Over the next several weeks, management at Global Water will haggle with Arizona Corporation Commission staff, city representatives and others in hearings regarding the utility’s proposed rate increase, but it just may be the discussion of several key acronyms that steals the show.
To the general populous, terms such Infrastructure Coordination Financing Agreements (ICFAs) and Contributions in Aid of Construction (CIACs) mean very little. But how the terms are interpreted in these Arizona Corporation Commission hearings could result in Global Water’s maximum allowable utility rate decreasing.
“The treatment of these ICFAs will have a large impact on this rate case,” said Court Rich, the lawyer from the Rose Law Group representing the city of Maricopa in the hearing. “This case will absolutely set a precedent.”
CIACs are contracts between a third party, typically a developer and a water company, in which the developer agrees to pay for a portion of the infrastructure necessary to serve the project.
These contributions are then subtracted from the rate base, ensuring the company does not earn a rate of return on money garnered from third-party contributions.
“These type of agreements help protect the water companies by making sure the developer has a vested interest in the infrastructure necessary for a community,” said William Rigsby, a rate analyst for the Residential Utility Consumer Office.
RUCO is the organization that represents consumers in utility rate hearings.
While these types of agreements do not require approval of the Corporation Commission, they do go before the entity for review.
It is a method of helping to fund water companies that Trevor Hill, Global Water’s president and chief executive officer, said is destructive.
Hill said the process discourages larger water companies from buying smaller, troubled utilities and doesn’t allow for water companies to put in place the best management practices.
The reason agreements chase off potential buyers is because of what Hill described as a negative rate basis. A rate base is essentially the amount of money a company has invested in a community; this number is multiplied by the rate of return to determine the company’s revenue.
If a company had a rate base of $10,000 for example and was given $100,000 through a CIAC, its rate base would effectively become negative $90,000.
To avoid the possibility of negative rate basis, encourage water management and provide financial assistance in the purchase of smaller utilities, Global Water developed the ICFA, according to Hill.
The ICFA is an agreement between developers and Global Water, which essentially states the company will provide water service to the development. However, the money granted to Global Water through these agreements is not deducted out of the company’s rate basis or ear-marked for specific projects.
Instead they are directly routed to Global as cash revenues.
“Global’s position is part of a disturbing trend by Arizona utilities to remove CIAC funds from their rate base in order to achieve higher levels of operating income,” Rigsby said.
“Mr. Hill thinks his vision for water management in Arizona somehow trumps traditional rate-making practices that have been established to ensure utilities do not earn a recovery on capital that is provided by third parties,” Rigsby said.
The Arizona Corporation Commission opened a blank docket in 2006 to investigate the utilization of these agreements; however, it never acted upon that investigation.
In testimony before the Corporation Commission on Global Water’s proposed rate increase, Hill stated the company was aware of the pending investigation and continued to enter into “many” more of these agreements in the years following.
To date, Global Water has garnered $60 million in cash revenue through these agreements, which Hill and others emphasize was used as part of th $84 million used to purchase smaller troubled utilities.
“Since these monies were not used to purchase plants (infrastructure), they should not be excluded from the rate base,” Hill said.
The Corporation Commission has a process in place for companies to recover a portion of the money they invest in the purchase of a utility; however, this recovery method is rarely given out, and Global Water is not asking for a recovery on the purchase price in their rate case.
Furthermore, Hill states that RUCO and ACC staff want to deduct the full amount of the ICFA funds from the rate case without taking into account the $24 million in taxes the company paid on the funds.
“Without these agreements Global will never consider purchasing another troubled utility,” Hill said.
Currently Global Water is seeking a combined rate base of $93 million for its two Maricopa utilities, Palo Verde (sewer) and Santa Cruz (water). However, included in this base is nearly $16 million the company obtained through ICFAs that both ACC staff and RUCO is recommending be removed.
None of the money garnered in Maricopa through these agreements was reinvested in the community, according to Hill.
The original rate design RUCO recommended for Global Water let the company keep the ICFA funds intact and resulted in an average monthly bill of about $105 at the end of a three-year phase. With the removal of the $16 million, the average bill will be reduced to about $90. The rates Global is requesting would result in an average bill of $121.24.
“We are going to do everything we can to argue the exclusion of these monies from the rate case,” Rich said.  |
To read more about Global Water's proposed rate increase and the city's reaction, click links below. - Global Water CEO defends salaries, decisions
- Global Water CEO testifies in first day of hearings
- Council to have representation at Global Water rate hearings
- Residents vent frustration, concern to Arizona Corporation Commission
- Council takes stand against Global Water rate increase
- Troubled waters in Maricopa
- HOAs prepare for battle against proposed Global Water rate increases Photo by Jim Williams |