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Commodity Cost Adjustment Clauses

Steve L. KlickManager-Rates and RegulationPennsylvania American Water

NARUC Staff Committee on Accounting and Finance

October 10, 2007

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Facts at a Glance Wholly-owned subsidiary of American Water Works Company, Inc.

Largest regulated water and wastewater service provider in Pennsylvania

Communities Served: 378 in 35 counties

Customers Served

• 628,000 water◦

92% residential

◦

7% commercial

◦

1% institutional/other

• 14,500 wastewater

Population Served: 2.1 million

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Facts at a Glance Treatment Facilities

• 36 surface water

• 28 facilities received 5-Year Directors Award from Partnership for Safe Water

• 63 groundwater treatment plants

• 4 wastewater plants

Avg. daily delivery: 215 MGD

Source of supply: 92% surface, 6% wells and 2% purchase

Distribution system: over 9,200 miles

Customer Assistance: H2O - Help to Other program

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What Are Commodity Cost Adjustment Clauses?

Rate mechanisms to pass-through periodically increases or decreases in the per unit cost of producing water

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What Commodities May Be Included?

Power

Water

Chemicals

Residuals Handling

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Commodity Cost Adjustment Clauses Are Not…

Not a pass through of the cost of increased units of the commodity. For example, increases in greater sales of water requiring greater power, chemicals or sludge hauling.

Not a pass through of increases in commodity costs because of growth.

Not a pass through of commodity costs if the water company is earning in excess of its last allowed rate of return.

Not a pass through of Administrative and General Costs (A&G) or affiliate charges

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2005 NAWC O&M Expense

9%

31%

27%

24%

9%

Production

Purification

Administrative &General

Transmission &Distribution

All Other Expenses

Source: 2005 NAWC F&O Statistics

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Who Cares About Commodity Cost Adjustment Clauses?

Rating Agencies (S&P, Moody's, Fitch)

Investors

Commissions

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Commissions Which Permit Commodity Cost Adjustment Clauses

Connecticut

Delaware

Florida

Illinois

Indiana

Missouri

Ohio

Pennsylvania

New Jersey (PWAC and PSTAC)

New York

Texas

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What is the Incentive to Keep These Costs As Low As Possible?

Purchased Water and Power Rates are typically set by the same utility commission that regulates the water company

Chemicals, Sludge Hauling and Property Taxes

– Pass through only a portion (85%/15%) to provide incentive to challenge costs. (NY PSC and property taxes)

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Thank youSteve L. Klick, Manager-Rates and RegulationPhone: (717) 531-3253E-mail: steve.klick@amwater.com