Ron Knecht: Don’t charge now for work that’s done later

Carson City Supervisors should reject the significant water- and sewer-rate hikes proposed for each of the next five years and direct city staff to rework them.

Proposed average water rates would rise 6.5 percent yearly, or 32 percent in five years, and sewer rates would soar 15 percent annually, or 75 percent total. Most of the increases result from a policy adopted by the board, but not yet implemented, to charge ratepayers for “system reinvestment” (SR).

The proposed SR charges would turn residents and businesses into involuntary investors in city utility services. Thus, it is very similar (despite technical differences) to proposals often made by investor-owned energy utilities to bill their customers for some costs of construction work in progress — that is, charging for power plants or gas pipelines under construction.

Generally, those charges are not allowed. Whether utilities are owned by governments or firms subject to government regulation, they hold a state franchise as the sole providers of their services in their territories, so customers are captive to them.

Because customers cannot choose another vendor for utility services, rates are set by governments to assure fairness to customers and utility investors. A key ratemaking principle is that utilities may charge customers only for reasonable costs of current services, including a market return on and ratable return of capital invested in facilities currently “used and useful” to serve customers. But not to supply capital to build or buy facilities, which is what the SR charges would do.

This limitation assures that investors (bondholders in the case of municipal utilities) carry the risks that investors shoulder in competitive markets by supplying capital, and that customers are shielded from being required via utility rates to be involuntary investors as a consequence of not having the option to get utility service from another vendor. It provides fundamental fairness to both sides and implements for utilities the pricing results of market competition that serve the broad public interest.

I have testified well over 100 times as an expert witness in regulatory and court cases on a range of economic, financial, technical and policy subjects. But the issue raised by the current proposal is essentially the one I addressed in my first testimony in 1977, and in numerous subsequent cases. In 1979, I became a partner in a restaurant, an experience that vividly illustrates the error of requiring utility customers to become involuntary investors in their utilities.

Because customers had many choices among restaurants, we could not charge people passing by our site fees while the restaurant was being built to raise capital for it, even though they would eat there later. No non-utility can do that, and that limitation is one way that market competition promotes the public interest. But that is essentially what utilities seek to do by proposals such as SR charges.

Proponents of such charges note that they improve the utility’s financial position and lower rates in the future. But if that were a sufficient reason to allow them, then all investment could be billed to present customers. Of course, that isn’t allowed.

Due to a Regents meeting in Elko, I can’t attend today’s hearing on this matter. I respectfully request that the supervisors direct city staff and consultants to rework the proposed rates without the SR charges.

Ron Knecht is an economist, law school graduate and Nevada higher education regent.