Constructive Ratemaking Mechanisms and Regulatory Policy in Water

1. Constructive Ratemaking Mechanisms and Regulatory Policy in Water NASUCA Mid Year Meeting June 2018 Maureen Westbrook, Vice President, Customer & Regulatory Affairs

2. CTWS Regulated Business Connecticut Presence Maine Presence Serving 135,000 utility customers in 80 communities through regulated subsidiaries: • Connecticut Water Company • Maine Water Company • Heritage Village Water Company • Avon Water Company

3. Our Mission … Passionate employees delivering life sustaining, high quality water service to families and communities while providing a fair return to our shareholders

4. Establishing Water Rates & Design • Rates need to reflect the “Value of Water” • Adequate rates critical to utility viability • Meet current and future system needs • Revenue requirement : • Operating Costs • Capital Costs – Recovery of and on investments • Balance customers’ rates with company’s financial needs to maintain and sustain system

5. Rate Design and Price Structures

6. 2005 NARUC Regulatory Best PracticesTools in CT

7. July 2013 NARUC Resolution … State legislative bodies play a significant and important role in addressing challenges in the regulation of water and wastewater utilities….. foster environment of cooperation and open communication between regulators, legislative bodies, and other State agencies in oversight of water and wastewater utilities implementation and effective use of sound regulatory practice and the innovative regulatory policies is both possible and effective

8. Collaborate to Develop Policies - Benefit Customers, Balance Needs

9. CT Regulatory Tools 180 Day Timeline for Rate Proceedings Construction Work in Progress (CWIP) Small Systems ROE Docket Low Income Assistance Programs Small Systems Acquisition & Takeover Proceedings WICA – Adopted in 2007, Expanded in 2013 Water Revenue Adjustment Mechanism (2013) Overearnings Sharing Mechanism

10. Low Income Assistance Programs Allowed In Rates H2O Customer Assistance program approved as pilot – still in effect Subsequently developed a low income assistance program for acquired company -Heritage Village Water

11. Small System Rate Design Challenges • Historic unmet operational and capital needs drive rate impacts at acquisition • Acquisition may best meet public health needs for customers of small failing systems • Can small customer base support the costs to properly operate and make necessary system improvements? • Acquisition surcharges and other tools • Subsidies from larger customer base?

12. Small Systems • CT Regulatory Tools • Certificate Requirement for New Systems • Acquisition Proceedings – Voluntary and Mandatory Takeovers • Acquisition Adjustments – Surcharge for customers of acquired system and/or acquiring company • Approved system improvements eligible under WICA

13. Infrastructure Replacement Legislation Timely replacement of aging infrastructure Incremental surcharge mechanisms mitigate customer rate shock Built in consumer safeguards in defining eligible projects, project approval and limits on surcharge Support of water utilities and environmental advocates

14. Water Infrastructure and Conservation Adjustment (WICA) Recovers PURA authorized investments in pipe line replacement, conservation and other eligible projects between general rate cases • Typically semi-annual adjustments • Maximum WICA allowed by the law • 5% per year • 10% between general rate case filings • Customer protections if overearnings

15. Water Infrastructure and Conservation Adjustment (WICA) • Initial Infrastructure Assessment Report • Financial Info • Main Break History • Pipe Inventory • Draft Customer Notice and Bill Format • Customer Service Training Materials • Project Prioritization based on established criteria • Main Break History, Age, Material Integrity, Critical System Impact, Water Quality Issues, Hydraulic Capacity, Scheduled Road Work

16. Additional WICA Eligible Projects Main rehabilitation projects such as cleaning and lining Purchase of leak detection equipment Production meters and pressure regulating facilities Energy efficient equipment for water company operations Capital improvements necessary to comply with streamflow

17. $120.4M - Replaced 112 miles of main Average age 75 yrs Eliminated all identified stove pipe Reduced amount of transite, small diameter galvanized steel and unlined cast iron pipe Annual spending = 1% replacement rate Equivalent to a 100 year replacement cycle versus industry average of 240-300 years

18. Investing in the Water SystemConnecticut Water Company

19. Investing in the Water System Avon Water Company Avon's WICA investment was limited in 2017 due to the Company being at 9.31% and approaching the WICA 10% cap.

20. WICA Benefits

21. Company tracks and reports WICA related inquiries and complaints each year • Average of 0.25 per 1000 customers per year • Most relate to timing of restoration • Very little pushback on amount of the surcharge • Modest, incremental increases in rates through WICA reduce impacts at general rate case • Support in surveys - customers and state/local officials

22. Water Revenue Adjustment Mechanism • Authorized by law in Connecticut in 2013 • Intended to support water conservation • Annual rate adjustments to recover PURA approved revenues from last rate rate case • Adjustment could be a surcharge or credit depending on amount of revenues collected in a calendar year. • Details submitted to PURA annually for approval before adjustment applied to customers’ bills • Customers protected – sharing of overearnings

23. Overearnings Protections • Protection for customers if company over earns allowed ROE • Rolling review, sharing required if exceed allowed ROE • Review at WICA filings • Water Revenue Adjustment • Provides assurances as regulators consider ratemaking tools

24. States with Fair Value Legislation

25. Fair Value Legislation in CT ? • Need to understand customer impacts • Determine if a good fit for Connecticut • How would it need to be structured to work here?

26. New Jersey Water Quality Accountability Act • Create and implement an asset management plan to inspect, maintain, repair, and renew infrastructure consistent with AWWA standards • Methodology for routinely testing valves and fire hydrants • Require mitigation plan by purveyors that exceed a certain number of - violations within any 12-month period • Create cybersecurity programs and join the NJ Cybersecurity and Communications Integration Cell 2018 - Indiana passed Water Accountability Act (IN 0362)

27. Moving Forward • Solutions only possible if we continue the dialogue • Work collaboratively to balance the various interests • Build on foundation of trust • Authorize tools that: • Reduce the administrative burden and costs • Support timely recovery, and authorized earnings • Have appropriate safeguards and protections for customers • Provide for sustainable water systems that encourage timely, prudent investments for customer benefit

28. Moving Forward • Solutions only possible if we continue the dialogue • Work collaboratively to balance the various interests • Build on foundation of trust • Authorize tools that: • Reduce the administrative burden and costs • Support timely recovery, and authorized earnings • Have appropriate safeguards and protections for customers • Provide for sustainable water systems that encourage timely, prudent investments for customer benefit Questions? Maureen Westbrook mwestbrook@ctwater.com