Missouri-American Water's president, Frank Kartmann, defended his utility's use of surcharges to fund infrastructure replacement in an op ed on June 21. Despite Kartmann's claims, the Infrastructure System Replacement Surcharge, commonly referred to as ISRS, remains fundamentally unfair to consumers.
The question is not whether water pipelines should be maintained. Missouri-American enjoys the status of a regulated monopoly; it has a mandatory obligation to provide safe and adequate water service. The question is whether consumers are paying too much for that service.
The traditional method of setting utility rates, which is used in every Missouri-American service area except St. Louis County, provides more than enough income to allow the financing of pipeline replacement. In St. Louis County, ratepayers were charged nearly a million dollars in an ISRS during 2003-2004, at the same time the water company earned a profit in excess of its regulated rate of return. Therefore, we do not recommend an ISRS for other Missouri-American service areas.
Giving a utility the right to levy an ISRS does not allow a thorough review of the utility's finances as would be performed during the audit in a full rate case. Surcharges such as an ISRS add up quickly, ignoring any excessive profits or declining costs the utility is experiencing. The staff of the Missouri Public Service Commission recently concluded in a report that the impact on consumers of the ISRS law has been "higher rate levels, than would be charged to them under traditional rate regulation."
Kartmann implies that surcharges save money because they avoid "costly rate cases." It is true that a full rate case does carry a price tag for consumers. Missouri-American reported it cost one million dollars for its most recent full rate case. But the cost was worth it for consumers. The thorough audit and scrutiny of the rate case saved consumers $19 million a year by cutting the company's request for a rate hike to $23 million from $44 million. Despite Mr. Kartmann's claim, an ISRS is levied without a detailed financial investigation.
A full rate case almost always ends up with greater savings than the process costs. An ISRS only raises rates higher and faster.