The Big Picture — Pennington Gap’s Water Rate Hike

waterdrop$PENNINGTON GAP – Water is a life-giving resource. All living things–including people–need water to survive. It is central to our lives. Drinking is only one of a whole host of important water uses. We cook with it, we clean with it, use it as a coolant in engines and pumps, and people use it in vast array of industrial processes ranging from simple to complex. People are also very good at making money with water, using it as a supply to provide products and services such as bottled water, swimming pools, laundromats, and car washes as just a few examples. Though our planet is largely covered with water, most of it is unsafe or unfit for any of these uses. Water must be treated in at least one of a number of ways before people can put it to use, and that costs money: a lot of money.

It is this cost, along with poor economic forecasting by past leadership that has put the Town of Pennington Gap’s water and sewer service into financial dire straits. Recent independent analysis shows that the difference between the town’s cost to produce potable water versus the money coming in from customers’ monthly bills, “Results in about a $200k loss for the town [per year],” according to Pennington Gap Town Manager Keith Harless in a recent interview with The Lee Daily Register. “We have one of the most efficient water plants in our area, but with our rates and the cost of equipment maintenance, power, and chemicals to produce the water—it’s not sustainable,” Harless said, adding, “we need to fix this; we should be breaking even at least, and maybe even making a little money.” Doing a bit better than breaking even helps the Town to stay ahead of the inflation curve, and puts funding in place to help cover the cost of unexpected repairs without dipping into the general fund.

“We have to look at this [water/wastewater processing] as a business, because that’s what it is. We don’t just provide water for town residents and businesses, but we are also one of the largest water wholesalers to other public utilities in Lee County,” Harless said in the interview Thursday. Pennington Gap sells water to the Lee County Public Service Authority (PSA), the Woodway Water Authority (WWA), the Dryden Water Authority (DWA), and the St. Charles Water & Sewer Authority (SCWSA)—all of which charge more, in many cases vastly more, for Pennington Gap’s water than the town itself charges.

Lee County Water Rates FY2016 - LENOWISCO Report pp19-20

Looking at water treatment as a business is apparently a new idea for the Town of Pennington Gap—or at least one that has not been taken up in a long time. The staggering annual losses have occurred year over year, with the last major adjustment in water rates happening way back in 1998. Harless informed this newspaper that the rate hikes of 1998 were in response to an absence of rate increase for a number of years before that. “There was some rate shock then, just like there is now,” Harless remarked.

The current rate shock Harless mentioned is due to the now widely publicized ordinance passed by Pennington Gap’s Town Council in April that implemented bracketed base rates for high volume water users. Some users will see an almost 80% increase in their monthly bill as a result. “These are users that use 10,000 or more gallons per month,” Harless explained. Harless said that Pennington has 42 customers that meet that criterion, and “Some are using over 100,000 gallons a month.” “It costs more to produce more water,” said Harless, “the more we produce, the more chemicals we use—the pumps run longer, and the men work more hours, too.”

Producing more water when the number of customers remains constant raises the per-customer cost to produce that same water. Pennington’s Town Council decided that the fairest solution was for the customers who greatly increase demand (the very largest customers are those who make a profit directly by using the water supply) to pay for that increase in production. Harless explained that the base rates for high water users will now be multiplied according to a bracket system based on how much water they use in excess of 10,000 gallons in a month’s time. At the last Pennington Gap Town Council meeting, Jeff Cochran of Lane Engineering Group noted that the bracketed billing system system for high volume users is nothing new, and that area towns Big Stone Gap and the City of Norton also use a similar system: with sewer in Big Stone and both water and sewer in Norton.

Harless advised that when a municipality has more customers, the cost per customer is generally lower. For example, Big Stone Gap, Harless said, has more customers than Pennington Gap: about 5,000. Yet, according to a recent LENOWISCO study on area water rates, Big Stone Gap customers pay about 260% more on average than Pennington Gap customers for the same amount of water. Having a gravity-fed reservoir, rather than electric pumps, as Pennington has, further reduces Big Stone’s costs. In fact, every locality in the LENOWISCO area charges more for water than Pennington Gap does—anywhere from 100-300% more, yet costs for chemicals and unit manpower are about the same.

Another option the town considered was adding a maintenance surcharge to each customer’s bill rather than implementing the high volume usage ordinance. After careful deliberation, however, the town council decided against the surcharge because of the affect it would have on poor residents and those on fixed incomes. “The high water users are in business, while people at home have no way to recoup the increase; they would have no choice but to absorb it.” Businesses have various ways to recoup higher costs rather than absorbing them, including renegotiating contracts, restructuring, or passing them through.

As we reported last week, three high volume water customers, Teresa Kennedy of Tidy-K Laundry, Frank and Becky Bates of Family Tire & Warsh House, and Todd Williams of AutoClean Car Wash, attended the May 15 Town Council meeting to express disgust at the new rates, which, Ms. Kennedy of Tidy-K Laundry said, “Will raise our bill 80%.” Ms. Kennedy, Mr. and Mrs. Bates, and Mr. Williams all also said that they felt that Council was punishing them with the new rates. In the words of Mrs. Bates, “You’re punishing us for being successful.” Both Ms. Kennedy and Mr. Williams said that they might “just shut the doors,” rather than raise their own rates.

At the meeting, and again during our interview, Town Manager Harless said that it was not about punishment, and that actually losing a business over the higher rates would be “devastating.” In our interview, Harless went on to say that, “This [implementing the high volume user rates] is not about punishing businesses that use a lot of water, not at all, it’s about economics.” (Harless) “Our water plant is one of the most efficient plants in our area. But, the Town [Pennington Gap] hasn’t raised rates in almost 20 years, all while of our costs for chemicals, equipment, electricity—have all gone up that whole time, so we are just at a point where we have to go up on our rates, too.”

Though the new rates have proved shocking to some, the rate shock should never happen again. Harless explained, “We have implemented for the next five years at least, a 2% increase to keep up with inflation.” With small, on-going increases that match inflationary increases in supplies, businesses and residents will be much better positioned to deal with inflation: the unpleasant reality facing everyone on the planet. It would seem, at this juncture, that the Town of Pennington Gap has learned from its past mistakes.

Residential Customers Affected, Too

High water users were not the only ones affected by Pennington Council’s recent actions on water. The residential base rate allowance, which is the maximum amount of water a customer can use in a month and still have the minimum bill, was cut in half from 3,000 to 1,500 gallons monthly. The base rate change is significant, because, Harless said, “The average household water use [in Pennington] last year was 3,086 gallons of water each month.” Even at 1,500 gallons, Pennington’s base rate allowance is 500 gallons higher than many other municipalities in Lee County and the broader region. Putting it simply, Harless said, “Unfortunately, everybody’s bill has to go up.”

Ineligibility For Grants & Loans

Apart from the $200k annual losses, there is another big problem plaguing the Town of Pennington Gap insofar as water is concerned: ineligibility for grant funds. The Town needs funding from state and Federal grants and loan programs for a number of ongoing projects related to water and wastewater treatment, yet they are ineligible to apply for most of these programs because they do not meet the requirements for financial sustainability. Guidelines for this requirement are based upon the applicant’s median household income (MHI), which, for Pennington Gap, is $26,896 [U.S. Census Bureau], compared with how much the applicant charges customers expressed as a percentage of MHI. For both Virginia Department of Health (VDH) and Virginia Department of Environmental Quality (DEQ), towns must charge no less than 1.00%, and for U.S. Department of Agriculture (USDA) Rural Development, no less than 1.50% of MHI for water and sewer service. The Town of Pennington Gap has not met that requirement to this point. The new rates for residential, business, and wholesale customers seek to rectify that.

Necessary ongoing projects include repairs to system telemetry and the water treatment plant ($145k), as well as replacement of the water main along East Morgan Ave ($110k). Water treatment plants have a limited life span, and Town Manager Harless advised that Pennington Gap’s plant is well-on into that life span, and must have improvements to keep it operational into the future ($318k). Another large project facing the Town is replacing aged water meters; the first phase of which will cost an estimated $212,600. All told, Pennington Gap’s ongoing and pending capital projects for water treatment and delivery equal $785,600—a gigantic number for a small town like Pennington, even without factoring-in $200k in annual losses arising from water production.

Additionally, the town of Pennington Gap must undertake a $1.65M upgrade to their sewer treatment plant. According to Harless, the plant “hasn’t been upgraded since 1992, and is just about used up.” The Town was recently successful in obtaining the $1.65M from DEQ in the form of a 0% apr loan with a 20-year term. Funding agencies calculate eligibility separately for water and sewer, and Pennington Gap just met the requirements for this desperately needed funding.

Broader Implications

Harless told us that these are not the kinds of decisions that council likes to make, but they are decisions they have to make for the future of the town. Harless stressed, “We can’t shut our doors and not provide water. Our customers depend on us.”

Indeed, Pennington Gap’s customers do depend on the town to provide water—and not just residential and business customers. Wholesale customers that provide water to a large percentage of Lee Countians buy their water from the Town of Pennington Gap. There is a good chance that if you are reading this article, you drink, cook, and clean with Pennington’s water every day. As cutting the base rate allowance and implementing the high volume user rates alone will not stem these massive financial losses, the Town of Pennington Gap also increased rates for wholesale customers, meaning that Pennington Gap’s new water rates will likely affect a large portion of the county outside Pennington’s Corporate Limits.

LENOWISCO’s Utility Rate Survey for fiscal year 2016 shows average water bills for the 20 public water utilities in the LENOWISCO Planning District, and it reveals some stark comparisons. Based on usage of 3,200 gallons per month, the average out-of-town water bill from the Town of Pennington Gap was $15.54.Screen Shot 2017-05-22 at 13.46.29 Dryden Water Authority’s average bill for the same usage was $34.71, while Woodway Water Authority’s average bill was $36.20. Lee County PSA’s average residential monthly bill was $37.63, and St. Charles Water & Sewer Authority’s average water bill was $49.50. All four of these utilities, Dryden, Woodway, Lee County PSA, and St. Charles, buy water from Pennington Gap to resell to their customers. Putting these rate differences into perspective, Harless said, “It is not fair to our [the Town of Pennington Gap’s] taxpayers to dip into the general fund to offset the losses we’re seeing in the water department, particularly when you consider that we [the Town of Pennington Gap] provide water to other utilities, who serve a large number of people outside of town.” In this sense, without a rate hike, the Town of Pennington Gap’s taxpayers have been and would continue to subsidize water rates for customers who do not live in town, and who, therefore, pay no tax. “That’s why we have raised rates for our wholesale customers, too,” Harless advised.

How the economics of Pennington Gap’s water system affect the county at large is an ongoing story. The Lee Daily Register continues to follow this and other news, and we will add to the broader picture as it takes shape.

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