Water customers in rural Letcher County could see a huge increase in their monthly water bills after the Kentucky Public Service Commission (PSC) granted Knott County Water and Sewer District a rate adjustment that will increase the cost it charges for water service by 45 percent immediately and another 15 percent a year from now.
The announcement of the PSC’s decision marks the end of more than year’s worth of filings and hearings as the Letcher County Water and Sewer District took action to oppose the increase requested by the Knott County district, which supplies treated water to Letcher County from its treatment plant at Carr Creek Lake.
The Public Service Commission said it granted such a large increase — which is expected to raise monthly water bills for Letcher County residents by as much as $12.19 a month for the next year and another $5.84 on the monthly bill a year after that — because the Knott County Water and Sewer District (KCWSD) had not applied for a comprehensive rate adjustment since 2003 despite years of worsening finances. The PSC also found that despite the utility’s dire financial condition the five members then on the Knott 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, but the PSC denied the request. In its January 31 order, the PSC found that three of the utility’s remaining board members are subject to removal from office, but that removal would require a separate PSC proceeding. The PSC also ordered that the health insurance benefits for the Knott board members be discontinued immediately, sparing ratepayers in Letcher County and in the City of Hindman, which the Knott district also serves, from any further costs.
In July 2019, the Knott County district proposed a rate hike to its retail and wholesale customers. Letcher County has purchased water from the Knott County district since 2012 when the first “Knott County Interconnect” was opened, and now depends on the system for much of its treated water. The interconnect is a connecting valve that connects Letcher County water lines to the source at Carr Creek Lake.
The rate increase proposal led to revelations of violations of the Kentucky Open Records Act and other chargeable offenses for the Knott County Water and Sewer District as part of the PSC inquiry into the need for the increase. At an evidentiary hearing conducted by the PSC on January 22, David Smith, Chairman of the Knott County Water Commission, admitted that the commission conducted business in an executive session that is not permitted by the Kentucky Open Records Law. Commissioners also gave themselves insurance benefits of $23,000 per year without officially entering it into their minutes. In Kentucky, published minutes of commission meetings are the official record for legal purposes.
Questioning in the evidentiary hearing began with David Smith, the KCWSD chairman, who told the PSC he had spent most of his career as an engineer in the coal business. Smith said he joined the KCWSD Commission in 2012 and became chairman of the water district in 2015. In 2016, he lost his job managing a large mine in West Virginia and started working as a consulting engineer. When he lost his job, he also lost his insurance coverage, but was covered by a COBRA plan. He said the commission already provided dental coverage, and that KCWSD General Manager L.J. Turner told him it was legal for the board to provide health insurance benefits.
PSC staff attorney Laura Coltrane asked Smith about the $6,000 annual salary each commissioner receives for serving on the board, and the health, dental and life insurance the Knott district provides for them. Although changes were made to limit compensation in May 2019, Smith testified that in 2017, health benefits were adopted in an executive session held during a board meeting. He said the members voted to add benefits, but after returning to the open meeting they neglected to mention it or add it to the minutes. Smith referred to leaving the benefits out of the minutes as an “error of omission.”
Smith said the vote to adopt the benefits had been unanimous with himself, and commission members Larry King, Greg Mullins, Dale Hamilton, and Terry Dean Jacobs. Coltrane asked if they had asked for a legal opinion and he said they had not, although he said he believes the board’s attorney was present. He also said that several commissioners were employed by the Knott County Fiscal Court. Jacobs is also an attorney and former judge.
Smith added that current Knott County Judge/ Executive Jeff Dobson asked that new board members appointed after May 2019 be given the choice between a salary or benefits but not both. However, commissioners appointed before May 16, 2019 were grandfathered in and could keep both salary and benefits. The coverage the commissioners received was the same as the benefits available to full-time district employees.
Schmidt, the PSC chairman, asked Smith if he worked full-time in his position with the district and Smith said no. Schmidt said that according to research the PSC compiled, at his current rate of salary and compensation, Smith received approximately $1,154 per hour for what amounted to a part-time job, spending just under 20 hours a month in meetings. Smith said he does other things for the district, but Schmidt said the commission only has the authority to conduct business at meetings.
Schmidt then asked why the inclusion of insurance was not conducted in an open meeting, saying that compensation issues are not included as privileged information in executive, or private sessions. When Smith said he had believed that any employee business was covered, Schmidt said the board should be re-educated in matters that can and cannot be addressed in executive session.
Schmidt went on to discuss a capitol improvements or infrastructure fund and asked how many years the KCWSD has been operating at a loss. Smith said that including depreciation, the KCWSD has shown continual losses since 2012 and could have had them before. He said the district hadn’t changed its rates since he came on board in 2012. The board had decided to seek a rate increase in 2019 so it could recover financially to address long-term depreciation issues. Schmidt said the requested rate increase amounted to an 80 percent increase and asked if it might not have been better to seek incremental increases rather than pursuing such a large increase at one time. Smith said the board had been under political pressure to keep water rates low. Schmidt then said that an inspection of annual audits revealed losses in 2016 of $980,042, $1,190,517 in 2017, and $1,356,640 in 2018.
Knott Water Commissioner Jacobs was also interviewed by the PSC at the January 22 hearing and told the agency he is a former district court judge for the district that includes Knott and Magoffin counties. Jacobs said he is uncertain if he had attended the meeting where the insurance compensation was included. However, he was among the commissioners named by Smith as being present. Jacobs said he would not deny being there, but he does not remember voting on health insurance or why it was not included in the minutes.
Jacobs said he believed KCWSD’s contract with Letcher County and the City of Hindman had expired, and the Knott district was no longer obligated to supply water at all and should be able to set the rate it chooses. Jacobs also said he owed an apology to the citizens of Knott County for not understanding sooner that the Knott water district had not gone about its goal to be a regional water supplier in the right way. He said a rate increase would be necessary in order to provide for the necessary infrastructure to supply the wholesale customers, and increase the flow to Letcher County and Hindman as the systems grow.
Jacobs also said his duty as a commissioner was to the people of Knott County and not to Letcher County or Hindman. He added that there had been no evil intent in accepting the health insurance benefits. He pointed to his legal education and said he wouldn’t jeopardize his current law career in private practice for free health insurance benefits, adding that he had already discontinued the benefits from the commission. He also suggested a regional water board as a possibility to prevent future problems, but added that his current position is that if the wholesalers would not sign a new contract the Knott County district is under no obligation to serve them.
PSC Chairman Schmidt said the problems the Knott County district faces are similar to many he sees in rural areas with declining population, where the relationship between water commissions and local government is too close. He said that often, local governments exert pressure to keep rates low and prevent the kind of incremental increases that would keep the systems financially healthy without creating sticker shock for water customers.
Schmidt pointed to the Martin County Water District as the prime example and said that years of neglect would probably cost the citizens of Martin County well over $10 million. He said the best way is to factor in rate increases is by automatic increases of one percent or slightly more each year on an automatic basis.
The PSC found that, in providing health insurance benefits to themselves, the Knott County water board members violated a number of state statutes. 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. e
Th 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 Letcher County Water and Sewer District will issue a statement concerning rate increases following its February 20 meeting.