maintenance Staff Most operations staff visited during this study in August 1993 were either working toward certification or had Level 1 Certification. However, there is a need to provide these indi- viduals with additional skills, tools, materials, and equipment to perform routine operation and maintenance functions. While all system personnel interviewed (during our visits) seemed motivated, some lacked an understanding of basic water and sewer utility operation requirements. This observation is not intended to be critical of the individuals ANC10011E6E.WPS 2-8 interviewed; it is intended to identify yet another challenge in the operation of rural Alaska water and sewer utilities. Somewhat different from other villages visited, Kotzebue appears to benefit from its size and staffing levels. Kotzebue utility system personnel are better trained in their jobs than their counterparts in the outlying villages of the region and, from observations made dur- ing our visit to the region in August 1993, appeared more focused and systematic in exe- cuting their work. Local Administrative Resources Village water and sewer utility administrative support for purchasing, personnel and pay- roll, regulatory reporting, and grant applications and coordination is performed by city administrative personnel. In most villages, administrative staff is limited to an adminis- trator and assistant administrator. Considering the administrative demands on any size community, these staff have a heavy workload. In many cases, village administrators are frustrated by inability to get things done with limited resources. In the case of Ambler, the village administrator and her assistant have to stop working when funds get low and pick up the backlog when additional funds are available. Available O&M Assistance Onsite technical and maintenance support to the primary operator is limited in most vil- lages to that supplied by the state-funded Manillaq Remote Maintenance Worker (RMW) or by Public Health Service (PHS) personnel. Although these assistance providers can be of great help, they infrequently visit the sites. The village operators reported being visited by the RMW once per quarter and twice per year by PHS personnel. Operators rely heavily on the help they get from these sources. As helpful as they are, the RMW and PHS personnel are greatly limited by their own funding sources and budgets. In addition, the State’s Rural Utility Business Administration (RUBA) Program provides training for city administrative staff in the fundamentals of utility management and admin- istration. Funding for this program has also been limited. Community Utility Financial Performance One measure of the viability of a utility is financial performance. Income received from collection of monthly utility service charges is the primary source of revenue for most tural utilities. If service is to be maintained, revenues must cover expenses. Current Income and Expenses Table 2 summarizes financial cash flow data for the existing independently operated com- munity water and sewer utilities in the region. As noted at the bottom of the table, data ANC10011E6E. WPS 2-9 01-7 2 a 5 i o x ALLA PREVIOUS ANNUAL ANNUAL | MONTHLY EXPENSES | REVENUES ACTUAL NUMBER OF PREVIOU: POPULATION | SERVICES OR ANNUAL HOUSES BILLED | EXPENSES BY UTILITY BUDGET CURRENT PERCENT COLLECTIONS VILLAGE KIVALINA i S| |8| [8] 18} is} lel ie} ie 8] [8] [8 NOATAK NOORVIK 2! lal fel ls| lal (el lel lel lal ie Eel | sl ls! isl (s} isl isl ig 3] lal ig] fel il él isl ial il al TOTALS NOTES: 1. Figures for Kotzebue are from recent 1993 data; avg cost/service adjusted for commercial accounts. 2. Noatak figures are from 1992 data 3. Remaining figures from audited 1991 records. 4. Actual annual expense data do not include administration costs. Except for Kotzebue, administrative expenses are assumed to be 5% of total expenses for labor, taxes, benefits, supplies, chemicals, electrical power, fuel oil and outside maintenance /repair costs. * AVERAGE COST/SERV PER MONTH were extracted from different sources and different years from 1991 through 1993. The data demonstrate a shortfall in revenues versus operating expenses for most outlying vil- lage utilities. Excluding Kotzebue water and sewer utility operations, the cumulative annual revenue for the region’s outlying village utilities is $419,411. The cumulative annual expenses for the region’s outlying village utilities are $582,369. The resulting cumulative shortfall for these outlying village utilities is $162,958, or roughly 28 percent of operational expenses. Cost data used for estimating overall utility operations expenses included labor, supplies, chemicals, electrical power, fuel oil, maintenance and repairs, and administrative costs. While costs of materials and supplies are high, especially in the smaller communities, between 40 percent and 50 percent of the utility operations cost is labor. Yet labor staff- ing does not seem to be excessive for the region. Except for Kotzebue, no more than one utility operator and an alternate operator are supported by the smaller communities. Labor rates are not out of line for the area, however, virtually no benefits are provided. Without benefits as part of the labor compensation package, personnel costs for the region are probably about 10 to 20 percent low. Power and fuel oil represent approximately 10 to 25 percent of existing operation costs, depending on whether waste heat is used to heat potable water in winter. As shown in Table 2, the calculated cost per month per connection for each community is between $45 and $90. The average monthly cost of service in the region is $69. Data for the Red Dog Mine are not included in Table 2. Service cost data do not exist for the water and sewer utilities at the Red Dog Mine site or the port site. It can be assumed that the mining operations support the full cost of service for the water and sewer opera- tions and there is no revenue shortfall for these utilities. Annual Operations Costs for Regional Contract Operations Projections of annual operational costs for the two regional utility structures, regional contract operations, and a non-profit regional cooperative were estimated and compared to the actual annual operational costs of the independently operated, individual community utilities. Table 3 is a summary of the operational costs of a regional utility under regional contract operations (referred to as RCO in Table 3) compared with the actual annual costs of the independently operated, individual community utilities. Cost data used in compiling opera- tions costs for the individual, independently operated, village utilities in Table 2 were extracted for use in Table 3. Past village utility expenses are broken down into cost cate- gories and compared to estimates for the same categories for regional contract operations. ANC10011E6E.WPS 2-11 lac - ~ sie ; ce = oe ee COS NY AL CONTRAC i . ae , TOTAL SUBTOTAL TAXES/ ELECTRICAL] FUEL | MAINT/ OTHER EXPENSES | EXPENSES | OM-- ADMIN | STARTUP | MGMT STAFF VILLAGE SALARY BENEFITS oi. | REPAIRS VILLAGES FOR RCO Cost cost cost W/OUT RCO JAMBLER* $26,427 $1,850 $12,355 545 $3,426| __ $71,940 | { pecan geen) gus { sagan {ainaot gente ff $71,795 $17,949 ACO BUCKLAND. 109 556 elo «Or | $65,308 $16,349 | [DEERING —ss—“sd| =~ S22,990| $3,508] $1,4ea| $2,653 | 36,390 essai names amnesic reenter lil iblenens i 028 RCO KIANA | __ $41,675] $13,753] $4,395] $7,gee {| —sia.g7at | KIVALINA |__ $34,303] aati ss22t siizo| $2,478] s2.0i5| $2,193 | 6 SANNA | SNORTING = ae a $800,746 KOTZEBUE" |__s2aaeso| $30,477] $131,706] $73,901] $71,071] $77,023] _$167,699 | [NooRVIKy | $39,067{ $13,576] $4,720] $13,236 | IRCONOORVIK —s| $39,867] $13,156] $4,720] s1n.gi2| $12,724] sae9e] ISELAWIKy | $42,222 $8247] $15,760] ss sa.se2] ND | | $3555] s74eas| | [RCOSELAWIK | «$42,222 -——_siasma | _sisveo} sare 80) agp $19,073 [SHUNGNAKY ss] $33,805 NDT tao] 7st] $13,223] gaia] $2,736 | 57,458 [RCOSHUNGNAK | $33,805|$tres| Seo] $400] siz.g0rf | 3561] $15,890 | IRCOKOTZEBUE | $198,951[ $05,654] $111,706] _se6,sez| $63,064] $59,200] $566,157| $141,539 INOATAK | $19,303] $9,680] $5,596] $14,033 | 51,934 Ye eee $3,696 $93,695 $86,076 SEVEN VILLAGE EST. | $435,200] $57,742] $163,526| $111,555] $142,307| $01,032] $184,500 | TOTALS a $1,155,640 PROPOSED ACO EST. | $427,146] _—$14o,05e] $147,861 _ $107,765] $128,157] _se2eoe{ Ss Sof $296,196] $10,000] $160,000 NOTES: TOTAL SELECTED VILLAGE OPERATION= $1,156,000 1. OTHER COSTS" FOR VILLAGES ASSUMES 5% ADMINISTRATIVE COSTS EXCEPT FOR KOTZEBUE TOTAL SELECTED RCO OPERATION = $1,481,000 2. STARTUP COSTS OF $50,000 SPREAD OVER 5 YEARS OF REGIONAL OPERATIONS 3, VILLAGES NOTED BY ASTERISK (*) ARE THOSE CONSIDERED IN FIRST PHASE OF REGIONAL CONTRACT OPERATIONS (RCO) PERCENT INCREASE (DECREASE) = 28% COMPARISONS MADE USE THESE VILLAGES ONLY. 4, OVERHEAD AND ADMINISTRATIVE COSTS ASSUMED TO BE 25% OF OPERATIONS COSTS. “ Only 7 of the 11 village utilities were assumed to be initial participants in the regional utility. The remaining four villages can be phased into the regional utility over time. These initial seven village utilities (Ambler, Buckland, Kiana, Kotzebue, Noorvik, Selawik, and Shungnak) were chosen on the basis of the level of services already developed that will be able to contribute the largest revenue base to the regional utility. The remaining utilities (Deering, Kivalina, Kobuk, and Noatak) would be added to the regional utility as their individual utilities are developed. The annual operating cost savings assumed for regional contract operations are based on estimated savings normally expected with a transition to contract operations. These sav- ings were estimated as a 10 percent reduction in annual electrical power and fuel oil costs for all community utilities participating in the regional utility, and some minor savings in personnel and chemical costs for Kotzebue’s utility. These savings are only estimates based on the experience of other small utility systems when they transition to a contract operations regional utility. Additional annual costs assumed to be incurred for the regional utility are for benefits (virtually none are paid at this time), company overhead and profit, regional management and administrative staff, and startup costs. Payroll taxes and benefits are assutned to be 33 percent of salaries. Company overhead, profit, and administrative costs are assumed to be 25 percent of the annual operating expenses and include staff, equipment and office space expenses for the administration of the regional utility. An annual cost of $160,000 is included for management and engineering staff to support the operation and maintenance of the utility. As shown in Table 3, a transition to a regional, contract operations, utility structure for the seven villages selected for analysis results in an overall 28 percent increase in expenses ($325,340) over existing total costs for these seven villages operated independently. While this increase is significant, it also represents significant improvement in utility service and benefits to the employees of the regional utility. Annual Operating Costs for Non-Profit Regional Cooperative The same comparison of annual operating costs was made for a non-profit cooperative regional utility using the same seven villages. Table 4 shows this comparison and reflects savings from bulk purchases and operational efficiencies. It is believed that the same operation efficiencies cannot be realized with a non-profit regional cooperative as can be with regional contract operations. Personnel benefits were assumed to be at a lower rate than for contracted operations (25 percent versus 33 percent). Management administrative costs were estimated higher than for regional contract operations because of the lack of a larger corporate support structure for accounting, personnel, and administration. The analysis indicates a revenue shortfall for the regional non-profit of 28 percent. ANC10011E6E.WPS 2-13 PI-@ 2 Ee SUBTOTAL TAXES/ MAINT/ EXPENSES | EXPENSES | O/H-- ADMIN | STARTUP | MGMT STAFF VILLAGE SALARY BENEFITS REPAIRS VILLAGES |FORREGIONAL| COST cost cost W/OUT COOP | COOPERATIVE . =a = REG. COOP AMBLER $26,427 $0,607 $4,337 $70,916 $12,515 f _ BUCKLAND" Het oe ae $57,156 - REG. COOP. BUCKLAND! | sett} saat) $61,869 $10,918 - DEERING $3, sf tua $1,037 : - KIANA® $3,508 $4,335 $8,184] $20,420 $82,028 —— REG. COOP. KIANA $10,419 $4,335 $0,184| $18,378 $82,991 $14,645 KIVALINA $522 1,129 $46,051 KOTZEBUE* $77,023 $167,699 _ REG. COOP. KOTZEBUE $73,991 $63,964| $59,200 $629,812 $111,143 NOATAK sae] si4933] REG. COOP. NOORVIK | —_seesez{__stause{__sazzo} $1.28) a1 724| $3,696 $87,399 $15,423 | SELAWIK* $42,222 ‘$15,760 _ REG. COOP. SELAWIK $42,222 a 760 $73,400 $12,953 SHUNGNAK* $33,895 $7, or | REG. COOP. SHUNGNAK $33,895 $8,474 — $7,111 $61,560 $10,864 _ TOTALS $558,875 $193,518 | $334,205 | 53,621 ISEVENVILLAGEEST. | _$435,209[ ——=—$57,742| $163,526] $111,555 $142,307] _ $81,032 ae REG. EST. $476,884 $122,410| $157,861 $119,739[ $128,157| $62,896 $o $1,067,948 $210,684| $10,000 $190,000 NOTES: TOTAL SELECTED VILLAGE OPERATION = $1,156,000 1. “OTHER COSTS FOR VILLAGES ASSUMES 5% ADMINISTRATIVE COSTS EXCEPT FOR KOTZEBUE TOTAL SELECTED REGIONAL COOP. OPER: $1,479,000 2. STARTUP COSTS OF $50,000 SPREAD OVER 5 YEARS PERCENT INCREASE (DECREASE) = 28% 3. VILLAGES NOTED BY ASTERISK (*) ARE THOSE CONSIDERED IN FIRST PHASE OF REGIONALIZATION; COMPARISONS MADE USE THESE VILLAGES ONLY. 4, OVERHEAD AND ADMINISTRATIVE COSTS ASSUMED TO BE 18% OF OPERATIONS COSTS. It must be emphasized that although the cost comparisons are estimates, they are based on what can be expected in similar systems. Needed Capital Improvements for the Region’s Utilities Hepatitis, viral meningitis, and other diseases endemic to rural Alaska residents are trans- mitted in human feces. Honeybucket haul systems provide ample opportunity for individu- als to come into direct contact with human fecal wastes. For this reason, users of honey- bucket disposal systems are at greater risk for contracting disease than those with flush toilets. The incidence of hepatitis in Alaska historically has run in cycles, including nota- ble periods of human debility and death. It is this risk that has motivated many rural Alaska communities to work toward eliminating the honeybucket system. Because of this, the primary objective of rural Alaska sanitation programs has been to provide systems that protect residents from unnecessary contact with human wastes. Although current federal regulations addressing water and wastewater system design, con- struction, and operation are not overlooked, the primary focus of rural sanitation upgrade projects is to reduce the risk of contracting diseases attributable to waterborne pathogens. This risk can be reduced in several ways. One is to provide piped water and sewer sys- tems that mechanically convey wastes away from individual homes to designated disposal areas. Another more recent development is to use water and sewage haul systems designed to be operated with four-wheel vehicles and trailer-mounted tanks. As indicated by the descriptions of the utilities within the region, several communities (Noatak, Kotzebue, Noorvik, Kiana, Ambler, Shungnak, and Red Dog) are served by piped water and sewer systems. Other communities (Deering and Selawik) are planning to construct new piped systems or extensions to their existing piped water and sewer systems. Others (Kobuk, Buckland, and Kivalina) have no immediate plans for major utility system improvements. Sources of Funding for Utilities Within the Region Almost all utility systems in the region have been funded by state or federal grants. Exceptions to this are the Red Dog Mine utility systems, although even that project has received loans from the state-funded Alaska Industrial Development and Export Authority. The reason for such extensive use of grant funds for capital improvements of rural sanitation systems is that the local communities do not have the economic resources to provide the funds themselves. With this disadvantaged economic status, the region’s communities are eligible for both state and federal grant funds for rural sanitation projects. Primary sources of federal funding are the Indian Health Service, the EPA, the Farmer’s Home Administration, and Housing and Urban Development (HUD). The primary state funding source is the Village Safe Water Construction Grants Program. ANC10011E6E.WPS 2-15 Grant funding appropriations for rural Alaska sanitation capital improvement projects are increasing. In 1993, the federal government appropriated more than $13 million for sanitation programs in the state, including funding from the Indian Health Service, HUD, and EPA. The state appropriated more than $54 million for sanitation projects, including $24.5 million through the Village Safe Water Construction Grants Program. It is uncertain whether this level of funding will continue; however, there is considerable political acti- vism to maintain support of programs for upgrading rural Alaska sanitation systems. The LUMP Program While capital funds are available for construction of sanitation projects, there are no per- manent programs to supplement the operational costs of rural water and sewer utility systems. The utility-service-charge affordability threshold for most village homeowners in the region is between $40 and $75 per month. Most piped water and sewer systems must charge more than this amount if monthly service charges are to cover the operational costs of the utilities. The revenue shortfalls identified in Tables 2, 3, and 4 illustrate this point. The state has initiated an innovative approach to subsidize rural water and sewer operations and maintenance costs. The program, called the Local Utility Matching Program, or LUMP, provides incentive for rural communities to improve the operation and manage- ment of their local utilities. Specifically, LUMP provides matching funds to a community for each dollar it collects as monthly service billings up to $10,000 per quarter. To qual- ify for these matching funds, a village must demonstrate the following: ° A current water and sewer utility ordinance is in place that authorizes the community to provide utility service and collect service charges for that service ° Employ a minimum of one full-time utility operator and one part-time alter- nate operator, based on approved job descriptions and pay rates. Each operator is to be state certified or enrolled in a training program leading to certification. ° Demonstrate an effective operation and maintenance capability by providing the following: - Maintaining approved daily operator checklists, weekly or monthly operations summaries, and a critical spare parts list and on-hand inventory - Remote maintenance worker or maintenance consultant water and sewer system inspection, dated within 6 months of application, veri- fying that the operator is successfully maintaining his system; or an inspection report together with a community work plan and repair time table for operator-correctable deficiencies ANC10011E6E. WPS 2-16 Collection of a minimum percentage (80 percent) of monthly utility billing payments Execution and maintenance of minimum bookkeeping procedures for the water and sewer utilities, including line item water and sewer utility budget for current year and revenue and expenditure state- ments for the last 2 years Development of a maintenance schedule and associated minimum monitoring and reporting requirements Completed daily operator checklists, weekly or monthly operational summaries, financial documentation, and minutes of council meet- ings showing that preventive maintenance and financial monitoring programs are kept up to date and regularly reported to the com- munity council As of January 1994, the state reports that all but three villages in the NANA Region have qualified for the LUMP Program. The program was funded only as a 1-year Gemonstra- tion project to demonstrate the feasibility of using an operations subsidy to improve the performance and viability of rural sanitation systems. A final summary report will be prepared in fall 1994 by the Northwest Arctic Borough to evaluate the successes and short- comings of the program. ANC10011 E6E.WPS 2-17 Section 3 Should NANA Region Communities Consider Regionalization? Sections 1 and 2 addressed alternative regionalization structures that have potential for the NANA Region communities and described the current water and sewer utilities in the region. This section addresses whether the communities within the NANA Region should consider forming a regional utility structure. Criteria for Consideration A community’s decision about whether it should consider participation in a regionalized utility arrangement with other communities depends on two considerations: 1. Has the performance of the local utility been satisfactory? Performance of the water and sewer utility should be evaluated in terms of whether there is a problem (is the utility able to supply the intended service continuously without interruption, satisfy customer expectations, comply with regulatory requirements, and generate sufficient income to cover operations costs). If the performance of the utility, measured in the above terms, has not been satisfactory, regionalization should be considered as an alternative. De Will the utility be viable in the future? If the utility is not performing well (in terms of the criteria listed above) with a good chance for significant improvement or if performance is currently marginal but not likely to meet future needs, regionalization should be considered. Long-term viability should be the ultimate goal of a utility and should be a determining factor in decisions regarding regionalization. Utility Performance/Viability Assessment Of the water and sewer utilities evaluated, Kotzebue, Noorvik, and Red Dog are perform- ing at a satisfactory level. Operators are trained and certified, equipment is reasonably maintained, and the systems in these communities or organizations are effectively operated. Operating funds are available with rates and collections at an acceptable level. Adminis- trative support is provided, and planning is under way for future growth and system maintenance. The remaining community water and sewer utilities in the region have sufficient capital funds through grants available for improvements, but have performance problems with day-to-day system operations. Operators are not adequately trained to perform effective operation and maintenance. Spare parts and equipment are not readily available. Sources of assistance (Manillaq and PHS) are inadequately funded to provide needed assistance in ANC10011E7C.WPS 3-1 a timely fashion. Service interruptions exist because of freezeups and boil-water notices. Administrative support and management is not adequately funded to provide sufficient direction and planning for future improvements. A greater concern with the utilities in the outlying villages is that significant changes are necessary to rectify these problems. Developing trained and certified operating personnel has been a slow proc ;. While Manillaq and PHS have made notable gains, their efforts are inadequately funded. There is a significant risk that the utility improvements being planned and constructed for the region will not be protected by proper maintenance or be able to effectively operate. Kotzebue, Noorvik, and Red Dog As discussed above, the utilities at Kotzebue, Noorvik, and Red Dog are properly operated and managed and provide a satisfactory level of service to their customers. They also serve a large portion of the region’s population (58 percent), representing a significant source of revenue for a regional utility. Therefore, their participation in a regionalized utility is critical. While Kotzebue, Noorvik, and Red Dog do not have the significant problems that other utilities in the region are experiencing, they also would benefit from a regionalized utility. These benefits, as discussed in Section 1, are the development and sharing of resources, including increased technical and management support systems oriented specifically toward water and wastewater utility operations, and opportunities for increased training and per- sonnel development. Other incentives for these communities to consider in the formation of a regional utility are the satisfaction of knowing they are participating in improving the health and quality of life for the people of the region. Obstacles to Forming and Operating a Regional Utility Several obstacles to the successful formation and operation of a regional utility are dis- cussed in the following paragraphs. Collection of Operating Revenues If adequate revenues for utility operation are not available, the utility (regional or individ- ual community) will not remain financially viable. The majority of operating revenue for a utility is generated from collection of monthly utility bills. While this operations income may be supplemented by government subsidies, such as the LUMP program, there is no guarantee that such subsidies will receive con- tinued support. The state is currently in a budget-reduction mode, and the federal govern- ment does not see subsidies for rural Alaska water and sewer utility operations as politically prudent at this time. Without operations subsidies, the majority of income for ANC10011E7C.WPS 3-2 the support of a regional utility is the routine collection of payments for monthly utility bills. If monthly utility bills cannot be collected, the regional utility will not be successful. The regional utility may have a more difficult time collecting payment of monthly utility bills than the local community utility. The head of a household in rural Alaska may be willing to support his local community utility, but may have misgivings about supporting a regional utility with interests outside the village. It is expected that the regional utility would have to develop a public relations program to secure the financial support of its customers. Participation of Kotzebue, Noorvik, and Red Dog Another obstacle to the formation of a regional utility is securing the support and partici- pation of the larger viable utilities in the region. A common problem in the formation of regional utilities all over the country, the difficulty of securing support and participation stems from the perception that a larger, self-sufficient utility’s association with outlying rural community utilities within the region will be a liability to the larger utility. The small utilities are seen as a drain on the resources of the larger utility. As previously discussed, this need not be the case. Regionalization promotes sharing of resources beneficial to both large and small utilities and acquisition of new resources which were not possible with even the larger utility’s revenue base. In some areas of the country, the unwillingness of larger utilities to participate in regionali- zation efforts has led to the formation of a regional utility that excludes the larger utility. In Texas, one major metropolitan area has almost been physically surrounded by the for- mation of a regional water utility consisting of outlying suburban community utilities. Ideally, all communities remain open-minded about participating in a regional utility. An individual utility’s decision about whether to participate should only be made after all options have been presented and the consequences of participation carefully considered. As for Kotzebue, Noorvik, and Red Dog, their participation will greatly enhance the for- mation of a regional utility within the NANA Region. Should they elect not to participate, the level of service available through a regional utility confined to only the NANA Region water and sewer utilities would be significantly diminished unless an outside source of support is available. Options for building a broader revenue base for a regional utility without the participation of Kotzebue and Red Dog include the following: ° Approaching neighboring regions, such as Doyon and Arctic Slope, with a regionalization concept to include communities in those regions ANC10011E7C.WPS 3-3 ° Expanding the regional utility's scope of services beyond water and sewer services. This could include electric power, fuel oil, telephone, and cable television. ° Securing utility operations subsidies. This is discussed further in Section 4. Perception of Loss of Control As discussed in Section 1, communities may be reluctant to subscribe to the regional utility if they perceive that there will be a loss of jobs in the community, a rate increase to sup- port regional utility operation, or they will have no local voice in the operation and man- agement of the regional utility. If the concern is over a loss of jobs in the community, the regional utility can offer to retain current operations staff in their positions and look to fill future openings from the local area. If the concern is over control of utility rates, a rate agreement satisfactory to the local community can be negotiated. These negotiations have to establish the level of service desired by each community in the region. If the concern is over the loss of a voice in the operation and direction of the regional utility, each community can have a position on the governing board of the regional utility. Kotzebue, being the largest community in the region, could be considered for multiple seats on the governing board. Would Additional Funding Achieve Local Utility Viability? In Section 2, Table 2 indicated that most of the communities in the NANA Region are operating with a revenue shortfall for their water and sewer utilities. The question there- fore arises of whether a regional utility structure is needed or whether the systems will become more viable with an infusion of operational funds to the individual communities, such as is provided by the LUMP program. What Can be Done With Added Funding to Communities If additional funds were made available to the local communities without formation of a regional structure, some levels of performance improvements are possible. These are identified below. ° Operator training opportunities can be provided. As discussed in Section 2, training to increase skill levels is especially cost effective in remote rural areas. ANC10011E7C.WPS 3-4 . Additional administrative staff support can be afforded. This additional manpower can be used in billing and collection efforts, budgeting, reporting and recordkeeping, and keeping up with grants and subsidies. This would necessarily be a part-time position, because most of the utilities have budgets of less than $100,000 per year; adding one additional person increases budgets 20 percent to 40 percent, an amount disproportionate to the benefit. ° Additional parts, tools, and equipment can be purchased. Additional Improvements With Regional Structure As explained above, improvements in community utility performance can result from an infusion of funding to the existing community utilities. However, if this same level of funding were available to a regional utility, significant additional uses of the funds are possible. Most of these advantages have been discussed in other parts of this report and are summarized in the paragraphs below. Centralized Administration/Management and Billing Regionalized operation takes most of the water and sewer utility administrative workload off village administrators and allows them to focus on many other pressing local issues. With a regional utility, all purchasing and utility personnel management functions for the individual community water and sewer systems are assumed by the regional manager. The local utility operator becomes the village liaison with regulatory and grant agencies. Ina regional framework, there is no duplication of effort in familiarization with grant programs and available public funding. The regional manager keeps up with program requirements and the availability of grant funding for all participating community utilities in the region. When technical, legal, or administrative assistance is needed to meet windows of opportun- ity such as the LUMP program, it is cost effective for one person in the region to assume responsibility for compliance with the grant criteria. Centralized billing reduces the duplication of billing by consolidating the recordkeeping, accounting, billing, and collection in one location. Central utility management increases efficiency; allows automation of billing, records, and procedures; and saves money. It also increases consistency of billing and revenue collection. Shared Technical Support The technical support services available through a regional utility structure to individual community utilities is too expensive for individual communities to develop and support on their own utility budgets. Backup technical support translates to better operations, increased equipment reliability and life, resolved problems, and lower operational costs. The technician or maintenance mechanic dedicated to the region helps ensure that problems ANC10011E7C.WPS 3-5 are fixed in a reasonable amount of time, avoiding unnecessary power consumption or equipment loss. The technical assistance services provided by the state-funded Manillaq RMW and the PHS play an important role in the current operations of the community water and sewer utilities. Any regional utility that proposes to serve the NANA Region should work with Manillaq and PHS to assure that these resources are coordinated. One key issue in the formation of a regional utility in the NANA Region, or anywhere else in rural Alaska, is determining the best way to use these government-funded services. Standardized/Shared Equipment and Spare Parts Regionalization of operations allows establishment of a common inventory of interchange- able parts and equipment. There are many similar types of pumping and treatment equip- ment throughout the region. Maintaining a common materials and parts inventory warehouse within the region reduces the duplication of costs and makes critical parts and equipment available when needed. Coordination of future equipment purchases helps ensure that interchangeability increases. Common tools, laboratory equipment, and specialized maintenance equipment can also be kept in a central location and distributed as the needs arise. This increases the capabilities of the local work groups that may otherwise be cost prohibitive. Bulk Purchases of Supplies and Equipment Consolidation of purchases of equipment or supplies establishes a basis for bulk purchases and volume discounts. This is possible for items such as chemicals, fuel oil, gasoline, and certain spare parts. A regionalized utility with several sites will be in a position to nego- tiate improved rates for power and waste heat with AVEC. Remote Monitoring of Community Systems A regionalized system can develop a remote monitoring system for water and sewer utility operations from a central location. There is currently a Manillaq demonstration project based out of Kotzebue to evaluate the feasibility of remote monitoring of village utility systems. Another possible option is to use and expand the existing SCADA system in place at Red Dog. Using a remote monitoring system greatly enhances the ability to respond to emergencies in a timely manner. Such a system may save millions of dollars in the event of impending system freezeups within individual community systems. ANC10011E7C.WPS 3-6 Should NANA Region Utilities Consider Regionalization? On the basis of benefits described above, the NANA Region community utilities should consider regionalization. A regional utility is more efficient in its ability to serve local communities than if the individual communities continue to operate these utilities them- selves. However, as discussed previously and summarized in the next section, there are presently substantial obstacles to the implementation of a regional utility structure. ANC10011E7C.WPS 3-7 Section 4 Implementing Regionalization As discussed in the previous section, there are several inherent advantages to the formation and operation of a regional utility. This section presents the steps NANA should take if it is to act as the coordinator and/or administrator for this regionalization effort. Formation of an Ad Hoc Committee on Regionalization The first step the NANA Board of Directors should take is to form an ad hoc committee to review the issue of utility regionalization. The committee’s charge will be to evaluate the issues surrounding regionalization and report back to the board with recommendations on whether or not to pursue forming a regional utility. It is recommended that the committee be assisted by a facilitator who can provide guidance on the resolution to issues commonly encountered in regionalization efforts. Addressing the Revenue Shortfall Issue The first, and most difficult, issue to be addressed is the projected 28 percent shortfall in revenue predicted for the regional utility as discussed in Section 2. If a regional utility is to remain viable, this revenue shortfall must be made up. Options for this are discussed below. The most direct way to make up a revenue shortfall is to increase customer service charges. This is not an option for most of the residential utility customers in the region because they cannot support increased utility rates. Another option for bridging the revenue shortfall gap is to improve the collection of monthly service charges for utility service. The LUMP program qualification criteria includes a collection rate of 80 percent of the outstanding utility bills for the community. Improving this rate of collections helps reduce the regional utility’s revenue shortfall but will not eliminate it. Another option is the inclusion of utility operations other than water and sewer in regional utility organizations to expand the revenue base of the regional utility. The Alaska Village Electric Cooperative has already expressed an interest in pursuing regionalization of rural Alaska water, sewer, and electrical power utilities under a single organization. This con- cept is being considered in other parts of the country. Finally, there is the option of making up the revenue shortfalls with subsidies for rural utilities operation and maintenance costs. This is discussed in greater detail below. ANC10011E7D.WPS 4-1 Subsidies for Rural Utility Operations Historically, the state has not supported the concept of operation subsidies for rural water and sewer systems. While there are state subsidies for supporting rural electrical power utilities (the Power Cost Equalization [PCE] subsidy), village public safety officers, and village road and airport maintenance, there is no operations subsidy for village water and sewer systems. As a state, Alaska has invested more than $628 million in sanitation proj- ects over the last 10 years but only $4.6 million for operations assistance in that same time period. Most of the $4.6 million has been spent in support of the RMW Program, which currently employs eight staff who are responsible for covering 108 communities. In Alaska, the hundreds of millions of dollars of capital investments are at risk because of insufficient operations funding. The LUMP program is an existing state subsidy program that addresses these needs in the NANA Region. Unfortunately, it is only a 1-year demonstration project and may not receive additional funding in the current state legislative session. NANA should look into ways of extending the LUMP program within the region to eliminate the revenue shortfall and make the regional utility viable. Another possible source of funding for regional utility subsidies is the federal government. Congress has passed a bill approving appropriation of O&M subsidies for Indian commun- ity water and wastewater utility systems; however, no funds have been appropriated to date. With the ongoing series of hearings before the Select Committee on Indian Affairs chaired by Senator Inouye, NANA may have an opportunity to present a proposal for an operations subsidy for rural Alaska utility systems. As of May 1993, EPA’s Region 10 office in Seattle has been tasked by Senator Inouye’s committee to prepare recommendations on how best to address the rural sanitation issues in Alaska. Congressional studies this year will identify means for Alaska non-profit Native corporations, such as Manillaq, to receive federal funding for sanitation programs. NANA and Manillaq should assess their respective eligibility for these funds and develop funding proposals for operations subsidy programs. We suggest structuring those pro- posals around the matching funding concepts and associated qualifications criteria of the LUMP program. If the revenue shortfall issue cannot be resolved, efforts to form a regional utility in the NANA region should not be pursued. Selecting a Regional Utility Structure Should the revenue shortfall issue be resolved, another key issue is to decide is the form of regional structure and NANA’s role in that structure. The alternate structures for a ANC10011E7D.WPS 4-2 regional uulity are presented in Section | and are reviewed below. NANA should review these alternatives and decide which is best. Regional Contract Operations With this alternative, a utilities operations contractor provides services under contract to a regional utility authority. The regional utility structure can take one of several forms. One option is to have the operations contractor secure multiple service agreements with individual communities within the region. Under this scenario, NANA acts as a contract administrator for communities served by the operations contractor. This helps the local communities in their dealings with an outside contractor. Another option is to have the operations contractor secure a single service agreement with a regional entity, such as NANA. Under this option, the local community utilities agree to designate NANA or a subsidiary of NANA as the regional utility authority. Because of the coordination required with the individual communities, the NANA Devel- opment Corporation would be an excellent management organization to administer a regional utility contract operations program. The corporation is based in the region, is recognized for its representation of the interests of the region, and is diverse enough to address opportunities to expand the regional utility. Expansion possibilities include utilities other than water and sewer or expansion into other native regional corporations with interests in developing interregional utilities. Non-Profit Utility Cooperative With this alternative, a regional non-profit utility cooperative is formed to act in the inter- ests of the water and sewer utilities within the NANA Region. Representation of the com- munities on the executive board can be by the community mayors, council members, city administrators, or individuals elected specifically to serve on the cooperative board. A charter can be developed defining the responsibilities and authority of the board and indi- vidual communities. The board then acts to implement regional utility programs that best benefit the community utilities of the region. Under this type of regional structure, NANA acts as a facilitator to assist with the forma- tion and development of a draft cooperative charter and with the seating of the board members. These board members can be the NANA corporate board members serving in a dual capacity—one as a director of the NANA Corporation and the other as a member of the non-profit cooperative. This dual role would save considerable administrative costs. ANC10011E7D.WPS 4-3 Privatization A third alternative for consolidation of the NANA Region community utilities is the pur- chase and operation of the individual utilities by a private corporation. The private corpor- ation owns and operates the utilities for profit. NANA or any other private corporation considering this option would first want to evalu- ate the financial performance of the individual community utilities and assess the value of the infrastructure. There are several accepted methods of assessing the value of an existing utility. One measure of value is the depreciated replacement cost of the utility. Another is the capi- talized net income approach, in which value is computed as net annual return on capital investment used to purchase the utility, divided by the expected rate of return on that capi- tal investment. Both methods are used in value studies to help establish the purchase price of an existing utility. Using the depreciated replacement cost approach, the value of the region’s utilities will be tens of millions of dollars. However, with a shortfall in the region’s utility revenues, the value of the region’s utilities as determined by the capitalized net income approach will be zero. Unless the prospective purchaser was willing to operate the regional utility at a loss or secure an outside subsidy for the utilities, there is no incentive for the purchaser to proceed. In addition to the poor financial performance of the region’s utilities, there is another disincentive for private ownership. A privately owned utility is not eligible for public construction grant funding for needed capital improvements. The foregoing statements combine to discourage most all considerations for private owner- ship of the region’s utilities. Building Consensus for Regionalization One of the most critical factors in launching a successful regionalization program is secur- ing a favorable consensus among interested parties. In the NANA region, there are a number of groups, in addition to the communities served by the utilities, that have been actively involved in supporting or assisting rural sanitation programs. To maintain this support and involvement, it is important that these groups be asked for their input and be kept informed on regionalization developments. Experience elsewhere has shown that development of regional utilities for rural water and sewer systems is a long-term process. Agreements are often reached only after ANC10011E7D.WPS 4-4 considerable efforts to gain the confidence and support of the customers served by the proposed regional utility. In addition, there must be political support for the regional utility, both for ensuring its eligibility for grant funding and for support from assistance agencies such as PHS. Village Meetings NANA should begin building its coalition with a series of local meetings or conferences. The first series of meetings should be in the villages that may be served by the regional utility. These village meetings should be preceded by coordination with the city councils and administrative staff to introduce the regional utility concept and secure sponsorship by the village councils for presentations within the individual villages. Village meetings to introduce the concept would be public meetings during which the concept would be presented and public input recorded. One key element for these meet- ings in the villages is identification of a limited number of individuals who could speak on behalf of individual villages on the issue of regionalization. While the public input process must be open to all, it will be facilitated if there are spokespersons who can carry the voice of the villages to other meetings on regionalization. Interagency Meetings In addition to local public meetings, the concept must be introduced to the agencies that have an interest and/or role in rural sanitation within the region. Parties that must be included at the table are the Northwest Arctic Borough, Public Health Service, Manillaq, Alaska Village Safe Water, Alaska Village Electric Cooperative, Cominco Alaska, City of Kotzebue, and legislative staff from the offices of Representative McClain and Senator Adams. Other funding agencies, such as Farmers Home Administration, Housing and Urban Development, and the EPA, should also be invited to discussions on regionalization. The following paragraphs suggest topics that should be addressed with these agencies. Northwest Arctic Borough. The Borough has not assumed a regional role in rural sanita- tion in the past, except to administer and support the LUMP program. They will have information on the success of that program that will be useful in efforts to pursue opera- tions subsidies from the state and/or federal government. Early discussions should allow an opportunity to confirm that they do not wish to assume a role as administrator of a regional utility. Public Health Service. Discussions with PHS will necessarily include alternatives for integrating their efforts into the operation of the regional utility. Options include contin- ued efforts to provide operator training and assistance directly through PHS, loaning PHS staff to the regional utility, or transfer of funds used by PHS for these efforts to the regional utility. ANC10011E7D.WPS 4-5 Manillaq. If NANA assumes a key administrative role, Manillaq is well positioned to apply for funding assistance and expand its current operations assistance and training program role. Discussions with Manillaq should address how they can secure operations funding to bridge the revenue shortfall gap for the regional utility. In addition, Manillaq should be developing and presenting proposals for how it can become a more effective component in regional utility operations. Coordination and integration with PHS, VSW, Alaska Water Management Association, and private programs for operations training in the state can be considered. Alaska Village Safe Water. At least two items need to be worked out with VSW. One is the continued support of the RMW Program through Manillaq. Ideally, these funds will be transferred directly to the regional utility for use in operations assistance. The other item to confirm with VSW is continued eligibility of the communities served by the regional utility for state capital improvement project funds. Alaska Village Electric Cooperative, Local Phone, Cable Television, and Bulk Fuel Distributors. These utilities should be contacted and requested to consider participation in a regional utility. Cominco Alaska. Cominco Alaska should be asked to consider participation in the regional utility. The following are possible roles for the company: ° Utility operations at the port site and mine site by employees of the regional utility ° Expansion of their SCADA program to monitor and/or control the perfor- mance and operation of village utility systems within the region ° A formal expansion of their generous past efforts to provide operations assistance for communities within the region City of Kotzebue. The City should be presented with options for their participation in the regional utility. This should be followed by meetings in which the City is given the opportunity to respond to these options. Alternatives for operation of the regional utility must be prepared that assure the City that the level of service now provided to its utility customers will not deteriorate nor be subject to higher operations costs, and that customer service charges will not rise. (This same representation may be prepared for other com- munities participating in the regional utility.) State Legislative Staff. The legislative representatives for the region must be kept informed of efforts to form a regional utility. The legislature can be instrumental in sup- porting the regional utility through operations support programs. Federal Funding Agencies. The regional utility must have assurance from federal funding agencies that it, or the individual communities it serves, will be eligible for grant programs for sanitation system upgrades and improvements. Discussions should also be initiated ANC10011E7D.WPS 4-6 with the EPA on the availability of grant funding to support the development of a regional utility within the NANA Region. EPA has long recognized the usefulness of regionali- zation as a means of improving utility performance and service. EPA may consider a request for grant funding for regionalization in the NANA Region. Development of a Business Plan for the Utility Once consensus has been secured supporting the regional utility, the next step is the devel- opment of an operating business plan. The plan must address the following issues: ° Definition of utility services provided by the regional utility, including where, what, and how ° Operations management structure for the utility; the organization chart for the utility, including individual job descriptions, responsibilities, and chain of command pat ° Financial performance projections of the regional utility, both near- and long-term, that identify anticipated income, expenses, and assumptions e Development of a Utility Operations Plan. Elements of this operations plan j will include the following items: - Business accounting and invoicing procedures and equipment to be used 5 - Negotiation for purchase of bulk consumables - Identification of needed operating equipment purchases and a pur- ' chasing schedule - Standardization program for parts and equipment - Acquisition of office and storage space - Establishing communications between the sites served, use of tele- metry, fax, telephone, and electric bulletin boards - Initial operations staff - Continuing operator training and certification programs - Establishing routine O&M schedules and procedures ANC10011E7D.WPS 4-7 - Monitoring and reporting procedures - Detailed inventory and evaluation of utility assets - Identification and scheduling of minor maintenance projects - Identification of major capital improvements, funding sources, and an implementation schedule for such improvements - Annual internal auditing procedures Once the business plan is compiled, the regional utility’s governing board can review it and either approve the plan for implementation or require that it be modified to suit the needs of the board. The draft plan must also be submitted to the Alaska Public Utilities Commission for review and approval. Once approved, the business plan becomes the guide for operation of the regional utility. The plan is subject to periodic review of the board (typically annually), at which time the financial performance of the utility is also reviewed. Changes in the direction of the utility can be made at that time. Summary Regionalization can improve the reliability and financial viability of utility service for neighboring communities in rural Alaska, including those in the NANA Region. The benefits of regionalization are derived from the opportunity to share resources and to make use of a larger revenue base to procure services and equipment to serve the entire region’s utilities. The most likely forms of a regional utility to serve rural Alaskan communities are either contract operations or a non-profit cooperative utility. Privatization as a regional utility structure in rural Alaska is not practical because of the generally poor financial perfor- mance of the region’s utilities, and because grant funding for utility capital improvements is not available to private utilities. There are, however, several overwhelming obstacles to the formation of a regional utility. One significant problem will be the revenue shortfall under which most outlying village utilities within the region operate. On the basis of existing community utility financial performance, Kotzebue, Noorvik, and the Red Dog Mine are the only water and sewer utilities within the region that collect sufficient revenues to cover expenses. Excluding Kotzebue and the Red Dog Mine, the region’s combined revenue shortfall for the water and sewer utilities is approximately 28 percent of annual operating expenses. Projections of a regional utility’s annual operating expenses were made on the basis of a utility consisting of the seven community utilities with the largest revenue base (not includ- ing Red Dog). Under either contract operations or a non-profit cooperative, the cost ANC10011E7D.WPS 4-8 savings achieved with shared administrative costs and economies in operations are not large enough to offset payment of labor benefit packages, costs of regional management, administrative staff, and technical support. Coincidentally, under the assumptions made for the comparative analysis, both these regional utility structures would incur annual operating expenses approximately 28 percent higher than the cumulative annual expenses of the seven individual, independently operated, community village utilities. It appears that a regional utility would not improve the revenue shortfall for the region, but would improve the performance of the area utility systems. If a regional utility is to be formed, the first objective must be to bridge the existing revenue shortfall in the region. Options include raising utility rates, improving collections, considering other utilities within the regional structure (other than water and sewer utili- ties), or securing subsidy funding for utility operations such as an extension of the LUMP program. If the revenue shortfall issue cannot be resolved, efforts to develop a regional utility should not be carried further. In addition to a projected revenue shortfall, another obstacle that must be addressed in the development of a regional utility is building a consensus among the potential participants. This is often a lengthy process consisting of several meetings with candidate participants and agencies. These meetings are structured to introduce and discuss the concept and to work out mutually agreeable solutions on the format, structure, and operation of the regional utility. A facilitator who has had experience with formation of regional utilities can answer questions and address issues that commonly arise during deliberations on regionalization. Once operational funding for the regional utility is resolved and there is consensus on forming the utility, a business plan can be drafted. The business plan that documents the details of the utility’s operations and financial management is distributed to the participants of the regional utility for approval. The final approved plan would be the basis for opera- tion of the regional utility. ANC10011E7D.WPS 4-9