‘Bad for Lexington.’ Mayor says bill backed by water company would raise rates.
Lexington Mayor Linda Gorton this week blasted a state Senate bill backed by Kentucky American Water and other utility companies as “bad for Lexington” and “bad for our economy.”
Senate Bill 163 would allow investor-owned water and sewage companies such as Kentucky American Water to use a different type of calculation to value a water system it wants to acquire. Critics say the change would lead to higher purchase prices, which the water company would then pass on to customers in the form of higher rates.
“This legislation is bad for Lexington … bad for citizens; bad for our largest employer, the University of Kentucky; bad for our economy,” Gorton said in a written statement.
“Since 2007, Kentucky American has more than doubled its residential rates with five increases. Its sixth request for an increase is now pending before the Public Service Commission,” Gorton said. “These rate increases are paying for a water plant in Owenton we didn’t need. The company wants to sell its excess capacity from that plant to other cities, and now it wants its customers in Fayette County to fund its expansion.”
Kentucky American Water argues the bill will help water companies provide better service to under-served areas.
“As a regional utility providing drinking water service to customers in portions of 13 counties and wastewater services in portions of four, we have seen first-hand how regionalization of water systems provides economies of scale that can help contain rates for all customers while also enhancing service,” said Susan Lancho, a spokeswoman for Kentucky American Water.
Similar bills filed in previous years have failed.
One of the bill’s co-sponsors said this week he now has reservations about the proposal.
The bill would allow water and sewer utilities to value an acquisition using its “fair market value” or the cost of the acquisition, whichever is less. To determine a utility’s fair market value, the bill requires three appraisals — one by the purchasing utility, one by the acquired utility and a third appraisal done by an appraiser picked by the other two appraisers. The average of the three appraisals would determine the fair market value of the acquired asset.
Appraisers would determine the value by studying “comparable” sales of utilities.
Traditionally, the value of a utility is determined by the cost of building the system, minus depreciation for pipes and other equipment as they wear out.
“The method proposed in this bill would be based on the ‘fair market value’ based on appraisal ‘comparables,’ which is theoretical since there is no ‘market’ for the sale of municipal utilities,” wrote Tom FitzGerald of the Kentucky Resources Council in a letter to state senators. “Such a theoretical value would likely diverge upwards from the book value — the original cost of the assets net of depreciation.”
States that allow water and sewer utilities to use fair market value typically have steeper rate increases, FitzGerald warned. The Kentucky Resources Council is a nonprofit that advocates on environmental and other issues, including utility rate increases.
“Several years ago, Kentucky American sought and received approval to build an additional water treatment plant on the Kentucky River, based on projected water demand that greatly exceeded what the actual demand has been,” FitzGerald wrote. “The result is that Lexington customers have been paying the costs and rate of return on an investment that has been shown not to have been needed to serve their water needs.”
Lancho, though, said the Owen County water treatment plant was needed.
“Our water treatment plant in Owen County addressed a much-needed solution for long-term water supply reliability for our customers. It has also allowed us to make many other necessary improvements in our system since it came online in 2010,” Lancho said.
A spokesman for the commission said it does not have any concerns about the legislation.
“The PSC does not support or oppose legislation,” said Andrew Melnykovych, a spokesman for the PSC. “That said, the current version of the bill reflects feedback that was provided by the PSC. So, at this point, the PSC has no concerns about the bill.”
In November, Kentucky American Water filed for its sixth water rate increase since 2007. That rate increase request is still pending before the commission.
The average residential customer would see a rate increase of 24 percent, or $7.56 a month, if the PSC approves the company’s request, according to documents filed with the commission. That means the average residential customer, who uses 3,869 gallons per month, would pay $39.62 a month, up from $32.06.
This story was originally published February 14, 2019 at 10:09 AM with the headline "‘Bad for Lexington.’ Mayor says bill backed by water company would raise rates.."
