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Infrastructure Replacement Programs Cheryl Norton President Kentucky American Water Lexington, Kentucky.

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Presentation on theme: "Infrastructure Replacement Programs Cheryl Norton President Kentucky American Water Lexington, Kentucky."— Presentation transcript:

1 Infrastructure Replacement Programs Cheryl Norton President Kentucky American Water Lexington, Kentucky

2 2 Heritage dates back to 1886 Largest U.S. water and wastewater services provider Serves more than 15 million people in more than 1,600 communities Operations in more than 30 states and parts of Canada More than 7,000 employees American Water – History and Operations

3 3 Distribution System Improvement Charge (DSIC) DSIC is a regulatory mechanism that allows for the recovery of costs between general rate cases related to distribution system improvement projects designed to enhance water quality, fire protection reliability and long-term system viability.

4 4 DSIC-eligible additions are limited to revenue neutral projects, consisting principally of replacement investments. The costs of extending facilities to serve new customers would not be recoverable through DSIC. DSIC Is Not A Revenue Increasing Mechanism

5 5 Regulatory Lag and Negative Impact on Capital Attraction Regulatory Lag: The time between the investment or cost a utility incurs and when it can begin earning a return on the investment or recover the cost during the traditional regulatory process. Negative Impact of Regulatory Lag: Permanent impairment of the ability to earn a return on invested capital which the commission has determined is appropriate.

6 6 The Challenge of Infrastructure Replacement and Capital Attraction - > $1 Trillion/20 Years for Water and Wastewater Systems Wastewater: 2002 US EPA Gap Analysis - $331 Billion - $450 Billion/20 Years

7 7 Old Pipes = Failing Pipes

8 8 Infrastructure Replacement Surcharge Programs: Programs Can Differ But Contain Common Elements Identified as best practice by NARUC in 2005 Surcharges currently exist in 11 states (CA, CT, DE, IL, IN, MO, NH, NJ, NY, OH, PA) Included plant (all or some combination) Replacement of mains, valves, services, meters and hydrants New facilities due to changes in law/regulations Main cleaning and relining Main extensions to eliminate dead ends Unreimbursed relocation expenditures Land or land rights associated with qualifying plant Wells Sewer: force to gravity collection mains, services, man holes, lift stations ApplicabilityTimed Frequency of Surcharge Recovery CapReconciliations Water Water/Wastewater - Quarterly - Semi-Annually - Annually 3% - 10% Generally annually or at time of surcharge

9 9 Source: Steve Klick, Executive Policy Manager, PA PUC

10 10 Source: Steve Klick, Executive Policy Manager, PA PUC

11 11 DSIC Rate Gradualism – Smaller Rate Increases Over Time Source: Steve Klick, Executive Policy Manager, PA PUC

12 12 Cap on the DSIC rate (3% to 10%) resulting in low impact to customer bills Annual reconciliation of costs and revenues associated with DSIC by the Commission Customer notification requirements of DSIC changes Commission audits ensure money is spent on DSIC-eligible projects Surcharge reset to zero if quarterly or annual earnings reports show company earnings exceeding the allowable rate of return used to calculate fixed costs under the DSIC Surcharge reset to zero as of the effective date of new base rates A Number Of Consumer Protections Can Be Built Into System Improvement Charges

13 13 Water main replacement/rehabilitation increased substantially – from less than 4 miles per year pre-DSIC to 23 miles per year – with the DSIC program in place. Infrastructure investment increased from $1.2 million per year pre-DSIC to $2.7 million per year under DSIC. Replacement/rehabilitation pace increased from replacing the entire system over a 900-year period to replacing the entire system over a 125-year period. Intervals between general rate cases increased more than a year (much more in some instances). Jurisdictions With DSIC Programs Have Seen Numerous Benefits:

14 14 Additional Benefits of a DSIC Program Accelerates the replacement of aging infrastructure, improving water quality and service. Proactively addresses main breaks, using cost and reliability measure to prioritize projects. Allows coordination and sharing of paving costs with DOTs, local government, and other utilities. Promotes acquisition of small and non-viable water systems. Other benefits: Promotes economic development Less property damage Less traffic disruption Facilitates street repaving projects

15 15 Significant capital needs for aging infrastructure nationally. Regulatory lag can result in investment delays, more frequent rate failings and impacts to credit ratings. DSIC encourages infrastructure renewal and operational efficiencies by reducing regulatory lag. DSIC programs incent capital investment. DSIC programs provide gradual rate impacts and do not guarantee a rate of return. Many ratepayer protections exist with DSIC programs. Summary

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