Efficiently and responsibly managing and protecting our water and land resources for the sustainability, health, safety, and economic benefit of the State of Arkansas
Oversight of Retail Water Providers – Act 605 of 2021
What is Act 605 of 2021?
Act 605 of 2021 tasked retail water providers with additional responsibilities in managing and operating their water systems, with some exceptions. These responsibilities include preparation of a rate study every 5 years or before any major development project. Rates determined from the study are required to be implemented within one year of the completion of the study, or two years if the recommended rates increase the provider’s rates by fifty percent or more. Failure to complete a rate study or implement the required rate increases will result in a determination that the water provider is in fiscal distress. Rate studies must be filed with the Arkansas Legislative Audit and the Arkansas Department of Agriculture’s Natural Resources Division.
Additionally, when a municipal water system has 20 percent or more of its customer base outside of the municipal boundaries, the municipality must establish a non-voting advisory committee to advise the municipality in water system matters. This committee must represent the water users outside the municipal boundaries.
Also under the legislation, all members of a retail water provider governing board must complete eight hours of training. The training must be completed within one year of becoming a board member. A member with 10 years or more service on the governing board is exempt from training. The Act provides that the Arkansas Department of Agriculture’s Natural Resources Division will utilize an advisory board of water professionals to develop the curriculum for the training.
Rate Study Providers
Per Act 605 of 2021, the Arkansas Natural Resources Commission shall maintain an approved list of entities to conduct rate studies for Water Service Providers. The list of currently approved providers can be found below. Entities that intend to provide Rate Studies for Water Service Providers, as required by the Act, shall apply for inclusion on the list of approved entities on the form provided below.
All rate studies performed by an approved rate study provider shall be an objective and unbiased review of the Water Service Provider’s fiscal status. All submitted rate studies must include a certification by the approved rate study provider that the study complies with Act 605 of 2021 and the rules implementing the Act. The Arkansas Natural Resources Commission may remove an approved rate study provider from its list of approved entities if it determines that an entity violated Arkansas law or Commission rules in performing a rate study.
All Water Service Providers, except those specifically exempted by Act 605 of 2021, must complete a rate study a minimum of every 5 years and prior to any major development project. A major development project is defined as a project with a total cost exceeding 20 percent of the gross revenues of the provider for the immediately preceding fiscal year.
Prior to a major development project, all Water Service Providers, except those specifically exempted by Act 605 of 2021, must complete their rate studies by the following deadlines:
- July 1, 2024, and every five years thereafter for a provider that serves five hundred (500) or fewer customers
- July 1, 2025, and every five years thereafter for a provider that serves five hundred (500) to one thousand (1,000) customers
- July 1, 2026, and every five years thereafter for a provider that serves more than one thousand (1,000) customers
The rates determined from the study are required to be implemented within one year of the completion of the study. If the increase will be 50 percent or more of the current rate, the system will have two years to implement the total increase. Rate studies must be filed with the Arkansas Legislative Audit and the Arkansas Department of Agriculture’s Natural Resources Division.
Rate studies shall be based on the guidelines of the American Water Works Association and the Water Environment Federation and shall include:
1. Reports containing the following information for the current year and projections for the next five years: A. A comprehensive cost analysis, including: i. Operations and maintenance (O&M) expenses; ii. Financing expenses, including but not limited to debt service payments, bond issuance costs, and commercial paper fees, if applicable; iii. Any required cash reserves unavailable to pay for expenses, including but not limited to the annual refurbishment and replacement account deposit requirement as set out in Ark. Code Ann. § 14-234-802(e); iv. Depreciation expenses; v. Future capital expenses; vi. Expenses required for an annual audit or agreed-upon procedures and compilation report; vii. Expenses required for rate studies required under Ark. Code Ann. § 14-234-802; and viii: Any other expenses not accounted for in paragraphs (a) through (g). B. A comprehensive revenue earnings analysis, including: i. Available Cash balance; ii. Non-rate revenue; iii. Rate revenue without recommended increases; iv. For the five projected years, recommended rate increases and the projected additional revenue derived therefrom; v. Debt Service Coverage Ratios; vi. The number of days that the available cash balance could cover O&M expenses without additional revenue; vii. Annualized revenue requirement. 2. The provider’s asset management plan, including: A. An inventory of essential assets. For each essential asset, the provider shall provide the following information: i. Asset type; a. Annual maintenance costs; b. Year installed; c. Vendor-specified useful life, if available; d. Anticipated date of replacement; e. Installation or replacement cost estimate; and f. Projected consequence of failure. B. The provider’s plan for replacement of essential assets. 3. An explanation of the provider’s chosen rate design. 4. Recommendations for any changes to the provider’s operations, including a plan on how the changes should be implemented. 5. Certification by the entity performing the rate study that such study complies with Ark. Code Ann. § 14-234-801 et. seq. and the Rules.
Rate studies for providers that operate a joint and integrated water and sewer system shall analyze the total System. Rate studies performed shall be an objective and unbiased review of the provider’s fiscal status. Proposed changes in rates should be based on achieving and maintaining a Debt Service Coverage Ratio of 1.1 or higher.
Water Service Providers in Fiscal Distress
The Arkansas Natural Resources Commission shall designate a water service provider as being under fiscal distress when a provider fails to obtain a rate study, fails to implement the rates contained in the study, or fails to maintain a debt service coverage ratio of 1.05 of higher. In addition, the Arkansas Natural Resources Commission may designate a water service provider as being under fiscal distress if its board members fail to:
- Obtain required training;
- File the required audit report or agreed-upon procedures and compilation report with the Arkansas Legislative Audit;
- Maintain unencumbered cash or cash equivalents in an amount equal to one-twelfth of the total expenses from the most recent fiscal year;
- Adopt a budget before the beginning of a new fiscal year providing for sufficient revenues to meet or exceed anticipated expenses during that fiscal year;
- Make all required payments due to the United States Treasury – Internal Revenue Service, Arkansas Department of Finance and Administration, or Arkansas Department of Health;
- Make any bond, loan, or lease payment; or
- Comply with an administrative order of the US Environmental Protection Agency, Arkansas Department of Health, or Arkansas Division of Environmental Quality concerning operation and maintenance of the system.
Within 90 days of being designated as being in fiscal distress, water service providers shall submit to the Arkansas Department of Agriculture’s Natural Resources Division an improvement plan detailing the provider’s plan to resolve the issue or issues that caused it to be considered in fiscal distress. A provider will be determined by the Commission to no longer be in fiscal distress if the provider resolves the issues that caused it to be considered in fiscal distress and obtains written verification from the Commission that the issues have been resolved or the provider implements a change of rates that is shown by the study to resolve the provider’s fiscal insufficiency.
List of Water Services Providers in Fiscal Distress (Currently there are no systems designated as in fiscal distress.)
Water Service Provider Board Training
All members of a retail water provider governing board must complete eight hours of training within one year of becoming a board member. A member of a water provider board as of January 1, 2021 shall receive the training required under this section by December 31, 2022. A member with 10 years or more service on the governing board is exempt from training. The Arkansas Natural Resources Commission will consult with an advisory training board to develop the curriculum for the training. Each provider board shall report the following information annually, by January 31, to the Department:
- The names and contact information of each member on the provider board;
- An identification of which members have obtained eight hours of provider training; and
- An identification of which members have served on the board for more than ten (10) years and are exempt from the training requirement.
For more information contact:
Darla Brooks, Audit Coordinator
Arkansas Department of Agriculture
Natural Resources Division
10421 W. Markham Street
Little Rock, Arkansas 72205
Phone: (501) 682-3977
Fax: (501) 682-0561