Tennessee: Economists, lawyers debate water utility’s profit rate

Tennessee-American Water Co.’s detractors say the utility’s request for the highest rate increase in its history is an attempt to please investors.

“They are overestimating what the shareholders need,” Steve Brown, an economist for the Consumer Advocate Division of the Tennessee attorney general’s office, said Tuesday.

The publicly traded water company is seeking a 20.58 percent rate increase, which is expected to generate an extra $7.6 million a year. The rate hike, if approved in full, would provide the utility with an 11.75 percent return on equity. Return on equity is a common financial measure of a company’s profitability.

The Tennessee Regulatory Authority is conducting hearings all week at the Hamilton County Courthouse on the proposed rate hike.

State regulators last year approved a 12.3 percent rate hike for the water company, which would have allowed it to earn a 10.2 percent rate of return on equity. But Dale Grimes, an attorney for Tennessee-American, said increased labor, fuel and chemical expenses are eating into profits, and the company is earning only 4.16 percent. That amount will drop to 3.26 percent if the newest hike is not approved, he said.

John Watson, Tennessee-American’s president, said attracting investors is critical to building infrastructure and providing quality service.

“The money necessary to build and replace treatment plants and distribution systems comes in large part from shareholders who invest their money in the company,” Mr. Watson said Tuesday. “These investors, like any investor, will only provide their capital if they can expect a fair return on it.”

In Tuesday’s hearing, Michael J. Vilbert, an economist with The Brattle Group, said investing in utilities is risky because of high capital costs and heavy government regulations.

Tennessee-American’s critics say the utility could save money by cutting costs. They said the rate case is an attempt to recover money lost in “imprudent” business decisions.

The consumer advocate office believes the utility should be allowed to earn a maximum of 7.5 percent return on equity, based on a study of eight other water companies, Dr. Brown said.

“Tennessee-American Water Co. is a monopoly,” he said.

Rick Hitchcock, an attorney for Chattanooga, said that American Water Works, Tennessee-American’s parent company, has written off $1.1 billion since 2003 and aggressively has pushed for rate hikes for its subsidiaries to make up the difference.

The current rate case was filed 10 months after Tennessee-American received its last increase and six weeks before American Water became a publicly traded company, he said.

American Water Service Corp. performs most of the Chattanooga utility’s management and testing services and charges for its work. Vance Broemel, an attorney for the Consumer Advocate Division, compared that practice to a person buying a car from a dealer who demands the customer can have the car repaired only at his shop at a price he sets.

Tennessee-American should look for local vendors to perform some of its management services, Mr. Broemel said.

“They can control those expenses,” he said.