Payson Water Company’s customers may soon be paying twice as much for water — but they’ll still likely face the frustrations of water rationing and a ramshackle system.
The private water company’s filings with the Arizona Corporation Commission reveal that the company in January will seek a 118 percent rate increase to erase an operating deficit, make up for lost ground and ensure an adequate profit margin. But any real improvements in the system will have to wait on a future rate increase, according to the documents filed with the ACC.
Only the 400 customers living in Mesa del Caballo will likely end up with enough water to eliminate rationing and the threat of water hauling — but they’ll have to pay an additional $31 to $39 a month on top of the 118 percent rate increase for the whole system. Those surcharges will cover the $1.2 million cost of connecting the small, unincorporated subdivision to the Blue Ridge pipeline.
The rate increase would boost company revenues from about $320,000 to about $720,000, according to sometimes confusing figures included in the filings. The system would also end up with some of the highest water rates in the region, far higher than Payson or Star Valley and about equal to the Pine-Strawberry Water Improvement District.
The Arizona Corporation Commission has scheduled a Jan. 13 hearing on Payson Water Company’s requests.
The hearing will focus on the 118 percent increase in the base rate for the unincorporated communities of Geronimo Estates, Deer Creek, Mead Ranch, Whispering Pines, Flowing Springs, Gisela/Tonto Creek Shores, East Verde Park Estates, and Mesa del Caballo.
The other part of the hearing will focus on the company’s request for a $30.75-a-month surcharge on Mesa del Caballo customers to cover the cost of the connection to the Blue Ridge pipeline.
In a previous hearing, the company won the right to charge Mesa del Caballo customers an extra $7.50 a month for a $275,000 connection with the Town of Payson’s water system. That connection will eliminate water hauling this summer that can increase summer bills 200 to 400 percent.
Water company officials have repeatedly insisted that only Mesa del Caballo customers will pay for the pipeline connection.
However, in the mass of documents and responses already filed with the Corporation Commission, company officials leave that door open. Overall, the documents already filed raise almost as many questions as they answer — both about the need for the 118 percent increase in the base rates and whether the cost of the Blue Ridge hookup for Mesa del might someday end up covered by the base rates for the whole system.
The stakes for the small communities completely dependent on the private water company remain enormous.
Formerly owned by Brooke Utilities, Payson Water Company has long frustrated customers with water rationing, outages and ACC-approved water hauling charges.
Such problems prompted Pine and Strawberry to buy out the water company some years ago to remove a decade-long building moratorium for lack of adequate water. Mesa del residents the past three summers have dealt with severe limits on their water use. Families unable to afford to pay the water hauling charges have said they only let their children take a bath once a week, save up dishes in a bucket of chlorine water for a week, let landscaping die and water cutoffs when they can’t pay bills four times higher than normal.
Many customers have already filed appeals and protests with the corporation commission in anticipation of the Jan. 13 hearing.
Many of the complaints have focused on whether people elsewhere will have to pay for Mesa del’s connection to the pipeline.
Others have complained about the condition of the system, water rationing and the specter of water hauling charges and wondered why the company needs such a large increase.
The company’s filings offer a flood of figures in an attempt to justify the first rate increase for the company in more than 12 years.
Base water rates for the Payson Water Company System under Robert Hardcastle’s leadership had not changed since 2000. The company invested very little in upgrading pipes, digging new wells or increasing storage. However, increasing demand and drought effectively reduced supplies.
Now, the new owner of the company wants to wipe out a claimed operating loss, establish a reserve fund, build in a profit and make up for a decade of lost ground.
The company notified customers in September it wants to increase its base rate from $16 to $39.24. In addition, the company wants to charge $2.75 per 1,000 gallons for the first 4,000 gallons, $4.75 per 1,000 gallons for 4,001 to 10,000 gallons and $6.75 per 1,000 gallons above 10,000.
The company said the bill for the average customer using 2,856 gallons a month would rise 118 percent, from $21.51 to $47.09.
By contrast, the average Star Valley water user pays about $33 a month. Payson charges $29.14 for the first 5,000 gallons. The Pine-Strawberry Water Improvement District charges $47.75 for 3,000 gallons a month. Thus, the new Payson Water Company rates would be among the highest in the region, even without upgrading the system.
The opening volley in the rate case:
On April 22, 2013, former PWC owner Robert Hardcastle asked the Arizona Corporation Commission (ACC) to approve a rate increase. The corporation commission grants private water companies a monopoly on selling water in a given area, but then reviews the company’s rates. The corporation commission generally seeks to allow the company to cover the cost of delivering water plus a “reasonable” rate of return on its investment.
Hardcastle said he had put off filing for the rate increase for years in part to finalize an agreement with Payson and the Salt River Project to connect the Mesa del Caballo water system to the C.C. Cragin/Blue Ridge pipeline.
“... we preferred to wait to file this rate application until we had greater certainty on the cost of the Cragin pipeline,” he said to the ACC. “Furthermore, we knew we’d need to apply for financing and believed those issues would be inextricably linked to a rate case.”
Hardcastle reportedly also opened discussions with Payson about acquiring a Blue Ridge pipeline water right for other communities like East Verde Estates and Whispering Pines, but has never proposed an agreement. Those communities could perhaps take water out of the East Verde, since Salt River Project (SRP) will put some 9,000 acre-feet of water into that stream from Blue Ridge annually. However, none of the communities can seek a share of the water directly, since Payson Water Company remains the sole water provider recognized by SRP and the commission.
Later in his testimony, Hardcastle said he needed the rate increase to recover the $102,000 cost of 24 projects to improve the system. Those projects included the “replacement of water supply infrastructure, pressurizing equipment, system pumps, and various control systems — plus 906 meters in various water systems.”
But Hardcastle said the “most notable expense increases” were the result of increased electricity, insurance, property tax, telephone and chemical costs.
What PWC would do with extra money
The filed documents include a jumble of figures to justify the rate increase.
PWC accountant Thomas J. Bourassa testified that PWC had “adjusted gross revenues” of $320,525 and an “adjusted operating income (loss) of $182,478.” He said that led to an “operating income deficiency” of $255,000.
In a sharp exchange of questions and answers, East Verde Estates customer Tom Bremer tried to make sense of the company-provided figures without much success. He calculated that the company’s full operating costs come to about $500,000 and the rate increase would bring in an extra $400,000. By his calculations, that would give the company a 32 percent rate of return.
The accountant took issue with Bremer’s calculations. “The company does not agree with the calculations contained in the data request that result in the allegation that it is seeking or would receive a return on rate base in excess of 30 percent. The company’s direct filing, including the schedules contained therein, speak for themselves and reflect the company’s request for recovery of operating expenses (including property and income taxes) equal to $647,770 and a return on its proposed rate base equal $72,540 .... The total revenue requirement the company proposed in its direct filing is $720,310. The company’s proposed rate of return on rate base is the weighted cost of capital consisting of a capital structure of 100 percent equity at a cost of 11 percent.”
Bremer complained that the water system in East Verde Estates was falling apart, lacked sufficient storage and imposed routine water rationing. Residents there fear the company will soon seek to impose water hauling charges during the summer months, a move that could easily triple their bills. So Bremer asked what the company would do to upgrade the system if it got the rate increase approved.
In response, PWC wrote, “The company objects to this data request. To begin with, the request assumes facts not yet in evidence .... For example, in the data request itself, the company is asked to justify an increase in rates based on plans for future investment in the EVP system. Yet, under Arizona and federal law, the company is entitled to rates that provide it recovery of its operating expenses and a reasonable opportunity to earn its authorized return on the fair value of its current rate base.”
The company suggested that it will seek another rate increase in the future to provide the money to upgrade the systems.
Bremer asked the company to address the water restrictions now routinely imposed on East Verde Estates from May to September.
The company gave the same response, in exactly the same words.
The exchange suggests customers throughout the system will have to pay twice as much for exactly the same service they’re now receiving with no upgrade in the capacity.
The Mesa del factor
Some of the documents filed with the commission suggest that only Mesa del will see an increase in water production as a result of the connection to the Payson system — but they’ll pay for that $1.2 million connection separately with an estimated $30.75-a-month surcharge on top of their current rates. The corporation commission has already approved a $7.50 monthly surcharge for Mesa del Caballo residents to cover the cost of connecting to Payson’s existing water system.
Presumably, Mesa del residents will also pay the 118 percent base rate increase as everyone else in the system.
The company’s filings repeatedly indicate that Mesa del Caballo residents will bear the entire cost of the pipeline hookup. However, a note of uncertainty crept into the exchange between Bremer and the company, as he pressed the company on whether other customers will end up paying any part of the long-term cost of a $1.2 million federal loan to pay for the Mesa del connection.
Current PWC owner Jason Williamson responded in filings with the ACC, “That is up to the commission and the company cannot state what a future commission might determine is just and reasonable.”
When Bremer asked Williamson what the benefits of the Mesa del project would be to the communities served by PWC outside of Mesa del, Williamson responded, “The most significant benefit to customers outside MDC will be the ability of PWC’s management to allocate more time and resources to other system needs, once the biggest water supply issue facing PWC has been resolved.”