Contact: Mr. Tom Hall, City Manager, The City of LaGrange, P.O. Box 430, LaGrange, GA 30241, T: 706/883-2010, F: 706/883-2020
Description of Effort
The City of LaGrange is the regional water provider for the city, some of the unincorporated portions of Troup County, and areas in Meriwether County including the City of Greenville. LaGrange is a midsize, heavily industrialized, community located in west, central Georgia with a population of approximately 27,000. About 65-70 percent of the water consumed in LaGrange is sold to industry.
Like many communities in Georgia, water is the key to the growth and economic future of LaGrange. The city’s source of water is the 26,000-acre West Point Lake. Water quantity is currently not an issue, although the water allocation formulas coming out of the tri-state water compacts could affect the lake level and withdrawal permits.
In the late 1980’s, the city realized additional treated water capacity to support growth was needed. In 1991 LaGrange made significant investments in a new wastewater facility and an upgrade to its water treatment plant, which has triggered problems for the city. Expansion of the system’s capacity was absolutely critical and an important investment, but it was a substantial financial commitment for a community the size of LaGrange.
A water and wastewater system is a capital-intensive business made up largely of fixed costs. The economics of running a system necessitates a minimum service threshold to cover the expense of operating facilities and servicing debt. LaGrange had to increase rates to cover its financial investment in providing additional capacity. However, immediately after the additional capacity was put into place, system demand declined nearly 25 percent in response to the higher rates, while the cost of running the system did not change appreciably.
Managerial Considerations
In 1984, the city built a wastewater treatment plant at a time when the federal government subsidized 75 percent of the cost of such projects. Because federal policy prohibited financing excess capacity, the facility was built to treat a maximum capacity of 8.2 million gallons per day (mgd), only 1.2 mgd over its then current usage of 7 mgd. Within five years the available excess capacity was gone and the city was under a sewer moratorium.
In 1991, the city approached the decision to build a new wastewater treatment plant to remedy the moratorium and to address capacity needs. City officials met with industrial customers to ask if there was some way industries could reduce water consumption with a corresponding reduction in sewer usage. The industries, about 65 - 70 percent of the customer base by total use, responded that reductions in consumption was not a practical alternative due to their investment in manufacturing processes.
Since the federal government was no longer subsidizing the cost of facilities, the city went to the bond market for funding. Based on input from the industrial sector, the engineers and planners assumed that the demand for water was rather inelastic, meaning that as prices go up people would not make other decisions in their water usage. At a cost of $37.5 million, the city upgraded its sewerage treatment capacity to 12.5 mgd and its water treatment capacity to 18 mgd, both of which went into service in 1993.
The City of LaGrange decided to make the sizable financial commitment for two reasons:
being environmentally responsible was the right thing to do; and
the city wanted to invest in growth.
When the facilities were built, the city had to raise rates to service the debt. Contrary to earlier indications and predictions, city officials found that the industrial demand for water and sewer services in LaGrange is highly elastic and rate sensitive. When the rates were raised, industrial consumption went down nearly 25 percent through different water reducing processes and industrial recycling. The average daily flows at the wastewater treatment plant dropped from 7.5 mgd prior to capacity expansion and rate increases to 5.5 mgd. Correspondingly, the water facility dropped from pumping 10 - 11 mgd to nearly 9 mgd after facility expansion and rate increases. LaGrange faced declining usage with fixed annual costs.
Technical Considerations
LaGrange retails treated water to Troup County, which maintains its own distribution system but does not have a water supply system beyond some problem wells. LaGrange also delivers treated water to the county line where the City of Greenville's system distributes it in Meriwether County.
The city believes that expansion of the system is difficult because the densities beyond LaGrange at this time do not justify the capital investment in extending water lines. Because of the relationship between system size and economical function, the city must place customers within the existing system rather than extend the system to rural areas.
The wastewater treatment facility is currently permitted at 12.5 mgd, however, usage is around 5.5 - 6 mgd. The facility was designed so that capacity could be increased to 16 mgd without substantial investment through the construction of another settling basin and an expansion of the discharge permit.
An unexpected consideration in the permit approval process for the construction of this wastewater treatment facility was the requirement to pump treated wastewater 13 miles to discharge into the Chattahoochee River. Previously, the city had been discharging treated wastewater to a small creek adjacent to the facility. To comply with permit considerations, the city installed a big pump station at the cost of an additional $1 million per year in debt service and operation costs.
Financial Considerations
LaGrange has made a significant financial investment in building additional water and wastewater capacity but has not yet sold one drop of it. The $37.5 million investment breaks down to $1500 of bonded indebtedness on the sewer and water system for every man, woman, and child in LaGrange. The annual cost to service this debt is $4 million, not including the cost of operating the facilities.
To achieve a return on its investment, LaGrange has taken several steps that do not necessarily support its environmental stewardship objectives but that allow the city to sell water at something above cost. It recently adopted a rate structure known as a capacity utilization factor. If consumption is high and the amount necessary to recover the revenue required to pay the fixed monthly costs is met through billing, the per unit price of water goes down. Conversely, if consumption drops and the given rate structure will not meet the revenue requirement for the month, the per unit price of water is raised automatically. This rate structure gives customers an economic signal to use more water, providing a total disincentive for conservation.
At the same time, the city also adopted a declining rate structure for industrial customers to provide economic incentives to increase consumption. The base water rate is $1.70 for the first 25,000 gallons and decreases incrementally. Large industrial customers, on average, pay less than $1.00 per rate increment. The sewer rate is flat, about $2.70 per 1000 gallons to all customers. When 1 - 2 mgd of capacity is left in the water treatment system, the city will shift its policies toward more conservation minded practices.
LaGrange serves extraterritorially at a 50 percent rate differential to Troup County, which is under negotiations relative to the Service Delivery Strategy Act. Even at the 1.5 rate differential to the county, the city cannot afford to extend water lines to many rural areas. LaGrange also sells water to the City of Greenville, population of about 1,170, through a negotiated contract based on the cost of distribution for around $1.90 per 1000 gallons.
LaGrange is looking for ways to sell its excess capacity. The critical economic factors for the city are the cost to treat its free supply from West Point Lake to drinking water standards and the cost to deliver it. While the cost to treat water is fairly stable, the cost of delivery depends on distribution requirements.
LaGrange could sell excess capacity to serve rural customers but even with a $100 tap-in fee the expense to distribute water long distances from existing lines makes selling all of its excess capacity to rural areas cost prohibitive. Therefore, LaGrange is actively trying to bring customers to the existing distribution system by marketing relocation opportunities targeted at large water demand industries.
Outcomes
The City of LaGrange learned some valuable lessons while making its ‘to build or not to build’ decision. In retrospect, the city realizes it should have raised rates first because once a local government makes the capital investment, it will be forced to raise rates regardless of consumption patterns. This step would have allowed demand-side consumption to level out before the decision to increased capacity was made.
In addition, LaGrange sees a clear need for the federal and state governments to increase their role in helping local communities finance investments in systems to become environmentally compliant and to provide incentives for investments in economic growth. Although the federal policy has been to not subsidize the cost of capacity, to force individual communities to make investments of that magnitude provides a lot of disincentive for taking the risk.
In the long-term, the expansion of the water and sewer capacity is a good investment for LaGrange. The community cannot grow without water and over time it will sell the excess capacity by bringing business into the community; the problem is significant but short-term. |
