Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

KRC Expresses Concerns With Bill Stripping Public Service Commission of Power To Determine Value Of Acquired Utility Water And Sewer Assets  Posted: February 25, 2014

February 24, 2014

Dear Senator Girdler:

I’m writing to convey my concerns regarding SB 152, a bill drafted on behalf of Kentucky American Water Company in order to change the current process by which the Public Service Commission reviews and values the acquisition of water or sewer facilities by investor-owned water or sewer utilities. I am very concerned the bill could result in sharp increases in costs to ratepayers, and would delegate to non-governmental parties the ability to determine what value of acquired assets should be included in the rate base of the acquiring utility.

The current Public Service Commission criteria for valuing acquisitions establish the “book value” of the acquisition as the original cost (less the accumulated depreciation). Adjustments can be allowed by the Commission that would permit the acquiring utility to include in the rate base a value higher than book value if the utility can demonstrate that acquisition at above book value is in the public interest, i.e. that the purchase price was negotiated at arms-length, the price plus the cost to restore the acquired facilities does not adversely affect overall costs and rates to new and existing customers, the acquisition will result in operational economies, the purchase price of utility and non-utility property can be separated, and the purchase will have financial and service benefits for the acquiring utility. The review is on a case-by-case basis, and the acquiring utility has the burden of demonstrating in a formal hearing process that a higher value than the book value is justified and in the public interest.

SB 152 would require the Commission to include “in the acquiring utility’s rate base the entire value of all assets acquired as measured by the fair market value” or purchase price, whichever is less. The fair market value would be set by three appraisers, with one chosen by the acquiring utility, one by the utility to be acquired, and the third chosen by those two. The Commission would be required to accept the average of the value so determined by these three individuals, and would not be allowed to dispute or question the methods of valuation nor the determined current value.

There are several concerns that I have regarding the proposal. The first is that the bill effects a delegation of governmental power - that being the authority and obligation to determine the value of an acquired utility asset for purposes of inclusion in a regulated utility’s rate base - to three non-governmental individuals. The public is ill-served by removing from the Public Service Commission the authority and obligation to make a determination on how an asset should be valued and from the Commission staff and third-party intervenors such as the Attorney General’s Office, the right to evaluate and test evidence provided under oath as to the proper value in such a case. Additionally, there are constitutional non-delegation issues associated with the transfer of this governmental power, resulting in imposition of new costs to ratepayers, to three private individuals.

Additionally, as a practical matter, since the Commission’s decisions are subject to judicial review, the effect of requiring the Commission to accept the average value as determined by three individuals, will be to create an issue that will likely have to be resolved at the appellate level, since the agency would no longer be in a position to determine value and that agency decision would no longer be subject to the deference accorded to exercises of judgment by the “fact-finder.”

A third concern is that the bill could result in ratepayers of acquired utility systems paying twice for their utility assets. By failing to use the original cost and depreciation in the valuation of utility assets, customers of acquired systems whose infrastructure has been paid for once could be required, in essence, to pay again for an asset based on “current value” exclusive of cost and depreciation.

A fourth concern is that of socializing the costs of acquisition by spreading those costs to the entire customer base of the utility acquiring the asset, rather than on the customers of the acquired asset. Kentucky-American Water Company has excess capacity, in part as a result of approval of a second water treatment plant based on projections of a four-fold increase in demand that has not materialized. The existing customer base is paying the debt and a rate of return on the debt, and could now be required to underwrite the expansion of the KAWC system into new geographic areas.

Finally, since both an acquiring utility and one disposing of a water or sewer asset would benefit through a generous appraisal of the asset value, it is important that the public and Attorney General’s office have the ability to challenge the valuation and to assure that the valuation is appropriate. This concern is especially acute where “city-owned” assets are considered, since the ability of the Commission to review the records of municipalities in such a transaction is much more limited than in a transaction between regulated utilities.

The Commission must retain the ability to determine how acquired assets will be valued, and what value should be included in the acquiring utility’s rate base, as well as who should be required to pay for the acquisition. The concern that the bill will result in higher utility costs for ratepayers is compounded by the expressed interest of Kentucky-American Water Company to “establish a position of leadership in the provision of wastewater services in the KY market.” If the company does expand into the area of wastewater treatment, the bill could result in ratepayers overpaying for both water and sewer assets, since the bill as written applies to both.

Thank you for your consideration of these concerns.



Tom FitzGerald

Cc: Lindsey Ingram III, Esq. Stoll Keenon Ogden
Jeff Derouen, Public Service Commission

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