A public utility, such as Kentucky American Water Company, is given a monopoly with a guaranteed income, but in return is required to only charge enough to make a reasonable profit.
One question is whether Kentucky American is already making a reasonable profit when it asks for another in a never-ending line of rate increases. The answer hinges on how much return would entice investment in a company whose profits are absolutely assured.
The most similar, 100-percent guaranteed investment, is a 30-year U.S. Treasury bond where the highest yield over the past 10 years was 4.5 percent. But if investors are receiving more than 4.5 percent, then they are receiving more than a reasonable return and the rate that the water company is charging is too high.
Well, the truth is that investors in American Water Company, parent of Kentucky American, have received, year-after-year an annual 18-percent return on investment. Put differently, if you had invested $10,000 in American Water stock in 2008, it would be worth $90,000 today. But a 4.5 percent return each year would be worth only $15,500 now.
It is absurd that KAW is again asking for a rate increase when its profits have gone from $1.7 million in 2005 to $18 million in 2016, a 21 percent annual increase.
How do they make so much money? Let’s open the game playbook. The end-run play is when KAW says it needs a $3-million rate increase to repair the pipes at location A. It receives that increase.
Then, two years later, it says it needs another $3 million to repair pipes at location B. And they receive that increase. But now they will receive that $6 million every year in the future for having repaired pipes at locations A and B. Then, two years later, they ask for another $3 million to fix pipes in location C, even though they are now receiving $6 million for pipes in A and B. What a clever end run.
Then there is the hail-Mary pass where KAW is allowed to use “projected” costs in its rate-increase request. Yet, KAW’s past projections have been as far off as the moon. Previously KAW predicted that it would need another multi-million-dollar water plant to accommodate the fast-growing demand for water in the Bluegrass.
Of course, average family water demand was falling because average family size was dropping and that newer plumbing fixtures use much less water. But because the utility gets credit for its investments, it claimed that it needed another increase, partly to pay for this unnecessary costly water plant. KAW received that increase to build the plant and keeps receiving it every year, even though that plant was completed years ago.
Then there is the screen pass when KAW lobs the problem to its “experts,” whose job is to “prove” that KAW is suffering financially and it badly needs another rate increase. They shower us with hundreds of equations and spreadsheets so complicated that even the state regulators are baffled. Then, this game ends with a coin toss where the regulators agree that an increase is warranted but just not as large as was requested. The Public Service Commission agrees to split the difference. Game over. KAW profits surge and the consumers take it in the pocketbook.
In a recent column, two KAW executives pleaded poverty. They cry all the way to the bank and tell us that they need continuing rate increases to keep updating their facilities. But the truth is that excess profits provide more than enough money to take care of the needed upgrades.
It is past time for the PSC to whistle this game over, penalize KAW for excessive obfuscation and demand a water rate decrease.
Marty Solomon of Lexington is a retired University of Kentucky professor and can be reached at firstname.lastname@example.org.