Aqua North Carolina found a legal way to raise its rates—at customers’ expense

Document

This stipulation shows some details of the Acquisition Incentive Account that was established upon the sale of Heater Utilities to Aqua America.

On the third page, under section (6)b, you’ll find the clause explaining that the Utilities Commission, its public staff and the N.C. Department of Environment and Natural Resources will identify “nonviable” water systems for the utility to pursue.

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Editor’s note: This is the third story in a three-part series about Aqua North Carolina. The first article addressed Aqua NC’s potential sale of water to 751 South in Durham. Last week’s story examined Aqua NC customers’ frustration with poor water quality and customer service.

Tell us your experience with Aqua NC by posting a comment below.

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At this price, the sinks and showers should flow with champagne.

Depending on their usage, Aqua North Carolina customers pay as much as $425 a month for water and sewer billsroughly equivalent to the average monthly payment for a new car.

Aqua NC’s water and sewer rates are the highest of any private utility in the state. The costs to customers reflect a corporate strategy, one that involves buy-outs of troubled water systems, that plays out in all nine states where the parent company, Aqua America, does business.

Aqua America increased its presence in North Carolina in 2004 when it acquired Cary-based Heater Utilities, then the largest private utility in the state. The N.C. Utilities Commission approved the transaction, which allowed the company that later became Aqua North Carolina to receive a particularly sweetand legaldeal, but one customers would pay for.

“With the acquisition incentive program, North Carolina is giving Aqua money to do what they do,” says Juli Williams, an unhappy Aqua customer in eastern Wake County. Her family of five pays about $425 a month for water and sewer. “It’s not fair.”

The core of the Aqua NC deal is an Acquisitions Incentive Account, also known as an AIA. When Aqua America purchased Heater for $76 million, the company asked that $18 million of it be considered “goodwill,” which, unlike a customer base or pipelines, is an intangible asset. You can’t touch goodwill.

The utilities commission, on the recommendation of its public staff, knocked the amount down to $12 million. Yet that money was placed into an AIA for eventual pass-along to Aqua ratepayers, even though it’s unusual to bake goodwill into customer rates.

Now when Aqua NC buys a troubled or neglected water system, it can dip into the AIA for matching funds, up to $400,000 for water systems and $100,000 for sewer, subject to utilities commission approval.

Aqua earns back that expense by passing it along to all Aqua NC ratepayers after the next rate increase, even if the customers are not in the newly purchased system.

As a result, Aqua customers pay higher rates. And Aqua NC has an incentive to buy troubled water and sewer systems.

“The customers pay for these incentives,” says Katie Hicks of Clean Water for North Carolina, a frequent critic of Aqua. “And the profits go to the shareholders.”

While legal, AIAs are unusual. The utilities commission has granted just one in North Carolinafor Aqua.

William Grantmyre is a staff attorney for the utilities commission’s public staff, which represents the consumers. He says that the staff reviews Aqua’s projected AIA withdrawals and recommends an amount that “could be less” than the company asks for.

Since 2004, Aqua has spent $2 million of its AIA money on more than a dozen troubled water systems, Grantmyre says.

(The commission contains several former Heater employees: Grantmyre; Jerry Tweed, who worked in the commission’s water and sewer division until his recent retirement; and Freda Hilburn, a financial analyst at the commission. Grantmyre says he received no stock options from the Heater sale and has no financial interest in Aqua. Former utilities commissioner Jo Ann Sanford now works for Aqua North Carolina.)

According to utilities commission documents, the commission itself, the public staff and the N.C. Department of Environment and Natural Resources identify “nonviable” systems for Aqua NC to persue. Yet Grantmyre says the public staff doesn’t steer owners of troubled water systems to Aqua.

“If an operator came to me, I would give the operator a list of several companies,” Grantmyre says. “Aqua is the only one showing an interest in acquiring these systems.”

Aqua NC President Tom Roberts acknowledges that corporate strategy: “We do recognize we have the ability to absorb troubled systems.” He notes that while Aqua must spend the money to buy these systems, it can take more than a yearwhenever the next rate increase is approvedto recoup the expenses.

In North Carolina, private utilities such as Aqua legally can peg their water and sewer rates to operating expenses and customer costs. Because of the way expenses, revenues and rate of return are calculated, the higher the operating expenses and customer costs, the more revenue the company can generate.

From a business perspective, Aqua America’s growth and acquisition strategy is smart. The company buys customers and systems to generate revenue, while “pruning,” oeprations as Aqua America President Nicholas DeBenedictis describes it in his annual reports, that are too expensive or onerous.

Yet the company’s growth strategy has backfired in some states, including Florida, Indiana and New York. Aqua recently sold its Florida operations to a state governmental authority for $49 million (the company asked for $95 million). Like their counterparts in North Carolina, customers in the Sunshine State complained about high bills, poor water quality and service, according to the Tampa Bay Times.

In Indiana, Aqua couldn’t meet water demands during a recent drought. About 20 neighborhood associations have asked to move to city water, which could save each household $160–$220 annually, according to media reports.

And in 2010, U.S. Sen. Charles Schumer, a Democrat from New York, called for a federal investigation of Aqua America’s business practices because rates were so high.

Growth and acquisition is typical business practice. The difference is in what Aqua is selling. If a company buys too many restaurants and unloads or closes the unprofitable ones, there are other restaurants for customers to patronize. Well-run water and sewer systems, however, are not mere conveniences. They are vital for public health and safety.

This article appeared in print with the headline “A sweet deal.”