Last month, the Wall Street Journal reported that more commercial and manufacturing customers are generating their own electricity supplies instead of purchasing power from electric public utilities. (September 18, 2013, page A1). This trend, which has quadrupled since 2006, in turn is threatening the revenues and growth of the utilities losing such loads on their systems.
Regulators as well as electric utilities are concerned. As large electric users leave a utility system, the remaining customers, including residential users, likely will pay higher rates to produce sufficient revenue to pay costs associated with infrastructure such as power generation facilities and transmission and distribution lines.
The movement to self-generation appears to be driven by advances in solar panels, fuel cells, wind turbines, and natural gas turbines and reciprocating engines, which make energy independence economically feasible. In addition, for some, self-generation may seem to be more reliable.
Water utilities also can experience a similar trend toward customer water self-suffiency. For example, a large commercial or industrial water user may decide to install its own wells and to disconnect from its local water utility. Or, the customer may retain connection only for standby purposes. The effect upon remaining customers of the utility can be quite dramatic. They will likely experience rate increases necessary to bear the full revenue requirements for the infrastructure such as wells, treatment facilities, pumping and storage facilities and mains.
Can a water utility protect its customers and itself when faced with a significant revenue shortfall resulting from a large volume customer leaving the system? I think there are some possible measures.
For example, a large user institutional customer of one of my water utility clients threatened to leave the system to become self-sufficient by drilling its owns wells and constructing its own treatment facilities. The utility and the customer negotiated a long term contract under which the customer agreed to purchase all its water requirements from the utility at a discounted rate which covered variable costs plus a contribution to fixed costs. The arrangement provided an attractive alternative to the customer building its own system. Retention of the customer benefited the other customers because the special rate produced revenue to cover a portion of fixed costs. The regulatory agency approved the contract.
Where a large water user installs its own water supply but seeks to retain a connection to the water utility for standby purposes, it would seem appropriate for the utility to develop a standby service rate or readiness to serve rate that would produce revenue sufficient to recover the customer's allocable share of revenue requirements associated with infrastructure needed to provide service if called upon.
Some municipalities require that all residents take water service from the municipal-owned water utility. Some court decisions have upheld such requirements. Accordingly, a large water user in such a municipality may not have the option to become water self-sufficent. When a potential large water user requests service from a utility, and infrastructure expansion or upgrade is necessary to provide the requested service, contracts can be structured to obtain from such a customer advances for the cost of such construction and commitments for a term of service.
Fresh water is essential for life and commerce. However, its scarcity is resulting in increased regulation of water resources and their corollary, wastewater. This blog will discuss developments in such regulation. It will be my clepsydra measured by the flow of water law.
Monday, September 30, 2013
Saturday, September 14, 2013
IT'S RAINING ACORNS! FEELIN' SQUIRRELLY
We have had a serious shortfall of rain in these parts since July. So, you can imagine my excitement when recently I heard drops on the roof of our house. The noise became increasingly intense, like the din of a hundred hammers on the shingles or the pounding of a thousand woodpeckers in unison. I began to fear damaging hail along with rain.
I nervously glanced out the window, and was shocked to see that the walk and lawn were as dry as ever. No water! What is going on?
So, I even more nervously exited outdoors to ascertain what was perpetrating such a clatter. To my amazement, it was raining acorns, non-stop, from the 200 year old oak tree over reaching the house. The roof, walks, driveway and lawn were smothered in acorns. Many of them hit the roof and bounced off like some medieval rock thrower weapon. Others gracefully rolled into the rain gutters to be removed eventually by grumbling, bruised hands after clogging everything. Still others fall directly onto the walks and driveway to be crushed under foot or tire with an aggravating pop.
On and on the acorns have rained for the past two weeks, with no cease fire in sight. The squirrels should have a field day. But, where are they? I do not see any gathering acorns or diligently digging up the lawn to bury them in storage for a winter day forage. They must be hiding in fear of the noise or being hit by these missiles. Yes, squirrels should be eating these acorns. Interestingly, some people eat squirrels. So, eating squirrels could be said to be equivalent to eating acorns.
As a matter of fact, on a trip to northern Italy, we learned from a partisan fighter in World War 2 that the partisans survived a winter in the mountains by eating acorns for their diet.
In our western pine forests, usually there are no oak trees dropping acorns, but there are squirrels who eat pine cones. Thankfully, pine cones are not falling on our roof. On one of my visits to a pine forest, I discovered that a pack rat had eaten most of the wiring under the hood of my car. I hope it got a charge out of that. Thankfully, pack rats are not falling on our roof.
It has now occurred to me that the EPA should regulate acorns to assure my safety and well being. They regulate things that fall from the sky, so why not acorns? Indeed, when I think about it, EPA regulates air, earth, fire and water--what else is there? (Or was that merely a rock group?) If government can regulate rock fracking, surely it can regulate acorn cracking.
My late aunt used to say: "Half the world is nuts, and the other half are squirrels chasing them". With age, I think I now know what she meant. I'm feelin' squirrelly. Pass the acorns, and welcome EPA...
I nervously glanced out the window, and was shocked to see that the walk and lawn were as dry as ever. No water! What is going on?
So, I even more nervously exited outdoors to ascertain what was perpetrating such a clatter. To my amazement, it was raining acorns, non-stop, from the 200 year old oak tree over reaching the house. The roof, walks, driveway and lawn were smothered in acorns. Many of them hit the roof and bounced off like some medieval rock thrower weapon. Others gracefully rolled into the rain gutters to be removed eventually by grumbling, bruised hands after clogging everything. Still others fall directly onto the walks and driveway to be crushed under foot or tire with an aggravating pop.
On and on the acorns have rained for the past two weeks, with no cease fire in sight. The squirrels should have a field day. But, where are they? I do not see any gathering acorns or diligently digging up the lawn to bury them in storage for a winter day forage. They must be hiding in fear of the noise or being hit by these missiles. Yes, squirrels should be eating these acorns. Interestingly, some people eat squirrels. So, eating squirrels could be said to be equivalent to eating acorns.
As a matter of fact, on a trip to northern Italy, we learned from a partisan fighter in World War 2 that the partisans survived a winter in the mountains by eating acorns for their diet.
In our western pine forests, usually there are no oak trees dropping acorns, but there are squirrels who eat pine cones. Thankfully, pine cones are not falling on our roof. On one of my visits to a pine forest, I discovered that a pack rat had eaten most of the wiring under the hood of my car. I hope it got a charge out of that. Thankfully, pack rats are not falling on our roof.
It has now occurred to me that the EPA should regulate acorns to assure my safety and well being. They regulate things that fall from the sky, so why not acorns? Indeed, when I think about it, EPA regulates air, earth, fire and water--what else is there? (Or was that merely a rock group?) If government can regulate rock fracking, surely it can regulate acorn cracking.
My late aunt used to say: "Half the world is nuts, and the other half are squirrels chasing them". With age, I think I now know what she meant. I'm feelin' squirrelly. Pass the acorns, and welcome EPA...
Saturday, September 7, 2013
WHO SHOULD OWN WATER SERVICE PUBLIC UTILITIES?
Recently, a newspaper reported that several small towns in the United States are seeking to take over "privately owned water systems" providing water service in the towns because residents allegedly are upset with rate increases. (Wall Street Journal, August 20, 2013, p.A3)
Any discussion as to who should own a water public utility should consider some often overlooked facts:
First, references to "public control" or "public ownership" of a municipal water system compared with "privately owned water system" are a misnomer. Water systems can be government owned and/or controlled or investor owned and/or controlled. Several investor owned water utilities are national or regional in scope of operations and can be more "public" than local government owned systems because they have thousands of shareholder-owners.
Second, water utility service is not an inherently governmental function. Historically, water service in many U.S. towns and cities began with investor owned companies. For example, in the mid-1800s, a company began water service in Chicago by constructing an intake into Lake Michigan and distributing water with wooden mains. Today, investor owned public utilities provide water service in many towns and cities in the United States or manage government owned utilities through so-called "privatization" or "public/private partnership" arrangements. Moreover, in many European countries, such as England, France, Germany and the Czech Republic, investor owned utilities either own or manage water service systems in major cities and towns.
Third, several courts have held that a municipality providing water service does so in its proprietary capacity, not in its governmental capacity. Along the same lines, a municipal owned utility is required to employ an enterprise accounting system for its water utility.
In comparing government ownership of water systems with investor ownership, consideration also should be given to the following:
Rates. Investor owned water utilities are regulated by state utility regulatory agencies, including their rates. Local government utilities in most states are not regulated. Their rates are set by the local city council. For customers of water service, regulation of investor owned utility rates provides a distinct advantage. Not only are the rates approved by a state agency, but customers can appear and participate in rate hearings and appeal to courts from rate orders. Customers of government owned utilities generally do not have such advantages. Further, investor owned utilities are more likely to seek rates that cover full costs of service. Government owned utilities frequently defer rate increases, or fix rates below full cost of service, for political reasons, which can result in deferred maintenance or use of reserves to fund operating expenses instead of infrastructure replacement. When rates are increased, their magnitude can result in rate shock to the customers. It should be noted that in many states, government owned utilities are entitled to rates that recover a return on rate base ( assets) just as investor owned utilities. If their rates recover full costs of service they could be comparable to rates of investor owned utilities.
Service. Larger investor owned water utilities can have advantages due to their regional or consolidated mature. Generally, they may have technical staff and expertise, which local government owned utilities generally would not have due to their size. Size also results in economies of scale for certain operating expenses and purchases. Further, because such investor owned utilities are regulated, management must be responsive to the state agencies, which also regulate quality of service and, of course, to shareholders and customers. These factors provide incentives to maintain and upgrade service and facilities, the costs of which necessarily are reflected in rates.
Financing. Local government owned water utilities have access to municipal bond funding, which generally carries lower interest rates than are available to investor owned utilities. In addition, they also frequently are able to receive federal or state grants and often can collect substantial connection charges from new customers. However, investor owned utilities often are able to use internally generated funds for infrastructure projects or utilize private activity bond programs.
Comparison of the two types of utility ownership probably is more complicated that a typical customer or the media think. One thing is certain, however: every one wants good water service at a reasonable price, and to satisfy that goal, every utility should have rates that recover all reasonable costs of service.
Any discussion as to who should own a water public utility should consider some often overlooked facts:
First, references to "public control" or "public ownership" of a municipal water system compared with "privately owned water system" are a misnomer. Water systems can be government owned and/or controlled or investor owned and/or controlled. Several investor owned water utilities are national or regional in scope of operations and can be more "public" than local government owned systems because they have thousands of shareholder-owners.
Second, water utility service is not an inherently governmental function. Historically, water service in many U.S. towns and cities began with investor owned companies. For example, in the mid-1800s, a company began water service in Chicago by constructing an intake into Lake Michigan and distributing water with wooden mains. Today, investor owned public utilities provide water service in many towns and cities in the United States or manage government owned utilities through so-called "privatization" or "public/private partnership" arrangements. Moreover, in many European countries, such as England, France, Germany and the Czech Republic, investor owned utilities either own or manage water service systems in major cities and towns.
Third, several courts have held that a municipality providing water service does so in its proprietary capacity, not in its governmental capacity. Along the same lines, a municipal owned utility is required to employ an enterprise accounting system for its water utility.
In comparing government ownership of water systems with investor ownership, consideration also should be given to the following:
Rates. Investor owned water utilities are regulated by state utility regulatory agencies, including their rates. Local government utilities in most states are not regulated. Their rates are set by the local city council. For customers of water service, regulation of investor owned utility rates provides a distinct advantage. Not only are the rates approved by a state agency, but customers can appear and participate in rate hearings and appeal to courts from rate orders. Customers of government owned utilities generally do not have such advantages. Further, investor owned utilities are more likely to seek rates that cover full costs of service. Government owned utilities frequently defer rate increases, or fix rates below full cost of service, for political reasons, which can result in deferred maintenance or use of reserves to fund operating expenses instead of infrastructure replacement. When rates are increased, their magnitude can result in rate shock to the customers. It should be noted that in many states, government owned utilities are entitled to rates that recover a return on rate base ( assets) just as investor owned utilities. If their rates recover full costs of service they could be comparable to rates of investor owned utilities.
Service. Larger investor owned water utilities can have advantages due to their regional or consolidated mature. Generally, they may have technical staff and expertise, which local government owned utilities generally would not have due to their size. Size also results in economies of scale for certain operating expenses and purchases. Further, because such investor owned utilities are regulated, management must be responsive to the state agencies, which also regulate quality of service and, of course, to shareholders and customers. These factors provide incentives to maintain and upgrade service and facilities, the costs of which necessarily are reflected in rates.
Financing. Local government owned water utilities have access to municipal bond funding, which generally carries lower interest rates than are available to investor owned utilities. In addition, they also frequently are able to receive federal or state grants and often can collect substantial connection charges from new customers. However, investor owned utilities often are able to use internally generated funds for infrastructure projects or utilize private activity bond programs.
Comparison of the two types of utility ownership probably is more complicated that a typical customer or the media think. One thing is certain, however: every one wants good water service at a reasonable price, and to satisfy that goal, every utility should have rates that recover all reasonable costs of service.
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