RATE SHOCK

What is "rate shock"? It is not a jolt of electricity, but it is a jolt of sorts. It is not a rule of utility ratemaking, but it is a concept within it.

Rate shock is a subjective measure of the assumed impact on utility customers of a proposed rate increase. It is a claim that can pop up in a ratemaking proceeding of any public utility, including water and wastewater utilities.

For example, in an Illinois case involving a drinking water utility, a witness for the regulatory commission testified that a rate increase of over 30% could be considered rate shock.* In that case, the commission approved a consolidated rate structure applicable to several water utilities having a common owner. The commission stated that the consolidated rate structure would enable capital costs to be "spread over a larger base of customers, thus mitigating rate shock to a smaller stand-alone division's base when infrastructure improvements are necessary."

In an Arkansas case, a witness for the Attorney General argued that a 22% gas utility rate increase to the residential class of customers would cause rate shock and, therefore, was unreasonable.** The commission did not address the argument.

Commonly, rate shock assertions arise when a large rate increase is proposed due to a sudden increase in a cost of service. Examples could be storm damage to facilities, unexpected failure of infrastructure and need to repair or replace it, new regulatory requirements, and the like. Sometimes, large rate increases arise because a utility has postponed seeking needed rate relief.

Generally, rate shock is not a basis for denying a rate increase that is justified by cost of service analysis. Rather, rate shock may be a basis for mitigating the impact on customers of a large rate increase. When potential rate shock is perceived, a rate increase may be phased in over two or three years. Or, as illustrated in a Connecticut case, an increased cost be recorded as a deferred expense or regulatory asset and amortized in rates over a period of years.*** The court quoted "A regulatory asset is a liability of a utility's ratepayers. Utility companies may incur large expenses in various ways--storm damages, installation of new facilities, increased taxes and so forth. These expenses, if passed immediately on to ratepayers, could create havoc. An immediate recovery of such expenses could cause sudden upward increases in rates, commonly termed 'rate shock.' In order to avoid rate shock, [public utility] commissions often will permit utility companies to recover their expenses from ratepayers on a deferred basis, listing the ratepayers' debt as a 'regulatory asset.' A regulatory asset is, therefore, a future debt of the ratepayers that can be passed on, together with interest, to the ratepayers."

Perhaps the best way for utilities to avoid claims of rate shock is to avoid, as much as possible, cost factors that can give rise to such claims. For example, regular and frequent review of costs of service and regular resulting incremental smaller increases in rates may avoid deferred large increases. Long range planning for repair and replacement of infrastructure along with establishment of reserves for such work in rates may also mitigate future sudden large proposed rate increases. Finally, phasing in of rate increases or using deferred expense and amortization procedures may enable more "gentle" rate adjustments.

Of course, there may be times when a large rate increase cannot be avoided because of a risk to continuity of good service. However, shock may be diminished when the utility adequately explains to its customers the reasons for the increase. There is no substitute for good communication.

________________________________________________


*Lake Holiday Property Owners Association v.
Illinois Commerce Commission,2016 Ill.App3d
150816-U (3rd Dist 2016)

**Winston v. Arkansas Public Service Comm.,
984 S.W.2d 61 (Ct.App.1998)

***Office of Consumer Counsel v. Department
of Public Utility Control, 905 A.2d 1,
(2006)

© 2017 Daniel J. Kucera

HOW SAFE IS WATER AND WASTEWATER UTILITY SECURITY?

Fifteen years have passed since the events of September 11, 2001. One of the fallouts of that tragic experience was the rush by water and wastewater utilities to implement more strict security measures. Some went so far as to employ around the clock guards to protect facilities. Eventually, the federal government jumped in to require vulnerability evaluations, although implementation of measures to address vulnerability risks was left to each utility.

Now, fifteen years later, how effective is the present water and wastewater security? Is it time for a fresh vulnerability assessment?

It would seem that there are at least four possible security issues for utilities: grounds security, structure security, procedural security and cyber security.

Grounds Security. Presumably, any physical breach of security would begin with attempted entry onto a utility's property. Protective measures could likely include limited access gates, parameter fencing, lighting and television monitoring. One could assume that such measures have been in place for utilities for some time. However, it would be erroneous to assume that these measures may be all that are needed for security.

Structure Security. Buildings, tanks and the like may be vulnerable in a couple of ways-- physically, such as by ramming, or by way of entry through available doors. How are the structures secured and alarmed? Of particular concern may be how visitors are monitored upon seeking entry. How is identification of a visitor confirmed? Are items brought in by a visitor inspected? How are the movements of a visitor after entry monitored?

Procedural Security. There are at least three vulnerabilities in connection with activities within utility structures: First, how are new employees vetted? Is consideration given to possible security issues? Second, if a utility permits entry of members of the general public--a tour, for example--what security measures are applied? Third, every utility from time to time has outside engineers, consultants, accountants, vendors, suppliers, and contractors visit their premises. Have written security protective agreements been executed by all such visitors?

Cyber Security. Perhaps the major security threat to water and wastewater utilities at this time is from cyberattacks, particularly those concerning process control systems. There are measures available to resist hacking by implementing cyber hygiene in the work force and by developing virtualization of work stations and servers. For more information on this subject see Campbell, "Protect Your System From Cyberattacks",AWWA Opflow, August 2016, p.8 and the AWWA Cybersecurity Guidance Page, www.awwa.org/cybersecurity.

Finally, regardless how extensive security measures may be in place, do utilities also have in place contingency plans and procedures in the event of a security breach that causes interruption to operations?

YIKES! BLOB ATTACKS LONDON SEWERS!

One of my favorite science fiction films is the 1958 movie called The Blob, starring Steve McQueen. An amorphous jelly-like ball of material invades Earth from outer space and grows huge by eating and dissolving people into its mass. Perhaps the most dramatic scene is when patrons run out of a movie theater as the Blob digests its victims.

Well, it appears that the Blob may have attacked again. In late April of this year, the Guardian reported that a 10 ton blob of fat was removed from a sewer in the Chelsea area of London. Called a "fatberg", the blob was said to be 40 meters long and was so huge and heavy that it broke the sewer, necessitating costly repairs.

This was not the first time that a fatberg was encountered in London sewers. In 2013, a 15 ton fat blob was removed from a sewer in the Kingston area of London after residents complained that toilets would not flush. Again, damage to the sewer had to be repaired. Interestingly, after the blob was removed, it was dewatered and the remaining fats and oils were recycled into soap and fuel. Perhaps the soap later wound up back in the same sewer.

One wonders from where does the fat come that feeds a sewer blob. One source could be the kinds of fatty foods that Brits may have been eating. Putting aside such items as bacon rolls, one example may be the so-called full English breakfast, a quintessential "fry-up." Consider the ingredients, all of which are fried: pork sausage, bacon, beans, tomato, bread, mushrooms,eggs, black pudding and maybe kidneys, kippers and potatoes.

It is no surprise that media report Brits are getting fatter. Maybe it all began with Britain's first obese man, Daniel Lambert. At around 1800, he probably qualified as a blob, as he weighed 53 stone or about 740 pounds. He charged people a shilling to come and see him, and he is said to have made a fortune. Unfortunately, he died young.

According to published reports, Brits on average weigh 3 stones (42 pounds) more than they did in the 1960s. However, they still have a way to go to match the average American adult as the heaviest in the world. British adults are said to weigh 30 pounds more than the average globally, whereas Americana adults are 40 pounds more than the global average. Last year, the Telegraph reported that British women are the fattest in Europe, and pointed out that some believe that being fat can be a positive thing. On the other hand, as people become fatter, they also eat more, which can place more stress on world food production and related resources such as energy and water.

Is there any defense to the fat blob attacks against sewer systems? Perhaps an action plan to auger well could include:

1. Eating less
2. Eating healthier
3. Refraining from pouring cooking oils, fatty food debris and other nasties into drains
4. Frequent inspection and maintenance of sewers by the local utility

In the movie, the Blob eventually was captured and removed to polar isolation. But lingering doubts left an opening for a sequel or remake. Beware of a possible Return of the Fatberg Blob.

DEALING WITH RISKS

As discussed in the prior post, water and wastewater utilities can be exposed to several different types of risk in their operations. What measures or strategies may be available to utilities to deal with or to mitigate such risks?

* Ratemaking. It is obvious that efforts to control risks to operations likely will require expenditure of funds, and the primary source of funds generally is operating revenue produced from rates for services rendered. The adequacy of revenue to fund, for example, new infrastructure, or security measures, or new sources of supply, is dependent upon rates which recover all revenue requirements--all the costs of service.

Revenue will not be adequate if rates are not reviewed and adjusted frequently to assure that all costs are being recovered. Further, unless there is some local legal impediment that permits recovery only of operating expense , the costs of service to be recovered should include depreciation expense and/or other cost items necessary to fund reserves such as renewal and replacement reserves.

Many municipal-owned water and wastewater systems have been built initially by developer contributions of cash or plant during growth periods. Unless adequate reserves have been recovered through rates over subsequent time, such systems will face difficulty in funding replacement infrastructure when the need arises.

Depending upon the nature of a proposed expenditure to deal with a risk, a utility may be able to consider the amortization of the cost in rates over a relatively short period of tine.

* Debt. Incurring debt, typically by means of a bond issue, has been a traditional funding mechanism for municipal-owned utilities. Of course, the feasibility of this mechanism is dependent upon the sufficiency of revenues produced by rates. Payment of debt service is a cost of service. In addition to bond issues, utilities may be able to participate in low interest revolving loan programs available on the state level.

* Grants. Certain governmental agencies, such as the US Environmental Protection Agency, have given grants of funds from time to time for improvements to facilities. Of course, grant money tends to be limited.

* Joint Actions. Another possible way to mitigate risk is to engage in a joint action with one or more other entities-the notion that there is safety in numbers. For example, a municipality facing a costly upgrade of its water system could consider privatization- the sale of the system to a regulated investor-owned utility. Consolidation might result in economies of scale as well as a means to finance needed improvements. Or the municipality could enter into a public-private partnership with an investor-owned utility, whereby the town might retain ownership of the system, which would be upgraded and managed by the investor-owned utility.

A water system needing to upgrade its treatment facilities may find a better alternative in purchasing water from a wholesale joint action agency or a neighboring utility with available surplus capacity. In the same way, a wastewater utility may find it more efficient to deliver its wastewater to a larger regional treatment facility than to maintain its own plant.

WATER AND WASTEWATER UTILITIES CAN FACE MANY RISKS

Many assume that water utilities and wastewater utilities are relatively risk free operations. After all, in the case of water, one installs a pipe in the ground or into a water body to collect some water, then somehow makes the water collected "pure", and furnishes it to customers in pipes, all of which is generally hidden from public view. The same is true for waste water-- when a toilet is flushed, that is the end of the matter. In actuality, however, water and wastewater utilities can be exposed to many challenging risks in their operations. Here are some examples:

* Aging Infrastructure. Utilities, particularly those in operation for some time, must deal with infrastructure that may be beyond its useful service life and requires repair, replacement and upgrade. Infrastructure work obviously is capital intensive and strains funding options for utilities as well as service reliability.

* Diminishing Sources Of Water Supply. As is evident in several areas of the United States, water utilities are experiencing reduced sources of supply, due to drought, excessive withdrawal of ground water or population exceeding available water sources. Hunting for more water or rationing water delivered to customers can be frustrating.

* More Restrictive Regulations. Compliance with governmental regulations is a constantly moving target for utilities. Moreover, compliance issues tend to impose the need for infrastructure and operational enhancements, necessitating increases in capital funding and revenue requirements, and resulting in unwelcome rate increases or revenue shortfalls.

* Contamination of Source Water. Recent examples of source water pollution include upstream industrial chemical spill and algae. While a water utility may not have caused a contamination, it faces the burden to provide safe water, which means it generally has to deal with the consequences of upstream contamination of its source water, no matter what.

* Leaks. Unaccounted water can be a real headache for utilities, particularly in areas where water supplies are limited. Finding leaking mains is not an easy task, but must be done.

* Main Breaks. Nothing is more troublesome than a main break that floods a street or nearby basements, particularly if it happens in the middle of winter.

* Vulnerability. In today's world, utilities face the risk of terrorism and vandalism. Security measures can be expensive and imperfect, but are necessary.

* Finished Water Quality. If a contaminant required to be removed is not removed in the treatment process, water and wastewater utilities become exposed for any adverse effects on customers or receiving streams, as the case may be.

* Conservation. Using less water may be meritorious. However, for water utilities, conservation can translate into revenue reductions and idle capacity, which in turn can translate into rate increases to customers for using less water--a public relations headache.

* Waste water Issues. Wastewater utilities face many of the risks encountered by water utilities, and have a few more of their own. For example, inflow and infiltration of storm water can cause sewer backups into homes and the need for excess flow bypasses of a treatment facility. Flushing into the wastewater system of certain products can interfere with biological treatment processes or be beyond treatment capabilities, such as the case of certain medications.

In my next posting, I will discuss how water and wastewater utilities may be dealing with the risks they may face.