Opportunities and Constraints for Managing Water Resources and Infrastructure in Illinois November 17, 2011 Karla Olson Teasley President Illinois American Water

2 About Illinois American Water A wholly owned subsidiary of American Water (NYSE: AWK), and the largest investor-owned water utility in the state Long history in Illinois - celebrated 135 years of service in Alton, IL Approximately 500 employees in 12 operating districts Regulated by the Illinois Commerce Commission (ICC) and Environmental Protection Agency (EPA) American Water national customer service center in Alton, operating 24 hours a day American Water’s national water quality lab in Belleville, IL

3 Illinois State Operations Over 120 communities and 1.2 million people served (water and wastewater services) Maintenance of more than 4,300 miles of water main, some of which was installed in the early 1900s. The American Water system has about 49,000 miles of pipe About 29,000 fire hydrants are inspected at least annually to identify maintenance and replacement needs Approximately 115 million gallons pumped a day / Nearly 41 billion gallons pumped a year

4 We care about water. It’s what we do. One of only six Illinois water utilities participating in the Partnership for Safe Water program Collaborate with EPA in their Water Sense Program to help customers reduce leaks Partner with the Great Rivers Land Trust to support the Piasa Creek Watershed Project in Alton, IL Support ‘Water for People’, a non-governmental organization that supports locally sustainable drinking water, sanitation and hygiene solutions in developing countries where water issues are critical

5 Major Issues Facing Water and Wastewater Industry Aging Infrastructure Quantity & Quality of Water Supplies Conservation/Revenue Erosion Increasing Costs/Affordability Changing Customer Expectations Increasing Regulations Severe Fragmentation

Capital Intensity Per Revenue Dollar Source of Information: AUS Utility Reports – May 2010 Published by AUS Consultants

7 Commitment to Continuous Investments Invested approximately $150 million in in infrastructure Over $200 million to be invested in 2011 – 2013 Proactive main replacement program Largest Ultraviolet (UV) disinfection system in the state LEED ® Certified water treatment plant in Champaign IL in Only second WTP in the United States to receive LEED certification

8 Buried Infrastructure – The Challenge of Leaky Pipes In the United States, approximately seven billion gallons of treated drinking water are “lost” each day primarily due to system leaks Source: American Society of Civil Engineering: 2009 Infrastructure Report Card This is approximately 16% of the nation’s total daily drinking water production Chicago has recently announced a 70% rate increase over the next four years to address upgrading its aging infrastructure and mitigating lost water Solutions include the use of technology for leak detection (e.g., continuous read acoustic monitoring)

9 Innovative Leak Detection Approach Creation of Water Loss Control Department We take a proactive approach -  Leak surveys, verification/pinpointing of leaks, monitor historical flow data and excavation history to identify problem areas “Fixed Network” leak detection enables our team to monitor a service area in real time to locate leaks Utilize regulatory inspection process for hydrants and valves to check for any leaks Statewide implementation of smart meters

10 The True Cost of Water Service Efforts to sustain a reliable water supply and service also include education on the true cost of water service Many communities charge artificially low rates that are subsidized by taxes and other revenue sources The true cost of water service includes all accounting costs required to provide service and support sustainability, including capital attraction, financial viability and timely investments in infrastructure Charging the true cost of water service is endorsed by:  Illinois EPA  Chicago Metropolitan Agency for Planning  Metropolitan Planning Council

11 The True Cost of Water Service (continued) Full-cost pricing for drinking water sends the right signal to customers and  Encourages wise and efficient use of water  Promotes conservation  Ensures the necessary funds to maintain and invest in facilities Measured as a percentage of household income, the U.S. pays less for water and wastewater than other developed countries A fundamental shift in thinking is needed

12 Water Industry Fragmentation Currently in the United States there are 40,000 water systems and 17,000 wastewater systems Illinois has 1300 water systems and 600 wastewater systems that serve populations less than 3,300 Consolidation is needed to better leverage existing resources

13 Challenges to Financial Sustainability: Declining Trends in Residential Water Usage Per Customer Energy Policy Act of 1992 (effective in 1994) Energy Policy Act of 2005 (effective in 2006) Energy Independence and Security Act of 2007 (effective in 2010) DECLINING WATER USAGE PER CUSTOMER Conservation (water- efficiency) programs Customer conservation ethic and awareness High Efficiency plumbing fixtures and indoor appliances Elasticity to water and sewer rate increases Economic conditions Decreasing average household size

14 Impacts of Conservation Under Traditional Rate Design Reduced Demand = Reduced Revenue Most capital investment needs remain unchanged Maintenance of existing facilities and high percentage of fixed costs (e.g., labor) remain the same Necessitates review of rate structure Innovative rate design can unlock the economic and environmental benefits that can be achieved through water/energy conservation.

15 Maintaining Water Utility Viability Under Conservation Appropriate sales forecasting for rate setting process Conservation pricing / rate structures Infrastructure Replacement Surcharge – Qualifying Infrastructure Plant (QIP) Revenue adjustment clause (RAC) Revenue decoupling (higher fixed service charge) Moves to higher fixed charges require consideration of impacts to low volume / low income customers H 2 0 Help to Others Program ® provides financial assistance in paying water bills in partnership with the Salvation Army

16 The Solution Going Forward The solution includes the various industry stakeholders working together as partners Providing sustainable and financially viable water supply and service in the future will require groups such as utilities, regulators and customers to work together to:  Encourage infrastructure projects and other programs that protect the environment  Drive public awareness of water and wastewater issues and infrastructure needs  Consider the need for sustainable water supply and service when evaluating rates  Implement mechanisms to promote revenue stability  Educate customers on the true cost of water to build awareness of cost drivers and reduce water waste