Water Law Blog

By Dominic Corollo

The House Subcommittee on Water and Power held a hearing adressing concerns over the impacts of invasive quagga mussels on Tuesday, June 24, 2008.

The hearing, entitled “The Silent Invasion: Finding Solutions to Minimize the Impacts of Invasive Quagga Mussels on Water Rates, Water Infrastructure and the Environment,” particularly focused on the threat the quagga mussels pose to water and power systems in the west.

The quaaga mussel is related the better-known zebra mussel.  Both species are thought to have been introduced to North America around 1988 from ballast water in ships from Eastern Europe entering the Great Lakes.  Since their introduction, both mussels have proliferated in the northern regions of the Midwest and have been documented in several western states, including California and Nevada.  Most scientists believe that quaggas have spread to new water bodies from the hulls of recreational boats.  In the right humidity and temperature range, the mussels can live up to a month out of water.

The quagga is a both a prolific feeder and breeder.  They rapidly filter algae out of the water, thereby altering the food chain and severely impacting ecosystems.  In addition to thriving off the nutrients in the water, the mussels rapidly reproduce and attach to both soft and hard surfaces, causing significant economic impact by clogging water intake structures, interfering with flows, decreasing pumping capacities, and impairing water quality.  At the hearing, aquatic specialist Dr. Charles O’Neill of Cornell University reported to the Committee that the impact of the quagga mussel has been felt across 23 states to the magnitude of $1 billion and $1.5 billion.  Dr. O’Neill explained that roughly one-half of the financial burden has been borne by the electric power generation industry, while the drinking water industry has paid out nearly one-third of the total cost. 

Researchers are still trying to develop effective methods for controlling the quagga mussel where it has already been established.  Thus, many states have implemented programs designed to increase public awareness and slow the spread of the mussel into new bodies of water.  In 2002, Oregon established the Invasive Species Council to address issues relating invasive species and the Oregon State Marine Board has a Clean Marina Program that encourages boaters to thoroughly clean their boats to prevent the transfer of invasive species between water bodies.  Fortunately, Oregon has yet to document the quagga anywhere in the state, but the mussel has already found its way into certain waters in California and Nevada. 

The quagga was first documented in the west in January 2007 when it was discovered in Lake Mead.  Since that time, the mussel has been recorded throughout the Lower Colorado system, including into California.  The Statesman Journal reports that the Southern California Metropolitan Water Authority spent $6 million last spring cleaning freshwater aqueducts of quagga mussels.

While western states are beginning to ramp up efforts to slow the mussel’s proliferation, the Committee hearing highlights just how large of a problem the mussels are causing.  Many people realize the destructive environmental effects of invasive species, but the effects the mussels are having on water systems are bringing this issue to the national level.

For people interested in learning more about invasive species, visit Oregon Invasive Species Council’s website at:   http://www.oregon.gov/OISC/ .   The Oregon Invasive Species Summit is scheduled for July 22, 2008.  To see a short video feature about the quagga mussel see the Oregon Public Broadcasting website link at: http://www.opb.org/programs/ofg/videos/view/11-Quagga-Mussles For a special report about the quagga mussel by the Statesman Journal see: http://www.statesmanjournal.com/apps/pbcs.dll/article?AID=/20080210/INVASIVE06/802100309/1034 For information regarding Oregon’s Clean Marina Program, see: http://www.boatoregon.com/OSMB/Clean/ANS.shtml

As the weather starts to heat up for the summer and water becomes scarce, many areas are affected by drought.  Fortunately, the average domestic water user can avoid being a passive victim of droughts by conserving water.  Individuals and families that conserve water will reduce their personal expenses and help their community by limiting the impact of a drought.  There are many ways a household can conserve water.  Small changes in routine in the bathroom, in the kitchen, in the laundry room, in the yard and around the house can significantly reduce water consumption.  These changes could be as simple as taking shorter showers, turning off faucets when water is not being used, and keeping track of water consumption to avoid leaks.  Click on the following link to learn 53 easy tips tp use less water.

(June, 9th 2008) Today the Environmental Protection Agency (EPA) announced a new rule excluding transfers of water from one body of water to another from the permitting requirements of the National Pollutant Discharge Elimination System (NPDES). 

The new rule stipulates that water transfer activities that do not introduce pollutants into transferred water will not be subject to NPDES regulations.  The rule defines water transfers as activities that convey or connect waters of the United States without subjecting the transferred water to intervening industrial, municipal, or commercial use. 

“The EPA’s Water Transfer Rule gives communities greater certainty and makes clear they have the flexibility to protect water quality and promote the public good without going through a new federal permitting process,” said Assistant Administrator for Water Benjamin H. Grumbles. “Clean water permits should focus on water pollution, not water movement. EPA is committed to working with our state, tribal, and local partners to reduce environmental impacts associated with transfers and will continue to use all appropriate tools such as standards, best management practices, and watershed plans.”

The new rule is meant to clarify water transfer requirements so that municipalities, irrigators and other water users that rely on water transfers are not needlessly burdened with regulation aimed at preventing pollution when engaging in water transfers that do not pollute.

In South Florida Water Management District v. Miccosukee Tribe of Indiansthe Supreme Court declined to rule in the issue of whether NPDES permits were required for water transfers.  In the face of this uncertainty, the EPA issued an interpretive statement in 2005 explaining that Congress intended water resource-management agencies and other state authorities to oversee water transfers, not the NPDES permitting program.  This rule codifies that position.

The Oregon Water Resources Commission received staff guidance and public comment on a number of issues during a May 30 meeting in Burns, Or, including an aggressive budget proposal by the Water Resources Department for the 2009-2011 biennium. 

The overwhelming focus of the budget proposal was on the $50 million dollars the Department proposed for funding Water Conservation and Supply Infrastructure.  Senate Bill 1069 directs OWRD to establish a grant program for both planning studies and project development.  As part of this program, the Commission and the Department have begun to formulate an Integrated Water Conservation and Supply Strategy.  While the program is still in its infancy, the Department expects the need for project implementation to occur soon.  Thus, they see the $50 million as necessary seed money to begin a grant program for funding projects such as the Umatilla Basin Aquifer Recovery Project.

The budget proposal prompted several public comments.  Both the WaterWatch of Oregon and the Nature Conservancy had concerns with moving forward on any projects before more studying and planning was able to proceed first.  However, the Special Districts Association of Oregon and the League of Oregon Cities both came out in support of the proposal.  They agreed with the Department that the Commission should not delay in moving forward with the project component of SB 1069.  The Commission will decide whether or not to support the budget request later this year.  If approved in total by the Legislature, the Department would see their budget triple from the $32.3 million allocated in the current biennium to $95.9 million for 2009-2011. 

The Commission also voted to adopt rules establishing special well construction areas for Eola Hills Ground Water Limited Area and Pete’s Mountain Area.  The Department received substantial public comment on the matter and ultimately decided to require at least a six-inch diameter casing on all new wells and a 3/4-inch dedicated measuring tube in all water supply wells at the time of pump installation or repair.

Lastly, several local groups took advantage of the remotely-held meeting and updated the Commission on a few issues in the region.  The Owyhee Irrigation District shed some light on a unique situation developing in the far southeast corner of the state.  In particular, the District is concerned about efforts by the Shoshone Tribe to shore up treaty rights to water in Nevada that the tribe had previously failed to develop.  The Owyhee flows through Oregon, Idaho and Nevada and the states do not have an interstate compact governing the allocation of the system’s water.

A representative from the City of Bend also participated in the public comment session and echoed support for funding Conservation and Supply Infrastructure.  

The Oregon Water Resources Department (OWRD) committed to initiate a rulemaking to address concerns by well drillers and contractors over potential liability for well alterations under current OWRD policy.

OWRD’s historic policy allowed well alterations without automatically requiring that the entire well be brought up to current construction standards.  However, recent Department policy now requires a contractor undertaking a well alteration to either bring the entire well up to code or submit a “Special Standard” for the Department to consider.   This policy shift has prevented contractors from performing certain well alterations for fear of taking on liability for contamination risks of the entire well, irrespective of the scope of the alteration performed. 

In attempt to remedy this problem, Schroeder Law Offices drafted a petition for rulemaking on behalf of the Oregon Ground Water Association (OGWA) that proposed to allow well alterations without requiring well constructors to address the well’s overall compliance with construction standards.  It would have also limited liability for well alterations to the work actually performed, rather than the entire well.  While the Commission denied the petition in a meeting in Burns on May 30, OGWA member testimony from Floyd Sippel and Paul Christensen helped persuade the Commission to require that OWRD draft a rule addressing OGWA’s concerns for approval at the fall Water Resources Commission meeting.

Department staff initially informed the Commission of their intention to begin drafting a rule that would be adopted no earlier than 2009.  However, it was clear that well drillers’ testimony concerned the Commission, prompting the OWRD Director, Phil Ward to suggest a timeline that will hopefully result in rule before the end of the year.

Interested parties should expect the Department to issue a notice of rulemaking sometime this summer.  Further comment by OGWA and others will likely be necessary to ensure that contractors are protected.

Retired Reclamation Commissioner John Keyes passing is sad news. I first “engaged” Reclamation with John at the helm in the Boise Regional office in 1992 when working for the Teel Irrigation District. We were dealing with issues surrounding “water spreading” then making headlines in the Umatilla Project by Water Watch of Oregon. Over the years, we kept in close touch on various Reclamation issues. Most recently, John assisted me in obtaining a position with the USAID working in Armenia. He was a southern gentleman in the best way. Kind and considerate always interested in a balance between what was best for the individual as well as the public. He told me that retirement to him meant a chance to spend more time flying.

The recent draining of Roslyn Lake could pose potential problems for nearby homeowners that have relied on leaks from the lake to augment their shallow wells.

The manmade lake was scheduled to be drained for some time as a necessary step in decommissioning Marmot Dam on the Sandy River. PGE warned 22 homeowners that their wells would likely be affected, but the Oregonian reports that as many as 60 could see their wells dry up. PGE denies responsibility for any costs associated with having to drill deeper wells; cost that could reach $20,000 to $30,000.

Many residents feel that they were underrepresented in the administrative process leading up to the decision to drain Roslyn Lake. Certainly, this issue appears to have received little attention.

Unfortunately, injured residents that failed to comment on the removal project could have difficulty litigating this matter. However, with the trend of decommissioning diversion dam systems similar to Marmot, the situation serves as a reminder to rural homeowners to familiarize themselves with their water rights and the vulnerabilities of their water systems.

For the Oregonian’s account, see: http://www.oregonlive.com/

     The Oregon Water Resources Congress (OWRC), the Washington State Water Resources Association (WSWRA) , and the Idaho Water Users Association (IWUA) met in Spokane Washington on May 16, 2008 for the first of three Tri-State Meetings to be held this year.    

 OWRC, WSWRA, and IWUA are all organizations which promote the protection and use of water rights for its members though legislative action and policy development. The memberships of these organizations are primarily irrigation districts, canal companies and other special districts which supply or control water for agricultural use.    

The next Tri-State meeting will be held in Boise Idaho in August followed by a November meeting in Portland Oregon. To learn more about these organizations and their members go to:

OWRC: http://www.owrc.org/
WSWRA: http://www.wswra.org/
IWUA: http://iwua.org/

Focusing on the soon to be launched adjudication in north Idaho, water and real estate lawyers gathered in Coeur d”Alene, Idaho May 15 and 16, 2008.

As in other McCarran adjudications in which we are involved, issues expected to be included will be federal including Indian, Forest Service and Reclamation issues; instream including hydro, water quality, and endangered species issues; and state issues including municipal, water district, and individual claims. It is likely that in all adjudications, the best water attorneys will be picked up early and conflicted out quickly. Speaker Steven C. Moore, a staff attorney for the Native American Rights Fund out of Boulder, Colorado, quoted Professor Drew Kershen at the University of Oklahoma College of Law stating “A good water rights case can be willed to your kids.”

We suggest that our clients and potential clients contact us early to prepare and review potential claims BEFORE the claim is filed.

The Federal Court made its decision on the jurisdictional question by sending the case back to Lyon County District Court last week. See http://www.kesq.com/Global/story.asp?S=8229832 for more information.

Interestingly, many farmers have still not received water that is due to them as insufficient flows continue in the Truckee-Carson Canal. Crops are being stressed and damaged.

Many meetings are taking place in Fernely and Fallon with the Bureau of Reclamation to help resolve these issues. Obviously, if enough water is not diverted from the Truckee River over to the Carson River via the Canal, the amount of water allocated to Fallon side water users in the project, as well as those in Fernley will diminish. With the “water year” already at 90% of the allocation, there may not be enough water to fulfill the allocation if Truckee water is not available.

We encourage your attendance to voice your concerns at these meetings! The next meeting is scheduled for Thursday, May 1, 2008, from 6:00 - 9:00 PM at the Lahontan Elementary School, Multi-Purpose Room,1099 Merton Drive, Fallon.

Storage capacity is obviously an important aspect of any municipal or domestic water supplier’s system. Increased storage capacity does any number of things for a water provider, including reducing the strain on equipment during summer peak demand times, increasing a water provider’s day-to-day flexibility, and providing for water during times of emergency.

We recently attended the ground breaking ceremony for South Fork Water Board’s new 2 million gallon reservoir. The excavation equipment was truly impressive, and the project should be fun to watch as it progresses over the summer. Present at the ceremony were South Fork Water Board Chair and West Linn Mayor Norm King, South Fork Water Board Vice-Chair and Oregon City Mayor Alice Norris, South Fork Water Board General Manager John Collins and staff, and the engineers, consultants and contractors overseeing and constructing the project.

In the aftermath of the January 2008 flood after the Truckee-Carson Canal break, many lawsuits have been filed.  These suits have been filed in both state and federal courts in Nevada and present many questions as to which Court holds jurisdiction to hear these issues.  Proper jurisdiction depends on the parties to the lawsuit as well as the subject matter of the action.

Recently, an action for an injunction to stop certain amounts of water from flowing down the Truckee-Carson Canal was filed for fear that the higher water levels and amounts of water would cause additional damages to them and potentially cause another ditch break.  While this action was limited to the parties involved and served in the pending lawsuit, this caused an uproar by Newlands Project water users.  Many users have contemplated intervening in this action as the reduced amount of water going over to the project has and will directly affect project water deliveries to the users on the Canal itself, and downstream in the project.

The action for an injunction has questionable subject matter jurisdiction because it was not filed with the Decree Court that administers the water deliveries affected. How can a Court that does not have subject matter jurisdiction of the waters affected make any affective order?

The Alpine and Orr Ditch were Decreed in Federal Court and that court retains jurisdiction to administer the Decree that defines exactly how much water each user is entitled to receive and where that water is to be delivered.  Thus, presumably an action to limit the amount of water delivered down the Canal should be brought in the Decree Court.  The problem is that those seeking the injunction may not have standing in the Decree Court because they have no water rights issued by the Decree Court.

An interesting question still to be decided.

Guest post by James Carver

I’ve worked for over thirty years in the field of water law in the office of the State Engineer and the Water Resources Department.  During those years I served as head of the Water Rights Division and later as Deputy State Engineer under Chris Wheeler.  I also presided over administrative hearings pertaining to water law for the State Engineer and his successor, the Director of the Water Resources Department.

Around the turn of the 19th century, Oregon saw a need for a system to document water use.  Recognizing that an orderly system for recording and prioritizing water rights would be necessary as water uses grew, the legislature, in 1909 adopted Oregon’s first comprehensive water code.  The code held priority and beneficial use as the standard for distributing water to growing agricultural and domestic needs.

Over the years, the Oregon legal system has fleshed out the scope of water rights and defined them as property rights akin to land.  The Oregon Supreme Court concluded that a perfected water right is a property right and an appurtenance to the real property on which it is used.  The legislature has also recognized new practices that satisfy beneficial use.  These include leaving water instream to ensure minimum stream flows exist to support various fish species.

Unfortunately, there is now a growing movement to distribute water based on a public benefit analysis without regard to priority.  Believers in this new distribution system argue that water rights holders have been given access to public water without a requirement for payment in return.  Therefore, they should be subject to losing the water if it is needs for the public good.  Since users never “owned” the water, it can be taken from them without compensation.  However, there are major drawbacks to such as system.

A water distribution system constantly subject to alterations based on nebulous concepts, such as the public good, will likely result in a great devaluation of land with water rights attached.  For example, lending institutions will become more hesitant to finance projects involving water because the water on which the project is based may disappear without compensation if the state decides the public good is better served by taking it.

The doctrine of prior appropriation is well established in Oregon and any departure from the current system may carry with it economic consequences that far outweigh possible benefits gained from applying more water to uses in the public good.

While irrigation districts formed under ORS 545 have no specific authority to accept municipal storm water or to convey that water, many irrigation districts have allowed near by cities to use their irrigation ditches and agricultural drains for storm water runoff. As urbanization continues to increase, the demand on the districts’ canals has reached new heights. Increased demand coupled with more environmental concerns and regulatory oversight have caused many districts to re-evaluate allowing use of their irrigation canals or agricultural drains for accepting urban, suburban and municipal drainage. Recently, the Pioneer Irrigation District initiated a lawsuit against the City of Caldwell Idaho to prevent the City from dumping municipal storm water into its irrigation canals.

From a City’s perspective, utilizing the existing delivery and drainage infrastructure is an attractive prospect. From the district’s perspective, allowing a city to use its canals requires consideration of the legal, financial and political issues that may arise. First the district must consider whether it may even accept the storm water pursuant to its authorizing statute and pursuant to it’s organizational by-laws, rules and regulations. Second the district must consider the impact the storm water will have on its users and the quality and quantity of water in its canals. If the district determines it may accept the storm water, it is imperative the terms and conditions of the city’s use of its canals and drains be specifically detailed in a storm water contract or other intergovernmental agreement. Many times these agreements can be a benefit to the district by increasing the financial resources of the district. Schroeder Laws Offices, P.C. can help districts consider these factors and make these determinations and agreements that will protect the district’s interests.

An historic agreement has been reached in a dispute over water in the Rio Grande Project. It has taken 29 years in a process stagnated by several lawsuits to prepare an operating agreement negotiated between the Bureau of Reclamation, Elephant Butte Irrigation District (EBID), and the El Paso County Water Improvement District No. 1. No previous operating agreement has been signed by either of these districts. Rather, they have been complying with the Bureau’s requests and procedures on a yearly basis. In working to negotiate the new operating agreement, EBID used the “Managing for Excellence” report prepared by the Bureau of Reclamation to guide settlement discussions.

The Managing for Excellence Plan was created in response to a comprehensive report regarding the Bureau’s construction and infrastructure, prepared by the National Research Council and the National Academy of Sciences. Ultimately, the principles outlined in the Managing for Excellence report helped to develop an agreement which aims to increase transparency, cost effectiveness, and efficiency while allowing irrigation districts some independence in their operation. The agreement will also allow regional issues to be addressed and will allow for carryover of conserved water to be stored in project reservoirs on a yearly basis, promoting recreation and allowing upstream storage of water. The agreement is notable not only for resolving this long standing dispute, but also for establishing an interstate agreement between New Mexico and Texas, which could be used as a model for other states.

To read the full operating agreement visit http://ebid-nm.org/static/pdf/opag/opag.pdf.
To learn more about other water issues like this visit the Family Farm Alliance at http://www.familyfarmalliance.org/ and click on the Water Review Link.

Armenia’s Public Services Regulatory Commission (PSRC) has suggested that new operator contracts with Yerevan Water require provisions requiring audit controls. Given some commentator’s thoughts on the management failures of the present agreements this request is not surprising.

Providing contract requirements for audits is not uncommon. However, determining what audit level is appropriate for a domestic water utility management contract is not easy. Regardless, it is a necessity. Comprehensive management audits can cost upwards of hundreds of thousands of dollars so selecting appropriate management criteria to limit output is critical to obtaining a true picture of management. As Armenia moves forward with new contracts between the Joint State-Controlled Stock Companies, it will be interesting to note, not if, but what auditing mechanisms will be selected.

The government of Armenia is inaugurating a new president on Wednesday, April 9, at 2 in the afternoon. Large crowds are expected in the downtown area in connection with the official events, which will include a military procession through Freedom Square and evening festivities at Republic Square.

It is not expected that much dramatic change will occur in Armenia with the inauguration. However, the Presidential election process, has substantially delayed our efforts to complete the revisions to the water code and place it before the legislative assembly for adoption.

In addition to the process delay, the State Committee has “filibustered” revisions to the water code involving sections of the water code related to dam inspection and safety, the transfer of the water system use permit, and the authorities of the Public Services Regulatory Commission (PSRC) as to the issuance of the water system use permit (WSUP). The WSUP permit is issued in Armenia to those operators who hold management or lease contracts with the State Committee acting through a joint stock company for operations of the water system. In most cases, the joint stock ownership is 51% to the State Committee and 49% to the local government “owning” the water system facilities.

Thus, the State Committee does not want revisions to the Water Code that would make it “beholding” in the sense of WSUP requirements or conditions for system inspections, control of tariff setting (and therefore “income” to the Operator), or other regulatory controls necessary to protect the public that the PSRC would hold if the water code revisions were adopted. If the State Committee continues to “filibuster” these changes, a ministry level committee is in charge of resolving any remaining issues to the revisions. This committee is scheduled to meet April 18th.

Armenia’s current water code requires a water system use permit (WSUP) without exception for any system of facilities. The WSUP is issued by the Public Services Regulatory Commission (PSRC). It has been suggested municipalities and small community water associations that own and operate their own domestic water delivery system should be exempt from the requirement for a WSUP. The major reason for the exemption would be to prevent dual regulation, ie regulation by the locals and also by the state through the PSRC. In addition, where access to the local person operating the water system can be made by “visiting with the neighbor across the street”, consumer and often times operator are one and the same. In such circumstances over arching state regulation is not required.

Since the PSRC has not enforced the WSUP requirement against the locals, the need for changes in the present water code may be overlooked at present. The real reason in fact may be that very few local delivery schemes exist (except rurally). Armenia’s urban population receives water services by conveying their water facilities to the State in return for a 49% in a joint stock company controlled by the State which owns a 51% share. The stock company then contracts with a third party operator for water services.

These Company-Operator contracts are “issues of public importance.” As such, the Prime Minister of Armenia appoints a Commission to develop and approve these contracts. Since the Yerevan Jur contract is up for tender in October 2008, it is expected that a Commission will be appointed soon. This Commission may well set the stage for the four other water companies who exist in Armenia who will also need new tenders in the near future. This process of developing the new contract for Yerevan Jur may well set the stage to move further into water sector privatization or not.

Development of public owner-private operator contracts in the water sector is largely a reflection of the extent of private sector participation. International literature on the subject generally describes the various forms of these Private Sector Participation Contracts (”PSP contracts”) as (1) Service contracts; (2) Management contracts; (3) Leasing contracts; (4) BOT type contracts; (5) Concessions; and (6) Divestiture under license (BOO) arrangements.

An article entitled: Guidelines for Performance-Based Contracts between Municipalities and Water Utilities in Eastern Europe, Caucasus and Central Asia (EECCA) provides a very good summary of these contracts. Excerpts from this article are provided below:

In a service contract the private contractor provides agreed services to the public authority under the public authority’s general control and supervision. Service contracts are a potentially beneficial form of PSP where there is strong political or community opposition to wider involvement of the private sector and if there is opposition to water tariff increases which are generally required for many of the other forms of PSP (e.g., lease contract).

A management contract is a more comprehensive form of service contract, under which the public authority appoints a private contractor to manage all or part of its operations. Under such contracts, the bulk of the commercial risk and all the capital and investment risks remain with the government. These contracts are useful if the core objective is to increase a utility’s technical efficiency for performance of specific tasks. If management contracts include clauses which link the contract payments to utility performance, they come closer to the lease and concession arrangements [footnote]. Like service contracts, management contracts can lead to improvements in service for those customers who are connected to the network but they provide little potential for improved access by those potential customers who are not connected to the network. Management contracts are a potentially beneficial form of PSP when there is strong political or public reluctance to water tariff rises or there is concern about handing over more control to the private sector. Management contracts may also be the preferred approach if potential private sector investors consider that the risks associated with a higher level of private involvement are currently too high. If this course is followed, the government can seek to address some of the risk factors over the duration of the contract. For example, the government may implement changes in tariff and regulatory structures to facilitate a greater preparedness for private sector risk taking in the future.

Under a lease contract, a water utility leases the full operation and maintenance of its facilities within an agreed geographic area to a private operator for a period of time, say, ten years. The contract grants the operator the right to invoice and collect charges from customers within that area. The public utility would own the assets and remain responsible for major extensions and upgrades. The operator would be consulted on all major works, especially when the continuity of service is involved, and may participate in tender evaluation or submit its own tender.

Under a best practice lease contract, the private operator would take the full commercial risk on all operations within its lease area, with its remuneration directly linked to the charges it collects from customers. From these charges, it would pay the public utility a rental fee intended to cover the public utility’s capital costs in extending or upgrading the facilities.

Under a lease contract, the operator is usually required to finance the renewal of plant and equipment. At the termination of the contract, the government would compensate the operator for the works it had financed that had not yet been fully amortized.

The management of such works (preparation, procurement, and supervision) would be the operator’s full responsibility. Best practice lease contracts have built-in incentives that encourage the private operators to:

• Update customer files and implement efficient collection procedures to improve the collection ratio from customers (including government agencies);
• Implement an aggressive commercial policy aimed at servicing more customers to increase the revenue base;
• Reduce operating costs to maximize profits;
• Carry out regular maintenance to increase the reliability of plant and equipment and postpone their renewal; and
• Make decisions, not only on day-to-day management issues, but also on improvement of the facilities for which the operator is responsible.

Build-own-operate-transfer (BOOT, a.k.a. BOT or ROT) schemes are an adaptation of leasing contracts specifically designed for investments in water infrastructure which require extensive rehabilitation. Under these arrangements, the private sector typically designs, constructs and operates facilities, and provides services to municipal or government owned water utilities. Generally, any existing underlying assets are leased for a limited period, often 15 to 30 years. Contracts should be designed to allocate risks between the private operator and the public utility, preferably according to capacity to manage and minimize risk.

In contrast with lease contracts, BOT type contracts allocate much more of the commercial risk for specific projects to private parties rather than governments. They can also provide a relatively quick method for mobilizing project based non-recourse finance for new capital investment in developing countries, particularly where capital markets are poorly developed.

BOTs are generally production or bulk supply focused. Such bulk supply investments cannot deal with the major problems of high unaccounted-for-losses in water distribution systems. Nor do they allow private operators to seek out new customers and expand their operations where it is commercially viable. In general, BOTs are not likely to remedy a utility’s faulty (leaking) distribution system or its poor collection processes.

BOT schemes, because they do not involve management of distribution systems down to the household or business meter, are easier to implement than more comprehensive private sector models such as retail concessions, which require more extensive negotiation of contracts. In economies with poorly defined regulatory and legal structures and emerging capital markets, BOT schemes can be implemented relatively quickly and provide a building block for subsequent PSP in the rest of the distribution system.

Effective implementation of BOT/ROT type contracts requires careful attention to the design of tender documents and can involve a relatively lengthy bidding process. Experience with some BOTs shows that they have achieved some savings in capital construction costs and facilitated more rapid investment in infrastructure. However, they can also have a downside in that they can be an expensive way of substituting private debt for public debt, if there is an expensive take-or-pay contract for sale of bulk water to the retail utility.

Many BOTs have failed to deliver optimal outcomes for government or consumers. This is because the government’s agency responsible for negotiating allowed too much of the risk to remain with government - especially where (foreign exchange) guarantees on commercial risks are provided or where take or pay contracts are signed. On the other hand, private operators will not submit bids for BOTs if they feel that the government has attempted to transfer too much risk to the private sector.

Concession contracts combine elements of operation leases for existing assets and BOT contracts for major rehabilitation investments. Under concession contracts, a private operator is given a contractual right to use existing infrastructure assets to supply customers.
However, the concession contract also includes obligations to finance extensions and upgrades to the existing water supply. This tends to result in concession contracts being of longer duration than lease contracts to enable the operator to recover its capital and financing costs.

Management of all capital extensions and upgrades, as well as normal maintenance, is often entirely the responsibility of the operator. Procurement, in particular, could follow acceptable commercial practices that are often different from those required of public agencies.

In comparison to single project BOT type schemes, concessions leave greater flexibility in the hands of the operator in determining the nature and timing of the investments they make to achieve contractual supply obligations. Typically, under a concession agreement, the constructor and operators also are given
the right to supply retail services direct to customers.

For some water supply networks, for example those spanning an entire state or large city, it may also be possible to have a number of concessions operating at the one time. This would have the potential advantage of enabling government to compare the performance of concessionaires, to assess the price and quality of their services, and to evaluate the adequacy of investment programs for meeting community needs. There may also be potential to allow some level of competition between concessionaires, say, for large commercial customers using third party access arrangements.
The rights to provide services under concession arrangements can be awarded through a process of competitive tendering for the concession contract or through direct negotiation. An advantage of competitive bidding for concession contracts is that it limits the scope for monopoly pricing, and thereby avoids the requirement for heavy-handed industry regulation. However, there can be trade-offs when the competitive bidding process determines the successful tender with reference to the lowest supply price to consumers. This is because low prices are not always conducive to efficient demand management of the water resource. If the competitive bidding process involves a range of quantitative variables, such as reductions in unaccounted-for-water or increased use of meters, the selection process becomes more complicated as these qualitative variables are likely to differ between bids.

Thorough preparation and negotiation of scopes of works are required for all concessions to prevent experienced concessionaires extracting advantageous terms. Again, as in BOT contracts, care must be taken not to transfer too much risk to the private sector or they will not bid. In all cases, the regulatory framework for the concession will be important in determining its success.

PSP in infrastructure can also be achieved through the direct sale of infrastructure assets to the private sector. Private ownership of assets may be achieved through either 100 percent private ownership or JVs with public sector corporations. In either case, government retains the regulatory role.

Divestiture can be by way of sale of assets, sale of shares or management buy-out. Like divestiture, BOO contracts require removal of constraints to private sector entry in the water sector and the introduction of
competitive market structures or regulation by government.

In a full divestiture or BOO arrangement, the private sector has full responsibility for operations, maintenance, and investment in a utility. In contrast to a concession, these arrangements transfer assets to the private sector. In a concession, the government continues to own the utility’s assets and is therefore responsible for ensuring that the assets are used efficiently and, in particular, returned to the government in the appropriate condition at the end of the
concession period. Furthermore, the government needs to ensure customers are protected from poor service and monopolistic pricing.

Under divestiture or BOO, it should be the private company’s concern to operate, design and maintain the asset base. The government, on the other hand, would concern itself with the regulation of the water utility, which commonly involves a license to operate a water supply system.

Although the private company has ownership of the water supply assets, these arrangements do not necessarily mean permanence. Typically, the government only allows the right to supply water under an operating license. This license can include a clause that permits its revocation or a not to renew clause. Thus, certain experts claim that the difference between a traditional fixed term concession and indefinite divestiture with a license may not be as significant as it might first appear.

Footnote: Guislain, Pierre (1997), The Privatization Challenge: A Strategic, Legal and Institutional Analysis of International Experience Washington DC: The World Bank.

In Armenia, domestic water supply and sewer services are supplied either by local municipalities or State owned stock companies. There are five State owned stock companies in Armenia, the State owns 100% of the shares in Armenian Water, Nor Akung and Yerevan. The State owns 51% of the stock in Lori and Shirak while the other 49% is owned by the local government (Marz or County).

Two private operators exist in Armenia: (1) “SAUR” SA Company (France) which operates pursuant to a management agreement with Armenian Water; and (2) Veolia dba as Yerevan Jur (Armenian Company) operates Yerevan through a lease of assets.

Interestingly, many commentators have noted that water facility ownership is in a state of confusion. Understandably so. When Armenia declared its independence from the Soviet Union some 15 years ago, ownership became a question as to all of the “commons” including large apartment buildings, collective farms, and water facilities.

Since little capacity existed then (and now) locally, the State initially took ownership of these “commons.” Eventually, the ownership of apartment buildings and collective farms was divided by a combination of “historical use” and a lottery. Unfortunately, this division failed to identify the ownership of any remaining “commons” such as the water and sewer pipes in the apartment buildings. This same confusion carried forth to local water delivery and sewer systems where local governments were either non-existent or without sufficient capacity to manage and operate these facilities.

Solutions are not easy. After 15 years the State is invested in maintaining its “ownership.” The State cites its need to retain control because local governments continue to lack capacity, particularly in the ability to finance any large scale improvements, repairs, and even in some cases, the day to day operations and maintenance. The State’s argument is compelling.

One report issued in conjunction with the State suggests that moving toward privatization of all water facilities is the answer to the financing issue. However, such privatization in this case means to turn over the ownership of Armenian water facilities to French companies. It is also requires that ALL water services will be delivered via private companies. While there is no doubt that the French companies have capacity to manage these water systems, there are many public concerns particularly as to consumer cost.

The State’s report in support of its privatization conclusion makes an all or nothing conclusion: In order to provide efficient and cost effective water services to all Armenia, private companies should provide water throughout Armenia, both in urban and rural areas. While the report recognizes that individuals can be self supplied by wells, it fails to mention or address the effectiveness of self-regulated and owned small community water associations.

Likely the State’s argument against incorporating individual supply and small community water associations in the Armenian mix of water delivery services, is again “capacity.” In general, this means that the population of Armenia maintain a “Russian” mentality preferring to allow the State to take the responsibility. However, given the very certain realities of the escalating costs to consumers under privatization, Armenians may well be interested in alternatives. Preserving flexibility as Armenian sorts out the ownership of the “commons” relative to water delivery and sewer facilities will be challenging.