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Kentucky American Latest in Big Water Rates

February 28, 2010

Illinois, Indiana, Missouri, Arizona and now Kentucky. We’ve been tracking American Water Co. all year and reporting on the large increases that the company has requested in each of these states. Kentucky is the latest. The increase requested there is 37%. The Kentucky American water rate increase contains very similar elements to all the others too. In this case the company tries to justify the increase on the cost of a new water treatment plant that is nearing completion. At a cost of $160 million, the new plant will treat 20 million gallons per day. The only problem is that the numbers don’t add up. If indeed the plant is the source of the increase, what consumers should know is that the company will be allowed to recover the depreciation expense on this facility, plus a return on the book value (the value of the asset after subtracting depreciation). A water treatment plant can be depreciated over different periods, but 20 years is typical – that’s $8.1 million per year. To make up the difference between $8.1m and the total of the $26m that is being requested, the Company would need about 11% exactly in return to its shareholders.

If you know of an investment out there with very little risk associated with it (like a water utility) that is paying 11%, please send your information to us so we can put everything we have into that investment! Is this rate increase justified. Obviously we don’t know enough to say definitively, but the information in the news article leaves a lot of questions.

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NY Times Chimes in on Infrastructure & Misses the Point

February 18, 2010

In a recent Op-Ed in the NYT, writer Bob Herbert regales us with the story of Pennsylvania Governor Ed Rendell who is evidently on a personal crusade to cure America’s infrastructure crisis. An advocate for increased investment in infrastructure, we are told that Rendell personally increased Pennsylvania’s infrastructure spending by roughly triple only to see the number of deficient bridges in the state increase by 7%. Herbert argues that the US is falling behind major competitors like China, and that failing to invest in infrastructure will put the US at a large-scale competitive disadvantage. In all, Herbert does a very good job of describing the problem and some of it potential impacts.

But he falls short in identifying actual solutions. He implies strongly that the problem falls on Washington and that with Congress focused on deficit reductions that the infrastructure issues he identifies so well will go unaddressed. In not identifying the solution, he has missed a major part of the problem: almost all infrastructure investment falls to the state and local level, and a huge portion of it is local rather than state funded. Infrastructure problems are well known and documented. Identifying those problems now is hardly news. The actual problem isn’t misunderstanding the issue or its consequences, the problem is coming up with the money to reinvest in dying infrastructure. Herbert correctly points out that the costs of doing so are enormous, but fails to point out that those costs are largely the responsibility of local governments who lack the financial resources and/or political will to address the massive costs. The problem is all about the money, and it’s not Washington money but City Hall money we are talking about.

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JM Eagle Whistle Blower Lawsuit

February 12, 2010

We are all well aware of of the expense to repair and replace water lines. Utilities expect these assets to last 50 years with little to no problem, but many are seeing failures in recently installed JM Eagle PVC water pipes. Nevada, Virginia, Delaware, Tennessee and over 40 water authorities in California experienced these failures and joined a pending whistle blower lawsuit against JM Eagle.

An employee of JM Eagle, John Hendrix, uncovered substandard materials going into the production of pipes, as well as cost saving manufacturing techniques that diminished pipe quality and durability. After raising his voice to superiors, and refusing to accept “acceptable business risk” as an excuse, he was fired. Since his dismissal, Mr Hendrix has filed a lawsuit to stop the “intentional” production of faulty pipes. Mr Hendrix asserts that more than half of all pipes sold since 1996 are of substandard quality. If this is the case, many more utilities have seen and will see premature pipe failures. We recommend reviewing past and proposed water line projects to make sure your utility is not impacted by this lawsuit.

The news story can be found here:

Bursting Pipes Lead to a Legal Battle

Utilities are faced with tough decisions when it comes to capital replacements. First, many utilities struggle to identify, schedule and finance these system repairs to begin with. Stepwise recommends implementing an asset management program to ensure repair and replacement becomes a priority to your utility. This program can be as simple as having annual meetings with operations staff to identify aging infrastructure to be replaced, or as complex as implementing an electronic system to monitor the age, criticality and probability of failure for each individual asset. Small to medium size systems can use CUPSS (Check Up Program for Small Systems), which is a free software package available through the EPA (http://www.epa.gov/cupss/).

Assets don’t last forever and failure is inevitable. Once you can accept this hard fact, you can manage the associated costs. However, when suppliers don’t hold up their end of the bargain, an expensive, labor intensive process becomes even worse. We hope that JM Eagle is found to be free of impropriety, but in the meantime keep an eye on this trial and on your assets!

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StepWise to Present Rate Course for Colorado Rural Water Association

February 11, 2010

StepWise will be presenting a 4-hour seminar at the annual convention of the Colorado Rural Water Association on Monday, February 15th at the Crown Plaza hotel in Colorado Springs, CO.

The course provides insight into the utility rate setting process from initial financial policies and planning, to cost-of-service rate making and process improvements. Targeted at elected officials, the training course provides advice on managing ratepayer expectations, improving communications with stakeholders, and avoiding risks.

The course materials are available on this website and will be made available in hard copy for attendees on the 15th. The links below will take you to PDF files for each of the three presentation segments.

Part 1 – Intro & Why Rates Are Important – CRWA Conference

Part 2 – The Right Way_CRWA Conference

Part 3 – Making it Work_CRWA Conference

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Economics of Small Water Systems

As water and sewer infrastructure across the country ages, deteriorates, and eventually fails the cost of replacing it all becomes a growing concern. The cost of replacements is fantastically large, and it doesn’t help that these needs have been largely unplanned, meaning that these large costs tend to come as a shock to oblivious rate-paying customers. It’s enough to cause even large well-heeled utilities to gnash teeth. The problem can sometimes be insurmountable for small water systems though.

According to the EPA, small systems – those serving fewer than 3,300 customers – make up nearly 85% of all water systems in the US. For these systems, the cost of infrastructure replacements is more than large, it’s unfathomable. In Lebannon, OR – a small town – the cost of replacing its incredibly old water treatment plant is going to cause water rates to go up by 60% . It’s one small example of how just one major capital replacement in one small town can cause a major disruption in the water rates.

What’s a small utility to do? First off, there are no simple answers. The days of never ending grant money for these systems is mostly gone and that means that in order to avoid a 60% hitch in rates, even small systems have to be smart about planning ahead for their needs. In the Lebannon example, the water plant had been in service since 1946! Running at capacity, the plant was only able to stay one day ahead of demand. In other words, it should have come as a surprise to no one that the plant would need to be substantially upgraded or replaced at some point (before the 64th year of operations). The costs of those upgrades and replacements can also be reasonably estimated by any professional engineer and, with enough foresight, small communities can start implementing small increases to rates to build cash funds as well as debt capacity to finance the costs of replacement. For small communities who lack access to credit markets and don’t have much cash in reserve, forward planning like this is even more critical.

Financial planning is the key. StepWise provides this service, but any utility manager can get started with the key elements of financial planning without consulting help. Start by understanding the need. Know what your fixed assets are, where they are, and when they were put there. Once you know that, you can start making reasonable estimates as to when you should expect those assets to be replaced. Then, get some estimates as to how much those replacements will cost, and you suddenly have a decent picture of what the future holds for your utility. Will rates need to be increased? Probably. The key is that you will now have some control over how much and when. Wait until the last minute though, and your options will be extremely limited.

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StepWise’s Utility Credit Rating Scorecard

February 10, 2010

An important part of our financial planning toolbox is the Credit Scorecard. Embedded in our financial plan models prepared for clients, we compare your own metrics against the published median benchmarks for Fitch Ratings’ AAA, AA, and A rated credits, and to S&P’s Strong, Avg., and Low indicators. While not an official credit rating by any means, the Credit Scorecard allows you to quickly see how your utility enterprise stacks up against the benchmarks. In this age of tight credit markets, we find that knowing how you compare before you go to market can be very valuable for any utility manager. Contact us if you’d like to find out more about our Credit Scorecard.

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American Water Increasing Water Rates Yet Again

February 8, 2010

In the continuing saga of American Water and its wide scale requests for large increases in water utility rates in its service areas nationwide, we find the latest such request for its Arizona affiliate. Water Utility Rates will go up in Sun City, AZ by 28% and wastewater rates by 40% under Arizona American’s proposal.

Not surprisingly, the local community is organizing opposition to the proposal.

In the news on the same day, we see the El Dorado Irrigation District in California reduce its planned water rate increases by 50% after voters staged a protest to the board of directors (board seats are elected offices). The contrast between the two cases is helpful in showing some of the differences that exist between private company approaches to utility rates and the process for publicly owned utilities. Arizona American is going forward with its proposal regardless of outcry from the local community; the El Dorado District repealed half of its proposal.

We often hear the argument that private companies are better equipped than government to provide utility services for local communities. If you read through all of the big water rate increases that private companies are proposing listed on this site alone, you will start to see that there is a strong argument that private companies are actually not providing services at lower rates, and that local communities may find themselves mostly at the companies’ whims when it comes to how, when, and why the companies increase rates.

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