Are Customers Taking a Bath with Iowa-American’s Security-Related Rate Hike? Print
News/Features - Feature Stories
Tuesday, 26 February 2002 18:00
In the name of security, Iowa-American Water Company has asked for and received a rate hike without going through the normal rate-case process – and without customers knowing what they’re paying for. Between the terrorist attacks of September 11 and November, Iowa-American spent approximately $900,000 on security measures, according to K. Brock Earnhardt, the company’s vice president and manager. But Earnhardt declined to specify – to customers or the River Cities’ Reader – on what that money was spent. He said the utility does not want to give terrorists any information that might help them attack the water supply or Iowa-American employees.

In any event, customers will be paying for those security measures. Last week, the Iowa Utilities Board (IUB), which regulates Iowa-American, approved an amendment to the settlement agreement between Iowa-American and the state Office of Consumer Advocate. As a result of the amendment, customers in Davenport and Bettendorf will see their water rates increase 3.43 percent so the utility can recover costs associated with beefed-up security.

This is on top a rate increase of 9.23 percent that was approved in August. The two rate increases combined will cost the average residential customer $2.22 a month. (Rates in Clinton jumped nearly 23 percent – or $4.23 per month for the average residential customer.)

Both the IUB and the Office of Consumer Advocate, which represents consumers in the utility-regulation process, reviewed the Iowa-American expenditures, found them reasonable, and agreed to keep them confidential. “We felt in this particular situation it was appropriate not to compromise those security measures,” said Ben Stead, an attorney with the Office of Consumer Advocate.

Earnhardt would only say that the security measures included expenditures on both equipment and staff and were designed to protect both Iowa-American employees and the water supply itself.

He acknowledged that some customers have claimed that Iowa utility facilities wouldn’t be likely terrorist targets. “That is naïve to believe,” he said. “Any place in the country is vulnerable.”

Earnhardt added that the U.S. Environmental Protection Agency, the Iowa Department of Natural Resources, and law-enforcement officials have all given “advice on [security] procedures we should implement,” he said.

Part of the trouble for some people is that they are now paying for improvements they can’t review.

“I’m sympathetic with those that feel that way,” Earnhardt said. “The safeguard is that the full detail of the facilities that have been put in place … has been filed with the Iowa Utilities Board and has been reviewed by the Office of Consumer Advocate.”

Other utilities aren’t being as secretive – and their security measures aren’t as costly.

According to Greg Swanson, Moline’s water-plant manager, the city has improved its security without needing much extra money. “There’s been very little cost,” Swanson said. “We’ve changed the work habits of our employees.”

Swanson said the city has increased surveillance of its water-treatment plant and its elevated ground tanks; improved lighting; increased police patrols; and increased monitoring of equipment and the treatment process. He said the costs have been minor and have come out of the utility’s operating budget.

Larger security improvements are also part of Moline’s $20 million water-plant expansion, but they were included in plans before September 11 and will cost $100,000 or less, Swanson said. “We haven’t added anything extra [since the terrorist attacks], but we’re going to derive extra benefit,” he said.

The secrecy involved in the Iowa-American rate hike is only one of its unorthodox features. Instead of filing a new rate case, the water company requested that its rate increase be added to the agreement that was approved in August. The Iowa Office of Consumer Advocate agreed to the amendment, and the Iowa Utilities Board approved it on February 21.

“The approach was unusual, but the situation was unusual,” Earnhardt said.

The amendment, according to Iowa-American, the Office of Consumer Advocate, and the Iowa Utilities Board, was designed to save customers money. Rate cases are expensive – IUB estimates that a case can cost a utility approximately $350,000 – and the cost is typically passed on to consumers. “The only expense we had in this was notification of customers,” Earnhardt said.

There were other savings, as well, Iowa-American claims.

Because utility companies are not allowed to file a “single issue” rate case – in which a rate hike is requested for a single set of improvements – Iowa-American officials say the amendment process was the least expensive for customers. If it had filed a new rate case, said Iowa-American Business Manager Charles W. Jones, the case would have encompassed other capital improvements and therefore included a larger rate-hike request. “That’s why the Consumer Advocate thought it would be appropriate in this case,” Earnhardt said.

One key difference is that a rate case requires a public hearing, while the amendment did not. Even without a public hearing, customers had the opportunity to give Iowa-American and IUB feedback, Earnhardt said.

But that ignores that the public still doesn’t have any information on which to comment because of the secrecy involved in the process. And the January 31 letter notifying customers did not prompt them to send comments to IUB or the utility company.

The Iowa Utilities Board received 23 letters and four telephone calls on the security-related rate increase, while Iowa-American received 38 calls, Earnhardt said. In their comments, customers said they couldn’t afford the increase; complained that they weren’t being told what they were paying for; and claimed that utility companies in Iowa don’t have to worry about terrorist attacks.

Earnhardt said that customers should be reassured that the expenditures have been reviewed thoroughly. If IUB did not think the security expenditures were prudent, he said, it could have rejected the rate increase.

The National Association of Regulatory Utility Commissioners, in a resolution in November, encouraged water utilities “to communicate promptly with regulators, preferably prior to the expenditure being made” when increasing security.

There are other safeguards in place to protect ratepayers. The Iowa Utilities Board sets a “return on equity” level, and that – to a certain degree – gives consumers a baseline to which to compare company profits. Since 1990, Iowa-American’s “authorized” rate of return has fluctuated from a maximum of near 13 percent to its current level of l0.454 percent.

That’s not a ceiling, however. From mid-1999 to mid-2000, Iowa American’s return on equity exceeded its authorized level. That, in itself, doesn’t trigger a rate change, however. The Iowa Utilities Board and the Office of Consumer Advocate must file rate-reduction cases if they feel the company’s rate of return is too high.

Iowa-American had security measures in place before September 11, Earnhardt said, but they were primarily aimed at preventing damage from vandalism or natural disasters. They would not have been effective against “a concerted, directed attack,” he noted.

Similarly, while the company has always had water-quality monitoring, “there is [now] a vastly different scope in the monitoring, type of monitoring, and frequency of monitoring,” Earnhardt said, although he would not elaborate.

He said that utilities aren’t even communicating among themselves about what security measures they’re taking. “There’s no forum for discussion of these things,” Earnhardt said. “I don’t know what others are doing.” He noted that security practices are “highly confidential,” even within the industry.

There’s also no standard within American Water Works Company, of which Iowa-American is a wholly owned subsidiary. (Iowa-American has 22 sister water-utility companies in the United States. American Water Works Company in September was bought by German utility company RWE.) “It’s pretty much up to the … management of each individual company,” Earnhardt said. “A corporate standard doesn’t exist” because of differences in facilities and communities.