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Water rate subsidy a drain for Pittsburgh

Monday, August 20, 2001

By Timothy McNulty, Post-Gazette Staff Writer

Twenty-nine years ago, Pittsburgh City Council and a private South Hills water company made a deal, and city water customers still are paying for it.

And the price is about to go up.

Now the question is, who will pay the higher rates?

Although most Pittsburgh residences and businesses get their water from the city, approximately 28,000 homes and companies in southern city neighborhoods get theirs from the Pennsylvania-American Water Co., a privately owned firm that serves most of the South Hills suburbs.

Penn-American charges higher rates than the Pittsburgh Water and Sewer Authority but, thanks to a 1972 agreement, all city water customers pay the same amount, whether they get it from Penn-American or the PWSA.

The difference in price is made up by the authority, which pays the sum to Penn-American, keeping the rates at the same level for all city water users.

A July study of the subsidy by the PWSA found the city has paid the company $44.8 million in reimbursements from 1985-2001. (The study did not cover the first dozen years of the agreement.)

Hershey-based Pennsylvania-American has proposed a 12.4 percent statewide rate increase for next year. Due to the city's agreement, the water authority's reimbursement to the company would jump about a million dollars, to about $4.6 million in 2002.

The rate increase, which is pending before the state's Public Utility Commission, has prompted the PWSA's board chairman to issue a plea for city government to revisit the subsidy and, perhaps, get rid of it, a proposal that has surfaced and died before.

The city doesn't subsidize electricity or gas bills, state Rep. Joseph Preston said, and it's time to stop underwriting water charges too.

"City Council has to stand up and do the right thing, and show the leadership to treat everybody equally," the East Liberty Democrat said. "They have to realize we don't subsidize other utilities."

Pennsylvania-American Water Co., a private water company with 561,000 customers statewide, provides the water to almost every city neighborhood south of the Monongahela River except the South Side Flats. Its water mains stretch from Fairywood in the west corner of the West End, to Lincoln Place in the southeast corner of the city.

The PWSA is a municipal agency, with a board appointed by Mayor Tom Murphy, that provides water to most of the rest of the city, from the North Side to the West End. (Some Homewood residents are served by the Wilkinsburg-Penn Joint Water Authority.)

City Council agreed to the reimbursement with Pennsylvania-American's predecessor, Western Pennsylvania Water Co., in December 1972. The city's Water Department paid the subsidy straight from the city budget until 1985, when the newly formed PWSA took over water operations.

The city kept paying the subsidy out of its budget until 1995, when the city sold its water lines to the PWSA, which then began reimbursing the city for the payments.

Though the subsidy usually cost the city or the PWSA about $2.5 million each year, it didn't look like much of a cash outlay until 1995. That's because, until then, Penn-American was buying 4 million gallons of water daily from the city, at a cost of about $2 million a year.

In September 1995, the company stopped buying the city's water and the subsidy has crept up, especially as the company's rates increased. The subsidy was $2 million in 1995 and the PWSA projects it to be $3.6 million this year.

The subsidy will go up further if the PUC approves the 12.4 percent rate increase Penn-American requested, an increase needed to defray $200 million in infrastructure improvements the company has made, said spokesman Philip Cynar.

If fully granted by the PUC, the increase would raise rates for residential water users from $4.86 per thousand gallons to $5.64 per thousand.

The city water authority charges $3.95 per thousand gallons, but due to the subsidy, city customers of Pennsylvania-American will continue to pay that rate and be unaffected by the private company's rate hike.

Families use an average of 6,000 gallons of water per month or 72,000 gallons annually. Without the subsidy, city users of Pennsylvania-American would be paying $5.46 more monthly or $65.52 more annually. With the rate increase, they would be paying $10.14 more monthly or $121.68 more annually than city PWSA customers.

Costs like that make the subsidy a difficult issue for City Council. With or without it, somebody has to pay, whether it's the customers themselves or the city water authority on their behalf.

Councilman Gene Ricciardi, a member of the PWSA board who represents both water authority and Penn-American customers, isn't sure what to do. And he fears pitting city residents against each other.

"It's a fairness issue. There's no denying the fact that there is one segment of the city subsidizing another. You also can't deny the fact that it gets complicated: There are residents and businesses I represent who are getting subsidized, so they don't have to face double-digit [percentage] rate increases," he said last week.

Cynar, the Penn-American spokesman, was quick to say his utility shouldn't be the punching bag in the subsidy debate. The debate should be in City Council, which approved the subsidy in the first place.

"This was something the city wanted. It wanted customers in certain geographic areas to pay the same amount," he said.

He also stressed that, as a private utility, his company has higher costs than the nonprofit PWSA, which doesn't have to pay taxes and can finance projects with lower-cost loans.

"We're a privately-owned company obligated to maintain quality for our customers and to answer to our investors," Cynar said.

Meanwhile, the PWSA has to determine how to pay for the increased subsidy, perhaps through an increase in its own rates, though authority treasurer and city Finance Director Ellen McLean said no discussions on rate hikes have been held. (The authority last raised rates in 1999, when Penn-American also did.)

The authority could take over the city customers of Penn-American, though that would be difficult because Penn-American owns the water lines. Or, City Council could eliminate the subsidy or place a ceiling on it.

Ricciardi wants studies and cost analyses performed on the subsidy before any changes are proposed, but both he and Preston said a ceiling, or "cap," may be the best compromise.

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