Regulators recommend sweeping changes as some Kentucky water districts falter

Lawmakers should dramatically overhaul how Kentucky’s water districts are managed and regulated in the face of widespread failing infrastructure that could cost billions to fix over the next two decades, state regulators warn in a new report.

In its report, the Kentucky Public Service Commission calls for several changes that would require legislative action, including establishment of regional water boards and removing the ability of county officials to appoint the boards that oversee many water districts.

If the General Assembly fails to act, regulators warn that problems among rural districts will continue to mount, as will costs that “are already well beyond what the customer bases of these rural water utilities can bear.”

“We must work together to find solutions for the challenges these water utilities face,” said Public Service Commission Chairman Mike Schmitt, in a message included in the report. “And the time to act is now.”

Customers of numerous water districts in Eastern Kentucky routinely complain about unreliable service, dirty water and unaffordable bills as the lines and meters used to provide water have deteriorated over time.

In Martin County last year, a major outage left thousands of residents without running water for days, drawing the attention and scrutiny of regulators who were already concerned about the financial and operational health of the district.

Martin County residents posted videos online that showed brown water flowing from their taps. The story drew national attention, and a Herald-Leader series published last year showed that numerous districts across the state faced similar ongoing problems.

A water district that serves parts of Floyd and Knott counties, for example, instituted a 42 percent rate increase earlier this year after declaring its own state of emergency.

A 2017 report from the Kentucky Chamber of Commerce estimated that Kentucky’s water systems will need $6.2 billion of repairs over the next 20 years.

“I don’t think you can underestimate the urgency with which the commission views this,” said Andrew Melnykovych, spokesman for the Public Service Commission.

The report will be provided to a legislative task force established earlier this year that aimed to evaluate and make recommendations to help curb the state’s growing water infrastructure problems. That task force made its own list of recommendations earlier this month, which included using state dollars to leverage federal grants and loans for struggling water districts.

The PSC’s report is the result of a months-long investigation into 11 water utilities that had water loss rates exceeding 35 percent. That means at least 35 percent of the drinking water those districts produce is never paid for because it leaks from broken lines or isn’t counted by faulty meters.

Of the 11 districts the PSC reviewed, eight were in Eastern Kentucky.

State Sen. Phillip Wheeler, R-Pikeville, who was co-chairman of the Public Water and Wastewater System Infrastructure Task Force, said legislators are committed to finding solutions that can balance affordability with districts’ need for revenue to fund widespread infrastructure repairs.

“We’ve got to try and find a solution that’s not only sustainable in the long run but that also recognizes that people’s economic situation has got drastically worse, “ he said. “That’s a tough balance to find right now.”

For years, many counties in Eastern Kentucky subsidized their water districts with money from coal severance taxes, which have declined dramatically in recent years. Many districts failed to increase rates gradually over time, and are now left with too little revenue to keep up with basic infrastructure maintenance and line replacement.

“Utility rates have been made artificially low in Eastern Kentucky for years because everything was subsidized with coal severance,” Wheeler said. “Now that that’s gone everybody’s getting sticker shock and they’re mad and I don’t blame them.”

Wheeler said the state will likely need to use revenue from the General Fund, which is already burdened by exploding public pension costs, to help residents of Eastern Kentucky, and parts of Western Kentucky, where infrastructure is failing and residents cannot afford to bear the steep rate hikes required by their water districts.

That will require legislators and county leaders to “convince some of the more prosperous areas of Kentucky to invest in this area,” he said.

“I think that’s where we got to step up to the plate and convince these folks that Eastern Kentucky and these parts of Western Kentucky are worth saving, and they are,” Wheeler said.

The Commission’s report recommended several changes that would fundamentally alter how most water districts are managed and regulated, including:

▪ Passing legislation that would allow the commission to involuntarily merge distressed water utilities with other distribution systems, including municipal utilities.

▪ Establish minimum qualifications for districts’ general managers.

▪ Establishing regional water boards, appointed by the governor, “to oversee the management of regional and local water supply, infrastructure and resources.”

▪ Removing the authority of county judge-executives to appoint water boards, and shifting that authority to the regional water boards.

Regulators and some district officials have complained that districts failed to make needed changes, particularly rate increases, because of pressure from county officials seeking re-election.

The commission also issued a separate report that revamps how water districts measure water loss.

Melnykovych, the commission spokesman, said a new, uniform water loss reporting system should provide a “much clearer picture of how big the problem is.”

“If these changes are not made as quickly as possible the situation is just going to continue to deteriorate,” he said.

This story was originally published November 26, 2019 at 3:04 PM.