The Kentucky Public Service Commission amended an order this week in which all Southern Water and Sewer District customers are charged a flat rate of $58.82.

The amendment was filed July 17, a day after district officials testified in Frankfort as part of an investigation into high water loss in the district. 

The PSC “reluctantly” approved that across-the-board temporary flat rate in June — an increase of about 42 percent over what Southern Water customers using 4,000 gallons per month typically pay. Southern Water is currently seeking a rate increase of about 32.3 percent, and the PSC permitted the flat rate because the district is struggling financially. 

On July 17, the PSC amended the order, citing testimony provided on July 16, so that businesses pay for water based on the volume used instead of the flat rate. The change came at the request of Southern Water officials, who reported businesses aren’t paying their fair share with the flat rate. Commercial customers will now pay a minimum bill of $33.34 and $11.51 for every additional 2,000 gallons of water used. 

Officials said the expectation is that the flat rate for residential customers will decrease because Southern Water will get more funds from businesses.

The PSC held the hearing in Frankfort on June 16 in a case in which the agency is investigating water loss rates at 10 Kentucky utilities that have water losses of 35 percent or more. 

Southern Water had a water loss rate of more than 62 percent in 2018, causing a loss of $474,299, the PSC reported. 

PSC Chairman Michael Schmitt said the high water loss was a “symptom” of a mismanagement problem. He said some of the information gathered in this hearing would be used to make a determination in Southern Water’s pending rate case.

Schmitt gave an overview of several issues Southern Water currently faces, including the fact that commissioners were appointed in February and have not received formal training. He said the resignation of the former commission members came after the PSC “basically had prepared charges or civil penalty assessments” against them. 

Chairman Jeff Prater testified about several issues that have already been highlighted publicly, including the discovery that 750 meters were “zero read” meters and that meters have not been tested, as required, in 10 years. 

Prater said Utilities Management Group, which manages the district, identified “the most pressing needs” as meter replacements and installing master meters, saying that accurate meters are needed in order to keep the district financially afloat and to detect water loss.  

The commission called a special meeting to be held after press deadline on Thursday to receive bids for the replacement of all district meters — a project that officials previously reported could cost more than $1 million. 

Prater told the PSC about that project, telling them that getting funding would be the biggest challenge. When Schmitt suggested the district seek a temporary surcharge as part of its rate application, Prater said officials believe getting financing through the water meter company would be the “fastest way to get all meters changed out.” Schmitt said, however, that a surcharge could temporarily provide funds until a loan is secured.

Prater also testified that he believes Southern’s customer base will decrease over the next 10 years, a comment that lead PSC officials to question him about selling the district. Kentucky American Water recently expressed interest in buying Southern Water, but Prater said he does not favor a sell. 

He said that officials would rather the district have a local board instead of selling it to a privately-owned corporation. 

“Could they do any worse by Southern’s citizens and ratepayers than its own people did, and the prior board, over the past 15, 20 years?” Schmitt asked. “How could they, whatever they did, how could they do any worse?”

Schmitt pointed out that in a recent rate case, Kentucky American Water customers are now paying $20 less than they were, citing a bill that’s less than those at Southern Water. 

Several people testified about financial matters at Southern Water, including around $2,000 in questionable purchases at restaurants, $35,000 that was allegedly embezzled by a former employee and, among other things, the $150,000 loan that Southern Water was required to pay back to the fiscal court by July 16 before a $100 daily penalty kicks in.

Southern Water is seeking a loan to repay the fiscal court. 

The fiscal court did not mention the late payment during its meeting Tuesday. 

PSC Assistant General Counsel Nancy J. Vinsel suggested that the former employee may still owe $500 to the district, according to documents supplied in the case, and she asked for proof that all payments were made. She also pointed out that, according to documents provided, Southern Water overpaid Frasure’s Electric by $3,000 in 2016 and underpaid the company $600 in 2017. 

“This goes to one of the core issues that I think created the Southern problem,” PSC Vice Chairman Robert Cicero said. He suggested that Southern Water seek restitution for overpayments.

Auditor Richard Paulmann and CPA Jeff Reed answered numerous questions about finances during the hearing.

Paulmann reported he didn’t catch the alleged $35,000 embezzlement because he wasn’t informed about it. He also revealed that his audits did not catch questionable credit card receipts and purchases at restaurants because they were less than $160,000 — less than the “tolerable measurement” he uses when reviewing financial records for audits. 

Paulmann, who also does audits several Floyd County cities, said any incident below that $160,000 would not necessarily be considered a material weakness in internal controls in the audit. 

Among other issues, Vinsel asked Paulmann whether allowing a former manager, who is the sole user of a credit card, to approve all purchase would be considered a material weakness in an audit. 

“It’s poor internal control, but I don’t know if I would go to a material weakness there or not,” he said, saying that it would be a material weakness if it met that $160,000 threshold.

Cicero appeared to take issue with that $160,000 threshold. 

“Are you saying that any incident, to be material, has to be $160,000?” he asked. 

Paulmann said that “there’s not a lot of looking at items” below that amount. 

“Any materiality would be based on the size of the organization, not on a standard $160,000, correct?” Cicero asked.

Paulmann said it would depend on the situation. He said the threshold is based off of Southern’s assets. 

“But in this case, where you had the general manager who was charging items to a company credit card, approving them and authorizing payment, I would think somewhere in the sampling process, you would at least check some of those to see if there was an issue or not,” Cicero said. 

Paulmann said the sampling of a $1,000 purchase at Southern is not normally done during an audit. 

Calling the reasons for the district’s financial problems a “complete mismanagement of the system,” Cicero voiced frustration that previous audits didn’t catch the problems.

“I know you’re performing an audit and it sounds like you know what you’re talking about, but it leaves us with questions on what to expect when an audit is complete if these kinds of situations can arise even after an audit and you’re left with a complete — well, at this point, if we let it go — would be a complete failure of the system,” Cicero said. He said Southern Water is basically “at the doorstep of bankruptcy.”

“Okay,” Paulmann said.

“I didn’t ask for an answer, but you understand the position that we’re in,” Cicero said.

“I do, yes,” Paulmann said. 

Cicero continued, “So, I guess there is no bar there that would prevent this from happening, based on the fact that you’ve done a complete audit and we are still in this situation.”

“Okay. Yes,” Paulmann said. 

At the hearing, it was suggested that the PSC may be required to help Southern Water and Prestonsburg City Utilities finalize the asset transfer that was approved in 2017 and has not been finalized. 

Prater said negotiations to unwind the agreement have stalled. Prater said it’s a “hindrance” to both utilities, moving forward.

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