Newberry’s Friends at Kentucky American Water are Just the Tip of the Ice Cube

Over the past few weeks, Lexington’s water supply has emerged as a point of contention in the upcoming LFUCG elections.

Mayor Jim Newberry has resorted to a series of political stunts and grandstanding in an effort to rewrite history — Jim Newberry was for Kentucky American Water’s rate hikes before he was against them.

In an expression of just how impotent an executive he now is, Mayor Newberry was reduced to seeking signatures to a petition in order to battle the big mean executives at Kentucky American Water.

And the minority members of the LFUCG — five of them — who are owned by Kentucky American Water have circled the wagons around their Mayor (who’s also owned by Kentucky American Water), attempting to block the majority of the City Council (and the city’s Vice Mayor) from reigning in KAW’s balooning rate hikes. (See here, here, here, here, here, here, here).

With all this local activity flying about — and Mayor Newberry’s pleading, plaintive campaign machine spewing out disinformation like a frat boy in a salmon-colored polo shirt might vomit after a night of Jaegerbombs — it seemed an opportune time to take a step back to look at the bigger picture.

Kentucky American Water is a subsidiary of New Jersey-based American Water Works. Until last year, American Water was itself a subsidiary of German-owned utilities giant RWE. Now, American Water Works is a publicly-traded company (RWE’s stake is, apparently, only 25%).

Most people in this country receive their water through truly public utilities. The rest of us get it from corporations.

American Water Works “is by far the largest water utility in the US.” They have 15 million consumers across 32 states. In most of those states, the subsidiary is named after the state and, as such, it’s often easy to think that, say, Kentucky American Water is really just a state-based company and Nick Rowe is just the beneficent head of that company. But no. There’s an Illinois American Water, a Virginia American Water… and so forth.

So when Nick Rowe, KAW’s chieftan, recently wrote in the Herald-Leader of all the good his company’s rate hikes would bring, declaring the very necessity of those hikes, he was  simply acting as a pawn in a larger game. (No offense, Nick. I’m sure you’d like to think you’re a big shot in your own right.)

Kentucky American Water is seeking a 37% increase in rates for residential customers in the Bluegrass. They claim — and Mayor Newberry doth protest too much — that 90% of that hike will be used to pay for a new treatment plant and a pipeline.

Fair enough. Infrastructure improvements would necessarily mean higher rates, right? Everyone can acknowledge and appreciate that (except Mayor Newberry, who supported KAW’s plan knowing full well it would mean rate hikes and now suddenly proclaims his opposition).

But… is it really about infrastructure improvements?

No one doubts that there will be a new plant, a new pipeline. But does KAW/Mayor Newberry’s rate hike really reflect these needs? Or is it part of a larger pattern?

Let’s see…

California American Water‘s version of Nick Rowe recently told Californians that their rates are going to double.

Arizona American Water is also seeking to double rates on its customers.

New Mexico American Water pushed a 65% rate hike last summer.

Missouri American Water is trying to raise rates to scrounge up an extra $48,000,000.

Iowa American Water (which got an 18% rate increase in 2007) has requested a 31% hike in the Quad-Cities and a 69% hike on citizens in nearby Clinton.

Ohio American Water recently sought a 60% increase on its customers. (Though after an investigation, the rate hike was lowered and OAW was found to have artificially inflated its operating and maintenance expenses by $4.4 million.)

New Jersey American Water is aiming for a much more modest 13.6% increase (perhaps it’s a home state gift — after all, that rate hike might adversely affect the pocketbook of the parent company!).

Virginia American Water has a $6.9 million rate increase slated to take affect this August (more here).

So what does that all mean? Perhaps, you say, it simply reflects the realities of providing water to people. Surely there must be infrastructure costs and improvements. Surely, the company must keep our water clean, its plants safe, our children healthy.

And yes, surely they must.

But it is not only safe to say that these rate increases aren’t simply about infrastructure and operating costs — it is important to say. And for some reason, in all of his whining and bemoaning, Mayor Newberry can’t just state the plain truth: Kentucky American Water is gouging its customers to make a buck. They are raising rates to pad their bottom line at a time when most Americans are suffering. They are seeking to charge more for a public resource that people simply cannot do without.

“Woah there, Socialist!” you might say. But that’s not socialism. It’s capitalism and it’s written right into American Water Works’ annual report. Let’s take a look:

Water services—Water service operating revenues from residential customers for 2009 increased $65.5 million, or 5.5%, from 2008, primarily due to rate increases offset by a decrease in sales volume. The volume of water sold to residential customers decreased by 10.3 billion gallons, or 4.8%, from 2008. We attribute this decrease to wetter and cooler than normal weather conditions in a number of states in which we operate. Water conservation in general, as well as the impact of California’s new conservation tariffs which were effective in 2009 and its severe water shortage due to legal restrictions imposed upon withdrawals from the Sacramento Delta, and a long-term drought also contributed to the reduction.

Water service operating revenues from commercial water customers for 2009 increased by $22.2 million, or 5.5%, mainly due to rate increases offset by decreases in sales volume compared to 2008. The volume of water sold to commercial customers decreased by 4.4 billion gallons, or 4.9%, from 2008. We attribute this decrease to the weather conditions as well as the downturn in the economy.

Meanwhile, American Water’s operating and maintenance costs increased just 1.6%.

So because water usage is down, American Water’s rates are going up and — happy days for its investors — their revenue goes up as well. Here’s more:

Declining Water Usage Per Customer

Increased water conservation, including the use of more efficient household fixtures and appliances among residential consumers, combined with declining household sizes in the United States, have contributed to a trend of declining water usage per residential customer. Additionally, in the current economic environment, both industrial and commercial usage continues to decline.

The average annual decrease in residential water usage per customer from January 2000 through December 2009 (as a percentage of January 2000 usage) in the larger states served by our Regulated Businesses ranged from a decline of 0.65% per year in New Jersey at the low end to as high as 1.51% per year in Arizona. The decline in industrial and commercial usage from 2008 to 2009 was 7.6%.

{snip}

Our Regulated Businesses are heavily dependent upon operating revenue generated from rates we charge to our customers for the volume of water they use. Declining usage due to conservation or economic environment contribute to regulatory lag and will have a negative impact on our long-term operating revenues if we are unable to secure appropriate regulatory treatment to offset the usage decline.

And of course, “Appropriate regulatory treatment” is just another way of saying, “C’mon Mayor Newberry — how much do you need for your re-election campaign?”

All in all… American Water’s strategy to isolate communities (people in Kentucky, Iowa, Virginia, California, New Mexico and so forth, all get their water from the same private company, but our efforts to battle that company are kept separate) and instill egregious rate hikes on a community-by-community basis is obviously working. In each case, they state the increases are needed for operations and maintenance (though those costs have increased only marginally), and from each community they “serve,” American Water squeezes millions of nickles and dimes.

Or, put another way:

Comparison of Results of Operations for the Years Ended December 31, 2009 and 2008

Operating revenues. Our operating revenues increased by $103.8 million, or 4.4%, to $2,440.7 million for 2009 from $2,336.9 million for 2008. Regulated Businesses’ revenues increased by $124.6 million, or 6.0%, for 2009 compared to 2008. The Non-Regulated Businesses’ revenues for 2009 decreased by $14.5 million, or 5.3%, from 2008.

The increase in the Regulated Businesses’ revenues was primarily due to incremental revenues of $187.3 million resulting from rate increases.