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Testifying

Region I Planning & Development Council Executive Director Jason Roberts testifies at a U.S. Senate Environment and Public Works Committee field hearing in Beckley Thursday. Roberts and two other witnesses testified about smaller utilities’ challenges in maintaining water and wastewater infrastructure. For some water distributors, those challenges have resulted in acquisitions by West Virginia American Water, an investor-owned utility whose customers using 4,500 gallons of water have seen monthly rates nearly double in the past 15 years.

On Tuesday, West Virginia utility regulators approved Appalachian Power and Wheeling Power customers picking up a burden of nearly $22 million a year from Virginia and Kentucky ratepayers.

On Wednesday, the U.S. Energy Information Administration forecast higher heating bills this winter.

Now brace for a water rate hike.

West Virginia American Water is seeking an additional $36.6 million in annual revenue for water operations from its roughly 167,000 customers across 19 counties.

The company’s latest rate hike proposal comes after it received a 14% rate increase in February 2019 and 15% in February 2016.

The newly proposed rates would not go into effect before Feb. 25.

Residential water customers using 3,100 gallons a month would experience a net increase of $9.56 per month when factoring in West Virginia American Water’s separate annual infrastructure improvement surcharge proposal, company spokeswoman Megan Hannah said.

The overall proposed rate increase would be 17.2%.

West Virginia utility regulators will rule on the company’s request – but not before they hear from the public.

The state’s largest investor-owned water utility has defended the rate increase requests made in April commission filings, including testimony earlier this month noting the company will have invested more than $250 million in system improvements from March 2019 through February 2022.

Customers are feeling heavy rate hike fatigue.

Monthly rates have nearly doubled in the past 15 years for West Virginia American Water customers using 4,500 gallons of water, from $40.27 in 2006 to $78.11 in 2021, according to the Public Service Commission.

“Unfortunately, the 2021 request is just another in a history of outlandish requests by the company,” Kanawha County Commission President Kent Carper said in testimony filed with state utility regulators last month.

A “no-win for the consumer seems to be a pattern for the company,” Carper said.

He cited past American Water requests for rate hikes ranging from 24% to 28% in recent years.

“Our citizens are struggling with the impact of the depressed economy due to declining production of coal, lost jobs, and the pandemic,” the Boone County Commission said in a letter of protest filed with the Public Service Commission. “Boone County is home to a higher percentage of budget stressed seniors for whom the proposed increase would create a greater hardship and may be devastating.”

Others filing protest letters include the Lewis County Commission and Princeton and Madison city councils and state delegates and senators in both parties.

“We encourage the Public Service Commission to consider the profits made by shareholders when reviewing the rate cases,” state House delegates Doug Skaff, Mike Pushkin, Kayla Young and Jim Barach, all Democrats representing parts of Kanawha County, said in a protest letter.

Skaff, the House minority leader, is president of HD Media, parent company of the Charleston Gazette-Mail.

In February, American Water Works, the Camden, New Jersey-based parent company of West Virginia American Water, projected the value of company shares increased 14% from 2019 to 2020. The company projected earnings per share would grow 7% to 10% over the next five years.

“Due to its profit growth and cash flow, it’s certainly a name to add to your list of best water stocks,” an analyst for the financial education website Investment U wrote of American Water last month.

Paying to play catchup

A Gazette-Mail analysis of Public Service Commission filings found West Virginia American Water’s net income increased nearly threefold from $9.9 million in 2010 to $28.7 million in 2020.

West Virginia American Water’s operating revenues increased 33.8% from 2010 to 2020, while its operating expenses rose just 25.9%.

“As the largest water and wastewater provider in the state, West Virginia American Water has had the ability to conduct infrastructure investment at a rate far greater than any other water or wastewater service provider in the state while also providing emergency aid to, or even acquiring, other failing and distressed systems,” West Virginia American Water spokeswoman Megan Hannah said in an email.

In testimony filed last month, the company reported a total combined investment of $22 million from acquiring the Page-Kincaid water distribution system in Fayette County and the East Bank and Cedar Grove water distribution systems in Kanawha County. Together, the three systems served approximately 1,440 customers. Each struggled to maintain adequate service due to outdated infrastructure.

“Providing safe, reliable services to our customers, while continuing to invest in our infrastructure, meeting evolving regulatory and water quality requirements and maintaining flat operating expenses is our top priority,” Hannah said. “Our current water and wastewater rates, and the adjusted rate for which we have requested, reflect the true cost of providing service while maintaining the systems we operate.”

West Virginia Consumer Advocate Division Director Robert Williams has been critical of the frequency of West Virginia American Water’s base rate increase requests alongside its annual infrastructure improvement surcharge.

The commission approved the infrastructure replacement surcharge mechanism in 2016. The mechanism since has resulted in a $4.99 monthly increase for residential customers using 3,100 gallons a month.

A base rate accounts for all utility service expenses, including operating and maintenance costs, taxes and depreciation.

Williams understands West Virginia American Water’s mission of upgrading water and wastewater infrastructure throughout much of the state is a gargantuan task. It’s one he doesn’t expect state customers to wriggle off the hook for anytime soon.

“I don’t see that there’s a great basis to object to the work being done. If we don’t fix it, then the system just keeps deteriorating,” Williams said. “ … [T]hey’re having to play catchup now.”

How much catchup?

More than a century’s worth.

In testimony praising the company’s infrastructure improvement program, members of the commission’s engineering and utilities divisions observed the company’s main line replacement cycle —the theoretical time to replace all the utility’s mains at the current replacement rate — is slightly less than 113 years.

In the early to mid-2000s, it was more than 400 years, according to commission staff.

Using the surcharge program “to stimulate investment in infrastructure represents a milestone in building a sustainable, secure and reliable drinking water infrastructure,” commission engineer Jonathan M. Fowler testified.

Customers already are paying for roughly $10 million of the company’s proposed rate increase under the company’s current infrastructure improvement surcharge.

The company in July asked the commission to approve a surcharge of 1.87% of proposed water rates effective March 1, 2022, to cover an estimated $32.5 million investment next year in upgrading and replacing infrastructure.

Fowler noted anecdotal evidence that many areas are enjoying improved water quality and system reliability and that unaccounted for water had declined 1.6 billion gallons a year.

The Public Service Commission defines unaccounted for water as the volume of water introduced into the distribution system minus the total of all metered usage and reasonably estimated non-metered usage.

Williams is hoping Congress delivers the federal investment that it’s on the cusp of approving. A $1.2 trillion bipartisan bill that allots $55 billion for water infrastructure upgrades was advanced by the Senate in August and awaits passage in the House of Representatives.

But West Virginia American Water’s argument that declining usage and loss of customers require higher rates — one that Williams resignedly accepts — has worn thin.

“Is the company saying that its customers must be penalized for conservation?” Carper said in his testimony. “Why should we all pay more for water when the demand is decreasing? If the company’s customers are using less water, or leaving the service area, then the company needs to adjust its budget and revenue projections accordingly.”

Protecting return on equity

West Virginia American Water has argued in testimony that return on equity rates recommended by commission staff and the Consumer Advocate Division — an independent arm of the commission that represents the interests of utility customers — would steer investors away from the company toward other utility companies.

Return on equity is net income divided by shareholders’ equity, which is the value of a company’s assets minus its liabilities. Return on equity is a measure of how efficiently a company produces profits, used by investors to compare returns.

Williams said utilities are shifting risk from shareholders to ratepayers.

“Investors are having less and less risk on their investment,” Williams said. “They’re not having to wait on their return.”

Williams said he sees what he called a potential “light at the end of the tunnel” in federal infrastructure dollars supporting more reliable and water and sewer service throughout the rest of the state.

“Then maybe less burden would be shifted to West Virginia American Water company, and they can get more on an even keel than what they have been the last few years,” Williams said.

Witnesses at a recent U.S. Senate Environment and Public Works Committee field hearing explained why that burden is so heavy.

West Virginia Rural Water Association Executive Director Todd Grinstead testified that 810 of 835 public water systems across the state serve fewer than 10,000 people, citing federal Safe Drinking Water Information System data.

Jason Roberts, executive director of the Princeton-based Region I Planning and Development Council, testified that public systems’ refusal to raise utility rates results in artificially low rates that deprive them of the revenue needed for proper maintenance.

Some utilities in Roberts’ region have not had water or sewer rate increases in 30 years, setting their customers up for enormous rate increases by percentage, Roberts said.

The Region I Planning and Development Council serves McDowell, Mercer, Monroe, Raleigh, Summers and Wyoming counties.

Roberts suggested incentivizing or assisting utilities to keep their system audits current, something he noted is required for grant applications.

“A lot of these smaller systems really can’t afford the professional services to have yearly audits current,” Roberts said. “So aside from not being able to apply for grant funds, they really don’t know the dollar figures, associated risks, the financial health of their system.”

Making matters worse lately, the West Virginia Water Development Authority’s executive director told a panel of state lawmakers last month, are frequent bid overruns.

Projects throughout the state are coming in at costs 30% higher than planned because of rising construction costs and a lack of supplies across the country, Marie Prezioso said at a joint meeting of the West Virginia interim State Water Resources and Infrastructure committees.

“[Contractors] are not even sure how to bid on a project because: a., they’re not even sure they’re going to get the materials that they’re gonna need to complete it; and, b., they can’t get a price guarantee,” Prezioso said.

Prezioso warned that a formidable financial hole might await municipalities or public service districts with rates already in place when bids come in.

Rocky terrain, aging infrastructure, artificially low prices, bid overruns and a dearth of grant funding have left the state’s many small water providers increasingly vulnerable to distribution issues that eventually require a company in charge with deeper pockets. That’s where West Virginia American Water has come in.

Wayne Morgan, executive director of the West Virginia Infrastructure and Jobs Development Council, testified that increased funding, gradual rate hikes and consolidation are potential solutions to address the need for cost-of-service rates.

Former customers of Cedar Grove’s water distribution system in eastern Kanawha County got a nasty case of sticker shock earlier this month when they began to see their rates adjusted to match West Virginia American Water’s.

Customers saw a 65% increase in their bills up to $43.46 per 3,000 gallons, 83% of West Virginia American Water’s base rate for those on its Kanawha Valley system.

Noting West Virginia American Water’s acquisition of the Cedar Grove system, investment research firm Zacks Equity Research observed that much of the country’s water infrastructure is approaching the end of its useful life, making it hard for small service providers to afford the necessary upgrades.

The firm reported shares of American Water had outperformed the industry in the past 12 months.

Myron Bragg of Lewis County objected to West Virginia American Water’s proposed rate hike in a comment submitted to the Public Service Commission in May. Bragg cited a $3-per-month increase in his Medicare payments and a $3 per refill rise in the copay on his medicines.

“Check their retained earnings and net profit,” Bragg advised. “Theirs is increasing and mine is decreasing.”

Mike Tony covers energy and the environment. He can be reached at 304-348-1236 or mtony@hdmediallc.com. Follow @Mike__Tony on Twitter.

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