To the Massanutten Community:
MPSC’s new rates have now been set by the SCC. There’s a lot to unpack here, and we’re still a little vague on aspects of it ourselves – but suffice to say: we’re not happy with the results, and MPOA members won’t be, either. The answer, for all of us, continues to rest in Rockingham County buying out MPSC. I’ve asked Garrett Smith, Great Eastern’s legal counsel, to take it from here.
I wish you all the very best for the holidays –
Matthias Smith, VP and General Manager, Massanutten Resort
To the Massanutten Community:
The State Corporations Commission (SCC) has issued its final determination on rates for MPSC. It will no doubt be tempting for MPOA members to look at the fact that rates for certain Massanutten Resort rate classes – most notably, the WaterPark – went down, while those for homeowners went up. We think it’s important for the community to understand what’s really happening here, and why.
Privately-owned utilities like MPSC are allowed by the state to generate a certain Return on Equity (ROE) on assets they pay for. This means that MPSC can set rates that generate that return based on the value of some of its physical assets. The new rate structure pegs that, in the aggregate across classes, at 9.25 percent. (Given MPSC’s shoddy performance in recent years, we think that’s grotesquely high).
Prior to 2014, we were all effectively paying the same rates for water and wastewater. MPOA residents were paying comparable rates to timeshares; commercial users, including MPOA and Resort businesses, were also at parity. But in 2009, MPOA asked for customer classifications because it believed that the Resort customers were being undercharged. Four customer classes went into effect after the 2014 rate case: Residential, Hospitality, Commercial and Waterpark. Time has proven MPOA was incorrect in its belief regarding underpayment by the Resort; the Resort was not, in fact, being undercharged. Instead, although the Resort customers did pay more, the classes created in 2014 directly resulted in a substantial subsidy from the Hospitality, Waterpark and Commercial classes to the Residential Class for roughly the next seven years.
The higher rates that Residential Class members will feel is, in our view, the result of 1) poor management and inefficient operations by MPSC, which drive a significant portion of the increase, 2) the willingness of the State Corporate Commission to support requested cost allocations and accounting changes that enrich MPSC at the expense of local ratepayers, and 3) the partial rollback, after seven years, of the Residential Class subsidies derived from the Resort customer classes and rate structure.
It’s important to understand how that subsidy happened. It’s complex – and it can be hard to see if one only looks at who pays what for a gallon of water. But there’s a lot more to it.
When I mentioned above that private utilities like MPSC have a right to earn a Return on Equity for infrastructure that they paid for (whether by installation in the field or by purchase, as occurred when Utilities, Inc. bought MPSC in 1984), that also means a utility is not permitted to make a profit on, or recover the costs of, improvements that that were contributed to the utility by adding those items to its rate base. The Resort contributed more than $12 million of capital infrastructure to MPSC as it developed projects – including the wastewater plant, water storage tanks, and infrastructure connecting all of our hospitality developments to MPSC’s systems. Prior to 2014, no customers were paying MPSC a return on those assets because MPSC hadn’t paid for them.
After the 2014 case and before the current rate case, our contributions were incorrectly treated as having been contributed by multiple classes, and some were wrongly attributed to the Residential Class. This meant the Residential Class was receiving the financial benefit of a portion of our capital contributions for seven years. With the current case, the SCC finally and formally admitted that the contributions of infrastructure were mis-allocated, with the result that the class structure was generating subsidies to homeowners.
Thus, before the rate classes were created in 2014, back when there was only one customer class, we all paid the same rates based on the Resort’s contributions to MPSC assets. The Resort had no problem equally subsidizing the entire customer base including residential ratepayers. We did have a problem with the fact that the MPOA-requested four rate classes distorted the subsidy in such a way as to benefit the residential class more than the Resort classes that actually contributed the assets.
The current rate case corrected the mis-allocations of capital contributions and restored most of the nonchargeable asset contributions to Resort customer classes, thereby ending that subsidy. While that change will naturally displease residential rate payers, it’s worth noting that the newly approved rates still reflect a lower profit (ROE) being paid by residential rate payers than other customer classes. In other words, a residential subsidy still exists (but now for a different reason). Under the new rates, Resort customer classes will still be paying MPSC an ROE considerably higher than that paid by homeowners – on both potable water and sewage.
And in raw numbers, even though it may not look like it, the Resort customers classes will be paying more for MPSC’s services going forward, too. But there’s no question that homeowners are taking a big hit in the pocketbook, in large part because the homeowner-favored rate structure from previous cases, originally driven by MPOA and incorrectly accepted by SCC, has now gone away.
We feel that MPSC has done a very poor job of serving all of its customers, and that the rates they’ve been granted are especially galling considering the poor service and the multiple accounting gimmicks used by MPSC to raise rates. They’ve been intentionally playing residents and the Resort Customers against each other. You’ve a right to be angry about this shoddy treatment. So do we.
The solution remains a buyout by Rockingham County, which will eliminate customer classes and put us all on an equal rate footing, and will certainly improve management. We know that the County is working hard on it, and that MPSC is not being cooperative with this process. That said, we hope that all of us will have good news on that reasonably soon. It WILL take time, so please: feel free to contact the Board of Supervisors and encourage them to buy or condemn MPSC. A County takeover is the best way all of us can ensure reasonable service at a reasonable cost.
Sincerely,
Garrett Smith, General Counsel
The Resorts Companies
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