West Virginia American Water has put forward a plan that could result in customers paying a surcharge for an estimated $88.8 million in spending over the next four years, something company officials say is necessary to increase investment in water mains and other infrastructure.
While that proposal is expected to fund roughly $45 million in main replacements throughout the company’s water system by the end of 2020, documents filed with the West Virginia Public Service Commission show that it also includes roughly $20 million for a new seven-mile section of pipeline connecting Weston to Webster Springs and a 9.75 percent return on equity for the company’s investors — even though the surcharge all but eliminates investment risk for its parent company’s shareholders.
West Virginia American Water CEO Jeff McIntyre said the surcharge — requested just months after the PSC approved an $18.2 million annual rate increase for the company — would help reduce the size and frequency of the company’s traditional rate increases and improve the reliability of the distribution system that serves around 169,117 customers in 19 counties in the state.
The PSC’s Consumer Advocate Division and the Advocates for a Safe Water System, a group that is trying to organize a public takeover of the company, have suggested they will oppose the surcharge. In the water company’s rate case that ended in February, both groups took issue with how the company was spending money and what infrastructure investments it was collecting a rate of return on.
At that time, attorneys for the groups seized on the plan to spend millions on the proposed line to Webster Springs as proof that the company’s investments needed to be vetted more by the PSC, and they questioned whether the company had conducted any studies to determine if it would be cheaper to repair the aging water treatment plant in that town, which the company wants to eliminate.
“Certainly, the company has failed to carry its burden of showing that this is the most cost-effective way to address the needs in question,” said Paul Sheridan, the lawyer representing the Advocates for a Safe Water System. “And these are not matters which the commission should be taking on faith.”
In their surcharge request, West Virginia American’s staff said the Webster Springs treatment plant is “beyond its useful life and no longer economical to repair,” but when asked if any studies had been conducted to determine the cost of renovating the plant, company officials would not comment.
In total, the Webster Springs connection would equal more than 22 percent of the money spent under the proposed surcharge between now and 2020, and company officials say eliminating the treatment plant will result in no operating or maintenance cost savings.
The Consumer Advocate Division pointed out that building the pipeline in Webster County, instead of repairing the treatment plant, is not the first time West Virginia American Water had pursued such a policy.
Tom White, one of the group’s attorneys, said the water company did the same thing when it closed down the treatment plant in Montgomery and built a multimillion-dollar pipeline to pump water up the Kanawha River from the treatment plant in Charleston.
“Perhaps the company simply has a business model that does not work: a central plant piping water over hundreds of miles of pipe,” White said.
Company executives have cited the high cost of infrastructure in their system to the geography of the state. In their surcharge request, they cite the 190 water storage tanks, the 325 booster and pressure reducing stations and more than 4,200 miles of water mains that make up their network, which includes 12 service territories that span from Princeton to Huntington and Weston to Boone County.
“The Kanawha Valley water distribution system,” company officials said, “provides a clear example of the complexities of operating a large system in mountainous terrain.”
Still, West Virginia American’s push for a surcharge fits with the larger business strategy of its parent company, American Water Works. The Fortune 500 corporation makes most of its profit from the rate of return it generates from the water mains, treatment plants and other infrastructure investments it undertakes in the 16 states where it operates regulated utilities.
In an earnings call earlier this month, the parent company’s executives emphasized the return that those regulated utilities have helped to generate. In 2015, the cash dividend payouts to the parent company’s 2,345 stockholders equaled $239 million, according to its annual financial report.
It is unclear what percentage of those earnings was derived from returns earned by West Virginia American. In total, the parent company has more than 45,000 miles of water mains in its regulated utilities.
When a Wells Fargo investment analyst asked during the earnings call if American Water Works saw future potential in West Virginia, Walter Lynch, the chief operating officer, emphasized the $18.2 million rate case order the company received in February and the new surcharge it is asking for.
“The infrastructure mechanism that we just proposed last week is a positive step forward,” Lynch said, “and it can allow us to continue to invest and invest more into the infrastructure in West Virginia.”
According to the numbers presented by the company in PSC documents, the new surcharge could yield a return on equity of more than $821,000 in less than two years, and even more from 2018 to 2020.
Laura Jordan, West Virginia American’s spokeswoman, would not comment on those calculations but said that not all of the return on equity goes to dividend payments for the parent company’s shareholders. She said some of the money goes back into investment projects, although she wouldn’t say what percentage.
In PSC documents and interviews, McIntyre consistently has cited what he calls an “earnings erosion problem” for West Virginia American, meaning the company has not received the full return the PSC has authorized in past years. Jordan said the utility has received only a 4.3 percent rate of return, on average, over the past decade.
Other groups, however, have openly questioned the types of investments that West Virginia American is currently receiving a return on.
In the last rate case, Advocates for a Safe Water System found out that the utility was not only earning a return on the water mains it was proactively replacing, but it also is netting a profit from nearly every leak repair the company makes — what it refers to as “unscheduled main replacements.”
That practice, opponents say, only works to reduce the incentive the utility would have to upkeep its water systems before they fell into disrepair.
In 2013 and 2014, the company spent $8.7 million on those unscheduled repairs, compared to $9.4 million on scheduled main replacement and restorations. According to PSC documents, it intends to continue to collect a return on those short-term fixes, which is estimated to cost roughly $3.8 million annually between now and 2020.
Company officials would not answer questions sent to them via email and said they would address any concerns about their request only as part of the official case in front of the three-member PSC.
The surcharge proposal doesn’t include any money budgeted for the unscheduled leak repairs, but opponents to the plan argue that rates wouldn’t be as high if customers were not paying an investment return for spot repairs, what they consider to be a operational cost.
“The company is clearly pursuing the interests of its investor, American Water [Works],” Sheridan said. “The commission cannot assume that those interests are inherently aligned with the interests of the rate-paying public.”
Reach Andrew Brown at email@example.com, 304-348-4814 or follow @Andy_Ed_Brown on Twitter.