Why are West Virginia American Water’s rates so high?

Caitlin posted several weeks ago about how high West Virginia American Water’s rates are. Why is that?

A utility’s rates are set by the Public Service Commission to cover the utility’s costs, plus a rate of return. A water utility’s rates are dominated by “fixed costs” – that is, most of the rate you pay for water utility service goes towards paying off past investments in infrastructure. Because rates are set as a cost per gallon, the utility and the Public Service Commission must accurately forecast how many gallons of water the company will sell in order to set a rate that will cover the utility’s costs and provide an appropriate rate of return (which the utility needs to pay off interest on borrowed funds and provide a sufficient return to shareholders that will attract continued investment in the company). If sales decrease, the water utility won’t collect as much money as it needs to cover its costs and will apply to the Public Service Commission for a rate increase.

As I discussed in a previous post, West Virginia American Water embarked on an expansion and regionalization effort in the ’80s and ’90s, and continued to expand its system into the 2000s. In the course of this expansion, WV American Water acquired more and more miles of pipes and infrastructure. But it also acquired more customers, and presumably assumed that the increase in customers, combined with the “efficiency” of a regionalized system, would lead to a stable or even declining rate for its customers.

Instead, it looks like the opposite happened:

WVAW sales2

Even though West Virginia American Water added more and more customers (and more and more fixed costs) to its system, the overall water usage peaked in the late 1990s and has steadily declined since.

As sales of water goes down, the utility has to raise water rates to compensate. As rates go up, people conserve and less water is used. This is not a good cycle for a utility to be in.

Why has this happened? Part no doubt has to do with the de-industrialization of West Virginia over the past twenty years. (Sales to industrial customers declined 60% from 1991 to 2012). Part of it probably has to do with WV American Water needing to spend more on improving and interconnecting the infrastructure of the old, rural water utilities that it acquired than it anticipated. But the bottom line is that WV American Water’s regionalization plan hasn’t worked out well for its customers – both in terms of rates and quality of service.

Note: the data underlying this post was sourced from WV American Water’s annual reports to the West Virginia Public Service Commission for 1992-2012.

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