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American Water Windfall During Recession
May 6, 2010
For many months we have tracked the activities of private water companies in America through their requests for – most large – rate increases. We have an entire category on this blog dedicated to these activities listed under “privitization” on the right sidebar; give it a click to get some of the astounding history behind the big water rate increases. After you’re done reading those blog entries, fast forward (or rewind) back here and read below as reported by MarketWatch:
American Water Reports First Quarter 2010 Results
Revenues increase by $37.9 million quarter-over-quarter to $588.1 million
Now, before the good folks at American finally read this blog and start getting angry, the point here is not that the company should not be making money. In fact, they are entitled by law to have rates that allow them opportunity to earn reasonable profits. The point here is that while every government-owned utility is trying to find ways to button down the hatches, save money, and cut rate increases as much as possible, American Water and other private companies are doing quite the opposite. 30, 40, 50, 70 percent increases are being proposed in different parts of the US by American Water’s subsidiary operating companies.
Government utilities take a black eye all the time. They take those black eyes because in the end they are politically accountable for the things they do. Private utilities are far less accountable. Their large water rate increases have spoken volumes on their low degree of accountability to the public. Their shareholders, however, are rolling.
Comments (1)Should Cities Sell Water & Sewer Utilities as Defense vs. Recession?
April 22, 2010
In these tough times, some cities and local governments are considering selling their water and sewer utilities to private concerns. USA Today ran a story on this recently: “Cities consider selling water, sewer systems for cash“. The issues raised in the USA Today story are interesting. As noted on this blog, we’ve seen at least one high-level example where the City of Indianapolis changed its water utility operations from purely private (Veolia Water) to a public-private partnership. The question raised here though is whether selling a utility makes sense as an effort to raise cash in an environment where tax revenue is too low to support other local government programs.
We’ve commented many times here on what we characterized at the pitfalls of private ownership. We have written many articles on the topic, all of which show how water rates and sewer rates spiral upward under private ownership. In general, selling a utility currently owned and operated by a local government to a private interest is likely to turn out with higher rates for customers. We’ve certainly documented the huge rate increases proposed by private companies in these pages, but the USA Today article provides yet another example:
“Pekin, Ill., City Manager Denny Kief tracked rates for the first 20 years after Illinois American Water bought the water system from a local company and says rates — for 6,000 gallons a month — rose 204%.”
Sometimes, local communities face impossible choices and selling an asset like a water or sewer utility is the only reasonable choice. However, if the criteria are about long-term costs and benefits to the customer, all else being equal, selling to a private utility is probably not the best choice. As we’ve documented before, unless the private operator is able to achieve steep long-term efficiencies, there is really no comparison.
Comments (0)Illinois American Water Rates Under Fire
March 30, 2010
The Illinois American Water Co. (subsidiary of much larger American Water Works Co. – AWK) is seeing new scrutiny from the Illinois Commerce Commission on its proposal for 30% increases in water rates for many Chicago-area utilities that it operates. The rate case has made its way to the ICC where Illinois Attorney General Lisa Madigan has argued that the company’s request is both “unreasonable” and “excessive.” The full story is reported in TheTelegraph.com. There is one gem in this story worth a little more time here though…
One of the cost items the company is trying to justify is the cost of a study it commissioned in 2007 to compare its own water and sewer rates with those of surrounding municipalities. The ICC had commented in the 2007 rate case that American’s rates were two to three times higher than those other cities’ and the company followed up with a study. It seems that after paying $37,000 for the study, the company concluded that no comparison of water rates or sewer rates was possible due to accounting differences.
Accounting differences?
There are several reasons why comparing rates with other utilities will give you dubious information. Not all utilities are supported 100% from user charge rates, some use tax dollars making rate comparisons tricky; some utilities do not recover their full costs of service (not good, but it happens); all utilities have different cost structures and different dynamics in their customer bases. “Accounting differences” is not one of the reasons.
More likely, the real reason is that comparing a privately owned utility like Illinois American with any equally situated utility under public ownership will ALWAYS result in the private company being the one with the higher rates. Since we’ve made this point before here, we can just direct you to the links to find out why private companies have a hard time comparing. Here are two good ones:
Private Does Not Mean Better Water Rates
Corporate Water Utility Rates – Show Me the Efficiencies
Keep in mind that American Water Works Co. is also attempting to increase its rates by similarly large amounts in many of its other jurisdictions simultaneously. Rate increases are in the works in Illinois, Indiana, Missouri, Kentucky, and Arizona just to name the ones we’ve been able to follow. Most of our blog posts on these issues is under our Privatization Tag if you want to see everything we have on this topic.
Comments (1)Indianapolis Mayor a Believer in Efficiencies of Public vs. Private Water
March 18, 2010
The City of Indianapolis, whose privately operated water system (Veolia has been the private owner/operator for several years) was ever so recently facing a 35% increase in water rates just 6 months after an 11% increase, has even more recently decided to scrap their private ownership model.
“With this agreement, I am rejecting private ownership of our water and wastewater system while embracing the benefits that come from private sector efficiency and expertise, and putting water and wastewater utilities under a public trust.” – Mayor Greg Ballard.
We can’t be sure if Mayor Ballard and other city leaders are regular readers of this blog, but the quotation is very much in line with several blog entries we’ve made here, including “Corporate Water Utility Rates – Show Me the Efficiencies” published in October 2009. The Indianapolis case was and is one of the great examples of how private water utilities are challenged to produce long-run efficiencies above those of public-sector owners. We have argued here before (and probably will again) that private owners would have to produce major long-run reductions in costs just to break even with the same utility operation under public ownership. Indianapolis now knows this to be true: funny how 46% water rate increases can change your mind so quickly.
Comments (0)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.
Comments (1)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.
Comments (0)United Water Speaks to NY Rate Hikes
January 6, 2010
A VP for United Water New Rochelle recently published a letter explaining the reasoning behind the company’s requested rate increase that is now being considered by the NY commission (click here to read the full letter). He brings out a couple of points in the letter that bear additional commentary.
“Capital improvements are not a one-time, optional expense for utilities such as United Water; they are an essential, core part of our business.“
This is true for any water utility. Capital is constantly reinvested in utility systems, and it is one of if not the largest costs in terms of cash expenditures in any given year. That being said, one of the ways that private companies like United Water can generate cash flow for their investors is to delay required capital improvements for as long as possible. If properly regulated, private utilities cannot start recovering the costs of capital improvements until after those improvements are constructed and placed into service. Therefore, there is a balancing act that takes place between minimum required levels of service and the need for capital investment on the part of the company. If the company has truly made the investment, then it has a constitutional right to seek fair rates to pay for them.
“Harris [the person that the VP's letter is in response to] also takes exception to the fact that United Water is part of a shareholder-owned, multinational company, implying that government ownership would be better for the public. I believe he is mistaken. Many water systems owned by local governments are in disrepair because of a lack of resources required to maintain and update infrastructure.”
Comments (0)The cost of debt for most municipal/local governments is LESS than the cost of debt for a private company due to the tax-exempt nature of municipal bonds. The cost of equity capital for both entities should be expected to be the same for the same utility. Therefore, the only difference in the cost of capital between municipal and private owners would be differences in capital structure (the relative use of equity v. debt to finance the assets). In addition, as we’ve said before here on this blog, a private utility also pays income and other taxes where a municipal utility does not (see: Corporate Water Utility Rates – Show Me the Efficiencies). Altogether, these cost differences mean that private owners would have to generate substantial operating efficiencies in order to compare favorably to a municipally owned utility. It is true that many locally-owned utilities are in disrepair, but so are private systems and if I were Mr. VP I wouldn’t want to take any bets on whether private systems are in better overall condition than their municipal counterparts.
Global Water’s Hackneyed View of CIAC
December 22, 2009
As the Global Water rate case in Arizona unfolds, we are starting to see “under the skirt” of the water utility that is seeking a 34% increase to its approved water rate and 130% for its sewer rate. We were pretty sure that we would see some fireworks in this case given the size of the increase within the context of new construction (i.e. growth) coming to a standstill in the Phoenix area after over a decade of white-hot activity.
During recent testimony before the Arizona Commerce Commission, the state agency charged with approving or rejecting the company’s rate request, the company stated that it has not removed contributions in aid of construction (CIAC) from its rate base in calculating its requested rates. Doing so, the company says, is the only way Global Water will consider purchasing more small, troubled water systems. (Click here to read the article from Maricopa.com).
First, a few definitions. CIAC is free capital that the utility receives from a third party, usually a real estate developer. The CIAC can come in the form of cash or often in the form of infrastructure assets. Either way, the contribution is given to the utility with the understanding that services will be provided in exchange. Rate base, on the other hand, represents the utility’s investment in the system and in the case of Global Water, a private company, the utility is allowed to earn some reasonable return on that investment through the rates it charges. We summarized the rate of return aspects of the rate case in a separate article, so I won’t go into much detail here. The important thing to know is that rate base represents the company’s investment; CIAC is not an investment by the company and so it is correct to subtract them from rate base before calculating rates.
What happens if you don’t? Since the company isn’t subtracting CIAC in some cases, the result is that the rate base is too high. In testimony, the company says it has $93 million in rate base; but $16 million of that is CIAC that has not been deducted. Assuming an 8% return (for the sake of illustration only), the company is asking to earn an additional $1.28 million per year on money and assets that it received for free. That’s additional money that the ratepayers will pay in their rates, if approved.
This is all part of something that seems to be a disturbing trend in the US: lack of proper regulatory oversight of private water companies. How else to explain the huge increases that are being approved over the past several months? Treatment of CIAC is one issue, including planned investment instead of actual investment in rate base is yet another and potentially larger issue. Stay tuned as we continue to track these rate cases and get to the bottom of the drivers and implications.
Comments (0)Inside a Water Rate Case
December 15, 2009
As Global Water’s testimony supporting its requested rate increase before the Arizona Commerce Commission begins, we are starting to see a small glimpse inside what can be a very involved process. Rate cases are not new: they are the rule for privately owned utilities and have been part of our history since pre-1900 times. Your electric company, gas company, phone company, and cable company all are likely required to file rate cases in front of a state regulatory agency before they can legally increase their rates. Although it sounds like the public is in control in such a process, it is really more like a court case where the judge applies the law and legal precedent to make a decision to approve, deny, or amend the rate request. The judge is bound by the law, and the law requires much from the utility to be sure; the law also allows the utility to increase its rates to recover all of its expenses, plus a reasonable return to shareholders. So, if the utility is performing its role by providing the utility services to customers at a reasonable standard, and the expenses incurred in providing the service are also found to be reasonable, then the judge is more or less bound to approve the rate request. Whether service is being provided at a high enough level, and whether the expenses -including the requested return to shareholders – are reasonable, are the major areas for argument during the case.
A recent article about Global Water’s requested increase in Arizona sheds some light. What we hear from the company’s CEO during testimony is that the proposed rate for recycled water is $2.00/thousand gallons and that 60% of all HOA’s (homeowner associations) are now paying just $0.33. If you go to the company’s web site ,you will find that they appear to have not changed their rates for about 10 years, during which time the company claims to have added over $200 million of new infrastructure to serve the area (in Maricopa County). The article goes on and describes a few strange things about this rate request:
- The company is not seeking a “fair and equitable return.” The CEO claims that the company will not earn a return in this case for 20 years. That is quite a statement. Shareholders may want to sell at this point!
- The company says that the rate should be $2.00/thousand gallons, yet they propose to phase in the rate over five years. All that means is that the company is not asking the commission to approve a rate that would recover its costs of service. Why?
- The water rate requested is increasing by 34% and the sewer rate (the company also owns and operates) is increasing by 130%. These kinds of increases are indicative of failure to revisit rates more frequently. Most likely, the company didn’t get any real increases for 10-years and need those increases now.
In an earlier article I posted here (What’s Driving High Utility Rates?) I discussed that growth, or lack thereof, was one of the key drivers to the need for higher utility rates. Phoenix has been one of the highest growth areas in the US over the last 10 years. That growth has come to a near standstill of late and the rate case has been filed coincidentally. It’s no coincidence.
Stay tuned for more. We hope to follow this case and publish a few more tidbits as they come out.
Comments (0)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.
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