City officials hope to end water war

Kyle Mayor Lucy Johnson is looking to wash her hands of Monarch Utilities, the water and wastewater utility that local officials say has been overcharging customers and stifling commercial growth in the city.

In April, Johnson provided testimony for Senate Bill 1612, authored by state Sen. Judith Zaffirini, D-Laredo, which would ify Monarch's state-granted monopoly on water service in the city and allow the City of Kyle's Water Department to compete within Monarch's service area. On April 25, that bill passed the Senate and was sent to the House of Representatives.

"We find that this, so far, has been a much more productive session than 2011," Johnson said.

There are 66 bills in the Texas House and Senate related to water utilities. Some look to defend investor-owned utilities (IOUs), such as HB 3857 by Rep. Eddie Lucio III, D-San Benito, which would allow IOUs to increase rates by up to 5 percent each year without having a contested case hearing before the Texas Commission on Environmental Quality. Others, such as SB 1612, have drawn opposition from private utilities such as Monarch.

The City of Kyle provides water service to 9,300 residential and commercial customers within its city limits. Monarch Utilities provides service to 2,116 customers in the Amberwood and Indian Paintbrush subdivisions, the retailers in Kyle Town Centre, and parts of an industrial park in south Buda. The rest of the city receives water service from Goforth Special Utility District and County Line Water Supply Co.

Rates on the rise

In Central Texas, rates from investor- and publicly owned water utilities have been steadily increasing.

Monarch's rates in Kyle have increased 45 percent since 2008, and if council approves the final step of a three-year rate increase in October, the City of Kyle will have increased its rates 70 percent during the same period. Rates in San Marcos and Buda have increased by 6 percent and 8 percent during the same period.

The difference between Monarch's and the cities' increases, Kyle officials say, is that Monarch's customers have not seen improved service.

Since Monarch bought the Plum Creek Water System in 2005 and began providing water service to residents and businesses, their customers have complained of discolored water, low pressure and high rates.

Kyle Assistant City Manager James Earp said the problem goes beyond residential customers. The low occupancy of Kyle Town Centre is partly due to Monarch, he said.

"We've had a couple of projects that have looked at going in that area that did not go because of Monarch Water," Earp said. "There is definitely commercial impact."

In 2007, the utility submitted an application for a 42 percent rate increase to TCEQ, the state agency that regulates water utilities. Kyle residents lobbied the city to intervene, and in December 2008, the two parties agreed the rates would increase by 28 percent. As part of the deal, Monarch was not allowed to file for another rate increase until January 2011.

Monarch's investments

Chuck Profilet, vice president of SouthWest Water Co., Monarch's parent company, said bills such as SB 1612 amount to changing the rules in the middle of the game.

"We've invested almost $7 million in the systems that we have there in Hays County and primarily in Plum Creek," Profilet said. "The way I see it is, you're changing the rules after significant investments are made, and that's going to discourage private-sector capital investment in Texas."

When those rate increases are denied or lessened, Profilet said, the company has to cut back on infrastructure improvements. Profilet said the company is not recovering the cost of doing business because those proposed rate increases keep getting slashed before they take effect.

"Your revenue is lower than your cost of service," he said.

According to TCEQ, in 2012, receipts from the 87 water systems within Monarch totaled $23 million. According to TCEQ, $230,052, or 1 percent, went to regulatory assessment fees paid by Monarch to the commission.

When Monarch took over the Plum Creek Water System in 2005, a TCEQ survey of the system found 10 infrastructure deficiencies. By 2011, six years after Monarch took over, that number was down to zero.

Johnson said she is not buying Profilet's claim that his company's large infrastructure investments—$6.95 million since 2005—should allay customers' dissatisfaction.

"From the conversations I've had with their actual customers, I still see not only bad customer service, but I still hear about bad water quality, colored water, sediment in water," Johnson said. "I still don't think they're receiving the quality of water they deserve or [are] paying a reasonable price for water."

Profilet counters that since 2009, when the company received more than 30 customer complaints about the Plum Creek Water System, Monarch's infrastructure investments have improved the system so much that in 2012, the company only received 13 complaints from customers served by the system.

Competition

Under state law, water utility providers, whether municipal- or investor-owned, must hold a TCEQ-issued Certificate of Convenience and Necessity, or CCN, to provide water service to an area. The CCN grants the provider a monopoly in its area.

If SB 1612 passes and Kyle is allowed to lay lines to Amberwood, Indian Paintbrush and the businesses in Kyle Town Centre, on Kyle Crossing at I-35, those customers would be able to choose between service from the City of Kyle, which currently charges $46.96 for 5,000 gallons of water, or Monarch, which charges $71.47 for the same amount.

Earp said he is hoping the city will eventually be able to "outcompete" Monarch and force the company out of the area.

"Ultimately the concept there is if they're so much better for the customer, why are they so scared of competition?" Earp said.

Walter Smith, vice president of the Amberwood Homeowner's association, said Monarch's practice of raising rates and painting fire hydrants black—a loophole that clears the utility provider of liability in the event that one of its hydrants does not provide adequate water flow to combat a fire—are not shady practices.

"That doesn't make them bad people," Smith said. "They're just going along with the rules that are there. I think we have a little bit of a policy issue, basically. We don't allow competition, and we know what [Monarch's] intentions are.

"There is a conflict in the profit motive and the very basic need for [water] service."

Pushing legislation

On May 7, Buda Assistant City Manager Brian LaBorde updated City Council on Senate Bill 1086, which would require Monarch to paint its hydrants red in Buda's industrial park west of I-35 and the Amberwood and Indian Paintbrush subdivisions, indicating to firefighters the hydrants can provide adequate fire-fighting flow.

The bill has been stripped of language that would hold Monarch liable during a fire emergency but will give firefighters the assurance that they will be able to suppress a fire using the hydrant. In spite of the amendments, LaBorde remains optimistic that the bill will help the city.

"All signs look good," LaBorde said. "We're hoping now that it gets through [the House]."

Profilet said the company is committed to the Plum Creek Water System, regardless of what city officials say.

"We're trying to be a good business partner with [Kyle and Buda]," he said. "We've taken care of our water system. We've improved the pressure, the water quality, the capacity and we're looking forward to improving whatever relationship there is with the city."

Johnson said she is encouraged by the response she received after her testimony to the Senate in favor of SB 1612, and she hopes the bill's passage will be a big step in the city's long fight with Monarch.

"We're gearing up to make sure this legislation can also pass the House, even if that means slightly changing it," Johnson said. "We know it's going to be difficult, and we're ready for that challenge."



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