The Herald Leader Editorial Board had this to say the other day:
Lexington residents and businesses will soon be getting their sewer and landfill bills from the Greater Cincinnati Water Works — costing our government an extra $700,000 a year.
Yes, you read that right.
By summer’s end, you’ll be writing a check to or approving an automatic withdrawal by a municipal utility in another state.
That’s because the private Kentucky American Water, which touts itself as a model corporate citizen, cut the city off.
A Kentucky American official last year explained that billing and collections contracts such as the one with Lexington were no longer “a good fit” for the company, which is part of investor-owned American Water, based in Voorhees, N.J.
In most places, the fit would be fine because in most places the city owns both the water and sewer systems. Plus, sewer bills are directly based on water consumption.
But in Lexington, one of very few cities its size that does not own its water utility, things get complicated — usually, as in this case, to the detriment of consumers and taxpayers.
They’ve got a lot more — from the cost breakdowns, how we ended up with Cincinnati, to official comments — and you should read it all.
Lexington has been abused by the American Water corporation before. Based in New Jersey, it renames its state-based systems (Kentucky American Water, Tennessee American Water, etc) as if they are localized entities. But they aren’t.
KAW is belongs to a publicly traded company. There’s nothing wrong with publicly traded companies, per se, but when a government puts a public utility in the hands of a publicly traded company, that public utility is now controlled by the fiduciary best interests of the stockholders. Which means your water price is dictated by investors’ need to make money.
We’ve looked at all this before, especially around the Newberry-era water rate hikes which KAW claimed were needed for infrastructure while American Water’s own annual report made perfectly clear that rate hikes were needed primarily to increase profit and return for shareholders. (Read that here, if you like.)
Looking at the sewer issue, it again becomes obvious that our generous local water providers are making decisions about our infrastructure and utilities which have little to do with local needs or good corporate citizenship.
Here’s what “Missouri” American Water is doing:
For the first time in more than a decade, the city will bill sewer customers for wastewater service. Users currently pay sewer fees as part of the bill they receive from Missouri American Water.
The result means customers will send a smaller payment to Missouri American, but will send a separate check to the city for sewer usage.
Christie Barnhart, spokeswoman for Missouri American, said the move was part of a nationwide decision to eliminate billing for municipal utilities the company did not provide. The company currently handles sewer and trash service billing for municipalities in 30 states, in addition to collecting bills from its water customers.
“It’s really about getting back to our core service, which is providing water service,” Ms. Barnhart said.
And here’s what “Tennessee” American Water is doing:
Tennessee American Water no longer will collect sewer and garbage fees for some area municipalities after October, a change city officials say could prove costly for them and confusing for ratepayers.
“It’s kind of a surprise,” said Jerry Stewart, Chattanooga’s director of waste resources, adding the privately held water company had been collecting sewer fees for the city since the 1950s.
….Tennessee American spokeswoman Jessica Presley said the company decided in 2011 to exit billing for municipal sewer and other services by Oct. 31.
“We’ve made a decision to focus on our core business of providing quality, reliable water to [our] customers,” she said.
And “Pennsylvania” American Water is not only forcing a rate hike on its customers but also dumping the sewer billing process:
Pellegrino explained that, while the McNeilly project is the main reason for the rate increase, there is another reason.
“PAWC (Pennsylvania American Water Company) is going out of the business of billing for sewage (as of Oct. 12, 2012),” he said, “which they had been doing for about 10 years.”
In turn, the township will have to look for another company to collect sewage bills, Pellegrino said, and he expects that the new company will charge more.
American Water’s 2012 Annual Report states:
Despite challenging weather events in the northeast region of the United Sates in the third quarter of 2011, for the year ended December 31, 2011, we generated $2,666.2 million in total operating revenue, and $803.1 million in operating income compared to total operating revenue of $2,555.0 million, and $728.1 million in operating income in 2010. Our Regulated Businesses, our largest operating segment, generated $2,368.9 million in operating revenue, representing 88.8% of our consolidated operating revenue compared to $2,285.7 in operating revenues representing 89.5% of our consolidated operating revenue in 2010. This increase of 3.6% in operating revenues, when compared to 2010, was primarily driven by rate increases offset by decrease in sales volume in all customer classes in 2011. Additionally, for the year ended December 31, 2011, our Market-Based Operations generated $327.8 million in operating revenue, compared to $294.7 million in operating revenues in 2010, an increase of 11.2%.
Less water being used, but higher rates of payment means good things for the company, bad things for the customers, and return for investors.
[I]ncreased 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. All of the states served by our Regulated Businesses have experienced a declining trend in water usage per residential customer, with the rate decline in the various states averaging 2.1% and ranging between 1.3% and 3.42% annually over the last 5 years, some of which may have been attributable to variations in weather conditions. Because the characteristics of residential water use are driven by many factors, including socio-economic and other demographic characteristics of our service areas, climate, seasonal weather patterns and water rates, these declining trends vary by state and service area and change over time. Our Regulated Businesses are heavily dependent upon operating revenues generated from rates we charge to our customers for the volume of water they use. Declining usage due to conservation or the 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.
Therefore, rate hikes. Blue skies around the country!
In 2011, we received authorizations for additional annualized revenues from general rate cases, totaling $78.8 million. In April 2011, we received final orders in our Tennessee and West Virginia rate cases, both of which were filed in 2010. On August 1, 2011, our Virginia rate case, which was filed in 2010 and for which interim rates had been in effect under bond subject to refund since the third quarter of 2010, was approved. In November 2011, we received final authorizations in our Pennsylvania rate case and our Hawaii rate case, both of which were filed in 2011.
Additionally settlements have been reached, in our general rate cases in Missouri and New York, which could provide approximately $30 million in additional annualized revenues if approved in accordance with the settlement agreement. There is no assurance that the settlement amounts, or any portion thereof, will be approved as they are pending regulatory approvals and are all subject to change. Details of this case will be released upon final approval.
On February 23, 2012, the Iowa Utilities Board approved an additional $2.8 million of annualized revenues for our Iowa subsidiary. The increase approximates what we had been collecting since July 29, 2011 under interim rates and the partial settlement that was reached in October 2011.
It goes on, but you get the point.
On a final note, I recently picked up a copy of A Dynasty of Water: The Story of the American Water Works Company for a dollar at the ReStore. It’s a corporate biography commissioned by American Water and published in 1991. Here’s a stirring passage about Lexington:
….[If] the primary avenue of attack on a privately owned public utility is legal, the principal line of defense, and the obvious point of counterattack, is political. (Machiavelli recognized the power of public opinion, even in the despotic city-states of the sixteenth century, and counseled the prince on the importance of winning and holding public support. The difference then, of course, was that if the public attitude turned sour, it expressed itself not merely in a painful defeat at the polls, but in riots and rebellions, conspiracies and assassinations.)
In Lexington, Kentucky, the struggle came to a head quickly, as described in the American Water Works annual report for 1960:
The City of Lexington moved early in the year to acquire the Lexington Water Company under the terms of its franchise. Because we were convinced that the best interest of the company would not be served by the sale of this subsidiary, and that it would not benefit the public served, we advised the City that we would be unwilling sellers, and were prepared to conduct a vigorous campaign to gain support of Lexington citizens in opposition to the acquisition.
The campaign was successful. “Late in the year,” the report went on, “the City abandoned its proposed acquistion… when incomplete valuations indicated the extent of the undertaking and it was realized that public opinion was opposed.
Thanks, Machiavelli! Cheers to you, sir.