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.