General Information about Rates
Liberty Utilities, Apple Valley’s rates for water service are set by an independent third party, the California Public Utilities Commission (CPUC). The CPUC’s mission is to protect utility customers and to ensure the provision of safe, reliable utility service and infrastructure at fair and reasonable rates. The role of the CPUC is to oversee the, rates, service, quality, operations, and investment of Liberty Utilities as it balances the needs of customers with the financial and operational requirements of the water utility to provide safe reliable service.
Water rates are calculated based on the expenses or “cost of service” needed to operate and maintain the water system in compliance with state and federal guidelines. Part of this cost of service is the cost of raising the funds for investments the water company must make to replace and improve the facilities which make up the water system.
While the process for setting rates is very comprehensive, complicated, and time consuming, what determines your rates is conceptually very simple; the necessary costs and the customers and water sales.
The first category of cost is the recurring expenses of the company: These are the expenses of the company that happen every year. In a home, these expenses would include things like groceries, clothes, electricity, cable, insurance, gas, etc. In a regulated water utility, recurring expenses are the costs to operate and maintain the vast water system, including cost of employees, taxes, chemicals, maintenance, and electricity.
The second category of cost is the cost related to capital expenditures, or investment, (sometimes called CAPEX): These costs relate to the money Liberty Utilities and its stockholders invest to replace and improve the water system and equipment — the investment that is known as the “rate base.” For a regulated water utility like Liberty Utilities, rate base represents the total amount of money the company has invested in the water system for which it has not been paid — similar to the unpaid mortgage on a home.
As part of the cost of service of the company, the CPUC authorizes a return on rate base designed to cover the cost of raising the funds used for that investment. Normally, each dollar invested by Liberty Utilities is made up of approximately 50% debt, and the remaining 50% is money invested by the company’s stockholders as equity. The return on rate base includes the cost of debt service, or interest expense, for the debt-funded portion. The CPUC also authorizes a “return on equity,” which is an established opportunity—not a guarantee—that stockholders have to earn a return on their investment. This return on equity is paid back to stockholders, who may elect to take the money in the form of a dividend or, as has been the case with Liberty Utilities, allow the utility to retain that return and make that money available to the utility to fund other necessary investments. In either case that return on equity is a cost to the water company — the cost of getting someone to provide the utility money. This return is just like interest paid to you on your savings account or like any money you receive from stocks, bonds, or mutual funds that you may own or have in your 401(k).
Unlike debt-holders who require annual payment at specified pre-arranged interest amounts, stockholders are not guaranteed a specific return but only receive whatever is left over after all other expenses, including debt service, of the water company are paid. Like any investor, however, stockholders expect a fair and reasonable return if they are going to invest their money, and rates that provide for a fair and reasonable opportunity to earn that return are a necessary cost for Liberty Utilities so that stockholders will invest their money and provide funding for the water system.
In simple terms, when you take these three items — the annually recurring expenses to operate the system, the cost of debt incurred by Liberty Utilities for its part of the investment, and a reasonable return on the investment of the stockholders for the use of their money (leaving aside the 30% of the cost of service that is recovered through monthly service charges)– and divide it by the number of gallons sold, you will determine the cost of a gallon of water. In Liberty Utilities, Apple Valley’s service area, the cost of quality drinking water today is less than a penny a gallon.
LIberty Utilities and the CPUC
When you combine investor-owned water companies, like Liberty Utilities, with third party public oversight from the CPUC, what you get is a regulatory model that has served generations of people in Apple Valley with rates that provide Apple Valley with quality water, replacement and repair of water infrastructure, fire protection and economic vitality. This model ensures that continuous improvements are made in the water system to maintain, and even surpass, water quality standards and to ensure continued delivery of high-quality and reliable water service.
When Liberty Utilities, Apple Valley requests a rate increase, unlike a town or municipality, the company must prove its case for the rate increase by providing approximately a thousand pages of information and facts. The application for a change in rates is reviewed by the CPUC staff and the Office of Ratepayer Advocates. In addition, the materials can also be reviewed by third parties called intervenors who may represent local governments and associations. There are also various local public hearings for customers to provide input about Liberty Utilities, Apple Valley’s rate increase request and public evidentiary hearings before an Administrative Law Judge. A Town or municipality can pass a rate increase with little or no transparency or public input.
In addition to oversight of rates, the CPUC also maintains and enforces service standards (water pressure, customer response times, meter accuracy standards, etc.) and procedures for interactions between the utility and customers; exercises financial oversight of stock and debt issuances to ensure utilities maintain the financial capability to provide service; has a Public Advisors Office which reviews notices to customers, runs public participation hearings, and provides help to customers who may wish to participate in proceedings; and has a Consumer Affairs Branch which responds to any customer complaints about the utility. When a Town or municipality runs the water system customers don’t receive the benefits of third party oversight. Under Town ownership if a customer had a complaint about their service or bill, there would be no one else to go to but the Town.