Update 3/14/24: MPSC, rate structures, and the proposed County buyout

To the Massanutten Community:

Most of our thoughts this time around center on MPSC. But first, we’d like to congratulate MPOA and its website development committee for the launch of MPOA’s new website. In our view, the old one was hard to navigate and made it difficult for residents to find important information.

On a related note, we also think congratulations are due for MPOA’s recent addition of regular newsletters to residents. In our opinion, the website and newsletter are helping provide Massanutten residents with much better communication than we’ve seen in the past. In our view, the MPOA Board and administrator Bradford Dyjak and the team involved deserves our compliments!

UPDATE ON THE COUNTY MPSC BUYOUT PROCESS:

In Rockingham County’s lawsuit to condemn MPSC’s water and sewer systems, Judge Baugher recently decided various motions filed by Rockingham County and MPSC.  In short, he handed the County a complete victory that now allows the case to move forward.

Last year, MPSC sought dismissal of the case on a variety of procedural and technical grounds.  After a hearing on January 5, Judge Baugher wrote a letter disagreeing with these points.  He also granted the County’s motion to appoint a neutral attorney to create an inventory of MPSC’s system for the jury to review as it considers how much MPSC should be paid for the system.

We expect this will be helpful in clarifying the assets that are subject to condemnation.  Although we expect that MPSC will continue to fight and delay the case at every opportunity, the recent decisions should speed up progress in what’s been a slow case to date.

MPSC RATE HIKE REQUEST:

Benjamin Franklin famously wrote “The only things that are certain are death and taxes.” We would add one more certainty: that MPSC will apply for a rate hike any time it can. As you may know, such a request has been submitted to the State Corporations Commission (SCC).

To us, it appears that (among other things) MPSC is attempting to increase its valuation so it can stave off the proposed acquisition by Rockingham County. MPSC’s parent, Corix, has been slow-walking the buyout at every opportunity – a tactic we fully expect to see continue going forward.

We’ve previously posted on MPSC and our efforts related to rate increases and the proposed County takeover. Many of these efforts were done in coordination with area residents. But for those who haven’t closely followed this issue, we thought it would be a good idea to recap some of the background and historical information regarding how MPSC’s rates are currently regulated, and how they charge residents and three other rate classes (the latter categories are mostly ours).

The first – and most important thing – to understand is that under Virginia law, regulated private utilities are entitled to a Return on Equity, or ROE. In MPSC’s case, the State Corporation Commission reviews applications and can grant them rates that generate an approved ROE.  This is usually somewhere around nine percent.

When the organizational forerunner of MPSC was created in the 1970s, it built the water and wastewater systems that serve the franchise area: wells and pumps; the distribution system – water mains and laterals; sewer lines and a wastewater treatment plant – a plant that would become obsolete in the early 2000’s under emerging state and federal law.

Those are assets for which MPSC can generate the target ROE approved by the SCC. But here’s where it gets more complicated. Nearly every expansion and improvement made by Great Eastern – for example, the WaterPark, timeshare, and commercial developments – required new infrastructure to be installed. Great Eastern built and donated or paid for those capital costs under a concept called Contributions In Aid of Construction, or “CIAC”. MPSC cannot base its ROE on assets it didn’t pay for, and since Great Eastern made contributions to the system, it was entitled to receive CIAC credit for most or all of these.

As an example: when the wastewater treatment plant was replaced in 2002, Great Eastern paid for it (the plant ended up costing nearly three times as much as initially projected due to changing regulatory standards – we also paid for the over-runs). However, all we received in exchange was up to 2000 tap fee credits for future use (tap fees are charged to new construction for water and sewer hookup. If you own an undeveloped MPOA lot and decide to build on it, you’ll pay a tap fee).

Had the entire service area – residents and commercial alike – funded that improvement, we would all have shared in the equity basis upon which MPSC is permitted ROE. Had the existing plant been brought in line with emerging standards, the work would have cost millions of dollars and, again, that would have constituted MPSC equity due a return from all customers. But because the plant was funded by Great Eastern’s CIAC, MPSC cannot count the plant as equity when requesting rate adjustments. Homeowners don’t have to pay ROE on that plant as part of their bills.

Several years ago, MPSC invested several million dollars to upgrade the plant to improve runoff standards, as required by law. Because MPSC made that investment, all its customers are paying for it through their water and sewer bills. This investment is entitled to generate ROE; we’re paying for it just like residents are.

But in the most recent rate cases, the SCC has repeatedly failed to include the full value of Great Eastern’s investments into MPSC’s infrastructure. Further, it created rate classes that exacerbated the problem; during the 2017 case, the Hearing Examiner characterized the 2014 rate design as “poorly designed” and noted the “wildly differing” ROE’s for the four rate classes, with -5.90% (a loss) for Residential, and strong profits of 22.17% for Commercial, 28.83% for Waterpark and 10.9 % for Hospitality.  Since the interclass subsidies had existed since 2006, and the Hearing Examiner recommended the Commission move the classes 50% closer to “parity” that year.  Changes in the law continued to drive that process in the 2020 rate case, but a subsidy still exists.  As a result, Great Eastern has certainly paid for water and wastewater–more than we should have – because of SCC’s rate design and CIAC allocations.  Even though the rates charged to commercial accounts are nominally lower than those charged to residents, the economic reality is that the Waterpark, Hospitality, and Commercial classes still effectively subsidize the Residential class.

It’s easy to miss that if you look residential charges compared to the other three classes based solely on the cost per gallon. Yes, on a gallon-per-gallon basis, we’re generally paying less than homeowners. But it’s important to remember that ratepayers – regardless of class – aren’t just paying for gallons of water. We’re paying for the use of the distribution system. MSPC has equity in the system that provides water and sewer service to homeowners. We provided the 2002 wastewater treatment plant upgrades for the entire system and almost all of the infrastructure equity that serves our operations.

This year, MPSC proposes to end the interclass subsidies altogether.  MPSC has been unfair to area residents and unfair to us, and we continue to believe that the only permanent solution is for the County to acquire the system. As noted above, that process is (slowly) working its way through various court filings and hearings and is likely to take another year or two. In the short term, we expect to vigorously challenge MPSC’s proposed rate increase – and we expect to work in close coordination with MPOA in doing so.

 

So that you know, here’s a timeline of the proposed rate case:

3/27 – Deadline for MPSC to publish notice and serve notice on customers and local officials.

4/17 – MPSC proof of notice and service due.

6/12 – Deadline for Respondents (such as the Resort) to file Notices of Participation.

6/28 ­– MPSC to post $904,159 bond.

7/24 – Respondent testimony and exhibits due (with one page summary).

7/29 – MPSC’s proposed rates go into effect on an interim basis subject to refund from bond.*

8/21 – Commission Staff testimony and exhibits due.

9/11 – MPSC rebuttal testimony and exhibits due.

10/2 – Deadline for written public comments; Deadline for public witnesses to sign up for the Public Witness Hearing.

10/9 (10 am) – Public Witness Hearing (by telephone), followed by full Evidentiary Hearing (in person at the Commission in Richmond).

We hope this summary has been helpful.

Sincerely,

Matthias Smith, Executive Vice President

 

*            This 180-day suspension of the new rates is the maximum period of suspension allowed by law.  The Commission is requiring MPSC to post a bond by 6/28 in the amount of $904,159, which is the full amount of the requested increase. If some portion of the rate increase is not approved, MPSC will refund its customers from the bond.