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PSC Grants Rate Increase to Knott County Water District
Knott County Kentucky

Finds district commissioners illegally granted themselves health insurance

FRANKFORT, Ky. (Jan. 31, 2020) - The Kentucky Public Service Commission (PSC) has granted Knott County Water and Sewer District a rate adjustment that will increase water service rates by 45 percent immediately and another 15 percent a year from now.

In an order issued today, the PSC stated that the size of the increase is due to the fact that Knott County Water has not applied for a comprehensive rate adjustment since 2003, despite years of deteriorating finances.

The PSC also found that, despite the utility's dire financial condition, the five members then on the district's board of commissioners had in 2017 secretly and illegally granted themselves full health insurance benefits, costing the district more than $133,000 over the last three years.

Furthermore, when the PSC began inquiring about the health insurance benefits, Knott County Water sought to shield the information from public disclosure during the rate case. The PSC denied the request.

In today's order, the PSC found that three of the utility's remaining board members are subject to removal from office. Removal would require a separate PSC proceeding.

The PSC ordered that the health insurance benefits be discontinued immediately, sparing ratepayers from any further costs.

Knott County Water applied in July 2019 for an increase in water rates, including both retail rates and the rates it charges to five wholesale customers. The utility has nearly 3,000 retail customers.

The PSC found that an increase in annual retail revenue of $677,000 would be needed to meet the utility's needs, including adequate revenue to set aside funds for future infrastructure repairs and replacement. Wholesale rates also will be increased. Sewer rates are not affected.

For a typical residential customer using 3,500 gallons per month, the first phase of the rate change will increase the monthly bill by $12.19, from $26.70 to $38.89. The second increase a year from now will add another $5.84 to the monthly bill, bringing it to $44.73.

The PSC noted in the order that stretching out the increase over more than two years, while perhaps lessening the burden on customers, was not possible due to the utility's dire financial condition. A longer phase-in would worsen the situation, the PSC said.

Knott County Water's 17-year gap between comprehensive rate increases is not unusual. In November 2019 a PSC report on distressed water utilities found that a major contributor to financial difficulties is a reluctance by water utilities to seek comprehensive rate adjustments on a regular basis. The report recommended that utilities analyze their operations and rates every three years to determine whether they have adequate revenue to meet present and future needs.

The PSC found that, in providing health insurance benefits to themselves, the Knott County Water board members violated a number of state statutes. In testimony before the PSC, the board members acknowledged that the decision to grant the benefits was made in closed session, that no vote was taken in any subsequent open session, and that no written record of the decision was produced - all violations of state law.

Additionally, the board members violated a provision in state law that prohibits them from taking any action that benefits them financially, the PSC found. The law (KRS 74.020(3)) states that a violation may result in removal from office.

The PSC also found that it is clear that that the board members "intended to withhold public disclosure of the benefits and the value of those benefits." Not only was the decision made behind closed doors and not disclosed, but the board members unsuccessfully petitioned the PSC to keep the information confidential.

Because the health insurance benefits represent compensation that goes beyond that authorized in state law and in light of Knott County's high poverty and unemployment rates, the utility should consider "seeking restitution from those (board members) who since 2017 have received benefits in violation of" state law, the PSC said.

The PSC conducted an evidentiary hearing in the case on January 22. Other parties to the case were the Letcher County Water and Sewer District and the city of Hindman, both of which purchase water from Knott County Water, and the Kentucky Office of Attorney General.

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