PSC gives water company 15 percent rate hike

Gazette-Mail file photo
West Virginia American Water’s Elk River treatment plant.

West Virginia American Water customers can expect to pay more than $6 extra a month on their average bill in the near future.

Late Wednesday, the Public Service Commission approved an $18.2 million — or 15.1 percent — annual increase for American Water, the largest water company in the state. The company serves about 4 out of every 10 West Virginians.

“While it is never easy for the customers to accept any rate increase, the commission has determined that a rate increase of $18.2 million for water customers is warranted based on the thorough review of the extensive record in this case,” commissioners wrote.

The order will raise the average residential customer’s bill by $6.26, to $47.53 per month — or $570 per year — for the 3,265 gallons of water that those customers use, and will give American Water an additional $151,324 annually for its sewer operations in Fayette County.

On Thursday, American Water officials said they needed the increase largely because of past investment in their system and because they “recognized the need to improve the company’s economic stability in light of increasing infrastructure investment needs.”

The roughly $18 million increase ends a highly contested 10-month regulatory process in which the company debated its need for rate increases with the PSC’s staff, the state’s Consumer Advocate Division, local government officials and Advocates for a Safe Water System, a group that formed after the January 2014 chemical spill that contaminated the company’s Elk River drinking water intake in Charleston.

American Water had requested a $32 million rate increase, including $13.1 million in forecast spending. The commission refused to approve most of the future spending estimates and instead focused on what is known as a historical test year, the $22 million requested by the company for spending that had already taken place.

While the PSC order reduced the company’s request by roughly $3.9 million — based on historical criteria — the commission’s decision was criticized by groups involved in the case, including the Advocates for a Safe Water System, which called the order “deeply disappointing.” That group has called for a public takeover of American Water’s system.

By comparison, the PSC staff had requested an increase of $10.9 million for American Water, and the Consumer Advocate proposed a $1.8 million increase.

The commission’s order also provides a 9.75 percent rate of return for the company’s shareholders. That return for investors was disputed during hearings. The PSC staff and the Consumer Advocate had both proposed a return for investors below 9.5 percent.

Company officials, including President Jeff McIntyre, defended American Water’s request for higher investment returns during hearings, arguing that the company believed regulatory lag, declining sales and a low rate of return were not providing shareholders with enough opportunity to make a profit.

The three-member commission also denied previous proposals to give American Water an infrastructure surcharge, which would allow the company to place a separate monthly fee on customers to pay for things like water main replacements.

But the PSC complimented the idea of a surcharge, and the commissioners said American Water officials should file another case if they want to assess a charge on customers for increased main replacements.

The costs associated with the cleanup from the 2014 Freedom Industries spill that contaminated American Water’s intake on the Elk River and the water lines serving hundreds of thousands of West Virginians was not included in the current case. Those costs will likely be taken up in a future rate request or a completely separate PSC case.

The first eight pages of the new order were largely devoted to explaining why American Water deserves an increase in their rates and why the company has received so much opposition from the public and the groups intervening in the case.

The commission wrote that American Water is not like most water utilities in West Virginia, because of its size and investment needs. The order pointed out that the company has more customers than some of the electric and gas utilities in the state, including Potomac Edison and Hope Gas.

The commissioners suggested that customers are not aware of the work and costs associated with maintaining a water system because the pipes are not easily visible or accessible, which is why, the commission wrote, the system is unfortunately fixed when there are ruptures, leaks or breaks.

“Although all the intervenors express dissatisfaction with the rate increase request, no party suggested that a main replacement rate in excess of 400 years is acceptable or sustainable on a long-term basis,” the commission wrote.

Unmentioned in the order were the concerns voiced by the Consumer Advocate Division and Advocates for a Safe Water System, which believe American Water has not prioritized main replacements. During hearings the groups, criticized the company for future plans to spend $17 million on advanced water meters instead of aging water main replacements.

At several points, the commission stated that the opposition to American Water’s request was a product of the spotlight that has been placed on the company since the 2014 chemical spill. Prior to 2014, the commission suggested there was very little public commentary or opposition to American Water’s repetitive rate increases that were approved by the commission.

The commission said pending lawsuits looking to take American Water “to task” for their role in the contamination of people’s drinking water has kept the company in the public conscience. “Those spill cases have been pending during this rate case and have to some extent clouded the issues raised by some parties in this case,” they wrote.

The commission also addressed opposition by local government officials. The commissioners suggested that those same government entities supported American Water when they were taking over smaller systems and expanding service.

“Although it is axiomatic that no customers are enthusiastic about rate increases, there was a fairly significant period of time when many entities (municipalities, public service districts, and other small public and private systems) viewed [American Water] as a viable solution for their troubled water systems,” the commission wrote.

At one point, the commissioners cited a previous order that explained that American Water was a “good corporate citizen, frequently supporting small town and large city activities and encouraging its executives and professionals to participate in government and nonprofit charitable activities within the state.”

In the current case, American Water sought to recover $19,363 from its ratepayers for spending it made on some of those community activities. According to the order, American Water wanted to charge customers for the company’s annual water festival, an American Water-sponsored West Virginia Power baseball game and spending on television advertisements for the comapny.

The Consumer Advocate maintained those costs should not be recovered by the company because they are “community relations charges” meant for “corporate image building.” The commission denied the company’s attempt to collect that money from its customers.

“In future rate cases, [American Water] should explain how these types of expenses benefit customers if it wishes to recover the expenses in rates,” the commission wrote.

The commission also stated that American Water’s attorneys had shown there is declining customer usage and little if any customer growth, which affects the company’s revenue.

“We are troubled by the loss of residential revenues from the decline in the average residential usage per customer,” the commission wrote. “Clearly, over time, the decline in residential consumption has been real, significant and damaging to [American Water].”

The company’s data on customer usage was contested during the hearings in October and several parties to the case suggested that part of the reason for any decline was people’s fear of consuming the company’s water after the 2014 spill.

In a separate order, commissioners Kara Cunningham Williams and Brooks McCabe also took up the issue of the company’s proposed depreciation rates, which determine how the company recovers the cost of things like water mains and treatment plants over the life of that infrastructure. Those costs are factored into the rate case.

Commission Chairman Mike Albert was recused from the depreciation case because of his previous work representing American Water as an attorney for Jackson Kelly. The PSC’s advisor, Mike Miller, also recused himself from the depreciation case because of his 35-year career with the company.

According to PSC records, a 1998 order that Albert helped draft for the company was not followed by American Water. As a result, the company did not file reports every five years as it was required to and continued to use accounting practices that were barred under the order.

“That issue is most certainly troubling to the Commission,” McCabe and Williams wrote in the order. “We expect public utilities — and for that matter, all parties — to comply with the terms of agreements into which they enter in commission proceedings.”

While other parties to the case had argued that the company should be punished for not following the previous order — which company officials admit to — the two commissioners declined to do so and ordered that American Water should receive $19 million annually through depreciation rates, instead of their requested $23.4 million.

“The company has not satisfied its burden of proving that the increase should be of the magnitude it requested,” the commissioners wrote. “We likewise conclude that the commission lacks the authority to use ratemaking treatment as a tool for punishment, as some of the parties have suggested we do.”

Reach Andrew Brown at andrew.brown@wvgazettemail.com, 304-348-4814 or follow @Andy_Ed_Brown on Twitter.

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