How much profit should West Virginia American Water's shareholders receive for maintaining the company's system and providing water to hundreds of thousands of customers in West Virginia?
That was one of the main questions discussed at a Public Service Commission hearing Wednesday, where the state's three commissioners are considering American Water's ongoing request for a $35.4 million increase in annual revenue.
Attorneys representing several groups, including the Consumer Advocate Division, the West Virginia Energy Users Group and the PSC staff, all took their turns questioning representatives for American Water about why the company believed it deserved a 10.75 percent return on equity.
In the case's written testimony, the Consumer Advocate Division suggested an investment return of 9 percent, and the PSC staff proposed a return of 9.49 percent. While those numbers don't seem that far apart, they can represent a significant difference in the amount of money that would be paid to the company and shareholders.
Several of American Water's customers who spoke at a public meeting in front of the PSC on Monday criticized the company for collecting any type profit for providing water. Many of them also went on to call for a public takeover of American Water's entire system.
"I don't give a damn about the shareholders," said Jane Claymore, one of the customers who spoke. "Full disclosure here, I don't own stock in West Virginia American Water."
Dr. James Vander Weide, an economist representing the company's position in the case, told the commission Wednesday that there are many reasons why investors receive a rate of return from regulated utilities, and a number of other reasons why some utilities receive higher percentage returns than others.
As he explained his economic model that calculated the 10.75 percent figure, Vander Weide explained that investors undertake business, financial and regulatory "risk" when investing in any type of for-profit utility.
In American Water's case, he said there are risks that the amount of water used by customers would decline and that the company's water system would require more investment than expected. He also said that water utilities were more of a risk for investors because of the large amount of money needed to operate water systems, compared to electric and gas utilities.
Lawyers representing some the state's largest industrial water customers pushed Vander Weide on that point, and emphasized that risk was an inherent part of the business, which investors should already realize.
When the final percentage is approved by the commission, Susan Small, the PSC's director of communications, said it is based on the evidence presented during the case.
The Consumer Advocate Division asked the commission to consider studies highlighting the downturn in the state's economy when they weigh whether American Water's investors should get a double-digit return on their investments.
Lawyers for the consumer advocate also introduced evidence that showed that the water utilities parent company - American Water Works - has provided its shareholders with a roughly 20 percent rate of return on average throughout much of 2014.
The lawyers from Jackson Kelly, who are representing American Water, took exception to those numbers. They explained that those were returns for shareholders of the parent company, which operates in dozens of other states, not just for West Virginia American Water's shareholders.
Company officials have said in the past that West Virginia American Water is one of the parent company's least profitable subsidiaries. On Tuesday, McIntyre told the commission that he isn't always able go to the parent company for financing because states with more favorable regulations offer the parent company a better profit margin.
Lawyers for several groups also discussed the impact that newly proposed rate-making policies could have on the company's investment return.
American Water has suggested using projected spending estimates to establish the rates in the current case. That practice commonly referred to as a future test year, has been rejected by the PSC in the past. Alternatively, the PSC staff has suggested a separate surcharge that would be placed on customers to pay for things, like water main replacements.
According to the testimony Wednesday, either of those regulatory approaches could reduce the amount of "risk" shareholders face in investing in American Water.
"It would give them a greater likelihood of getting a return on their investment," Vander Weide said.
In other cases, when separate surcharges have been approved for utilities, the consumer advocates office has suggested that the new revenue streams should also reduce the shareholders rate of return.
But company witnesses suggested Wednesday that if those new policies are implemented, it may not actually reduce the company's proposed return for investors.
Reach Andrew Brown at andrew.brown@wvgazettemail.com, 304-348-4814, or follow @Andy_Ed_Brown on Twitter.