This setting determines how far in tiles an object has to be from a town center, before it comes under the local authority jurisdiction.
You can set this value during the game, by typing the following in the console:
setting dist_local_authority X
where X is the radius (in tiles) of a town's jurisdiction.
The default value is 20.
You can set the value permanently using the following syntax in Openttd.cfg:
[patches] dist_local_authority = X