National Association of State Utility Consumer Advocates

Discouraging State Regulatory Commissions from Adopting Automatic Adjustment Charges for Water Company Infrastructure Costs

WHEREAS, certain regulated water companies have recently proposed mechanisms for automatically increasing water rates, prior to regulatory review, based upon isolated items of expense related to infrastructure projects; and
WHEREAS, the National Association of State Utility Consumer Advocates (NASUCA) believes that public interest is still best served by rate of return regulation of investor-owned water companies and that such automatic adjustment mechanisms contradict several sound rate of return ratemaking principles, including the matching principle, because increases to items of rate base are recognized far outside of the test year from which all other rate base, as well as revenues, expenses, and cost of capital items that are used when calculating rates, allowing ‘piecemeal ratemaking’ and preventing the recognition of any simultaneous offsetting reductions in other items; and

WHEREAS, automatic adjustment mechanisms also circumvent regulatory review of increases to rate base for prudence and reasonableness; and

WHEREAS, automatic adjustment mechanisms further create bad public policy by eliminating the built-in regulatory incentive to control costs between rate cases and, generates incentives to increase spending in order to avoid reduction of the surcharge which occurs if the water company’s authorized return is reached; and

WHEREAS, when an automatic adjustment clause is adopted, rate stability is reduced and proper price signals are distorted by frequent rate increases, and no convincing evidence has been shown to support the claim that the frequency of rate case proceedings is reduced by such clauses; and

WHEREAS, special incentives are not needed in order ensure adequate water quality, pressure, and a proper reduction of service interruptions; and

WHEREAS, automatic adjustment mechanisms can inappropriately reward water companies that have imprudently fallen behind in infrastructure improvements; and

WHEREAS, it is inappropriate to tilt the regulatory balance against consumers and shift business risk away from water companies simply for the purpose of creating an incentive for these companies to fulfill their basic obligation to provide safe and adequate service;

THEREFORE, BE IT RESOLVED, that NASUCA strongly recommends state legislatures and state public utility commissions avoid the implementation of automatic adjustments charges for water company infrastructure costs; and

BE IT FURTHER RESOLVED, that NASUCA authorizes its Executive Committee to develop specific positions and to take appropriate actions consistent with the terms of this resolution. The Executive Committee shall notify the membership of any action taken pursuant to this resolution.

Approved by NASUCA:

June, 1999, Baltimore, Maryland

Submitted By:

NASUCA Ad Hoc Water Committee

Christine Maloni Hoover, PA, Chair
Wes Blakley, IN
Robert Brabston, NJ
John Coffman, MO
Brian Gallagher, DE
Donald Rogers, MD
Dale Stransky, NV
James Warden, Jr., NY