Ky. American Water, PSC at odds over dividends

The state Public Service Commission has rejected a settlement offer from Kentucky American Water in a case that charges the utility ignored a PSC order that limits the way it pays dividends.

Kentucky American "has been extremely lax and negligent in exercising proper management responsibility, especially after its first violation three years earlier," the PSC wrote in its order released last week.

The case is rooted in conditions the PSC set in the 2002 case in which German utility RWE took control of Kentucky American by buying its parent company at that time. The PSC ruled Kentucky American would have to receive the commission's approval before paying out dividends in a calendar year that were more than 5 percent of its retained earnings as of Dec. 31 of the prior year.

The purpose, according to the PSC order, was to "guard against any drain of (Kentucky American's) financial resources through excessive dividend payments."

But in the third quarter of 2009, Kentucky American acknowledged to the PSC that without approval it had made dividend payments in the first and second quarters of $1.98 million and $2.69 million, respectively, exceeding the 5 percent threshold. Kentucky American spokeswoman Susan Lancho said the dividend payments were on par with other payments.

"We believe the PSC would have approved them," she said, adding that the utility "regrets the error."

In an informal conference, Kentucky American executives said the matter "had fallen through the cracks" and they had not "willfully violated" the conditions, according to the PSC's order.

Under state law, the utility could be fined up to $2,500 per violation, or $5,000 total. However, because there were other parties to the original case, the total fine could wind up being $25,000.

Kentucky American offered a settlement of $25 to $2,500 for its violations and argued that the penalty should be toward the lower end of that range, according to PSC documents.

In rejecting the settlement, though, the PSC noted Kentucky American previously failed to obtain permission for a dividend payment in December 2005. The commission wrote that it chose not to assess penalties at that time "because of Kentucky American's assurance that appropriate mechanisms are indeed now in place to prevent a recurrence."

"The assessment of a small penalty in the current proceeding, after we had warned of but not imposed administrative sanctions after the last violation, may ... create the wrong impression among regulated utilities as to the need to comply with Commission orders," the order stated.

The commission said the case will be kept open 20 more days to allow for more filings from Kentucky American. Lancho said the utility will respond.

Kentucky American is now under different ownership as RWE spun off American Water and now has no stock ownership of the company.

This story was originally published May 20, 2010 at 12:00 AM with the headline "Ky. American Water, PSC at odds over dividends."