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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.

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