SOCIAL ENGINEERING OF UTILITY RATES

The governing principle for water and wastewater utility rates is that rates should be based upon costs of service. These costs are to be assigned and recovered respectively from classes of customers who create such costs. Cross-subsidiztion of one class of customers by another is contrary to the cost of service concept. Well-established case law and AWWA Manual M-1 enunciate this ratemaking principle.

Social engineering of rates can occur when charges are based upon perceived social objectives and/or subsidization instead of costs of service. Recent media stories about federal government subsidization of ticket prices for flights to rural airports provide an example. According to the Wall Street Journal, taxpayers subsidize air service at 109 airports at a cost of $175 million per year. Allegedly, these subsidizes can be as much as $200 to $3,000 per ticket.

Now, it appears that federal social engineering may be entering utility ratemaking. In July, 2011, the Federal Energy Regulatory Commission (FERC) entered an order which apparently allows non-utility developers to construct segments of interstate electric transmission lines to connect remote wind and solar generators to the grid. The obvious purpose of the order is to promote wind and solar generation. FERC asserts that the costs of such new transmission lines are to be borne by utility customers who benefit. It is to be noted that these costs will not be created by utility customers but by developers and the wind and solar generators. Further, determination of who benefits from these costs can be questioned, particularly if the costs of wind and solar generation coupled with the new transmission costs are not competitive with other electric sources of supply. It also should be kept in mind that some jurisdictions may require electric utilities to purchase a portion of their supply as higher-priced wind/solar generation, which suggests that ultimate customers may be bearing no benefit.

There may be another consideration. Currently, some federal regulatory agencies appear to be extending rules and authority into areas where Congress has not spoken. Apparently, there was a Senate bill to socialize the costs of new electric transmission lines. After the Senate bill stalled, FERC initiated its regulatory proposal culminating in the July order. That order, therefore, seems to do what Congress refused to do.

The potential implications of social engineering for water and wastewater ratemaking are not wholly speculative. Simply stated, costs of service can be manipulated to be vulnerable to social "adjustments." Diligent utilities, and their customers, should remain vigilant in their application and acceptance of appropriate cost of service ratemaking.