Louisville Utilities and Public Works Advisory Group

May 15, 2012

Agenda
I. II. III. IV.
A. B.

Background Guiding Principles Key Constituents Findings

Black and Veatch Advisory Group

V.
VI.

Advisory Group Recommendations

Implementation
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Background
Kentucky State Audit of MSD was made public on December 16, 2011 Mayor Greg Fischer appointed Greg Heitzman, President/CEO Louisville

Water Company to also serve as Interim Executive Director of MSD on December 16, 2011

Mayor Greg Fischer formed a Task Force, known as the Louisville Utilities

and Public Works Advisory Group on January 12, 2012. The Advisory Group is comprised of the following members:
John Huber, Chair Scott Brinkman Al Cornish Diane Cornwell Pete Mahurin Joe Wise Wendell Wright

Background
Mayors Directive: Examine the operations of Louisville Water Company

(LWC), Metropolitan Sewer District (MSD) and Louisville Metro Department of Public Works (DPW). Review should include an evaluation of synergies, partnerships, shared resources, reduced costs and possibly merger

LWC retained Black and Veatch consulting firm to assist with the

operational review of LWC, MSD and DPW

Black and Veatch researched and benchmarked data, interviewed staff of

LWC, MSD and DPW and made a series of observations and presentations to the Advisory Group 2012, including an evening meeting to solicit public input on April 25

The Advisory Group held 10 public meetings from January 25 to May 15,

Guiding Principles
Opportunities for new relationships and structures between LWC, MSD and DPW were considered. These are guiding principles used to analyze and form recommendations.
Enhanced Governance and Process Significant, Realistic Savings for LWC, MSD and DPW

Local Ownership (municipal control) is in the best interest of the

community

Minimal Risk to LWC Charter and Business Model No Adverse Impact to MSD Federal Consent Decree

Mitigate Future Rate Increases

Sustainable Business Model Manageable Employee Issues (transition and change) Minimal Legislative and Regulatory Risk

Improvement of Service and Reliability to Customers/Citizens

Key Constituents
Customers, Citizens and Employees

Louisville Metropolitan Sewer District Board

Louisville Water Company Board of Water Works Louisville Metro Council Jefferson County Legislative Delegation Federal, State and Local Governments Utility Regulators (EPA and KY Division of Water) Regional Wholesale Customers Community Stakeholders (Area Community Ministries, GLI, Urban

League)

Environmental Constituencies Homebuilders Association

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Black and Veatch Findings

Governance Options:
Limited Interlocal Agreements (ILA) Requires approval from KY Attorney General Expanded Interlocal Agreements - Requires approval from KY Attorney General Consolidation Requires approval from KY General Assembly

A phased approach moving from limited ILAs, to expanded ILAs, with

ultimate consideration of moving to consolidation was evaluated long-term savings

Phased approach has least impact on operations, is flexible, and has greatest
Opportunities for Synergies/Cost Savings Include:
Shared or Consolidated Purchasing Shared or Consolidated Fleet Maintenance Shared or Consolidated Energy Management Shared or Consolidated Billing/Customer Service Shared or Consolidated Back Office Functions Shared or Consolidated Operations
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Annual Cost Savings Range from $14-$24 Million after full implementation

(estimated to be in 2022)

Potential Savings for Each Strategic Option (2013-2022)

Because of Costs to Achieve, savings are not realized until 2014
2013 start up costs are estimated at $900,000 Phase II and III will also require significant start up, due diligence and

evaluation costs
Limited Interlocal Agreements
Annual savings for all three entities (MSD, LWC and DPW) after 10 years are

estimated to be $9.3 million

Expanded Interlocal Agreements
Annual savings for all three entities (MSD, LWC and DPW) after 10-years are

estimated to be $13.2 million

Phased Consolidation of LWC and MSD
Annual savings for all three entities (MSD, LWC and DPW) are estimated to be

$25.5 million

Annual Net Savings By Strategic Option (2013-2022)

Phased Consolidation Concept

2013
PHASE 1

2017
Limited ILAs DPW LWC
PHASE 2

Current State

Expanded ILAs DPW LWC

PHASE 3

Consolidation

DPW

DPW UTILITY HOLDING CO.

LWC

MSD
MSD
Limited Cooperation Emergency Support

MSD
Form Integration Committees Cost/Savings Allocation Model Draft ILAs Identify Back Office/Support Areas Business Plan and Staffing Plan Draft or Revise ILAs Align Non-ILA Functions Board Approval AG Approval Implement and Sustain Strategic Plan & Objectives Procure Legal, Financial, Engineering Customer/Stakeholder Information Draft Consolidation Agreement Align Operational Functions Achieve Legislative Approval Legal/Governance Creation

Board Approval AG Approval Implement & Sustain

Financial Transaction Integration

Existing DPW, MSD and LWC Partnerships/Shared Resources

Following are DPW, MSD and LWC partnerships and instances of shared resources
Billing/Collections/Customer Flood protection Drainage service LOJIC/GIS Mapping Louisville Loop and Wharf Ditch and drainage work by Metro

Service

maintenance
Hansen system MSD call

for MSD
Road paving Shared Water and Sewer Services

center/Metro 311
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Potential Cost Sharing and Allocation Model

Interlocal agreement will require that cost sharing and cost allocation models be developed. There are three fundamental methods:

Work performed by single agency (or contractor) and a cost sharing and reimbursement model is developed
1. 2.

Metro Paving Contract used by MSD, LWC Joint Fuel Purchase.

A portion of the work is transferred from one agency to another and a reimbursement cost model is developed.
1. 2.

Metro 311 Calls transferred to MSD after hours Snow removal assistance by MSD

Work processes are consolidated into a common business model and a cost sharing and reimbursement model is developed
1. 2.

LOJIC GIS Combined Call Centers

Advisory Group Findings

1.

Potential for significant operational efficiencies and savings for the three operations could be achieved using a phased approach Legislative changes would be necessary for combining LWC and MSD

2.

3.

Coordinated debt planning is necessary to protect bond ratings, affordable rates and bond covenants that facilitate these recommendations
There is a significant need to define and fund the long-term infrastructure needs for all three organizations Louisville Metro, DPW and MSD/LWC Board and Senior Management Support for these recommendations as a strategic goal is critical
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4.

5.

Advisory Group Findings cont.

6.

Each organization must have strong executive leadership in place dedicated to moving through the recommended phased process Appropriate management structure is needed to lead the change at MSD and concurrently implement the Advisory Group Recommendations MSD Leadership (Board and Senior Management) is currently under transition

7.

8.

9.

MSD resources are presently dedicated to Action Plans for the State Audit and EPA Consent Decree and these must remain top priorities

10. MSD Re-engineering of Systems and Processes is necessary for long-term

sustainability and success

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Recommendations
These recommendations emanate from the work of Black and Veatch and other information gathered by the Advisory Group 1. Synergies and Improvements should be accomplished within a five year phased approach

Phase I Interlocal Agreements (2013-2014) Phase II Expanded Interlocal Agreements (2013-2016) Phase III Combine LWC and MSD (2013-2017)
Due Diligence and Risk Assessment Review Legislative changes

2.

Phase I & II - Pursue Partnerships between LWC, MSD and DPW. High Priority areas include:
Purchasing Safety Energy Cost Paving Restoration Fleet Operations Customer Education and Communications Centralized Plan Review and Inspection

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Recommendations cont.
3. Phase III - Develop plan to combine MSD and LWC within five years

Conduct comprehensive risk assessment and due diligence assessment Develop business plans and management models of a combined One Water utility Pursue Enabling Legislation

4. 5. 6. 7. 8.

Continue to Benchmark and Integrate Industry Best Practices Adopt common Quality Management Systems for both LWC and MSD Adopt common Management Control Systems for both LWC and MSD Adopt common Leadership Development for both LWC and MSD Develop cost sharing, allocation and reimbursement model for interlocal agreements to assure mission and utility cost of service principles are maintained
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Recommendations cont.
8. 9.

Adopt effective change management process to assure success and minimize risk to stakeholders Incorporate recommendations into LWC, MSD and Metro Strategic Business Plans and establish executive and senior management accountability success Plan

10. Develop an Implementation Plan, including resources necessary for

11. Identify and develop the leadership structure for the Implementation

12. Establish quarterly reporting for benchmarks and key milestones to

measure progress and success of recommendations

13. Communicate Plan and seek approval of LWC and MSD Boards 14. Develop Communications Plan for Key Stakeholders
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Next Steps
Feedback from the Mayor May 2012 Metro Council Presentation May/June 2012 Black and Veatch Finalize the Report June 2012

Board Presentations June 2012

Stakeholder Communications June/July 2012 Develop Transition and Implementation Plan July to Dec 2012 Launch Transition and Implementation Plan January 2013 Quarterly Progress Reports to Mayor and LWC and MSD Boards
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