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Aqua Utilities Florida, Inc. NARUC Staff Subcommittee on Accounting and Finance New Orleans, LA April 2, 2008. Troy Rendell Manager of Rates Aqua Utilities Florida, Inc. [email protected] 850-575-8500. Topics. Overview of the Water Industry Corporate Overview

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Aqua Utilities Florida, Inc.

NARUC Staff Subcommittee

on Accounting

and Finance

New Orleans, LA

April 2, 2008


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Troy Rendell

Manager of Rates

Aqua Utilities Florida, Inc.

[email protected]

850-575-8500


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Topics

  • Overview of the Water Industry

  • Corporate Overview

  • Aqua Utilities Florida Background

  • Consolidation of rates (Single Tariff Pricing “STP”)

    • Definition

    • Analysis

    • Goals and Objectives

    • Advantages and Efficiencies


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U.S. Water Industry Today

  • Highly fragmented; few providers of scale

  • Price inelastic demand - No substitute exists

  • Infrastructure concerns

    • EPA Needs Survey - hundreds of billions over the next 20 years

  • Monopoly – Subject to state regulatory jurisdiction (environmental & economic)

  • Only utility that is ingested


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Water Industry Risk Profile

  • American Society of Civil Engineers – 2005 drinking infrastructure grade of D- (Poor)

  • Federal funding for drinking water- $850 million, less than 10% of the total national requirement.

  • Risk-Return profile will keep Wall Street focused on water industry investment in infrastructure

Source: 2005 ASCE


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Aging Infrastructure

  • EPA recommends over $277 billion in infrastructure improvements over the next 20 years for water utilities

  • Ongoing Problem: high plant rehabilitation and pipe replacement costs

    • Municipalities are deferring costs

    • Companies face regulatory lag (disincentive to invest)


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Water Industry is the Most Capital Intensive Industry

  • EPA rules require large investment in filtration plants

  • Immense investment needed for distribution system and road repair

  • More capital per revenue than all other utilities and manufacturing industries

Source: 2003 C.A. Turner Utility Reports


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Water Industry has the Lowest Depreciation Rate in the Industry

  • Water industry has longest capital recovery period, which is viewed negatively by Wall Street

  • Historic cost recorded is lower than replacement cost

Source: 2003 C.A. Turner Utility Reports


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U.S. Water Industry “Factoids”

  • Too many

    • More than 50,000 community water systems

    • 16,000 wastewater systems

  • Too small

    • 84% of the water systems serve less than 3,300 people

  • Too inefficient

    • Less than 1% of the water systems serve more than 100,000 people

    • Most water and wastewater systems are owned by municipal governments

*Source: EPA, “FACTOIDS: Drinking Water and Ground Water Statistics for 2001”


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Florida Demographics

4,506 Public/Private water systems

  • 2,055 water systems (1,010 private)

    • AVG. CONNECTIONS = 257

  • 2,451 waste water systems (1,446 private)

    • AVG. CONNECTIONS = 225



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Aqua America Today

  • The largest US-based publicly traded water utility

    • Formed in 1886 in suburban Philadelphia

  • Focus on asset ownership model – invest needed capital and earn fair, regulated return

  • Unique growth story – growth through acquisition strategy

  • Financial strength; good credit quality

    • Aqua Pennsylvania, largest subsidiary

      • S&P corporate credit rating A+

      • S&P senior secured debt rating AA-

  • Strong focus on improved regulatory and customer relations


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Operating Locations

Current operations


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Aqua Utilities Florida(AUF or Aqua Florida)

  • AquaSource – July 2003

  • Florida Water – August 2004

  • System Characteristics:

    • Piecemeal systems Examples:

      • Stone Mountain 10 customers

      • Morningview 34 customers

      • Raven’s Wood 45 customers

      • Sebring Lakes 73 customers

  • Aging infrastructure

  • “Unwanted” systems



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    Water Service Must Be Reliable

    • The water industry provides the only utility service that is ingested

    • Critical to residential sanitary needs

    • Important fire protection service


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    Aqua America’s Track Record

    • Improved customer service

    • Willingness to purchase and improve small (troubled) systems

    • Major capital investments for water quality and infrastructure improvements

    • Efficient operations through infusion of technology

    • Investing capital/expertise to improve system security and reliability


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    Consolidation of Water Rates

    Single Tariff Pricing

    (“STP”)


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    Definition

    • “the use of a unified rate structure for multiple utility systems that are owned and operated by a single utility, but that may or may not be contiguous or physically interconnected”


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    Other Utilities Are Not Like Water

    • Other utilities are larger, born consolidated

    • Never experienced fragmentation like water industry

    • Although costs of service differed, expansion took place from one consolidated utility and differences were largely ignored


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    Analysis

    Comparative Utility Size




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    Other Utilities Are Not Like Water

    • Other utilities are larger, born consolidated

    • Never experienced fragmentation like water industry

    • Although costs of service differed, expansion took place from one consolidated utility and differences were largely ignored


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    Number of U.S. Utilities

    • 2,776 electric plants in the U.S.

    • 69 electric plants in Florida

    • > 66,000 water & waste water systems in the U.S.

    • 4,506 in Florida

    • 91 owned and operated by Aqua


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    Other Utilities Are Not Like Water

    • Other utilities are larger, born consolidated

    • Never experienced fragmentation like water industry

    • Although costs of service differed, expansion took place from one consolidated utility and differences were largely ignored


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    Observations

    • Customers living different distances from the supply and showing differing demand characteristics could theoretically be assigned a different rate

    • No true stand alone rate, subsidies exist in any rate structure

    • Some discrimination results from the efforts of utilities and commissions to simplify rate structures and group customers into a limited number of classifications


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    History

    • Rural utility services have been subsidized by city / suburban customers

    • In the public sector, local governmental subsidies related to water and wastewater services are relatively common


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    Best Example of “STP”

    The Postage Stamp


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    Best Utility Example of “STP”

    • Great Britain

      • In 1989, formed 10 large Investor Owned Water Utilities

      • Tariffs established within each system are uniform


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    Similarities Among Systems

    • Corporate oversight

    • Capital attraction

    • Engineering capabilities

    • Management and customer information systems

    • Financial oversight

    • Purchasing practices and national contracts

    • Operating practices and procedures

    • Quality of service

    • Shared resources


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    Differences Between Systems

    • Water Supply

    • System characteristics

    • Economies of scale (system size)


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    Rate Structure Goals and Objectives

    • Simplicity, Understandability

    • Revenue Stability

    • Fairness (to the extent subsidies occur)

    • Efficiency

    • Affordability for all customers


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    Rate Structure Goals and Objectives (cont.)

    • Ease of Administration

    • Rate Continuity

    • Resource Protection (Conservation)

    • Effect on Future Acquisitions


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    One Definition of Price Discrimination

    • Charging different rates for customers receiving a consistent level and quality of service


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    STP Advantages

    • Protects against unaffordable rates

    • Addresses small system viability issues

    • Lowers administrative costs (economies of scale)

    • Promotes customer equity with a consistent rate for a similar quality of service


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    STP Advantages (continued)

    • Facilitates cost efficient compliance with SDWA standards (capital costs incurred universally – recovered similarly)

    • Provides incentives for regionalization and consolidation

    • Provides ratemaking treatment similar to other utilities

    • Minimizes rate shock


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    Efficiencies of STP

    • Streamline filing process (lower rate case expense)

    • Reporting Requirements

      • 82 Annual Reports

    • Accounting Process

      • Journal entries and allocations

      • Budgeting

      • “splitting” invoices and time sheets

      • Analysis of “82” divisions



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    Efficiencies of STP

    • Streamline filing process (lower rate case expense)

    • Reporting Requirements

      • 82 Annual Reports

    • Accounting Process

      • Journal entries and allocations

      • Budgeting

      • “splitting” invoices and time sheets

      • Analysis of “82” divisions



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    Considerations

    • Cost-of-service principles

    • Subsidization

    • Affordability


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    A Public Policy Issue

    • STP involves a balance among utility rate setting standards and other goals, including:

      • Small-system capacity

      • Rate stability

      • Universal service & affordability

      • Compliance with environmental standards



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    Sources

    • Consolidated Water Rates: Issues and Practices in Single-Tariff Pricing, September, 1999

    • The REGULATION of Public Utilities, Charles F. Phillips, Jr.; 1993

    • Facts and Figures of the Florida Utility Industry, Florida Public Service Commission; March 2007

    • Actual experiences from running water and waste water utilities


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