Kentucky American Water has requested three rate increases in the past five years. Its latest asks the Kentucky Public Service Commission for an increase of 17.6 percent to invest in its plant and equipment. This is on top of a 37 percent rate increase requested in 2010 and 18 percent earlier. Combined, this would amount to a 72 percent increase in five years. The current rate increase request should be denied for a variety of reasons.
From 2000 to 2011, water demand did not increase one drop; rather, average daily water treated fell by a half-million gallons per day, from 41 mgd to 40.5 mgd.
Yet in 2008, when Kentucky American knew water usage was dropping, it feverishly requested permission to build a $162 million water treatment plant because, it said, water demand would increase dramatically. Experts argued that because of smaller family size, outsourcing of industrial manufacturing and newer federal conservation regulations regarding plumbing fixtures, demand probably would continue to fall.
Yet, the utility claimed that usage would increase to 44 mgd in 2020 and to 47 mgd in 2030, and therefore it needed this $162 million plant to increase its capacity by 20 mgd.
With water demand stagnant or falling, how in the world could the company say with a straight face that it urgently needed more capacity? You see, utility companies are guaranteed a profitable rate of return on investments. So if a utility invests more, it will usually be given an increase in rates to cover that investment.
But that notion also should take into consideration whether the investments are necessary or reasonable. This new water plant seemed to be entirely unnecessary. Nevertheless, the PSC bought Kentucky American's claims.
In addition to the fact that water usage was not increasing to support the claim of needed new capacity, if Kentucky American did need new sources of water, the new plant was far from the best alternative for obtaining it. Louisville Water Co., which has excess capacity, was willing to sell treated water over a new pipeline to Lexington.
Three professional engineering studies showed that buying water from Louisville would save $28 million to $44 million, as opposed to building the plant. But even purchasing water from Louisville was possibly not the best alternative.
In its 2007 rate request, Kentucky American reported that 7.2 mgd was not billed, most of which went to leaks in the pipes. If you suppose that a $10 million investment in pipe repairs could save half of that, the utility could have added about 4 mgd at minimal cost.
And it is easy to predict that an aggressive water conservation program — educating users on how to save — could produce another 4 mgd to 6 mgd. These two steps could have produced perhaps half the capacity of the new water plant.
Now the devil gets his due. Because Kentucky American built a multimillion-dollar plant that it does not need, it must pay back a large debt for that plant. And since the original water-treatment capacity is more than necessary and water usage is declining, the plant provides no revenue, but large costs. This is dragging down Kentucky American profits, and the company wants its customers to pay for its mistake. When we make mistakes, we must pay. When Kentucky American Water makes mistakes, it should pay. This request should be denied.
Not long ago, a group of civic-minded Lexingtonians proposed that the city buy the water company, but the voters unwisely rejected the plan. Municipal systems are owned by the city and managed by a board appointed by the mayor, who is pressured by voters to keep water rates low.
On the other hand, commercial utilities, such as Kentucky American, are beholden to stockholders to drive rates to the highest possible profitable levels. Water customers in Lexington pay about 50 percent more than Louisville customers. That says it all.
Reach Marty Solomon at email@example.com.
Feb. 4 commentary by Kentucky American Water president Cheryl Norton, "Investments in the water system reason for proposed rate increase"