Fayette County

Kentucky regulator grants about half of Kentucky American Water's rate-increase request

FRANKFORT — The state Public Service Commission granted Kentucky American Water Co. a rate adjustment Friday that will increase its annual revenue by $6.9 million, or slightly more than half the amount the company requested.

That means an average residential customer using 5,000 gallons per month will see the monthly bill rise from $35.40 to $38.95, an increase of $3.55, or about 10 percent.

Kentucky American proposed in December to increase its annual revenue by $12.32 million. A residential customer using 5,000 gallons per month would have seen the monthly bill increase to $41.23, or by about 16.5 percent.

The company said in its application that a rate increase was needed to recover the cost of capital improvements made since the last rate case in 2010. The water company, as permitted by state law, put its proposed rates into effect on July 27. As a result of Friday's decision, the company will have to refund to its customers the amount it has overcollected, plus interest.

To arrive at the lower rates, the PSC made several adjustments to Kentucky American's request. The largest adjustment reduced the rate of return for company shareholders. Other changes included reducing Kentucky American's allowable cash reserves and adjusting projected water usage.

Kentucky American Water serves about 124,300 customers in 10 counties in Central Kentucky. All but about 3,900 are in Lexington and surrounding communities. The company also is a wholesale water provider to five municipalities, three water districts and a water association.

Kentucky American Water is a subsidiary of the American Water Works Company.

The PSC order also addressed Kentucky American Water's acquisition of municipal water systems that are not regulated by the PSC. The PSC specifically cited concerns over the purchase of the Owenton city system and the amount Kentucky-American Water spent on necessary improvements to that system.

Kentucky American Water does not require PSC approval before acquiring systems such as Owenton's, but the PSC may examine how the acquisition will affect existing customers, the PSC noted in its order.

The PSC directed Kentucky American Water to provide 90 days' written notice of its intent to acquire a municipal water system. The PSC will then review the proposed acquisition to evaluate how it will affect the company's existing customers.

The state order also considers the impact of Kentucky American Water's 2012 withdrawal from a contract with Lexington-Fayette Urban County Government to provide billing for the local government's sewer, drainage and solid waste services. LFUCG argued that Kentucky American Water's annual revenue should be reduced by the $1.6 million it relinquished when it ceased providing the billing services.

The PSC disagreed, saying that the practical effect of accepting the city's position would be to penalize Kentucky American Water for no longer providing a service that falls outside its duties as a regulated utility.

Kentucky American Water had legitimate reasons for wishing to terminate the billing arrangement, the PSC said. Bills are less confusing, and customers see a clearer connection between their water usage and the amount of their bills, which helps promote conservation.

Kentucky American Water acknowledged that the loss of the revenue from the local government has the effect of adding 90 cents a month to the typical residential customer's bill.

Lexington Mayor Jim Gray said in a statement that he was "disappointed with yet another water rate increase, but I'm proud we were at the table, fighting for our citizens.

"I'm also glad Kentucky American will be paying back the higher rates they billed our citizens for before the PSC decision. That should be a lesson," Gray said. "Lexington hired experts to represent us in this case. Otherwise the increase may have been even higher."

Gray said he asked the Urban County Council to prepare for upcoming franchise negotiations with Kentucky American by hiring "seasoned professionals" to help.

Cheryl Norton, Kentucky American president, said that "As a utility whose services are critical to ensuring public health, we take our responsibility to provide quality drinking water seriously, and as such, are committed to keeping our systems and facilities well-maintained and serviced. The ongoing capital investments we make are necessary to ensure that such quality service continues."

In addition to Kentucky American Water, parties to the rate case included the state attorney general, Lexington-Fayette County Urban Government, and the Community Action Council for Lexington-Fayette, Bourbon, Harrison and Nicholas counties.

The PSC is an independent agency attached for administrative purposes to the Energy and Environment Cabinet. It regulates more than 1,500 utilities operating in Kentucky and has about 90 employees.