West Virginia American Water has not followed parts of a state Public Service Commission order that prohibits it from recovering certain costs from customers, according to testimony in the water company's latest request for a rate increase.
The costs are known as "cost of removal," and the PSC order that bans the water company from recovering those costs stems from a 1999 case in which Mike Albert, a lawyer with Jackson Kelly, in Charleston, represented the utility. Albert is now chairman of the PSC.
The accounting practices in question deal with a part of the rate case known as depreciation, in which the PSC says how much money a utility can recover for capital improvements, like new plants or lines, and how long they have to recover that money. Usually, a utility is paid back for the cost of capital-improvement projects over the entire life of that property.
The problem in the current depreciation case, according to testimony from PSC staff members and the PSC's Consumer Advocate Division, is that West Virginia American officials have allocated millions of dollars to accounts for "cost of removal," which the company was directed not to do under the 1999 order.
"The company did not abide by several of the stipulated conditions and, in fact in some cases, did just the opposite," one witness for the consumer division testified.
The issue is the biggest difference between three competing recommendations from the consumer division, the PSC staff and West Virginia American in the depreciation case.
The water company recovered about $19.7 million through its depreciation expenses in 2014, but it now wants a raise in those rates for the first time since 1998. The company wants to recover roughly $23.6 million from customers. The PSC staff has recommended rates that would provide the company with $21.9 million for annual depreciation expenses, and the consumer division has called for rates equaling $16.8 million.
In testimony before the PSC, water company officials don't deny they haven't followed the 1999 order, which also required the company to file depreciation reports every three to five years. But they argue that PSC consumer advocates have "no factual basis" for their findings and that the company used the "most widely utilized methodology" in calculating its requested rates.
"There is no history I can present to support the basis for past actions of the company," Jeffrey McIntyre, West Virginia American's president, testified. "We have looked at the effect of not following the order, and it is clear that it has not negatively affected our customers."
The depreciation issue has seemingly complicated the water company's request for a 28 percent base rate increase that would provide it with an additional $35.4 million annually.
At the same time, the company has raised questions among consumer division and PSC staff members about how it actually calculates the millions of dollars placed in accounts meant to record the cost of removal for things like distribution mains and water meters.
As PSC staff members point out, many of the company's distribution and transmission mains are not actually hauled away when employees replace a segment of line.
"In many instances, mains and services are either abandoned in place or are destroyed and not removed," a PSC staff member testified. "This practice was noted in staff testimony in the 1998 case and remains current practice. In addition, responses by the company to interrogatories clearly state that the proposed costs of removal for mains and services are far overstated."
According to documents filed by the consumer division, West Virginia American has allocated about $32 million for the cost of removal associated with distribution mains since 2002, and millions more for meter installations and hydrants.
Water company officials said they had no idea why the company continued to put money in cost-of-removal accounts even though the PSC ordered it not to in 1999.
"The company temporarily stopped cost of removal allocations for a few years, but then reassigned an allocation factor in years starting in 2002," said McIntyre, who has been president of the company since 2012. "The company has experienced changes in its leadership, which left this issue undetected by current leadership until preparing for these cases."
It also isn't clear how the settlement negotiated by Albert will affect his involvement in the current rate case.
PSC spokeswoman Susan Small said Albert would decide whether to remain on the case later and would announce any decision through a PSC order.
"Chairman Albert is reviewing every document and piece of evidence filed in the case," Small wrote in an email. "Whether or not he chooses to recuse himself is a decision he will make based on the evidence presented. As this case is currently before the commission, the chairman, and the other commissioners, will not be discussing the deliberations."
In August 2014, Albert recused himself from an investigation into the water company's handling of the Freedom Industries chemical leak that contaminated the Elk River and, subsequently, the drinking water of 300,000 people. In that order, Albert explained that, while his work as a water company attorney wasn't directly connected to the investigation, the PSC was looking into a period when he represented the company in other matters.
"The parties have raised issues and arguments in discovery relating to the activities of WVAWC during a time when I acted as counsel for WVAWC, and I believe that my impartiality might be questioned," Albert wrote at the time.
No matter what Albert decides, the PSC will still be able to rule on the rate request, because Gov. Earl Ray Tomblin appointed Kara Cunningham Williams, a former attorney for Steptoe & Johnson, as the third PSC commissioner last week. She and Commissioner Brooks McCabe could still form a majority of the three-member commission and make a decision without Albert.
Tomblin spokesman Chris Stadelman said the possibility of Albert's recusal didn't prompt the governor to fill the third PSC slot, which had been vacant for more than nine months.
"Gov. Tomblin appointed Kara Cunningham Williams because he thought she was the best person for the job," Stadelman wrote in an email. "The timing was based on when he determined that, not any other factors."
A public hearing on the proposed rate hike is set for Oct. 26 in Charleston.
Evidentiary hearings for the case are expected to take place before the PSC beginning on Oct. 27 and, according to testimony, West Virginia American officials don't believe the company's failure to follow the 1999 order will affect the trust of regulators.
"Trust is hard to build, but even harder to rebuild," McIntyre said. "I have taken the approach of doing the right thing, consistently and with continuous improvement in mind."
Reach Andrew Brown at andrew.brown@wvgazettemail.com, 304-348-4814 or follow @Andy_Ed_Brown on Twitter.