Statement in Opposition to the Adoption of the Joint Proposal on Behalf of the Municipal Consortium

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NewImageOn July 3, 2014, a Joint Proposal (“JP”) was submitted to Administrative Law Judge David Van Ort for his review.

By Ruling Establishing Schedule (Issued July 10, 2014), Judge Van Ort scheduled Statements in Support or Opposition are to be filed on July 22, 2014 with replies due on August 1, 2014. The JP is signed by Staff and United Water New Rochelle, Inc. (“UWNR”) and United Water Westchester (“UWW”). Municipal Intervenors (“MI”) also support the JP as it relates to Cases 13-W-0564 and 14-W-0006. MI is not an intervenor in Case 13-W-0539 and, therefore, is taking no position on the JP in that case.

This Statement in Opposition is submitted on behalf of the Municipal Consortium (“MC”). The MC consists of the following municipalities in’s UWNR’s service territory.

City of New Rochelle
Village of Dobbs Ferry
Village of Hastings
Village of Pelham
Village of Pelham Manor
Village of Bronxville
Village of Ardsley
Town of Eastchester
Village of Tuckahoe

The MC’s objections to the JP are as follows:

1. The recommended rate increases over three years is approximately three times the current rate of inflation. Such rate increases are not sustainable for municipalities that have to live under a 2% annual cap.

2. To justify a rate increase, a utility must show that it is being run efficiently and economically. There is no such showing in this case. The facts demonstrate just the opposite. The fact that the JP now requires the companies “to perform a cost/benefit analysis on major projects and demonstrate a clear prioritization plan” demonstrates that the companies were not being managed efficiently and economically. Management has failed to seek Economic Obsolescence adjustments for property taxes until October 2013. This means that UWNR ratepayers have paid unnecessarily high water rates UWNR for many years in the past.

3. Non-Revenue Water (“NRW”) is unacceptably high and neither UWNR nor UWW have been able to reduce NRW to the 18% reporting threshold. The JP merely restates what is already required by Commission regulation. There should be a specific incentive mechanism to reduce NRW.

4. The return on equity of 9.2% is unacceptably high given the very low business and financial risk of these companies.

5. The M&S Fees provision does not safeguard the ratepayers in the event the audit uncovers inappropriate charges and/or allocations. The MC reserves its right to contest other elements of the JP at the evidentiary hearing to be held on August 14, 2014.

The Recommend Rate Increase is Excessive

The proposed rate increases over the three-year rate plan set forth in the JP for UWNR are three times the current rate of inflation as measured by the CPI Index for all items.

CPI Index (all items)
(NY – NJ) Percent Change

2006 603.9 -
2007 621.106 2.998%
2008 644.951 3.839%
2009 642.658 (0.356%)
2010 653.198 1.640%
2011 673.818 3.157%
2012 687.761 2.069%
2013 697.836 1.465%

Past UWNR rate increases have been much higher than the rate of inflation. The JP in Case 09-W-0824 provided for a whopping 71.32% rate increase for Rate Year 1 (twelve months ending October 31, 2011), and then followed by inflationary increases of 2.40%, 1.01% and 1.27% for Rate Years 2, 3 and 4, respectively. A “levelized” base rate increase of 51.61%, 11.12%, 5.13% and 1.27% was also included in the Joint Proposal. The Commission adopted the JP by Order Adopting Terms of the Joint Proposal and Establishing a Four-Year Rate Plan (issued and effective October 15, 2010).

The Commission’s directive to UWNY in its recent Order Establishing Rates for United Water New York Inc. (Issued and Effective June 26, 2014), Case 13-W-0295, (“UWNY Order”) is equally applicable here.

More substantively, the Company should take a fresh look at the reasons for its revenue requirement escalation, persistently over nearly a decade now; identify which causes are more directly controllable by the Company efforts and differentiate them from those less controllable; and apply its full managerial capabilities across the spectrum of the Company’s challenges thus identified.

UWNR is Not Being Managed Economically and Efficiently – a Precondition to any Rate Increase

Apparently, UWNR does not perform cost benefit analyses as other utilities do in the routine planning of major capital projects. That is why there is a specific provision in the current JP to require them to do so. This is evidence of poor management. In addition, UWNR has not applied for Economic Obsolescence Awards (prior to October 2013) from the NYS Office of Real Property Tax Services. Virtually all utilities do so. The failure to file for EO adjustments was noted in the UWNY Order: As became clear through the course of this case, UWNY failed to file with ORPTS for an EO adjustment in years past. Only in response to Staff discovery questions as to why such filings had not been made did the Company then file a late EO application this year. The record developed on this issue reveals that UWNY's EO application contained substantial errors. UWNY Order at page 27. UWNY, UWNR and UWW have the same management team. This is further evidence of poor management. UWNR ratepayers have been paying higher property taxes as a result.

Non-Revenue Water is Unacceptably High

Non-Revenue Water (“NRW”) averaged 24.3% for UWNR for the five-year period 2008 to 2012. This is unacceptably high and the JP does nothing to address it other than to require UWNR to follow the Commission’s reporting regulations that provide for a report and plan of action when the NRW exceeds 18%. Apparently UWNR never complied with the Commission’s regulation. UWW did commission Halcrow Engineers, P.E. (“Halcrow”) to address NRW. In a report dated June 29, 2011, Halcrow wrote: Non-Revenue Water (NRW) is an importance issue to United Water Westchester (UWW) and the communities it serves. UWW is taking this issue seriously and is expending significant resources to realize an immediate reduction in NRW. The ultimate goal of any sustainable and responsible NRW plan is to drive the water loss percentage as low as possible. In the medium to longer term, NRW levels in the 15%- 18% range should be the goal to drive towards in UWW service area given the geographical topography and the diminishing returns in regards to the cost to reduce NRW versus what is saved. The second key goal in this program is to ensure that UWW sustain the level once it is reached. Reducing the NRW levels to a one time low without this sustainability will not be regarded as a successful outcome given the rising cost of purchased water.

Halcrow Report first paragraph of the Executive Summary.

The JP has no incentive mechanism to encourage UWNR or UWW to aggressively lower NRW. And that is a major failing of the JP. The MC suggests that rate relief be withheld until UWNR and UWW submit specific plans to reduce NRW to the Department of Public Service Staff. The plan should be self-executing in that if a certain level of NRW was not achieved by a date certain then there would be a financial penalty of a magnitude that would ensure full and undivided management attention.

The Return on Equity it Too High

A 9.2% return on equity for a poorly run utility is an insult to the ratepayers. The JP, if adopted, simply rewards poor management and condemns ratepayers to pay rates that are higher than they should be even under efficient and economical management. How can it be said that a water utility has a return on equity equivalent to Con Edison that provides electric, gas and steam service in New York City? This defies commons sense just from a business risk perspective. In the Order Approving Electric, Gas and Steam Rate Plans in Accord with Joint Proposal (Issued and Effective February 21, 2014), Cases 13-E-0030, et. al., the Commission adopted a 9.2% ROE for electric and a 9.3% ROE for gas and steam.

To give these water utilities a return comparable to that provided to Con Edison is a windfall to the shareholders and encouragement to UWNR management that its management behavior can be sub par but it will still receive above par returns. There is something wrong with the JP’s resolution of the return on equity in terms of public policy.

The JP Does Not Protect Ratepayers from Inappropriate Management & Service Fees

The JP acknowledges that the Commission in the UWNY Order has required UWNY to perform an audit of the M&S fees. The JP simply requires UWNR to “coordinate with UWNY with respect to such audit to avoid duplication of effort and the wasting of resources.” JP at paragraph 7, page 9. UWNR agrees to adopt any Commission ordered requirement flowing from the M&S audit. Id. The problem is such a provision does not protect current ratepayers from inappropriate charges that may (and probably will) be discovered in the M&S audit. Thus, the JP fails miserably in the absence of setting some level of rates associated with M&S fees temporary and subject to refund. The MC suggests that at least 50% of the rates associated with M&S fees be made temporary and subject to refund to protect the ratepayers from some of the types of inappropriate charges found in the UWNY case, e.g., alcohol and a wives breakfast.

CONCLUSION

The JP is not in the public interest, represents bad public policy and should not be adopted. The MC will so demonstrate at the evidentiary hearing to be held in this matter on August 14, 2014.

Respectfully submitted,

Daniel P. Duthie, Esq. on behalf of the Municipal Consortium July 22, 2014

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