New York American Water customers file complaint over tank project

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More than 50 residents filed a complaint with the state Public Service Commission last week calling for an investigation of “misrepresented costs stated by New York American Water” to replace an aging water tank on Dumond Place in Glen Head.

In 2017, residents were told that the estimated cost of the construction of a new, multi-column tank — the type stakeholders wanted — would be $3.6 million, but a postcard sent to ratepayers last month indicated that the project would instead cost $6.2 million.

The filing stated, “The $3.6 million quote to the community . . . did not include all added expenses that entail the replacement of the tank,” as reported by the Herald Gazette (“$6.2M water tank coming to Glen Head,” May 2-8). In a statement, NYAW’s external affairs manager, Lee Mueller, said the higher cost of construction was based on competitive bids.

The filing also indicated that in 2017, NYAW officials “clearly expressed their urgency to start the project during the winter” — when water demand is at its lowest. Removal work, however, is now slated to begin at the end of this month, and the new tank is expected to be in service by next May. NYAW Engineering Manager John Kilpatrick said that the company conducted a hydraulic analysis, using local consumption data from 2017, to ensure that it could meet customer demand while the tank is offline.

State Sen. Jim Gaughran, a Democrat from Northport, responded to the complaint filed by his constituents, and also called on the PSC to investigate its concerns. “I am outraged by these allegations,” he said in a statement. “It is time for American Water to once and for all act as a good corporate neighbor. Water is a human right.”

New surcharges ahead?

NYAW ratepayers in Nassau County could face new surcharges that would again increase their monthly water bills. According to Mueller’s statement, the company filed a set of proposals with the PSC on May 30. The proposed surcharges, he said, are not included in NYAW’s four-year rate plan, and are filed on an annual basis.

The first surcharge is a revenue and property tax reconciliation mechanism, which would reconcile the revenue collected from customers and property taxes they paid with the amounts approved in the company’s rate plan. “Property taxes make up a significant portion of our customers’ bills — up to 59 percent for our . . . North Shore customers,” Mueller said. The 5.07 percent surcharge for customers in the Sea Cliff district would take effect on Nov. 1.

The second is a system-improvement charge, which would recover the costs of infrastructure improvement projects that have been identified, approved and constructed but were not covered by base rates. This surcharge, 0.83 percent for Sea Cliff customers, would take effect on Aug. 1. Mueller said that all the projects were related to meeting customer demand and improving water quality.

Newsday reported that under the proposals, monthly bills for residential customers in Sea Cliff could jump by 97 cents for low-water users and as much as $6.34 for bigger users, according to filings with the PSC.

Glen Head activist Agatha Nadel said the proposed surcharges would eliminate any rate relief savings that the community has received from the state. “These increases [would] wipe out what little relief we got,” Nadel said. “If the PSC had a backbone, it would not allow this to go through.”

The bigger picture

NYAW, which serves 4,500 residents on the North Shore in the utility’s Sea Cliff District, is a subsidiary of American Water Works Company Inc., the largest investor-owned water utility in North America, with assets of $19 billion. Serving more than 14 million customers in 46 states and one Canadian province, American Water Works also operates wastewater-treatment facilities, owns some 80 dams and operates and manages a military division.

The parent company spent roughly $46 million on infrastructure, treatment and distribution upgrades last year as part of a $6.5 billion capital spending plan, said John Kilpatrick, an NYAW engineering manager. And therein lies part of the controversy: “The costs to complete these capital improvement projects are built into the customers’ rates,” Kilpatrick said.

Most municipalities charge residents for water. But pipes, pumping stations, filtration and purification must be paid for as well. The difference is that NYAW is a for-profit subsidiary of American Water Works, another for-profit entity that this year expects to disburse at least $3.54 per share in dividends to its shareholders, according to its first-quarter financial filings. The company currently has 181 million shares of common stock outstanding.

In order to do this, 70 percent of all capital expenditure is recovered in the form of “volumetric charges on the customers’ bills,” according to an April surveillance report on the parent company by Ryan Wobbrock, a vice president and senior credit analyst at Moody’s Investors Service. The remainder of such expenditures is financed by roughly $7.7 billion in long-term debt. Some of the debt is held by the parent company, but roughly $4.6 billion “has been advanced via intercompany notes to various regulated utility subsidiaries [i.e., local water companies] and is part of their respective regulated capital structures.”

NYAW customers are paying for a portion of American Water Works’ debt, as they would pay for improvement bonds issued by publicly owned water utilities. But they are paying not only for the replacement of infrastructure and the flushing of hydrants in their towns; they are also helping to pay for the 10 percent boost in the parent company’s annual stock dividend.

Meanwhile, the company is dealing with a few challenges. Free cash flow deficits have increased at a compound annual growth rate of 62 percent, while debt has risen by 9 percent. And funds from operations have only increased by about 6 percent. In addition, American Water Works became a net tax-payer under the 2017 federal reforms. Before that, depreciation rules allowed it to avoid paying any taxes at all.

The stresses were among the reasons Moody’s gave for its downgrade of the utility in April to Baa1 from A3. “The financial profile of the company has steadily declined since 2014, with free cash flow deficits and debt issuance having outpaced cash flow growth, as the company took on $6.5 billion in capital spending,” Wobbrock wrote in announcing the downgrade. And, he added, he expected the downward trend to continue for at least the next 12 to 18 months.

This means that the company is paying out more in dividends than it can replace though funds from operations, according to the Moody’s report.

“The brazenness of this company [shows] disregard for our elected officials, and it has to end,” Nadel said. “I implore the governor to do the right thing . . . and get us affordable, public water.”