Herald-Leader Editorial

Kentucky American's latest rate request merits deep scrutiny by PSC

Kentucky American pushed through costly plant as demand declined

January 20, 2013 

Kentucky American Water fought hard in 2007 and 2008 to build a treatment plant on the Kentucky River in Owen County. Construction of a booster station and 31 miles of pipeline pushed the price to $164 million.

This new infrastructure — the "largest project completed by American Water in any of its regulated businesses," according to a company official — began operating in 2010.

Now Kentucky American is citing a 10-year decline in customer demand, dating to 2002, as a justification for increasing rates by 17.6 percent.

If approved by the Public Service Commission, this increase, the third in five years, would transfer $12.3 million annually from households and businesses in the Bluegrass to KAW's corporate parent in New Jersey.

In filings with the PSC, KAW says its average residential customer is using 780 gallons of water less a year and that this trend will accelerate as more efficient plumbing fixtures and appliances replace older models.

At this point, you may wonder: Why did KAW insist on such an expensive water supply solution when it knew demand was declining, not just here but nationwide.

Rest assured, says Linda Bridwell, American Water's regional rates and regulation manager, this downward trend is "absolutely not" evidence the project might have been excessive as many, including then-vice mayor, now Mayor Jim Gray tried to warn.

"As demonstrated as recently as the summer of 2012 when KAW utilized 72.8 percent of its water treatment capacity including Kentucky River Station II, the plant was and is necessary for KAW to meet the reasonable demands of its customers," Bridwell told the PSC.

We must be missing something here because 27 percent excess capacity during a drought when there were no watering restrictions or aggressive conservation measures sounds like a pretty comfortable cushion, especially when demand is declining.

KAW also is saying it needs a rate increase to replace revenue the company lost when it ended its billing contract with Lexington. KAW collected city sewer and landfill fees along with water payments.

Lexington paid Kentucky American $1.59 million a year but is now paying the Greater Cincinnati Water Works $2.29 million to handle the city's billing — an additional cost to ratepayers of $700,000 a year.

We'll let that double whammy to your wallet sink in before sharing KAW president Cheryl Norton's explanation.

Ending the billing contract was the only "logical decision," Norton testified, because multiple charges on water bills confused customers.

"One of our key missions is to help customers understand the value of the water service they receive and a key component of that understanding (is) to make the bills as transparent and uncomplicated as possible. The additional services contained in a combined bill continued to undermine that mission."

In other words, suck it up, clarity has its price.

We understand KAW needs adequate revenue from consumers to replace and upgrade infrastructure. Regulated utilities are entitled to a return on equity. (KAW's expert says its return should be in the 10-11 percent range.)

But American Water and its stockholders also should bear some financial risk for the company's decisions.

The PSC, which has the responsibility for allocating that risk, has enabled some bad decisions about Lexington's water in the past. This rate request deserves deeper scrutiny than provided by past PSCs.

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