Tennessee American Water customers will start to see more frequent and less noticeable rate adjustments in coming years after the utility on Monday was awarded the ability to raise and lower water rates automatically when its costs change.
The Tennessee Regulatory Authority unanimously approved the utility's plan, which allows the utility to directly bill ratepayers for pass-through costs such as chemicals, power, waste disposal and regulatory fees.
"This means there's a smaller hit for the customers when a change is made," said Deron Allen, president of Tennessee American Water. "It's just a pure pass-through."
But consumer advocates have warned that such rate structures will shift utilities' risk on to consumers and businesses, effectively making ratepayers guarantee the utility's profits.
"What this does in our opinion is make it more likely that rates will increase for business and households," Assistant Attorney General Vance Broemel warned in 2013.
He was referring to a 2013 bill developed by Gov. Bill Haslam, whose administration reshaped the Tennessee Regulatory Authority last year. The change in law eased the passage of Tennessee American's measure by allowing utilities to explore alternate methods to raise rates.
Tennessee American Water, which is owned by Voorhees, N.J.-based American Water Works, says its new framework will allow it to avoid the costly water rate case legal battles that in previous years have dragged on for months and pitted the company's lawyers against the city of Chattanooga, the Chattanooga Regional Manufacturers Association, the Tennessee Attorney General and labor unions.
In the past, the utility has rankled its biggest ratepayers, including then-Mayor Ron Littlefield, by aggressively seeking double-digit increases.
But opposition to the newest plan was light to nonexistent, with The Chattanooga Regional Manufacturers Association and the city of Chattanooga sitting out the case entirely, and the state Attorney General offering almost no resistance.
Under Tennessee American's new plan, the likes of which are gaining in popularity around the country, the utility will estimate its fixed costs for the coming year, which are then billed directly to consumers. If the actual costs are lower or higher, the utility bills customers for the difference or offers them a refund.
For 2014, the system will actually result in a slight decrease for customers because a small 1.1 percent rate increase was offset by a drop in other expenses. The average water user will end up paying about 2 cents less per month this year because of lower power costs.
Still, the utility signaled that the lower water rates may not last. In a news release announcing the rate changes, Tennessee American noted that communities throughout Tennessee will collectively spend about $3.5 billion over the next 20 years to renew and replace aging infrastructure, according to a study by the American Society of Civil Engineers.
"Our goal is to keep the local water system strong and viable today and for generations to come," Allen said. "Ignoring the infrastructure needs of our water system, over time, would be a disservice to our customers and community."
Not everyone is convinced that the new system will benefit consumers. Attorney Henry Walker, who has worked on rate cases in the past, warned that the bill was "pushed through" by utilities' lobbyists, and could yield surprises for ratepayers over the long term.
"The downside is, a traditional rate case allows consumers to look at reasonableness of those expenses and other changes that may have occurred," Walker said. "Who wouldn't want automatic rate increases every time your costs change?"
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