RIPPLE EFFECT

A statewide fight over the biggest-ever water-rate-increase request could spill over into St. Louis County

What began as a trickle of protests three years ago has turned into a flood as businesses and municipalities across the state face a staggering increase in water bills proposed by the Missouri-American Water Company.

The proposed 51 percent rate increase, now before the Missouri Public Service Commission (PSC), would pay for a $75 million water-treatment plant in St. Joseph, just north of Kansas City. The increase would not pay for any local improvements, but residential water bills in the city of St. Peters and St. Charles County would jump by $9 a month.

Local Missouri-American customers say they shouldn't have to pay for a water-treatment plant on the other side of the state. St. Peters and St. Charles County have hired a lawyer, as have a group of towns in southwest Missouri that are facing identical rate hikes to pay for the St. Joseph plant. Fearing they could be hit next, companies such as Boeing and Ford are also fighting the increase, even though it wouldn't affect them. The companies, all in St. Louis County, are served by St. Louis County Water. American Water Works of New Jersey, the nation's largest water company, owns Missouri-American and St. Louis County Water. The two companies are expected to merge, and American Water Works likes to spread expenses among ratepayers no matter where they live.

"It's unusual for us to get involved in a case on this basis, but we think that the precedent it could set is so bad," says attorney Diana Vuylsteke, who is representing a group called Missouri Industrial Energy Consumers that includes Boeing, Ford and other St. Louis County companies. "This is an issue that small and large customers should care about. We're not sure what the impact ultimately could be. We think the principle is very unfair."

John Coffman, deputy public counsel for the Missouri Office of the Public Counsel, says the proposal, which his office opposes, may be the largest water-rate case in state history. "There really is nothing, as far as water-utility regulation goes, that I know about that's ever been on this scale," Coffman says. "This case is really unusual. There's so much money involved."

Faced with so much opposition, Missouri-American is trying to settle the case before the PSC holds hearings in June to determine whether the commission should grant the rate hike. Terms of the company's proposed settlement are confidential, but Dale Johansen, the commission's water-and-sewer-department manager, confirmed the company's offer would decrease the rate hike and eventually result in a merger between Missouri-American and St. Louis County Water. Lawyers involved in settlement talks won't say just what Missouri-American has proposed or what effect the offer might have on water rates in St. Louis County. Lisa Golden, company spokeswoman, also declined comment but says a settlement could be announced by the end of this week.

Lawyers for rate-hike opponents say the case might decide the future of single-tariff pricing, a one-size-fits-all pricing scheme in which a company's capital-improvement costs are spread among all customers, even those who don't get any direct benefit. The PSC has been moving toward single-tariff pricing since 1990, when it allowed Missouri-American to spread some costs among ratepayers in different water districts. After American Water Works purchased Missouri-American, the water company in 1997 convinced the commission to install one $17.67 monthly rate for nearly 100,000 customers in the seven districts served by Missouri-American. The single-bill system came with a rate hike that paid for a new $10.9 million pipeline in St. Charles County, which has about 26,000 Missouri-American customers -- about 27 percent of the company's total customer base. But the commission, whose staff endorsed single-tariff pricing, reserved judgment on whether it would allow single-tariff pricing in the future.

A 1998 study ordered by the commission showed that some water districts are already subsidizing others because of the commission's 1997 decision permitting Missouri-American to charge a single rate for all its customers. According to the study, St. Charles County ratepayers each year are paying $414,000 less than what it actually costs to provide service in the county. Meanwhile, St. Joseph customers are paying $940,000 more than service costs. Ernie Harwig, a consultant retained by Boeing and other companies to fight the proposed rate hike, says discrepancies will widen if Missouri-American gets its 51 percent hike to pay for the St. Joseph plant. In the 1998 study, he figures, St. Charles County would pay $2.8 million a year above its actual service cost, on the basis of an $81 million price tag for the St. Joseph plant (actual costs are now estimated at $75 million). Customers in Joplin would pay nearly $3.8 million above their real costs, and Warrensburg would pay a $1 million annual subsidy. All told, nearly $8 million from other districts would go to St. Joseph to pay for the new plant under single-tariff pricing, according to Harwig's calculations.

Missouri-American says subsidies will even out in the wash. Local ratepayers who are subsidizing other water districts will eventually have the favor returned when they get capital improvements whose cost will be shared statewide, the company has said. But opponents say there's no guarantee that ratepayers in areas that don't need large capital improvements won't get stuck.

Attorney Leland Curtis, who represents St. Charles County and St. Peters, likens single-tariff pricing to the situation of 12 folks who go out for dinner and decide to split the check equally, no matter who orders what. In Curtis' analogy, the waiter, or the PSC, likes the single-check idea because it's less work to figure out the cost of a meal if there's one bill to tally instead of a dozen. The restaurant, or the water company, also likes one check, because diners tend to order expensive food if they know they don't have to pay the full cost -- "They sell a lot of high-priced stuff and they make money," Curtis says. It's the vegetarian who orders macaroni and cheese instead of chateaubriand who gets screwed, because he ends up subsidizing other diners. In the world of water, the vegetarian is the customer on a relatively trouble-free water system and the meat-eaters are the ones who need new water mains and treatment plants.

"It's no different than me going to you and saying, "Hey, here's my electric bill -- why don't you pay it?'" says Stuart Conrad, a Kansas City attorney who is representing industrial customers in St. Joseph opposed to the rate increase. Conrad says his clients are worried they might end up paying for capital improvements in the St. Louis area if the commission approves single-tariff pricing.

In addition to industrial customers in St. Louis County, the proposed rate hike and single-tariff pricing have drawn fire from St. Charles County and other jurisdictions that didn't fight Missouri-American's 1997 rate hike that established a single rate for the company's seven districts. Attorneys for opponents say the size of the proposed hike has gotten everybody's attention. "Now, with this big plant, the price of poker gets different," Curtis says. Curtis and other opponents see the proposed rate hike as a make-or-break issue for single-tariff pricing in Missouri.

The St. Joseph plant is already under construction and scheduled to begin operation this spring. The plant, which gets water from wells, is replacing an aging Missouri River plant in a floodplain that had to be shut down during the 1993 flood. Rather than build a new plant, rate-hike opponents argue, the company should have gone with a cheaper option, such as buying water from Kansas City or diking the old plant to protect it from floods. As part of the rate hike, the PSC will determine whether the new plant is prudent. If the commission decides the company should have gone with a cheaper alternative, American Water Works shareholders could end up paying for the new plant. Otherwise, ratepayers somewhere will pay. If the commission puts all the cost on St. Joseph, rates there will double, Coffman predicts.

Twenty-six of the 45 states that regulate water have adopted some form of single-tariff pricing, according to the National Regulatory Research Institute at Ohio State University. Typically, single-rate tariffs pay for capital improvements in small water districts that otherwise would not be able to afford them without doubling or tripling water bills, says John Wilhelm, a water-utility expert at the institute. States allow single-tariff pricing because it is in the public interest to fix substandard small systems without astronomic rate increases spread among just a few hundred or few thousand customers, he says.

The case in Missouri is different from the norm because the St. Joseph water system, which has about 30,000 customers, isn't considered small. In fact, it's the largest district owned by Missouri-American. "In this case, the small cities like Warrensburg (with about 5,000 customers) and Brunswick (with fewer than 500 customers) would be subsidizing the larger cities," says Coffman. "That seems to be contrary to the biggest public-policy reason that you would have to go to uniform rates."

The biggest wild card in all this is St. Louis County, where 300,000 people get their water from St. Louis County Water. The system is old and has a history of water-main breaks. Just how much it will cost to replace mains hasn't been determined, but everyone expects the company to ask for a rate increase to upgrade the system.

Opponents of the proposed rate hike say they want no part of whatever happens in St. Louis County. "The people in St. Louis should pay for the people in St. Louis," Conrad says. "People in St. Charles should pay for people in St. Charles. Joplin should pay for Joplin. St. Joseph should pay for St. Joseph."

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