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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.”

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.

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