Friday, July 30, 2010

USA water utility rates … making profit from basic service

Dear Colleagues

Later today I will be attending a public hearing about a water utility making an application to raise the rates it charges by a substantial amount … an increase that according to the opponents of the raise will increase the rates paid by some users by 240%.

I believe this is another example of the public being gouged by a community of corporate decision makers and their political allies who have a singular focus on top management and the stockholders. While these people may be opposed to socialism … communism … and apposed to government intervention and supportive of the free market system and enterprise on ideological grounds ... the fact is that unbridled monopolistic capitalism is not a free market and enterprise system but something quite evil requiring careful responsible regulation.

The idea of a regulated monopoly was incorporated into the communications legislation of 1907 which allowed AT&T to be the sole supplier of telephone service and the rates charged were regulated by government authorities according to a formula. The formula allowed for the company to earn a return on its investment … but over the years this “investment” was manipulated in such a way that it was ridiculously inflated. I authored a series of corporate “Directions Intelligence” reports in the early 1980s and these showed, for example, that if AT&T was using the same depreciation practices as IBM, then there would be a $4 billion shortfall in the balance sheet of AT&T … in other words AT&T had driven itself into bankruptcy. You may note that AT&T allowed itself to be “broken” up into multiple Baby Bells around this time … a move needed in order to mask the underlying reality that the company was failing and did not have the resources to modernize.

The water utility situation has some of the same characteristics. The water and sewage service at Saw Creek was originally supplied by the developers and was an integral part of the lot ownership and facilities service. As a lot purchaser you “paid” for a piece of this infrastructure. At some point about 20 years ago Saw Creek saw fit to sell off the water and sewage infrastructure and service responsibility to a private company. As a lot owner I now got a bill from a service that was previously part of what I “owned” … but I did not really get any payment for this change in structure. At the time Saw Creek was trying its best to be “profitable” and the owners of the development did everything in their power to “make money”. Eventually a “loss making” Saw Creek was taken over by an Owners Association and the current Owners Association is doing a fairly good job of managing the property.

Subsequent to the first sale of the water and sewage infrastructure to a private owner, the property has be sold and resold in mergers within the water utility industry. The consolidation of the industry delivers financial benefit to managers and stockholders, but does little for the operations and the customers. The infrastructure used … or needed … to deliver water and sewage service to my family property at Saw Creek is the same as it was 20 years ago.

At issue is what return should be reasonable for a water utility to earn from water and sewage service to a customer. I argue that this ought to be a technical engineering question and cost accounting … not a question of GAAP accounting where the law and the FASB rules allow for all sorts of distortions that favor the corporate entity. Bottom line … my water and sewage rates should be lower today than in the past because the infrastructure being used should have been correctly depreciated in the books of the corporate organization … when in fact my guess is that the books of the current organization consider me to be using more infrastructure assets. This is a ridiculous accounting and a legal construct completely at odds with real engineering.

As a small consumer I am not privy to the accounting being used in the water utility requesting the rate increase. I would like to see the internal accounting to verify what has been done to create the numbers that are the basis for their rate application.

My background is academic education at Sidney Sussex College, Cambridge University in the UK majoring in engineering and economics … and training as a Chartered Accountant with Coopers and Lybrand (now part of PriceWatrehouseCoopers) in London. I came to the USA in 1967 and worked in the corporate world in cost accounting, computerization of management information systems and as the CFO of a US based multinational corporation. Subsequently I went into international management consultancy and have been a consultant for the World Bank, the International Finance Corporation, the United Nations, foreign governments and other entities of the official relief and development assistance community. I am the founder and CEO of Tr-Ac-Net Inc. … an organization committed to international transparency and accountability and the deployment of systems of socio-economic metrics for a smart society that combines both profit and value in a comprehensive ubiquitous system.


Peter Burgess


  1. Dear Colleagues

    The issues raised in the proceedings were very profound ... and providing a lot of understanding of why it is that corporate profits get protected and grow while infrastructure itself gets short-changed and the price customers have to pay can be quite unreasonable.

    The proceedings were driven by "law" ... a judge presided over the event, and attorneys for the utility company, that is the Pennsylvania American Water Comapny, the Public Utilities Commission (PUC) and the Office of the Consumer Advocate were in attendance. A court recorder logged the proceedings.

    There were two sessions ... one in the afternoon and one in the evening ... a total of about 5 hours! An audience I estimate to have been over one hundred were in attendance at each session, and about 30 people at each session gave sworn testimony.

    Much of the testimony was about how the rate increase was bad ... all sorts of words were use like obscene, ridiculous, exorbitant and more. Many people explained how they were going to be hurt by the increase ... how it was pushing them "over the edge" financially.

    Some of the testimony inquired how on earth the PUC rules allowed for rate increases like this ... something was seriously wrong. My testimony was along these lines, but with a focus on the idea that accounting should be helping to determine what the technical and financial facts were, rather than what the rate applicant wanted them to be.

    At a break in the proceedings someone when out of their way to explain to me that utility companies kept several sets of books, those that are used for reports to stockholders, those that are used for compiling tax returns and those that are used for rate justification. I am a trained professional accountant ... I know about these practices and I am appalled that the accounting profession helps to optimize them and the laws make these practices legal!

    I put my "blog" into the record ... made some verbal testimony, but was not allowed to supplement my testimony later on (apparently I would have been out of order, though others were not ... which raises some questions about what the judge "wanted" to hear!). In my verbal testimony I made the point fairly forcefully that accounting that is based on legal constructs and regulations tends to mask the reality of technical engineering and financial reality which is what accounting should be getting on the record. I volunteered to do all I could to ensure that there will be a reasonable and just outcome to these proceedings ... and that, in my view, the PUC should stop this rate application dead in its tracks!

    Several people pointed out to me that the PUC was really nothing more than an external manifestation of the utility industry ... and that the whole of the regulatory apparatus had been totally compromised by the utility industry and its political friends. This is something I know very little about ... but I do know that the misinformation that arises because the accounting, analysis and reporting is being done in a legal but meaningless manner should be addressed and sooner rather than later.

    Stay tuned ... this story is only just starting.

    Peter Burgess

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