Tag: water companies

Citing the indictment of one of its former members, state utility regulators voted today to review a policy allowing utility company owners to pass along some of their personal income tax burden to customers.

But it remains unlikely that anyone will get a refund, even if the policy is overturned.

Separately, the Arizona Corporation Commission voted to take a closer look at everything from the management of Johnson Utilities to the rates it charges its water and sewer customers. Whether that results in changes will depend on what an outside consultant finds.

Both votes follow the indictment of Gary Pierce, who was chairman of the commission and was instrumental in getting both the policy on taxes changed and in having the panel approve overall higher rates.

All four pleaded innocent last week. A trial is tentatively set in federal court for Aug. 1.

“I’m sick to my stomach over this whole thing,” said commission Chairman Tom Forese during a break in the first commission meeting since Johnson, Norton and the Pierces appeared in court.

“It is up to the courts to decide guilt,” Forese continued. “But that this could have possibly happened in this place is really, really troubling.”

Commissioner Andy Tobin said the damage to the regulatory board’s reputation is “severe.”

“I think you repair it by opening up as much as you possibly can,” he said.

Most immediately, current commissioners need to decide what to do in the wake of the indictment, including revisiting that 2013 vote on taxes.

Regular corporations – known in IRS code as C-corporations – have long been entitled to pass the cost of income taxes to customers. But smaller corporations and limited liability companies pay no income taxes, with earnings instead passed through to owners.

That policy change, advanced by Pierce, sought to provide some equity by allowing those utility owners to have those costs be borne by ratepayers.

On Tuesday, Pinal County Supervisor Mike Goodman, whose district includes areas served by Johnson,  said the commission should not have given the benefits of a C-corporation to smaller firms.

“If that’s what the individual is after, they should be changing their type of corporation,” he said. “I don’t think it’s fair to the customer to be paying that rate to offset somebody’s personal income taxes.”

But Bob Burns, the only current commissioner who was on the panel in 2013 – and who voted for the change – said he sees it as a matter of fairness. He said one type of corporation should not get different treatment than another.

Still, Burns voted with the others to have a consultant review the policy.

That still leaves the question of what happens if the panel decides the change was unjustified, including whether customers should get a refund.

“If something has been done inappropriately, they deserve it,” said commission Chairman Tom Forese.

Only thing is, the commission’s own attorney told the panel that forcing affected utilities to give back cash collected in prior years would be an illegal retroactive act. Still, Forese is undeterred.

“If it needs to be fixed, we’ll fix it,” he said.

One surprise Tuesday was an offer by John LeSueur, who had been Pierce’s staff adviser, to provide the commission’s hired consultant with details of how the tax law change came to be.

Addressing the commission by phone, LeSueur, now with the Attorney General’s office, said he had received a partial waiver from Pierce from the normal confidentiality that would keep him from disclosing conversations between Pierce as the client and him as Pierce’s de facto legal adviser at the time.

LeSueur told regulators he has records of how the policy had been changed.

Potentially most significant, he said it had not started with Johnson Utilities but in 2009 – years before the vote – in a case involving a small water company. That could affect not only the commission’s inquiry but could prove relevant, as Pierce defends himself in court that his vote on the tax issue was linked to money allegedly furnished by Johnson to Pierce’s wife.

But LeSueur didn’t get very far in his details, with Forese cutting him off and telling him to report what he knows not to the commission but to whatever consultant is hired to review the matter.

“It sounds like you don’t want me to speak,” LeSueur responded. “I’m willing to wait. I just think the public deserves as much sunshine on this issue as early as possible.”

LeSueur also mentioned, before being cut off, that no one from the FBI had interviewed him before the indictments were handed up.

Tax policy aside, the other question for the commission is whether the rates that Johnson Utilities is now charging customers are appropriate.

Those rates are based, at least in part, on the commission’s 2011 vote, also advanced by Pierce according to the indictment, to increase the “fair value” of the utility’s wastewater division. That, in turn, entitled the company to collect more.

Commissioner Doug Little said he does not want a full-blown rate case.

“Every time there’s a rate case, the rates go up,” he said. Little said he prefers a more limited review of the company’s charges.

That’s the way the commission voted. But they also agreed to have an outside consultant see if the current management, including Johnson himself, is capable of running the company or needs to be replaced.

The high was 96 degrees on the day the tap went dry at Terry Mestas’ house. Mestas was among several hundred residents who endured heat that climbed to 106 degrees over three days in August, when five waterline breaks and a weak pressure valve shut down the water.

Mestas’ neighbors had their children take baths in the Colorado River, according to a written complaint. Gene Ohlendorf said he used buckets to scoop water from the Colorado River for his 88-year-old mother-in-law and his 93-year-old grandmother. The local public works department trucked in bottled water to the town for customers, records show.

An Arizona Corporation Commission report later told the story of calls to part-owner and manager Robert Hardcastle on the cell phone number he supplied that went unanswered, and customers who say their calls to a call center in Costa Rica ended in frustration.

A waterline break started on a Sunday night, Aug. 21, and erupted into four more before the system was repaired and running water was fully available on Wednesday morning, Aug. 24. The shutdown spurred a Corporation Commission investigation, as well as customer complaints over water quality, lack of communication and service, and a response from Hardcastle that the criticism of the water company was unfair and unwarranted, according to public documents, interviews and Corporation Commission meetings.

Months later, after reams of documents and several hearings with claims from acrimonious residents, the investigation is still going on. Corporation Commission member Bob Burns acknowledged the case has dragged on, but said the case likely still has to come before an administrative law judge.

The situation shows the tense relationship between residents and Brooke Water LLC, the only water utility supplying about 2,000 customers in the century-old city on the California border. Numerous small water companies that dot Arizona, on urban edges and in rural areas, often face unique challenges as they serve thousands of residents. Just before and after the Parker outages, the Corporation Commission instituted new policies for small water companies that include tightening the process for hearing rate cases and issuing guidelines to determine the viability of a water company.

“We pay a high price for water,” Jackie and Gerald Roza later wrote in a complaint about Brooke Water to the Corporation Commission. “However, we do not drink the water because we do not trust the quality of the water. I do not know of any of our neighbors who do drink it.”

The Corporation Commission investigation found a history of customer complaints with the company’s international call center, failing equipment and issues with service. A Sept. 20 report from the Corporation Commission on Brooke Water found flaws:

– “Extensive” rust was discovered inside one 50,000-gallon storage tank that could contaminate the water with insects or other material.

– Asbestos-cement pipes, common from the 1930s to the 1980s, are still operating for most Parker customers and are nearing the “end of their useful life.” The Corporation Commission is investigating whether the pipes pose a health risk. (Cronkite News commissioned a water test that showed the water fell within federal limits for copper, lead and arsenic as well as asbestos).

– Brooke Water has spent substantially below its annual budget for repair and maintenance in Parker, according to the report. The rates it charges customers are based on $267,309 annually. But “in 2015, reported repairs and maintenance expense were $89,508.00,” investigators wrote. Hardcastle wrote in an email to Cronkite News about the budget discrepancy: “You do not understand this issue correctly. Any conclusion of this kind would be a significant error.”

Hardcastle, who also is a part-owner of a water company for nearby Circle City, Morristown in the northwest Valley, and is a former part-owner of water utilities in Payson and Strawberry, said the company worked hard to repair leaks in Parker.

“Both operations staff and management worked tirelessly to restore service to its customers,” Hardcastle later wrote to the Corporation Commission.

Hardcastle declined several interview requests from Cronkite News but later answered some questions by email.

Yellow water after a repair

Brooke Water provides service to about 2,000 customers in Parker — a town of about 3,000. The breaks in the Lakeside Water system, which butts up against the Colorado River, hit neighborhoods that house about 800 customers, according to the Corporation Commission.

Documents from the La Paz County Sheriff’s Office and Corporation Commission detail the outages. The first leak happened at about 9 p.m. on Sunday, Aug. 21.

Documents show one resident called the Brooke Utilities emergency hotline at 2 a.m. on Aug. 23 — nearly two days after the initial outage. By 6 p.m. that day, the county brought a water truck out to Parker and the La Paz County Public Works Department brought out 30 cases of bottled water, according to the sheriff’s office.

The sheriff’s office reported that it tried to reach Hardcastle, who lives in California, but could not, according to the sheriff’s transcript.

“Later, staff learned that at no time was Mr. Hardcastle in the Parker area during or after the outage,” the Corporation Commission report says.

Some residents said they tried calling the customer service center in Costa Rica, but couldn’t get through.

“Apparently, County and Emergency officials had not been contacted about the outage,” the Corporation Commission report says. “One Official indicated that while the outage occurred on Sunday, he did not hear about it until Tuesday. Further, he heard about it from a customer, not the Company.”

Ohlendorf, who lives in a multilevel home on the riverfront, said he went down the driveway to scoop water in buckets for his mother-in-law and grandmother so they could bathe.

“I’ve got my mother-in-law up on top, who is 88, and my grandmother — I have her right around the corner and she’s 93,” he said. “I made sure they were OK. That’s part of the reason La Paz County and our district supervisor are so upset, is nobody can get a hold of them.”

Customers like Mestas had to work around the outages.

“We all had to fill empty water bottles with water from the river to flush our toilets,” Mestas wrote to the Corporation Commission. “It took several days to repair the broken water lines. The repairmen would quit working in the afternoon and start again the next day. If Brooke had competent management they would have had crews working around the clock.”

At 6:48 p.m. on Aug. 23, the sheriff’s office reported the water had been turned back on, but there was a problem.

It was yellow.

The problems were fixed by the morning of Aug. 24. Hardcastle contracted EPCOR Utilities to assist with repairing the leak, reconstructing sites which were affected by the outage and rebuilding or replacing the pressure-reducing valve.

Hardcastle later said his company was working hard to fix the problem, and estimated it affected no more than 600 customers.

‘We never drink this water’

Largely a retirement destination, Parker houses residents on riverfront properties who live in a sort of home away from home, coming to play on the river during the weekend and returning to California for the rest of the week.

Other residents spend every day in the arid, tight-knit community.

Some residents still refuse to cook with what comes out of their faucets, opting instead for bottled water to take care of their daily routines.

“We won’t drink it,” Ohlendorf said. “I won’t feed it to my animals.”

Other Parker residents also expressed concerns about using the water.

“This is the most expensive water that I can’t drink or cook with,” Parker resident Laura Miller said over the phone during a Sept. 23 Corporation Commission meeting.

Parker resident Anna Camacho said her sinks were corroded and water in the toilet was black.

“There is something very clearly wrong,” she said.

Several residents said they only use tap water for daily tasks, but do not drink it.

“We never drink this water, but we take our life in our hands washing the dishes,” Parker resident Peter Metzen wrote to the Corporation Commission. “Now (I) only use bottled water for cooking and drinking purposes.”

Other residents, like Nancy Hanner, have used the water regularly without any adverse effects.

“I mean, I’ve drank it, I’ve used it for when I boil my noodles or I’m cooking or doing something,” Hanner said. “It’s never — that I could say — it’s never made my family or I sick.”

Since 2005, Brooke Water has received 179 customer complaints, according to the Corporation Commission report.

The report also says the water is safe to drink. Brooke Water’s water meets Arizona Department of Environmental Quality standards, according to the report.

Hardcastle, in an Oct. 24 document filed with the Corporation Commission, pointed out the commission findings.

“Brooke has no tests, samples, regulatory reports, or records of excessive chlorine residual levels that exist in the LWS, any Brooke water system, or the Williams service location,” Hardcastle’s document says.

Cronkite News commissioned a water test of Parker water from IAS Laboratories in Phoenix that revealed the water fell within the EPA limits for copper, lead and arsenic. The tests also showed the water tested negative for coliform bacteria and E. coli.

Another test of a water sample taken about 100 yards from a Brooke Water tower site came back “acceptable” for asbestos levels. However, the Corporation Commission is investigating whether or not the asbestos poses a health risk.

Corporation Commission investigators looked at the system’s pipes that have been in the ground since 1962. The pipes “are probably getting near the end of their useful life,” the report says. It pointed out something else: Most of Brooke Water’s pipes are made of asbestos-cement.

Asbestos-cement piping was common from the 1930s until the 1980s, the report says.

“Brooke does not install ABS piping,” Hardcastle wrote in an email to Cronkite News. “The original developers of Brooke’s water system used some of this piping when they developed the water systems in the late 1960’s and 1970’s. This piping continues to perform at high levels without health risks.”

Equipment, customer service concerns

The report also had other findings, ranging from the state of the company’s equipment to its finances.

Two water-storage tanks are fine but a third tank has “extensive” rust that may have compromised the tank’s interior, raising the possibility of insects or other material contaminating the water, the report says.

“Staff determined based upon its field inspection that the mechanical equipment is in good working order and maintained adequately,” the report says. “The exterior of all plant equipment made of steel has not been adequately maintained … the rust was quite extensive on the 50,000 gallon storage tank with the possibility of rust through to the tank interior suspect. If the interior has been compromised, contamination could occur.”

That needs to be handled, the report says.

“Staff recommends that the Company repair the rusted areas of the 50,000 gallon storage tank and inspect the tank interior,” the report says.

The Corporation Commission investigation also questioned Brooke Water’s maintenance expenses. Although the company has drawn on money allocated for repairs, it hasn’t spent all of that money as budgeted, according to the report. In 2015, it spent less than half of the amount set aside for repairs and maintenance.

“The annual cost-of-service utilized to set the Company’s rates included a recurring level of annual repairs and maintenance expense of $267,309; however actual repairs and maintenance expense has been substantially below this level,” the report says. “For instance, in 2015, reported repairs and maintenance expense were $89,508.00.”

Brooke Water has not filed for a rate increase since 1991, according to the Corporation Commission report. That was before Hardcastle owned any stake in the company.

During a Sept. 23 Corporation Commission meeting in Phoenix, five Parker residents called in to complain about communication and service issues, as Hardcastle and commissioners listened.

Other residents at the meeting complained of poor customer service.

“They have literally one person servicing the whole area, which is concerning considering the amount of elderly people that we have in our community,” Ohlendorf said by phone.

Corporation Commissioner Andy Tobin voiced concerns over Brooke Water’s management at the meeting, as well.

“These are not isolated incidents from what I’m seeing,” Tobin said at the meeting. “I’ve got the Better Business Bureau — and I don’t see too many of them — I’ve got an ‘F’ rating from the Better Business Bureau. It’s clear that we’ve got an ongoing problem over here; it’s systemic at best.”

Hardcastle said the company had “made some mistakes.”

“I think there have been some issues that we could certainly do a lot better and I think some of those that you addressed are ones that we’re looking at and are committed to improving and I think there is substantial room for improvement,” he said at the meeting.

“Brooke has worked very hard for many years re-making the legacy company into a more efficient, streamlined and compliant organization,” Hardcastle wrote in the Oct. 17 response.

What happens next

Corporation Commissioner Tom Forese said it should not have taken as long as it has for information to come out.

“I’m very angry right now that we have this type of reaction from your customers,” Forese said to Hardcastle at the Sept. 23 meeting. “And everybody’s looking at each other like, ‘This is the first time we’ve ever heard of this,’ and they’re saying that they’ve been reporting this time and time again to an offshore call center that’s hard to connect with … The fact that this is news to any of us is just horrible.”

The Corporation Commission set up new policies for small water companies.

“The Commission also adopted standards to process emergency rate cases faster, guidelines which determine the viability of a water company, and whether a company’s financial position issues has a significant impact on rates,” a Corporation Commission statement says.

Commissioner Bob Burns, in an interview, said the Corporation Commission could end up installing an interim manager at Brooke Water.

“It’s kind of hard to get your arms around exactly what’s going on,” Burns said.

The next step would be for an administrative law judge to hear from both sides and explore evidence. But that has yet to be scheduled.

The Arizona Corporation Commission and the Residential Utility Consumer Office faced off before the Arizona Supreme Court Tuesday over the commission’s use of a rate adjustment for water companies, which RUCO has called unconstitutional.

The Arizona Court of Appeals ruled last year that the adjustment mechanism, called the system improvements benefit, didn’t meet the Arizona Constitution’s requirement for finding fair value when setting rates.

The commission’s attorney, Wesley Van Cleve, said the SIB doesn’t run afoul of the Constitution and complies with fair value. The commission is given the discretion to set rates, and a rate case isn’t always required, Van Cleve argued.

The mechanism would have allowed the Arizona Water Company to increase its rates by as much as 5 percent annually for five years to account for infrastructure costs. Typically, such costs are recouped following a regular rate case.

Van Cleve said the mechanism is “narrowly tailored” and utilities are required to file certain information before the SIB can continue, and the commission has the ability to approve, deny or change the SIB if it needs to.

Steven Hirsch, an attorney representing Arizona Water, said the SIB was designed to avoid big rate increases and regulatory lag, and is carefully structured with caps on rate increases and a review process with all intervenors.

The SIB allows water companies to address aging infrastructure, which is an extraordinary circumstance, Hirsch told the court.

“These aren’t wholesale changes bringing in huge wheelbarrows of new revenue,” he said.

Dan Pozefsky, RUCO’s attorney, said the rate adjustment doesn’t meet the standard for fair value ratemaking. The commission wouldn’t consider all elements involved in rates when setting the SIB, so it’s an incomplete picture, Pozefsky said. The rate of return on investment for a company could be going up, while its costs are going down, he noted.

“If that is not what fair value is designed to protect against, I don’t know what is,” he said.

However, the Arizona Supreme Court justices noted repeatedly that the commission would still have the authority and discretion to change or deny a SIB if that were the case.

The justices peppered both sides with questions about the Court of Appeals’ legal interpretations and the way the state’s Constitution envisions ratemaking.

Lawyers for the Residential Utility Consumer Office and the Arizona Corporation Commission faced off in the Arizona Court of Appeals on June 23 to debate the constitutionality of a mechanism that allows water companies to recoup costs for infrastructure investments outside of a rate case.

The mechanism, called the system improvements benefit, or SIB, allows water companies to increase rates by up to 5 percent annually for five years in order to replace aging infrastructure. Normally, costs for adding or improving infrastructure would be recouped after the fact in a rate case.

RUCO contends the mechanism falls outside the Arizona Constitution, which charges the Corporation Commission with ascertaining the “fair value” of the property any public service corporation has.

The SIB lawsuits were a source of contention between the Corporation Commission, particularly Chairman Susan Bitter Smith, and former RUCO director Pat Quinn. Bitter Smith has been a major proponent for the mechanism.

“There are over 300 water companies in Arizona, and many of them are small rural companies with aging infrastructure which has not been repaired for years,” Bitter Smith wrote in June 2013, after the SIB was approved by the commission. “Our decision will insure that Arizonans will have a secure water delivery future.”

David Tenney, the current RUCO director, wanted to find a settlement for the issue, but RUCO’s offer fell on deaf ears at the commission, Tenney told the Arizona Capitol Times.

RUCO worked on a settlement that would allow for an increase of up to 3 percent annually in rates over five years, capped at 12 percent, Tenney said. The settlement also included some reporting requirements for the water companies, like how old their infrastructure is and what sort of water loss they’re seeing from faulty equipment.

“We’re saying, we can see some good that can come from the SIB if you put the right sideboards around it. … We can see how it can be a useful thing,” Tenney said.

Still, RUCO believes it’s in a win-win situation: If it wins the lawsuit, the SIB goes away. If RUCO loses the lawsuit, “it’s only a matter of time before (the SIB) collapses under its own weight. It will not sustain itself, we’re convinced of that,” Tenney said.

The Constitution is deliberately vague about how exactly the Corporation Commission can decide fair value to make rates for utilities, commission attorney Wes Van Cleve told the three-judge panel.

“There is really no instruction manual on how the commission is supposed to use this (ratemaking) authority,” Van Cleve argued. Instead, the commission relies on previous case law, he said.

RUCO attorney Dan Pozefsky said allowing water companies to increase rates by 5 percent for adding infrastructure without considering any other aspects of the company that would come up in a rate case isn’t fair value ratemaking, and is therefore unconstitutional.

To make rates outside of a case, the Corporation Commission has previously used interim rates in emergency circumstances or allowed for automatic adjustments for things like fuel cost, Pozefsky told the judges.

But, with the water companies that were approved for SIBs, “there is no emergency. No one has alleged that there’s an emergency in this case,” Pozefsky said.

Moreover, Pozefsky argued, increasing 5 percent each year for five years amounts to a bigger rate increase than customers would normally see in most rate cases.

“(The Corporation Commission) has essentially gutted fair value,” he said.

Van Cleve said RUCO hasn’t done enough to prove to the judges that the SIB falls outside the fair value mandate. The mechanism allows water companies to replace aging, failing water infrastructure, which is a problem around the country, he said. Requiring rate hearings for this issue would be cumbersome, time-consuming and expensive for ratepayers, he told the judges.

The Corporation Commission maintains that the SIB fully complies with fair value ratemaking, and the commission doesn’t have to label it as an interim rate or an adjustment in order for that to be true, he said.

“There is no reference (in the Arizona Constitution) to the requirement of a rate case,” Van Cleve said.

Steven Hirsch, an attorney representing Arizona Water, an intervenor in the lawsuit, said he acknowledges that crumbling water infrastructure isn’t a “traditional emergency,” but there are photos of broken pipes and “geysers” from pipes leaking that make the case for a quick resolution rather than a rate case.

The judges seemed skeptical of the Corporation Commission’s position.

Judge Margaret Downie said all sides agree that there’s much less information in a SIB than a rate case, but questioned “under what authority can we say that’s OK, that’s sufficient?”

Downie said she understood the policy of wanting to improve water companies, but the “commission can’t rely on policy to change the Constitution.”

The panel took the matter under advisement and will be issuing a decision within 60 days.

There are some horror stories out there: Small water companies with crumbling pipes, duct-taped together. People with water coming out of the faucet, brown and clearly undrinkable. Or people who only get water intermittently.

Arizona has more than 250 water companies, most of which are small, and the Arizona Corporation Commission wants fewer, from companies merging or larger companies buying smaller companies.

Fewer water companies could lead to better service for customers in areas with spotty reliability, and small water owners could get out of the business if they wanted, said Corporation Commission Chairman Susan Bitter Smith.

“And that is good for ratepayers and good for consumers,” she said.

Arizona’s geography likely played a role in putting the state in the position it’s in now, with a lot of small water companies that have few customers, said Steve Olea, the utilities division head at the Corporation Commission.

When developers set up subdivisions, they would install the water systems, too, but it wasn’t their main gig, Olea said. And sometimes farmers drilled wells to service their land, then gradually added their neighbors onto the well, and eventually they became the owners of a small water company, he said.

Small water company owners face a tough road, Olea said. It’s not a particularly lucrative business, and it’s hard work. Many of the owners of small water companies inherited the business from their parents or grandparents and may have no interest in running the business.

“So if you can get some big company that is in the water business – it’s not a side issue for them, it’s their business – if you can get them to take over these companies, they’ll be run correctly. People will have safe water. They’ll actually have water when they turn on the tap,” Olea said.

One horror story: Green Acres Water Company, which provides water to about 200 customers in the Yuma area, had a history of noncompliance with the commission and contaminated water issues with the Environmental Protection Agency. The company’s owner had padlocked access to pumping equipment, barring an interim manager installed by the commission from the area and shutting off service to customers, Bitter Smith said. The actions led to an emergency meeting of the commission on New Year’s Eve 2013.

Perhaps situations like that of Green Acres can be avoided if there are strong water companies that wanted to be in the water business, she said.

NO UNNECESSARY ROADBLOCKS
The commission set a policy direction last year to make the process of doing a rate case simpler so small water companies wouldn’t feel intimidated to come before the commission and ask to raise rates, Bitter Smith said. Commission staffers have been holding workshops around the state to show small companies how the rate case process works and inform them that there’s interest in having fewer of them.

Some smaller companies haven’t increased rates in decades, so they have struggled to find money to undergo needed repairs or upgrades to their systems, which ultimately hurts customers, Bitter Smith said.

While a particular case of a small company merging with another one, or a company consolidating with a bigger provider, hasn’t come before the commission yet, Bitter Smith said the message is out there: “If there’s opportunities here (for consolidation), you will not find unnecessary roadblocks at the commission.”

Wanting fewer water companies isn’t an indictment of small water owners, though, said Paul Walker, a consultant for large water companies and chairman of Arizonans for Responsible Water Policy. Walker, with former Residential Utility Consumer Office, wrote a paper in June 2014 discussing the policy of encouraging consolidation of water companies.

“Ninety nine percent of the people running these small companies are fantastic human beings who are out constantly, worrying about wells and pumps and meters and lines, taking care of their neighbors, and earning almost no money doing it,” Walker said.

But the size of the companies means small interruptions, like a broken transmission line, could lead to big issues for the company, and ultimately for ratepayers, Walker said.

“That matters a lot when you talk about utility service. Because that’s how people get reliable, safe, adequate electricity, gas, water. … so size matters a lot,” he said.

It’s also hard for the Corporation Commission, the Department of Environmental Quality and the Department of Water Resources to effectively regulate more than 250 companies, Walker said. With fewer companies, the agencies would be able to take time to read each annual report and better understand what’s going on in the water world, he said.

The state will likely see a shortage of Colorado River water in the next two years, and curtailment conditions will affect water companies, Walker said. The Colorado has a 61 percent probability of falling into a shortage by 2017, according to the Central Arizona Project. A sustained drought would require healthy, resilient water companies with good infrastructure and strong plans, Walker said.

“The customer is going to know for sure that if something significant happens, the company has got the resources to fix it. So if the drought gets worse, when the curtailment orders come, the company is big enough to handle it and keep providing you safe, adequate and reliable water,” he said.

ADVANTAGES TO CONSOLIDATION
Larger companies are more likely to enjoy economies of scale, or the cost benefits that result when costs are spread across more customers. They may also have more redundant supplies and backup wells or storage areas when needed, said Jeff Tannler, active management area director at the Department of Water Resources.

DWR doesn’t have an official policy or position on consolidating water companies, but Tannler said there are advantages to the idea.

“From our perspective, it’s not a bad idea if you’ve got small water companies that consolidate, then it could translate into a more efficiently run water system,” Tannler said.

Providers have to meet a certain threshold of water loss. Small providers can’t have more than 15 percent of their water lost or unaccounted for, but to meet that goal, there might be repairs and upgrades needed, he said.

“It may be tough for some of the small providers to be able to afford that. There might be more opportunity for them to afford that with consolidation with another provider,” Tannler said.

Other states, like Pennsylvania, have worked toward fewer water companies with success, Walker said. If there are fewer water companies, when a system fails, a large company has a presence even in rural areas and can help, he said.

“If you get to about 50 (companies), you have more than enough participants to allow them to compete against each other. We do have to compete,” Walker said.

Bitter Smith said she doesn’t have a goal number in mind – just less than there are now, she said.

MAKING SENSE FOR RATEPAYERS
RUCO chief counsel Dan Pozefsky said his agency shares the commission’s concerns about troubled water companies. There will be some situations where it makes sense to consolidate or merge water companies and some where it doesn’t, so there shouldn’t be a blanket policy, Pozefsky said.

Small water companies have trouble attracting capital for infrastructure improvements and little to no rate base, so helping out customers of those companies is “one of the huge things on the commission’s mind and ours, too,” Pozefsky said.

RUCO would need to consider each consolidation or merger on a case-by-case basis to see if it makes the most sense for ratepayers, he said.

“Targeting troubled water companies and bettering the water supply is a great idea. … To do it and to do it right, it’s got to be fair and it’s got to be reasonable,” Pozefsky said.

Bitter Smith said the commission also will take the consolidations on a case-by-case basis to see if they work for everyone. She said she hopes larger companies will see a social responsibility in making sure all customers get reliable water, but smaller companies shouldn’t feel like there’s a target on their backs.

“There are people who this is their passion and they want to continue to run their company – they have a business plan that works. It’s something that they do profitably and do appropriately, there’s no reason for us to be in the middle of that,” Bitter Smith said.

For many customers, especially if they haven’t had problems with their water service, little will change, Olea said.

“But if you happen to be a customer of a small water company where you got water three days out of a week and not seven, you’d probably see a big change if you got bought out by a big company,” he said.