The Kentucky Public Service Commission issued an order on June 6 granting a temporary flat rate increase to the Southern Water and Sewer District and “strongly” encouraging the district to sell its assets or merge with another utility.
The order came as a shock, however, to Southern officials.
“It was completed unexpected, the way that the order was issued, or the manner in which they issued the flat rate billing,” Southern Water Commission Chairman Jeff Prater said. “It just took us completely by surprise … It’s a strange situation. Totally unexpected, and it’s definitely not what we asked for, but we may be forced to implement it and forced to deal with it.”
Accepting the recommendation of the Kentucky Attorney General’s Office of Rate Intervention, the PSC ordered Southern Water to suspend all meter testing and start charging all retail customers a flat rate of $58.82 per month, an increase of about 42 percent over what residents using 4,000 gallons per month typically pay.
The flat rate, which went into effect on June 6, will increase average customer bills by about $17, the PSC reported, from $41.40 to $58.82.
Southern Water’s rate increase application, which seeks an increase of 32.3 percent, is still pending. The flat rate approved Thursday is “subject to a refund” during the time it takes that case to be finalized with the PSC. It is being awarded “to prevent Southern District’s financial impairment during the development of the record,” the order states.
In issuing the order, the PSC found that the district’s credit or operations “will be materially impaired” unless an interim rate increase is granted prior to the final order in the rate increase application case.
The PSC reached its decision “reluctantly,” a press release said, because Southern Water has not tested meters in 10 years, has no replacement meters in stock and “cannot rely on the accuracy” of its meters. The order also noted that Southern Water did not object or offer other suggestions to the attorney general’s recommendation.
Prater said Southern Water did not object or offer another suggestion because the district’s across-the-board 32.3 percent rate increase application asserted its position.
“We felt like we had already stated that we thought an across-the-board rate increase would be the most fair,” he said.
The PSC, however, argued that a flat rate is the only way to make rates fair because Southern Water meters are old, untested and inaccurate. The PSC reported that if it approved a regular rate increase, rather than a flat rate, then a “significant portion of the increase” would be paid by customers “who are currently subsidizing at least 15 percent” of Southern Water customers who are billed for less water than they are using.
“Given this reality, there is no equitable way to ensure that Southern District’s ratepayers receive fair, just and reasonable treatment other than to institute a flat rate for the interim period pending a final decision by the Commission,” the order states.
The flat rate would generate more than $3.8 million for Southern Water, the PSC reported, and the order “should not be interpreted as a final determination that the revenue requirement as a whole, and any expense included therein, is reasonable.”
Prater said he is “very concerned” about the flat rate.
Prater said officials are working to determine whether the order can be modified to help low income customers.
“It concerns me greatly, having a flat rate of 58 dollars and something because it would adversely affect low income or fixed income people,” Prater said. “It concerns me because there’s a lot of people who are probably on a fixed income that is going to dramatically increase their bill … We’re going to look at any kind of unexplored options that we can to see if we could be less impactful on some of the people that it would affect.”
The PSC also accepted the attorney general’s recommendation that Southern Water suspend all meter readings — a process that district officials say ties up several employees for two weeks per month.
“The poor condition of Southern District’s meters, the lack of inventory of reliable replacements, and Southern District’s dire financial condition give rise to an extraordinary circumstance and the Commission reluctantly finds that Southern District should temporarily cease both meter reading and testing, and, instead, focus its efforts upon replacing all meters in its system,” the order says.
The PSC ordered Southern to request bids for the replacement of its meters by July 15. Prater doesn’t expect any problem meeting that deadline because Utilities Management Group has already been working toward that goal. At the last meeting, the commission gave UMG the authority to develop specifications that would be needed to seek bids for new meters, and officials said they’ve already started comparing prices between companies that sell them.
Having the temporary flat rate and/or the 32.3 percent rate that Southern Water is seeking in its application would make it easier for the district to obtain a loan for meter replacement, Prater said.
The PSC also addressed the $150,000 loan Southern Water obtained recently from the Floyd County Fiscal Court.
During its most recent meeting, the Southern Water commission voted to seek a two-year bank loan to repay the $150,000 to the fiscal court, but the PSC found that Southern Water “should not enter into any formal contract for management, finance or otherwise for longer than 30 days without obtaining prior Commission approval.”
Prater said he would not sign any loan documents without approval.
In the order, the PSC also “strongly encourages” Southern Water to consider merging or selling the district — something Prater is not in favor of doing.
“Southern District representatives testified that they wanted to work to improve Southern District’s financial position before exploring such options,” the order says. “However, given the significant financial issues, such as poor or nonexistent internal controls; management issues, such as allowing a significant portion of its customers pay for less water than actually used; and infrastructure issues, such as non-functioning meters and significant water loss from leaks, it is in the best interest of Southern District’s ratepayers that the Board seriously consider the financial and service benefits of being acquired by a financially-stable water utility.”
Prater said he agrees that “all options have to be explored” at Southern Water, but he said a merger and/or sell would not help the district deal with its short-term funding needs or benefit customers in the long term.
If Southern were to sell its system, “it would be an investor-owned utility” that makes decisions based on revenue, not people, Prater said, and a merger would take a long period of time to evaluate and implement.
“I don’t think either of those is a viable option for the short term problems that we have that have to be addressed immediately,” he said. “The revenue and cash flow are so low, there are things that have to be done in the next 30 to 90 days to keep the district going, and I think a merger and the sell of Southern by an investor-owned would be something that is considered, but it’s much more a longer term outlook than the immediate needs we have.”
He said if the district is sold, officials would have to “move very carefully” to ensure that “the true value of the water district is paid.”
He said, “I could see a business-oriented company coming in and trying to take advantage of Southern Water because it is in a critical condition.”
He said officials will work to implement the PSC order as soon as possible, while also working to seek if the order can be modified to help low income residents.
“There’s a genuine, earnest concern by all the commissioners to address the problems at Southern,” Prater said. “This flat rate is not what we asked for, but we have to work under the regulations of the PSC. We’ll try, everything within our power, to minimize the impact to the customers, but at the end of the day, we want to fix all the problems at Southern Water and provide people with safe, reliable drinking water at the lowest rate that we can possibly do that. It’s a challenge, but we’re earnestly working to solve every problem that we can as quickly as we can.”
Commission members were appointed to the commission about four months ago, after all other members resigned.