A rate consultant recommended Thursday that Central Arkansas Water change the methodology it uses to calculate wholesale rates, which would result in an approximately 30 percent rate increase for those customers over three years.

The Central Arkansas Water Commission took no action Thursday but will consider the proposal in more detail in the fall during 2015 budget talks. The recommendation suggests no rate increase to the agency's wholesale customers in 2015 and between 9.93 percent and 10.5 percent each year in 2016, 2017 and 2018.

Wholesale customers are municipal or private water utilities that purchase water to then resell to their customers. Central Arkansas Water sells to 16 wholesale customers including Bryant, Cabot, Jacksonville Water Works, North Pulaski Waterworks, Shannon Hills and the Salem Water Users Public Water Authority.

Jacksonville Water Works Manager Jake Short said Central Arkansas Water officials met with him Thursday morning before the commission meeting to go over the recommendations. The Jacksonville utility is still processing what its options are, Short said.

"We are going to keep an eye on the situation and are going to look at our numbers," he said. "We currently are getting between 60 and 65 percent of our water from CAW, so to say that we just go up and get another source, I don't know that that would be a viable option."

Dicki Kentner, chairman of the board for the Salem Water Users Public Water Authority, said the proposed rate increase is "serious" and that ultimately, it would be the Salem utility's 5,000 customers who bear the cost.

"As in everything else, the patrons always pay the price. I don't like it at all, but there's not anything we can do about it that I know of. In Saline County, we have the Saline Watershed, and we've been trying to get a pipe stuck in Lake Ouachita for a while, and we have not given up on that. This may drive that a little harder to be honest with you," Kentner said. The utility purchases about 60 percent of its water from Central Arkansas Water.

Other wholesale customers didn't return messages, declined to comment or weren't reachable Thursday afternoon.

Rocky Craley, the consultant with Raftelis Financial Consulting hired to do the wholesale rate study, projected that the proposed increase would raise an additional $900,000 per year for Central Arkansas Water by 2018, assuming the agency did not lose any wholesale customers and those customers purchased the same amount of water on average.

The agency's retail customers won't be affected by a methodology change in calculating wholesale rates. Central Arkansas Water Customer Relations and Public Affairs Director John Tynan said a retail rate study is planned for next year. There are no retail rate increases planned for 2015.

The wholesale rate study was prompted by concerns from city directors in Little Rock and North Little Rock dating back to 2012. Some city directors said that wholesale rates were too low and that Central Arkansas Water was putting the burden on inner-city customers, referring to the two cities.

There are other retail customers who are billed directly by Central Arkansas Water, such as Sherwood residents.

Commissioners said little about the proposal Thursday, aside from asking what reaction the agency has received from its wholesale customers.

"They didn't thank us for it, as you can imagine," Chief Executive Officer Graham Rich said. "But, I think they were aware it was coming. I think there was some appreciation that we were proactive in meeting with them and that we were waiting to phase in any type of increase [across three years.]"

The methodology change is from the cash-needs approach to a utility approach -- both common and widely accepted in the water industry. The current cash-needs method essentially bills each wholesale customer its proportionate share of the agency's future debt payments, while the utility approach has the wholesale customer pay based on the replacement cost of depreciated assets required to service that customer.

For example, wholesale customers aren't responsible for such costs as billing or reading water meters because they don't utilize those services. They are, however, responsible for costs related to treating, pumping, transmitting, supplying and storing the water.

Craley's proposal differentiates between peak rates, with an increase of 9.93 percent, and off-peak rates, which would see an increase of 10.5 percent.

Peak amounts are calculated based on certain times of the day when demand for water is higher, such as the morning and evening. Off-peak rates are based on an average usage amount. Only wholesale customers' rates vary depending on time of day.

The utility's 16 wholesale customers together are estimated to pay Central Arkansas Water $3.9 million this year. If the commission were to increase rates by the recommended amount by 2018, the projected $900,000 in additional revenue would represent less than 2 percent of the agency's annual revenue.

Tynan cautioned, though, that it's premature to even say the agency will get more revenue by increasing wholesale rates because there's no assurance the customers will continue to purchase water from the agency.

"Rate studies are done to ensure we collect appropriate revenue based on the service we provide to all customers," Tynan said. "That's where rate methodology is important because we look at where everybody draws on our system and what services they utilize."

Metro on 06/13/2014