Kentucky American Water Company's SB 163 is Unfair to Ratepayers - KRC Provides Extensive Comments Opposing the Bill

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SB 163 would allow Kentucky-American Water Company to propose a "fair market" valuation for water systems it acquires, rather than the lower book value of the systems. There already exists a standard by which the Public Service Commission can approve the valuation of an acquired municipal water system at higher-than book value, but only if it is demonstrated to be in the public interest and not to appreciably affect rates for existing customers. SB 163 sends the wrong message to the Public Service Commission, and could saddle ratepayers with paying off an inflated value for an acquired water system.

SB 163 was passed out of committee after opponents of the bill were allowed only 10 minutes to explain their opposition to the bill. Please call 1-800-372-7181 and ask "All Senators To Protect Kentucky-American Water's ratepayers needs, not their shareholders unjustified profits, and vote NO on SB 163."

Below is the letter that KRC sent to the Committee members, which is referenced in this Lexington Herald Leader editorial:

Dear Senator:

I'm writing to ask that you oppose Senate Bill 163.

SB 163 would allow Kentucky American Water Company and any other investor-owned water or sewer utility, to seek to recover the “fair market value” of water or sewer systems that it acquires, rather than the depreciated book value of those systems. Evidence from other states indicates the result, if approved by the Public Service Commission, will be over-valuation of the acquired assets and increased rates to both the current and new ratepayers.

Several years ago, Kentucky American sought and received approval to build an additional water treatment plant on the Kentucky River, based on projected water demand that greatly exceeded what the actual demand has been. The result is that Lexington customers have been paying the costs of an investment not needed to serve their water needs.

The prevailing regulatory standard for valuing a utility asset is the original cost less the depreciation on the asset. A second method is that of the reconstruction or replacement cost for the utility asset to be acquired.

The method proposed in this bill would be based on the "fair market value" based on appraisal “comparables,” which is theoretical since there is no “market” for the sale of municipal utilities. Such a theoretical value would likely diverge upwards from the book value – original cost of the assets net of depreciation.

What does the bill mean for the former municipal customers who are now ratepayers of KAWC? If approved, since the municipal system would be included by KAWC in a unitary tariff, rather than paying simply for the operation and maintenance of the existing system, the former municipal customers would be paying again for the same system by paying a portion of the costs of the system acquisition and KAWC’s return on the investment – in effect paying twice for the former municipal system.

And KAWC’s existing customers? They would be paying a portion of that acquisition cost and KAWC’s return on the investment, on top of paying the costs and profit on the unneeded water treatment plant that would now be serving the former municipal customers.

There is no need for this bill, since the Public Service Commission has already indicated in the case of the Delta Gas acquisition of Gas Service Company, that under the appropriate conditions the Commission will entertain cost recovery at higher than the book value. The Delta Order lays out these considerations:

"This Commission has concluded that plant acquisition adjustments should not be denied as a matter of rigid rate-making policy but that each instance should be evaluated on its own merits and, if it is demonstrated that. the acquisition at a cost above book value is in the public interest, the utility should be allowed to recover its investment. The Commission maintains its position that the net original cost of plant devoted to utility use is the fair value for rate-making purposes, unless the utility can prove, with conclusive evidence, that the overall operations and financial condition of the utility have benefited from acquisitions at prices in excess of net book value. The burden of proof is upon the utility to justify its investment at the price in excess of net original cost based on economic and quality of service criteria. In order to meet this burden of proof, evidence must be submitted that shows that the purchase price was established upon arms-length negotiations, the initial investment plus the cost of restoring the facilities to required standards will not adversely impact the overall costs and rates of the existing and new customers, operational economies can be achieved through the acquisition, the purchase price of utility and non-utility property can be clearly identified, and the purchase will result in overall benefits in the financial and service aspects of the utility's operations."

In the Matter of: An Adjustment Of Rates Of Delta Natural Gas Company, Case No. 9059, September 11, 1985.

Nothing in current law prevents a utility from proposing a fair market value approach to valuation, provided it can meet the Delta standards, so that the bill is not needed. In order to make the bill fair, three critical changes are needed in the bill. First, it must be made clearer that the Commission is not obligated to accept the valuation approach proposed by the utility. Second, the Delta standards must be incorporated into the statute in order to protect ratepayers. Finally, the Commission’s jurisdiction under the entire Chapter 278 must be recognized as being unaffected, rather than just KRS 278.040.

I encourage you to oppose SB 163 as written.


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