Chelsea eyes eminent domain as sewer system changes hands

The sewer system in Chelsea is at a crossroads.

As Double Oak Water Reclamation looked to sell the system to Shelby Ridge Utility Systems, the city of Chelsea pushed back because Mayor Tony Picklesimer wanted the city to buy the system as well.

“I feel like it’s in the long-term best interest of our city for us to own this public utility,” Picklesimer said in a March interview.

This is not the first time the sewer system has been a hot-button issue in the city. Prior to the 2016 municipal elections, Chelsea resident Connie Gilliland brought up concerns about high sewer rates that rose each year. At the city’s Alabama Communities of Excellence evaluation in January, 58 Inc. managing director Yvonne Murray noted how rates deterred businesses from moving to Chelsea. In the upcoming Republican primaries, some candidates have sewer rates as part of their platform.

Now, Picklesimer said he questions why Double Oak and SouthWest Water Company, the operating entity of Double Oak and Shelby Ridge, will not share the sales price or other details of the sales agreement.

“If the principals of Double Oak Water Reclamation have decided they want to sell it, why they don’t want to sell it to me, why they don’t want to sell it to the city of Chelsea, raises questions,” he said.

Picklesimer said he first heard of the sale at a 2017 meeting with DOWR Principal Bill Thornton and SouthWest Water Managing Director Craig Sorenson. 

“Well, when I got there to the meeting, they told me that SouthWest Water and Double Oak had contracted for SouthWest Water to buy the sewer system in Chelsea,” Picklesimer said. “I immediately told them right then that I want to buy the system. They told me, Craig Sorenson says, ‘You’re too late, we’ve got it under contract.’”

Instead, they proposed a contract between the new entity — to be called Shelby Ridge — and a governmental utilities services corporation, or GUSC. 

Picklesimer said it was suggested that Chelsea form a GUSC, a legal entity that is able to influence rates and charges for utility services, and then the GUSC and Shelby Ridge would “agree to a rate structure for a period of years.” The recommendation of a GUSC, Sorenson said, arose during discussions that stemmed from citizen concerns over rate changes. 

“The city and I really worked through and spent time on developing an approach to how rates would move, and in order for those rate controls to be implemented, it was really evident that a GUSC would be most effective in implementing those rate increases,” Sorenson said.

Because a GUSC is able to have control and jurisdiction in multiple areas, it was necessary  to make decisions regarding the DOWR system, which is located in and outside of Chelsea, said SWWC media relations representative Stephen Bradley. Chelsea established a GUSC in September 2017, and that entity was approved by the Shelby County Commission in October. From there, Picklesimer said they worked to negotiate terms on rate increases.

However, the length of the contract — 99 years — stopped those negotiations.

“They agreed to like a 3.5 percent [rate] increase per year, which a 3.5 percent increase sounds reasonable, but for 99 years? That was not reasonable,” Picklesimer said, “so we came to an impasse, and we were unable to reach an agreement.”

Sorenson said an agreement, which included a few years without any rate increase and then a rate increase based on the Consumer Price Index, was reached before the GUSC was formed, but “the city and the GUSC wanted to change the approach to regulation that was initially envisioned.” In the end, the GUSC decided not to act, he said, and withdrew from negotiations.

Upon deciding they wouldn’t enter the contract, Picklesimer said he returned to the possibility of the city buying the system. Attempts to find out what SouthWest was agreeing to pay, however, have been refused, he said. At that time, City Attorney Mark Boardman started looking into alternative means of acquisition, including eminent domain.

Under Alabama State Law, eminent domain allows municipalities to purchase assets within city limits, including utilities, for fair market value. That value, Picklesimer said, has been established by the purchase price Double Oak and SouthWest agreed upon.

“As of March 28, 2018, I have written Double Oak Water Reclamation a letter, pursuant to that Alabama Code,” Picklesimer said, explaining that in the letter they requested a five-year financial history, income, expenses, capital improvement history, depreciation schedules, tax returns and electronic maps of the sewer system within Chelsea city limits. The letter also stated that if fair market value has been established, that information should be provided. 

The letter gives 30 days for Double Oak to respond, Picklesimer said, and that information will be the next step in the process of potentially acquiring the system. 

While the city council approved a resolution to allow Picklesimer to enter a contract for an appraisal of the system, they first need the requested documents for an appraisal to take place.

Picklesimer hopes the letter will open the door to negotiations, but as of press time he did not know what the next still will be.

“By Alabama State Law, we feel like they have to comply,” he said. “What their response will be, I don’t know.”

On April 18, Shelby Ridge officially acquired the DOWR system, according to Sorenson and Bradley. Regarding the city’s desire to buy the system, Sorenson said, “We’ve heard that, and of course we’ve seen what the mayor and council have looked to do recently. That doesn’t have any bearing on our transaction.”

Why buy?

Bradley said in the conversation regarding DOWR and sewer rates, it is important to consider the start of the system. Around 20 years ago, he said, Shelby County chose not to expand its wastewater system down U.S. 280, and in place of a county system, DOWR was formed.

“A lot of people are concerned about rates, but Double Oak deserves credit for going in there and providing a wastewater treatment system without which you do not have development,” he said.

And while the sewer system in Chelsea allowed the young city to expand down the 280 corridor in the years following its incorporation, city officials say sewer costs are now stifling economic growth.

“The biggest thing is impact fees,” Picklesimer said, referencing the fee a proposed development project must pay to gain access to a utility. “We feel like the impact fees Double Oak charges to new businesses coming to Chelsea are excessive, and we feel like it is stifling our economic growth.”

Reservation fees, which are paid by landowners prior to developing property, are also excessive, Picklesimer added, and Double Oak has increased sewer fees over the course of the last several years.  

That increase, Picklesimer said, is unjustified and part of the reason the system’s sale price has not been disclosed.

“We feel like our customers’ rates are artificially inflated,” Picklesimer said. “We feel like the reason they don’t want us to know the financials of this company is because its rate of return is so high.”

Rates are decided based on an annual review, Sorenson said, at which time revenues and expenses as well as growth are examined. That process, he said, will continue under Shelby Ridge.

“What we plan to do is we’ll review annually the business and look at revenues, look at expenses, look at growth, look at all of those things and determine whether or not a rate increase is warranted,” he said. Rate increases would take place for commercial and residential, or neither, he said, adding that one group of customers would not be treated differently than another. 

Regarding the acquisition by Shelby Ridge, Sorenson said customers should expect a smooth transition with little change. They do plan, however, “enhanced customer service options.”

Picklesimer said he believes Double Oak has followed the lead of SouthWest’s rate increased just over the mountain. SouthWest, which serves the sewer systems in Greystone and Eagle Point, underwent a $7 million capital project to meet Alabama Department of Environmental Management (ADEM) standards for discharging into the Cahaba River.

As a result, SouthWest increased its rates for those systems, which Picklesimer said he sees as “somewhat justified.” 

“In my opinion it wasn’t justified for Double Oak to follow them and do the same rate increase even though they didn’t have the capital expense,” Picklesimer said.

In contrast, he continued, the city is not allowed to profit on utilities. If the city were in control of the system, it would have to limit rates to the cost of goods and services. 

“If we own the system and we operate it at no profit, there’s potential for rate decreases for residential, rate decreases for commercial, reservation fee decreases and greatly lowered impact fees. That’s the four primary benefits to us owning the system,” Picklesimer said.

The system could take 10-20 years to pay off, Picklesimer said, depending on the cost. Once it was paid off, however, “it will be a revenue stream forever,” he said.

Even if the city receives the requested information and completes an appraisal, or receives the fair market value for the system, Picklesimer said a purchase is not guaranteed.

“That number may be higher than we can afford. I’m not absolutely guaranteeing we’re going to purchase this system. I can’t do that,” he said. “We don’t know how much it is yet.”

For now, he said, “Our next step is to wait for their response.”

Editor’s note: In print, the term “eminent domain” appeared as “imminent domain.” The online version of the article has been updated to correct this error.