A 2026 rate increase for customers of Birmingham’s regional water works is unlikely due to a provision in a state law approved this year that requires the utility to have a consulting engineer in place to analyze proposed rate increases, a financial adviser for the water works said after a board meeting Monday.

The board needs to approve the 2026 budget, which will determine whether a rate increase occurs, by Nov. 30. Water works staff gave the board a draft document for soliciting engineering consulting firms Monday night and asked for feedback to incorporate into the final request, which outlines required qualifications.

“I think it’s highly unlikely that they’ll have a consulting engineer in place and ready to opine on the rate increase by Nov. 30,” said Peiffer Brandt, president and CEO of Raftelis Financial Consultants.

Senate Bill 330, which Gov. Kay Ivey signed into law in May, requires the water works to have a consulting engineer that does not also perform project engineering services for the utility. Arcadis North America had served as the water works’ engineering consulting firm but also performed work the new law doesn’t allow.

In a presentation meant to set the stage for the budget process, Brandt showed charts outlining three budget scenarios that entailed different rate increases or steady rates. He told the board of Central Alabama Water, formerly Birmingham Water Works, that water rates for the utility’s customers have increased every year since 2002, with the exception of 2021.

To achieve no rate increase in 2026, budgets for operating and maintenance expenses and capital improvement projects such as implementing automated-meter-reading infrastructure and replacing aging pipelines would have to be reduced compared to the 2025 budget, Brandt said.

That could be tricky since the water works is over budget for 2025, with revenue down $8.5 million and operating and maintenance expenses up $5.3 million compared to projections. Brandt said he thinks 2025 is an aberration as far as revenue being down because record rainfalls at the start of irrigation season this year reduced demand for water.

Matthew Arrington, who is president of Terminus Municipal Advisors and gave a presentation about ways to fund capital projects, said the board’s takeaway from the financial information presented should be an understanding of what’s driving rates and what costs it can and can’t control.

“About a third of what you have to budget every year is debt service,” Arrington said. “There’s nothing we can do about that right now.”

Things the board can control are in the operating/maintenance and capital budgets, he said.

Board to Apply for State Funds for Lead Line Replacement

Also during Monday’s meeting, which involved a planning session followed by a regular board meeting, the board approved applying for a $47 million federal loan to replace lead and some galvanized service lines.

Lead service lines, which carry water to homes and buildings from larger pipes, are typically the most substantial source of lead in drinking water. There is no safe level of the toxic metal in drinking water, according to the U.S. Environmental Protection Agency and medical research.

The loan from EPA’s Drinking Water State Revolving Fund would come with a 1.99% interest rate and $13.8 million in principal forgiveness.

Under a federal regulation finalized last year, public water utilities must replace all lead service lines and galvanized service lines that have ever been downstream of lead by 2037.

One of the water works’ outside attorneys, Shan Paden, advised the board to amend the resolution to approve applying for the loan subject to the city of Birmingham agreeing to recognize the loan if it wins a federal lawsuit challenging the state law that restructured the water works’ board. Senate Bill 330 established the City of Birmingham Water Works board to replace the BWWB, reduced the size of the board from nine members to seven and cut the number of members appointed by Birmingham officials from six to two.

That language was added to the resolution.

Board member Jarvis Patton Sr. said he had spoken with city officials, who said they would support such an agreement.

“Right now, the cheapest money that you can go out and get comes directly from the state,” through EPA, Arrington said. The Alabama Department of Environmental Management distributes SRF funds to utilities in the state. Arrington said a significant portion of the SRF funds would be spent in Birmingham.

“The thing about these that you have to be mindful of is these are only for the lead pipe replacement,” Arrington said. “I would say a fourth of this is in Birmingham, in the West End and Ensley communities.”

Underwood said the timeline for receiving and using the funds is uncertain.

“After we meet with the city, then we’ll submit the application package, and then ADEM will kind of tell us how long it’s going to take to approve,” he said.

Due to rules surrounding use of SRF funds, the water works would have to replace all portions of service lines, including parts that are on private property.

That’s because partial replacements can significantly increase lead levels in drinking water for weeks or months, according to the EPA and health research.

In the past, water works managers have said the utility doesn’t have the authority to work on private property. For this reason, they say, the utility has been partially replacing service lines when upgrading main lines that run under roadways.

Underwood said Monday that Central Alabama Water has drafted a letter to property owners that would resolve the issue, allowing the utility to fully replace service lines using SRF funds. The letter would ask property owners to sign a document granting permission for a water works’ contractor to perform the work, he said.