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Water Rates Up for Arizona American Water
November 18, 2009
A pattern is definitely developing for American Water Co. We have been tracking their activities through news releases since earlier this summer. Already, we have blogged about the large increases requested of the utility commissions in Illinois, Indiana, and Missouri. Now, we can add the company’s Arizona affiliate to the list of suspects. Water rates in Anthem, Arizona are set to increase by $77 per month under the company’s latest proposal. In this case, the residents of Anthem will see their rates nearly double. Although the Arizona commission has not yet approved the company’s request, one has to assume that the company at least intends to impose a large increase; it maybe less than double, but it’s not likely to run down to single-digit increases.
Is a private water company right for your community? The City of Chicago is considering leasing its water system to a private company as we speak. When you look at the body of evidence (especially in Illinois!) of what private companies are doing with their rates and charges, you will get the sense that it is perhaps not such a great idea to hand over control of a utility - a natural monopoly enterprise – to a private operator. Those private companies do have a constitutional right to have rates approved that will allow the companies to earn a return to their shareholders. While a utility commission would regulate what that return will be, the commissions are still required to provide a return of some kind (a profit) and approve rates that can provide it. Think twice before you jump.
Comments (2)Utility Rates and Legal Defensibility: A High Hurdle
November 5, 2009
I’m not sure what’s going on in Naples, FL when their water rate consultant is telling the City Council that the City’s water rates are not legally defensible, but we can speculate if only to illustrate a point. There are lots of reasons why utilities should address their rates on an ongoing basis, but legal defensibility is probably not very high on the list . It’s not that defensibility isn’t important – it is. It’s that the courts tend to give wide latitude to municipal utilities (owned by cities, counties, districts, etc.) to the point where in order to prove that utility rates are “illegal” is to prove that they are inherently unsound. In many jurisdictions we hear the words “arbitrary” and/or “capricious” as characteristics of such “inherently unsound” rates. That standard may not sound like such a tough burden of proof, but it is. If you’ve done any calculations at all to determine a rate, you are probably in good shape as far as the courts are concerned. Obviously, there are differences by state and if you have any questions as to the legal defensibility of your rates, you should find competent legal counsel – someone who practices in municipal utility law - to guide you.
And here’s a word of caution for city leaders and elected officials reading this right now: just because the burden of proof favors you doesn’t mean that you don’t have hundreds of other, better, reasons to take a hard look at rates on a frequent basis. Making rates cost-based on one hand, and fair and equitable on another is something that requires time and expertise. In addition, poorly designed rates can lead to disaster. Consultants can be very helpful in sorting through the maze and coming up with good solutions; the best consultants can provide you with options for you to consider, each of which is safe from a revenue and legal perspective.
StepWise is working on a new service package called Rate Lock that will allow utilities to have a professional rate study completed every year at a fixed price based on the number of customers served. With Rate Lock, you’ll be able to keep your rates up to date as your costs change and your system grows. You’ll be able to do this in a way that is easy on your budget too. We plan to release Rate Lock nationally in 2010. Stay tuned.
Comments (0)More Private Utility Increases
November 4, 2009
It looks like American Water Co. is out to get back in the black on a national scale. We now have three examples, all within the last 30 days, of subsidiary companies of American Water seeking very large rate increases in different service areas. Add the Veolia case from Indianapolis, and we have four examples.
Here are links to the stories:
Illinois American, 30% increase
Missouri American,18% increase
Veolioa (Indianapolis, IN), 35% increase
Our point in these examples is not that the increases are not necessary, but rather that private utilities are no better suited to absorb costs or even operate at a lower over all cost than municipal providers. The body of evidence is growing against the so-called efficiencies of private utility companies.
Comments (0)Social Costs of Infrastructure Neglect
November 3, 2009
When considering the total costs of the crumbling “wet” infrastructure (water/sewer utility infrastructure) around the US, the financial cost of actually repairing and replacing the assets is something that all by itself is able to cause severe sticker shock. Estimates from the American Society of Civil Engineers show that our drinking water infrastructure is underfunded by about $11 billion annually (that means that every year we fall $11 billion short); and our Congressional Budget Office estimates that wastewater infrastructure is underfunded by $23 to$37 billion each year. These are the costs of actually fixing the infrastructure systems. Yet, one of the costs that is not always discussed is the huge costs that exists if the systems are not fixed and then ultimately fail in one way or another.
The consequences of failure can be high. Water main breaks like those seen in abundance in Los Angeles this summer can cause millions of dollars of direct damage to public and private property due to flooding. People, many times the water utility crewmen, have been known to die as a result of these kinds of water main failures (click here to read about such an incident that occurred in Denver). One of the costs that is difficult to nail down, but a cost nonetheless is something called “social cost.” When water mains failed in Studio City (near Los Angeles), the immediate damage came in the usual way: flooding engulfed local homes and businesses causing property damage (and flooding isn’t covered under most insurance policies). Now, almost two months later, we see in this latest news article that businesses in Studio City remain closed due to the damage. The loss of commerce from those businesses is an example of a social cost that has been incurred as a direct result of the water main failures. How much has society lost? Apart from the customers’ convenience of being able to transact at these businesses, we have also lost an untold amount of income and sales tax revenue that has no doubt further exacerbated local government budgets; we may have incurred additional benefit payments to the unemployed workers who now have no job since the stores have not reopened; and we could have more widespread property devaluation depending on the extent of the damage and its lasting impact.
These “soft costs” are the kinds of things that are often overlooked, but they help us understand the magnitude of the problem of failing infrastructure. If the cost to repair the systems is high, imagine how high the costs are to NOT repair them when one considers the consequences of failure.
Comments (0)How to Sink a Water Utility
November 2, 2009
City governments have long admired the money making ability of a water or sewer utility. The enterprise funds are not tax based and, after all, they are natural monopolies where the cities could charge nearly anything they wanted. Plundering enterprise funds to shore up budgets elsewhere is an old practice, and it’s one of the reasons why water and sewer utility infrastructure is so very underfunded right now in America. Case in point today: Augusta, Georgia.
Here is a utility with a tidy reserve fund of about $65 million and, with the City in a big budget crunch elsewhere, the fingers are already in the pie. The real shame here is that this is a city with experience – bad experience – in what happens when you spend your water revenues on other things and, by default, fail to fund needed infrastructure improvements. In the 1990’s, the City saw lots of main blow outs and similar problems while the City was pilfering the water reserve funds. At least one councilman remains on the Council from that time and he’s warning his colleagues NOT to make history repeat.
It will be interesting to see what happens, but once the raiding starts it usually takes something severe to make it stop. Once you go to the cookie jar, it’s hard not to go back. Why do the tough things to balance the budget when you can raid the enterprise fund instead and increase water rates instead of taxes? These situations seldom end well. Let’s hope Augusta gets it right.
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