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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.
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.
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.
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.
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.
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.
More Private Water Company Rate Problems
October 27, 2009
Privatization is thought by many to be a panacea for lowering costs for water and wastewater systems. Yet, here we have again another example of how a private owner/operator, in this case Indiana American (subsidiary of American Water, NYSE: AWK), seeking a very large increase in rates (click here for the news story). We have reported on this same issue a couple of times already in just the past few months. In “Corporate Water Rates – Show Me the Efficiencies” we cited a case involving Illinois American (also a subsidiary of American Water); and in “Private Does Not Mean Better Water Rates” we discussed the huge increase proposed by Veolia (NYSE: VE) as the private owner/operator of the water works in Indianapolis, IN.
The predominate cost of owning and operating a water or sewer utility is the cost of capital. Municipal entities have access to low-cost and tax-exempt debt, private operators may or may not have such access. Private owners can issue stock to raise capital, which could be an advantage except those stockholders expect a return on their money that is higher than the interest rate paid on debt, and the private utility gets to include those returns in the rate you pay (they have a constitutional right to do it). In order for a private operator to produce lower rates in the long-run, they would have to drive operating costs down significantly. They would have to generate about 20% savings just to account for the additional cost of income taxes that private owners have to pay (your municipal system does not pay taxes), and then they would have to save even more to account for profits paid to shareholders.
A perfectly good question to ask if your community is looking to privatize is whether the private owner/operator really can lower your bills and sustain those savings over time. We are seeing evidence right now that private owners are not able to perform any better than public owners, and the cost savings do not appear to be sustainable either.
Corporate Water Utility Rates – Show Me The Efficiencies
October 21, 2009
We have previously commented on the fact that having a private water utility does not necessarily translate into lower water rates. In that post, we discussed the woes of the Indianapolis experience with Veolia being the private contractor in charge of the water utility’s operations. In the news today is yet another example where private utility operators have proven, yet again, that they are as beholden to the laws of economics as any municipally-owned water system. The Illinois American water company serving about 10,000 customers in the Chicago area has asked the Illinois Commerce Commission to approve a 30% increase in water rates and a 50% increase in sewer rates. The company states that the reasons for the increase include the usual suspects: the costs of repairing and maintaining infrastructure, and to cover the increasing costs of employee benefits. About 350 of the company’s customers (from the cities of Homer Glen, Orland Hills, and Lockport) showed up at a public hearing to protest the increase which would make the company’s rates triple those of the municipally-owned utilities in nearby communities.
What the protesters probably don’t understand, and what everyone who thinks substituting public ownership of their water/sewer utilities with private (corporate) ownership needs to know is that the private utility owner has a constitutional right to charge rates that will allow it the opportunity to earn a reasonable profit. That right has been established in US case law since the 1898 case in Smyth v. Ames . Of course, there are certain protections offered to determine just what is a “reasonable profit” and the Illinois Commerce Commission in this case, or its equivalent in any other state, has the charge to make sure that the rates are indeed reasonable. Still, if the real reason for the increases comes down to infrastructure repair costs and employee benefits, the company is very likely to have its request for higher rates approved.
On top of those costs, the company is allowed to profit from operating the utility. Meanwhile, a municipally-owned utility would not include profit in its rates. Instead, municipal systems allow whatever “profit” exists in the utility’s operations to flow directly back to its customers by way of lower rates (read more about this topic here). Increasingly, we see that private operators are unable to provide the economic efficiencies that they like to claim they can provide in anything but the short-term. They tend to realize short-term savings by deferring rather than eliminating costs as the Illinois American and Indianapolis stories both suggest.
StepWise Ratemaking Course for Elected Officials
September 20, 2009
The following links will take you to PDF files for the 4-hour seminar on water and sewer rates. The seminar is a short course that we present from time to time with the targeted audience being elected officials and general managers. It’s not a hands-on course that teaches the ins and outs of utility rates and the rate setting processes, but it is a broad overview of these issues with special emphasis on how elected officials can manage the risk of rate shock through competent rate setting processes tied to effective communications strategies. The seminar addresses four key areas:
- Why water and sewer rates are important.
- The right way to adjust water and sewer rates.
- How to get communities/customers to more readily accept needed rate increases.
- How to make rate setting part of a utility’s normal processes.
click to download Part 1 |
Part 1 – Intro & Why Rates Are Important - The first segment in the seminar addresses the importance of utility rates in the normal governance of any publicly owned water or sewer utility. The concept of risk is introduced with changes in rates being described as an event with a high probability of occurrence and a potentially high consequence that depends on the magnitude of the change in the rate. We introduce the concept of utility ownership and how customers’ reactions to rates can be compared to corporate shareholders’ reactions to low returns. We conclude the session by suggesting that managing the rate setting process is akin to managing customers expectations and,therefore, is a most effective tool for managing risk. |
click to download Part 2 |
Part 2 – The Right Way – The second segment of the seminar addresses the rate setting process. Starting with alignment of financial plans and strategic plans (like a utility master plan, or other long-range plan), this second and longest segment describes how rate setting starts with sound planning and financial policies before moving on to cost-of-service allocations and, ultimately, rate design. The intent of this segment is provide elected officials with exposure to rate making processes; we provide some simple examples to help the information sink in. |
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click to download Part 3 |
Part 3 – Making it Work - The final session focuses on using the information gained during the rate setting process to communicate more effectively with customers. General communication strategies are discussed,with more attention given to the process of ongoing customer relations. The session demonstrates how to tie-in the rate making process to the communication plan. The final segment in this session talks to the implementation of rate setting as a normal business process for the utility; it shows where the the rate setting process fits and talks to some of the challenges facing utilities for implementation. |
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