Responding to the Freedom Industries chemical spill
Three recent water main breaks in Dunbar within the space of a week left thousands of customers without water for days.
Come to a town hall meeting this Thursday to talk with your neighbors about what we can do:
Dunbar Town Hall Meeting on Water
Thursday, July 9th
Dunbar United Methodist Church (1401 Myers Ave., Dunbar)
Have you been affected by WV American Water’s outages?
Have you had enough?
Want to know what you can do?
The Public Service Commission issued an order yesterday setting out the schedule for WV American Water’s rate case. The Commission will be holding public hearings on the company’s proposed 28% rate increase in different parts of the state where the water company does business:
That’s the main message of yesterday’s editorial in the Charleston Daily Mail.
According to the editorial, the public has two alternatives: pay even higher rates to WV American Water, or continue to suffer from unreliable service and increasingly severe water main breaks as the infrastructure falls apart.
The rate hike required to get there is politically unpalatable, but the alternative — more and more water main breaks and service interruptions — is even more so. For the sake of a healthy and reliable water supply, the company, and its customers, are going to have to make the necessary investments.
The editorial presents this conclusion without asking some basic questions such as, how is it that WV American Water customers already pay some of the highest rates in the state yet our infrastructure is crumbling? And, if we do end up paying higher rates to WV American Water, what mechanisms could be put in place to make sure that money is spent effectively to improve reliability? And, are there less expensive ways to fund the needed infrastructure improvement than to continue funneling money to WV American Water?
One thing we do know (although the DailyMail apparently doesn’t) is that we are basically paying now for WV American Water’s failed expansion strategy. In the 1990s, the value of the infrastructure on WV American Water’s books tripled, but the number of customers paying for this infrastructure did not triple (or even double). This was a deliberate business strategy of the company; in 1994, then-company president Chris Jarrett explained “the concept for water purveyors throughout the U.S. and West Virginia is that of a regionalization concept where you build one large production facility and from that you extend water lines out to as many people as you can … It is simply more efficient and more economical, the more customers you can serve from one large production facility”. In a masterpiece of understatement the Public Service Commission noted in one of its orders in 2011 that “the plan to offset increased cost by spreading fixed costs over a larger customer base and larger sales volumes has not fully come to fruition.” In other words, it appears that much of our rate increases over the past couple decades have fueled WV American Water’s strategy of infrastructure expansion, instead of maintaining existing infrastructure.
Blindly throwing more money at WV American Water – without any change to the company’s transparency or accountability, and without exploring other means of financing infrastructure renewal – doesn’t seem like the best solution to me.
WV American Water asked the Public Service Commission to exclude the community group Advocates for a Safe Water System from participating in the company’s rate case before the Commission. In a motion filed with the Commission earlier this week, WV American Water gave a number of reasons that the Commission should exclude Advocates for a Safe Water System from the case, including that Advocates’ focus on water system safety issues is irrelevant. According to the company:
[T]he Commission will not be required to address any safety-related regulatory or policy issues; consequently, there is no reason to allow interventions motivated primarily by supposed water system safety concerns.
Recommendations on water safety issues are not “reasonably pertinent” to the Company’s rate … case.
We know that we have a serious infrastructure problem – as I write this, a major main break is affecting nearly 25,000 customers in Kanawha and Putnam counties. It will take nearly 400 years to replace the water mains at the current rate. And the Kanawha Valley’s water system loses more than a third of its water to leaks – a fact that presumably contributed to the company’s decision not to shut off its intake on January 9, 2014. Fixing these problems requires money for investment, which has to be paid for – through rates or through public funds in some way.
The company has already said that the main driver of its proposed rate increase is capital investments – it wants ratepayers to pay for nearly $200 million in recent and proposed capital expenditures. Is it really saying that none of these investments have anything to do with improving the safety and reliability of its water system?
Freedom Industries and the state Department of Environmental Protection (DEP) arrived at a settlement this past week in the Freedom bankruptcy case. The settlement would require Freedom Industries and its parent company Chemstream Holdings to contribute $2.5 million towards cleaning up the Elk River site. This is progress over a couple months ago, when Freedom argued that it could only contribute $150,000.
Assuming the settlement is approved by the bankruptcy judge, there’s more money available for the cleanup, which is a good thing. But DEP still hasn’t publicly provided any guidance on what standards it expects for the cleanup. DEP has stated that more data is necessary to determine the extent of the remediation needed – many of these data deficiencies were noted by DEP in its most recent set of comments on Freedom’s “site investigation report”. Under the proposed settlement DEP won’t be able to get any additional funds out of Freedom. Somehow, though, DEP Secretary Huffman is confident that $2.5 million will be enough to cover the unknown cleanup costs.
As part of the settlement, DEP is waiving its right to sue Freedom or Chemstream for anything related to the remediation. This is a bit worrisome given how poorly Freedom appears to be living up to its end of the Voluntary Remediation Agreement (both of Freedom’s initial work plans were rejected by DEP).
It may be that this is the best deal that DEP could have gotten out of the bankruptcy case. But there are still literally tons of MCHM sitting around in the soil at the Freedom Industries site, a mile and a half upstream from WV American Water’s intake, where the company still isn’t monitoring for MCHM. So the question then becomes, how is DEP going to be monitoring runoff from the site to make sure the public and the water company are promptly notified about any MCHM leaching into the Elk?
The slides from Advocates for a Safe Water System’s public meeting on this topic last Wednesday are available here.
So how do we fund our water infrastructure needs here in the Kanawha Valley?
Aging infrastructure and lack of infrastructure re-investment is a national problem. But it’s especially acute here where we have a declining customer base to pay for it.
WV American Water’s proposal is that new rates should reflect a 10.75% profit rate on infrastructure investment by the company. But we know that the company has been chronically unable to keep pace with infrastructure replacement needs. At the current rate of investment, it would take nearly 400 years to replace all of the company’s water mains. And we know that WV American Water’s parent company has had little incentive to make more investments here because it’s more profitable for them to invest elsewhere.
In the past, public money has gone to finance the water company’s infrastructure expansion. When WV American Water took over Boone County’s public service districts, for example, the Boone County Commission got public money to pay for extensions to WV American Water’s system; those bonds were then paid off through surcharges on water bills. Interest rates on government bonds are signficantly cheaper than capital raised by WV American Water. (A recent state budget shows outstanding bonds from the WV Infrastructure and Jobs Development Council with interest rates of 2-5%, far lower than the 10.75% return proposed by WV American Water). If public money can finance infrastructure expansion, why not infrastructure replacement?
Other parts of the country are able to think more creatively about financing their infrastructure needs. Washington D.C. is undergrounding its electrical distribution system, owned by the private electric utility Pepco. This billion-dollar investment is 50% financed by Pepco (who earns a profit on its investment), with the rest coming from D.C. funds and bonds floated by the D.C. government. The project is being managed in a partnership between Pepco and the D.C. Department of Transportation. Utility customers pay less for the project than if it were entirely privately financed, and the city has more control over managing the investment.
Clearly our traditional approach has failed to produce the infrastructure investment we need. What next?
In his testimony in the rate case, WV American Water president Jeff McIntyre notes that, in response to last year’s water crisis, his company has “begun taking careful, thorough and deliberate steps to evaluate measures to enhance the resiliency of our systems.”
Here is the progress that WV American Water says it has made since the water crisis (see pp. 420-422 of the utility’s rate case filing):
In other words, despite the 30% proposed rate hike for residential customers, the water company is still “planning to plan” on most of the elements of a safe water system.
In the past couple decades, WV American Water has made some questionable decisions about its infrastructure investment. WV American Water made a business decision in the 1980s to focus on expanding its system, buying out smaller PSDs and centralizing its Kanawha Valley holdings onto one water treatment plant. According to annual reports submitted by WV American Water to the Public Service Commission, the dollar value of the infrastrucutre on WV American Water’s books quadrupled from 1991 to 2000. Meanwhile, its customer base went up only 30%. This meant that rates had to go up to pay for the expanded infrastructure. In short, the strategy of expanding a water system in a rural area with declining population has not worked out very well.
And it has meant that the company has not invested enough in maintaining the existing infrastructure. This graph from WV American Water’s testimony in its current rate case shows how far behind the company really is:
At the current rate, it would take nearly 400 years to replace all of the company’s pipes. This is hardly sustainable.
WV American Water says that an additional $12.3 million a year – not included in their proposed rate hike – would be needed to get its existing infrastructure down to a 100-year replacement cycle. Clearly, despite the proposed 30% rate hike, the infrastructure replacement problem doesn’t seem to be getting any better.
WV American Water is proposing to raise rates 28% (30% for residential customers). This is the second in a series of posts dealing with the rate increase.
For private utilities like WV American Water, rates are set to recover their annual operation & maintenance expenses, and to allow the utility to recover the money it spends on capital investments plus a return (profit) on that investment.
In this case, the proposed rate increase is mostly about capital expenditures, according to the document that the company filed with the Public Service Commission to justify its proposed rate hike. The company states that it will have made $150 million in capital investment from its last rate case until Feb 2016, when its new rates will go into effect, and it plans to make an additional $46 million through February 2017. The company wants to start recovering and profiting on all of that investment in this case. If the Public Service Commission approves this plan, it will be a break from previous rate cases, in which the utility has not been able to recover planned capital expenditures, only past expenditures.
WV American Water is also seeking to greatly increase the return on equity (profit) that it earns on capital investments. As I’ve posted about before, the declining population of the Kanawha Valley is a real problem for WV American Water – because water rates are set per gallon of water sold, declining sales have meant that the utility tends to collect less revenue than its rates were actually set to collect. Additionally, WV American Water typically experiences a delay between when it makes a capital expenditure and when it gets to start recovering that money in rates, which drives down the utility’s profit margin. Those two factors have meant that WV American Water earns profits of 4-5% — much lower than the overall 8-9% profit rate earned by its parent company, American Water Works. American Water Works is a very profitable company (and its shareholders have seen their dividends increase every year since 2008), but WV American Water has argued that the low profit rate in West Virginia makes investing in West Virginia’s infrastructure unattractive.
As part of its rate increase, WV American Water is seeking a profit rate of 10.75%, more than double the profit it has earned in recent years. Is this really the best way for us to pay for fixing our infrastructure in the Kanawha Valley?