More on WV American Water’s rate increase

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?

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