Alerts
By: Sutton StokesAugust 12, 2022

Elkins Water Board Recommends Emergency Rate Increase

The Elkins Water Board has recommended an emergency rate increase of 32 percent for city water customers, and the Elkins council could approve the increase as soon as September 15.

This increase, which is essential for the utility to avoid insolvency in response to regulatory changes at the state level and huge inflation-driven increases in supply costs, would become effective immediately upon passage. An additional 3 percent increase would become effective in summer of 2023.

An Urgent Need

Elkins water rates were last raised in 2017 and are no longer sufficient to support operation and maintenance of the city’s water system. For the fiscal year that ended June 30, costs exceeded revenues and it has been months since the system could afford to make state-required deposits into accounts intended to defray future expenses. Other long-deferred expenses include vital new equipment purchases, urgent technology upgrades, and wage increases to better retain system personnel.

The city’s water rates are based upon the actual cost of providing the service, and the city is legally prohibited from transferring money from other city funds to cover those costs. This means that increases in costs for the water system must be met by increased rates—and time is of the essence, according to Wes Lambert, the chief operator of the Elkins water system.

“We’re following an emergency process to set this new rate, because the Water Board recognizes that there could be severe consequences otherwise,” says Lambert. “Without this rate increase, we would soon be getting to the point of not being able to make bond payments, pay vendors, or make payroll.”

Elkins is not the only city raising rates, and many area utilities are seeing increases of a similar magnitude, including Fairmont, which raised water rates 34 percent this summer.

How the New Rate Was Determined

To determine a suitable rate, Lambert and the board worked with the accounting firm of Griffith & Associates, PLLC to analyze the last three years of actual costs, the ongoing effects of inflation, the condition of rolling stock and other essential equipment, and vendor price projections. The board also worked with Robert Rodecker, an attorney with Kay, Casto & Chaney PLLC who practices before the West Virginia Public Service Commission on regulatory matters involving water and other utilities.

Inflation and Supply Chain Problems

One of the main reasons an increase is needed, the board learned, has to do with COVID-related disruptions and intense competition for supplies resulting from the massive influx of federal infrastructure funds nationwide. Although most sectors of the economy are experiencing inflation, water utilities are being hit especially hard.

“In my entire career, I’ve never seen such extreme inflationary impacts on water utilities,” said Michael Griffith, a CPA and the presiding member of Griffith & Associates, who presented the proposed rate increase to the water board. “We do work in 45 counties, and everyone is dealing with similar issues. Costs for many crucial supplies have at least doubled, and I don’t see that situation improving anytime soon.”

Lambert can point to many examples of hugely higher expenses.

“The cost of every material good we buy has shot up, sometimes as much as 500 percent,” he says. “For example, six-inch water line has gone from $2.10 to $7 a foot. Eight-inch line has gone from $4 a foot to $16.50 a foot.”

Chemical expenditures alone have increased more than 100 percent overall since the first year of the new plant’s operation. To take just one example, the water-treatment plant uses about 45 gallons of bleach daily; the cost of bleach has recently increased from $2 to $3.50 per gallon.

“That’s an increase from about $28,000 to $49,140 each year,” says Lambert. “And that’s just one of the many chemicals and supplies we use on a daily basis that we’re having to pay a lot more for.”

Bond and Statutory Obligations

In addition to covering increased supply costs, Rodecker explained that the new rate must also be high enough to meet the utility’s responsibilities to bond holders.

“This utility has a covenant with bond holders that rates will always be held high enough to both operate the system and make bond payments,” Rodecker said. (Under the terms of the bonds issued to pay for the $35 million water plant constructed in 2017, the city must pay $116,000 a month until 2055.)

Another factor driving the increase is Senate Bill 234. This bill requires municipal water and sewer utilities to set aside 12.5 percent of annual operation and maintenance costs in a Cash Working Capital Reserve Fund each year. Before the adoption of this rule, the West Virginia Public Service Commission did not allow utilities to set aside sufficient funds for future capital needs.

“SB 234 is having a huge impact on utilities all around West Virginia,” said Rodecker. After the meeting, he explained that “municipalities are now having to raise their rates to include the amount called for by the legislation. But SB 234 was adopted to provide an obligation that the municipalities and PSDs must set aside a specific amount of funds for upcoming capital needs.” SB 234 was sponsored and supported by the Municipal League and the West Virginia Rural Water Association, he added.

Under this rule and as part of the proposed rate increase, Elkins would now start setting aside about $270,000 annually toward large capital outlays, such as the eventual $1 million cost of replacing the water plant’s membrane filters, which will reach end-of-life in the mid-2020s.

Current Rate is Five Years Old

An additional factor contributing to this rate increase is the length of time since the last one, which went into effect when the new water plant went into service in 2017. The new plant, which uses membrane filtration, replaced a century-old plant that used mixed-media filtration.

“It’s now clear that the 2017 increase wasn’t enough,” says Lambert, who points out that day-to-day operations are significantly more expensive at the new plant than they were at the old one. “That rate increase was what was needed to pay initial costs and cover our monthly bond payments, but it didn’t turn out to be enough to cover the ongoing costs of electrical power and all of the new kinds of supplies that a membrane plant needs. A ‘smart plant’ like this has a lot of advantages but it also costs a lot more to run.”

Griffith described the recommended rate increase as unavoidable.

“My team has carefully examined the situation in Elkins, and all of your current and proposed expenditures are typical and necessary,” he said. “The timing of this increase is far from ideal, but I don’t see any way for you to keep meeting your obligations without a rate increase of this size.”

Evaluating Rates Every Two Years

The Elkins Water Board is making plans to avoid such large increases in the future. The board, an independent governing body that supervises the Elkins water system, was created in 2021. That same year, as required by state law, supervision of the city’s water utility was shifted from the City of Elkins operations manager to the chief operator of the water system, an employee of the Elkins Water Board.

At the same meeting when the proposed rate increase was recommended to council, the board also adopted a policy of reviewing rates and recommending smaller increases on a more frequent basis, as needed.

“The rate increase this summer will get us in a more stable position,” says Lambert. “After that, we are going to review our rates at least every two years to see if they are still sufficient. If not, we’ll be able to do a smaller increase then instead of waiting another five years and having to do such a large one again.”

Lambert knows that no one likes to see water rates increase but says he sees no alternative.

“The Water Board’s mission is to provide clean drinking water to around 14,000   customers inside and outside Elkins, but we can’t do it without enough money,” says Lambert. “If there were any other solution, we’d do it in a heartbeat, but there isn’t, and we can’t ignore the problem. If we don’t increase the system’s revenue’s soon, we will be in a very bad situation.”

Next Steps

Now that the Elkins Water Board has made its recommendation, the next step is consideration by city council, which is responsible for setting utility rates. As currently scheduled, the first of two readings of a rate ordinance will be September 1, with the second occurring September 15. Because this is an emergency rate increase, the new rate would go into effect immediately upon passage.

The proposed increase does not include funds for the systematic replacement of aging water lines citywide, work for which engineers retained by the city have estimated a bottom line of tens of millions of dollars. City and board staff are actively exploring funding options for the initial phase of this work.

See the following web pages for additional information.

 

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