Monday, December 12, 2011

Why West Lafayette Soon Could be Paying for Water It Doesn't Even Use

- Charlie Tritschler & Marc Loudon Journal-Courier Op-Ed 12/12/11

Last week the Indiana Regulatory Utility Commission started hearings to decide whether Indiana American Water Co. gets its proposed 8.64 percent rate increase. By contrast, the state consumer advocacy group has called for a 4.1 percent decrease for the company that serves West Lafayette.

The catch is that the company and regulators implemented single tariff pricing (i.e., same price statewide) in 1997. The requirement now remains that the lower West Lafayette rates go up another 60 percent just to catch up to higher rates elsewhere. The Journal & Courier has reported expertly on the wide disparity of rates on the west and east side of the Wabash River and why.

What alarmed us and motivates writing is the perverse process of management and regulation in the water industry. While the regulators and the company settle on exact dollar rates, these experts still use both gallons (according to invoices) and hundred cubic feet (according to regulations). Comparisons are muddled. Transparency of data is hindered, but relevant points from the hearings can be extracted below.

Often the lower cost of municipal utilities, including those in Lafayette, is attributed to income tax exemption. The 35 percent corporate tax rate is often cited, but Indiana American now discloses that it has not paid income tax in the last three years - that's zero percent. Moreover, the company has tax loss carry forwards for years to come to avoid tax.

Therefore, it's not hard to believe that the company rejected the 100 percent depreciation tax reduction, part of the federal economic stimulus for 2010. Not paying the estimated income tax expense is ignored for rate making. Rather its income tax expense is reimbursed by you - by the water customers - in your rate paid to the company to cover future tax. One witness testified that "the fact that the company pays no tax in any given year is completely irrelevant to whether or not it incurs tax expense for ratemaking."

What residents and businesses have also paid for can be found way out at 4803 N. Ninth St. The Indiana American facility sits by the old Davis Ferry Bridge on the other side of the Wabash River. Back in West Lafayette, on Happy Hollow Road, there were seven water main breaks last year. Some resulted in considerable yard damage. The point is that the company is not maintaining their aging West Lafayette infrastructure.

In spite of neglected maintenance within the city, existing ratepayers are being asked to pay more for system expansion outside the city to serve future customers. Indiana American President Alan DeBoy conceded that "our current replacement rate of 0.7 percent (143 years) is beyond the expected useful life of water mains." So less than 1 percent of water mains are being replaced, which would date back to the founding of Purdue and of the water company.

The company's consultant Kerry Heid testifies that in 2009 the city "received an overall average increase of 25 percent. On a standalone basis because of the new water treatment plant being constructed in West Lafayette, the West Lafayette increase would have been approximately 147 percent." If this expert is correct, then the plant should not have been built at all. Purdue has wells already and so does any home or realty development out in the county not tapped into - or trapped into - company water mains. Failure to maintain our old mains and building new mains to nowhere means old customers pay for new customers, if they materialize.

Heid testified that the company provides water "whether the customer uses one CCF (hundred cubic feet) or 10,000 CCF. Approximately 96 percent of company costs are fixed; only 4 percent of company costs are variable, i.e. varies based upon customer usage." Of course, the water usage itself costs nothing, zero, except for treatment.

This leads to the latest tactic of Indiana American pricing. The customer must pay for not using water. The water rates must be increased to offset conservation. Indiana American Vice President Bruce Hauk testified "the more successful our conservation efforts will be, the less water we will sell, which will mean less gallons over which we can recover fixed costs."

DeBoy testified: "Reduced consumption is a driver of the rate increase. Our authorized revenues are slightly more than $199 million. With our current consumption levels, however, our pro forma revenues at present rates are approximately $194 million. Making up that difference represents more than 24 percent of our overall requested increase."

So the company asks for rate increases to offset volume declines due to conservation.

In any event, close to $10 million (include sales tax) will leave the town every year and is not spent in Tippecanoe County, except for some property tax. Indiana's secure and sustainable water resources cannot be exported, but the profits and company fees derived from our water can be drained away.

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