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PSC grants rate increase to Ky. American Water, approves surcharge for water main improvements


The Kentucky Public Service Commission (PSC) has granted a rate adjustment to Kentucky American Water Co. (KAWC) that is about one-third less than the amount requested by the utility.

In an order issued Thursday, the PSC authorized a $13.40 million, or about 15.23 percent, increase in Kentucky American’s annual revenue. The utility had requested an increase of $19.86 million, or 22.6 percent.

The rates approved Thursday include a $2.51 increase in the monthly residential customer charge, from $12.49 to $15, and an increase in the usage charge from $5.06 to $5.757 per 1,000 gallons. The average monthly residential bill, for usage of 3,869 gallons, will increase by $5.21, from $32.06 to $37.27. Individual bills will vary with usage.

Other customer classes will see proportionally similar increases. The new rates take effect Friday.

Kentucky American has about 130,000 customers, the vast majority in Lexington and eight surrounding counties in Central Kentucky. It has smaller service areas in Gallatin, Grant and Owen counties and in Jackson and Rockcastle counties.

Kentucky American’s most recent rate increase was granted in August 2016.

After twice rejecting the utility’s proposals in prior rate cases, the PSC granted Kentucky American’s request to begin a qualified infrastructure program, or QIP, to accelerate the replacement of aging water mains. The QIP will be funded through a separate surcharge on customer bills.

The PSC found that Kentucky American’s application in this case both demonstrated a need for the program and provided an assurance that funding it through a surcharge would reduce the magnitude of future rate cases.

In its application, which was filed in November 2018, Kentucky American stated that its system includes 63 miles of cast iron pipe that is between 69 and 134 years old and 514 miles of cast iron, steel or cement pipe that was put in place between 1950 and 1970.

At its current replacement rate, Kentucky American said it would take 58 years to replace the cast iron mains in its system and 377 years for all of the current pipe to be replaced.

The PSC noted in the order that aging water system infrastructure is a national problem that must be addressed in order to continue to provide safe and reliable service to customers. Doing so through the QIP will allow a faster pace of replacement with smaller and more gradual rate increases, the PSC said.

Without the QIP, Kentucky American would seek to recover multiple years of capital investment costs in a single proceeding, “with the result that customers experience rate shock from large increases,” the PSC said. The PSC also noted that it has the authority to rescind approval of the QIP if it does not work as intended.

The surcharge will be adjusted annually, based on both projected spending over a 12-month period and a true-up for actual spending in the prior 12 months. The PSC will take up to 90 days to review each annual QIP. Kentucky American will file its first QIP application by April of next year for the 12 months from July 2020 through June 2021.

In arriving at the lower figure for the base revenue increase, the PSC made a number of adjustments. The largest adjustment was a decrease in allowable revenue of $3.35 million to reflect an authorized rate of return on equity of 9.70 percent, rather than the 10.8 percent requested by Kentucky-American.

An adjustment of about $1.65 million was made to Kentucky American’s tax expenses, largely connected to changes resulting from the federal corporate income tax reduction that took effect in 2018. The PSC also disallowed $1.15 million in various employee incentive payments tied to the utility’s financial performance.

Adjustments were made to various other expenses, including employee pension costs, the cost of power, and certain consultant costs related to the rate case itself; costs related to excessive water loss also were disallowed.

The PSC approved Kentucky American’s request for a single rate structure across its system. Since its last rate case, Kentucky American had acquired the water systems of the Eastern Rockcastle Water Association and North Middletown. Customers of those two small systems will see rate decreases, while the effect of the decreases on Kentucky American’s other customers will be minimal.

Similarly, the PSC approved Kentucky American’s request that the actual purchase price of the North Middletown system, rather than the somewhat lower book value, be used in the overall rate calculations. The effect of granting that request also will be minimal, the PSC said.

Denying both the rate equalization and purchase price requests would discourage future water system regionalization and consolidation and would have run counter to state policy that encourages such efforts, the PSC said.

The other parties to the case were the Kentucky Office of Attorney General and Lexington-Fayette Urban County Government. The PSC conducted a formal hearing in the case on May 13 and 14, and held a public comment meeting in Lexington on May 6.

Thursday’s order, videos of the hearing and public meeting, and other records in the case are available on the PSC website, psc.ky.gov. The case number is 2018-00358.

The PSC is an independent agency attached for administrative purposes to the Energy and Environment Cabinet. It regulates more than 1,100 gas, water, sewer, electric and telecommunication utilities operating in Kentucky.

From Kentucky Public Service Commission


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