Testimony of State Representative Phyllis Mundy

Aqua Pennsylvania, Inc. Rate Increase Hearing

March 4, 2008

Good evening.  Thank you all for coming to Kingston Township.

I appreciate the opportunity to offer comments on Aqua Pennsylvania’s most recent rate increase request this evening.

Aqua PA serves approximately 404,000 customers – including customers in Exeter, Jackson, and Kingston Townships in my legislative district. As you can well imagine this company’s service and rates are of vital importance to the people I represent.

The company is requesting a rate increase of 13.6%, and says such a rate hike will produce additional operating revenues in excess of $41 million. Company officials claim the proposed revenue increase will produce an 11.75% rate of return on common equity.

Under the proposed rate increase, a typical Main Division residential customer, using 5,000 gallons per month, would see their bill rise from $43.99 to $52.68, an increase of $8.69 per month. On a percentage basis, this is an increase of 20%.

This would follow the March 2007 imposition of their Distribution System Improvement Charge - a surcharge of  2.67% on all bills.

If the Public Utility Commission approves the requested increase, it would be Aqua’s 3^rd rate increase in 4 years. In June of 2006, the company was approved for a 9.2 % increase and in August 2004, a requested increase was approved for 5.56%, that’s a total of 14.76% or $38.7 million in rate hikes over the last 4 years alone!

These were substantial increases for customers, many of whom subsist on retirement incomes and struggle to make ends meet each month.

Issues with Statement of Reasons

As part of their request, Aqua was required to submit a “statement of reasons” for the rate increase. These reasons, on the surface, seem wholly plausible, but a closer look reveals areas that bear further consideration.

As stated by Aqua PA, two of the main reasons for the rate increase are as follows:

 “Despite concerted efforts to control costs, the Company has incurred unavoidable increases in wages and wage-related benefits, including pension expense and healthcare expense consistent with national trends, along with chemical costs and other operating expenses.”

It is true that costs are up in many of the areas cited above. But is Aqua PA doing everything that can be done to minimize expenses and improve efficiencies? The answer is no, according to a PUC management audit report. These management audit reports determine, among other things, the extent to which a utility has contained costs and has provided adequate service to its customers. Released in November 2006, the audit report showed that Aqua PA could experience a yearly savings between $1.1 and $1.2 million and a one-time savings of $890,000 by implementing the 27 recommendations contained in the report. At the time, the PUC stated that Aqua PA planned to implement the majority of the recommendations by the end of the first quarter of 2008. I would suggest that the Commission closely review Aqua’s compliance with the recommended changes, to ensure that Aqua has done all it can to minimize expenses and make sure consumers are not picking up the tab for company inaction.

They follow with:

“To finance the needed plant investments the Company must be able to raise capital on reasonable terms. Unless adjusted, the Company’s present rates will not provide current or new investors with an adequate return on their investment.”

I fully understand the business model, and realize the importance of rewarding investors’ confidence. However, Aqua PA is not a “normal” company; it is a Public Utility, with a great public responsibility. Aqua PA doesn’t sell widgets – it sells water – a basic element of life. And while Aqua should be permitted to appropriately address business concerns, it in turn must be accountable to more than just shareholders.

Aqua PA’s request of an 11.75% rate of return on common equity appears to be excessive. This seems to be the new “magic number” or “gold standard” of recent rate requests. The Office of Consumer Advocate deems this amount “wholly without merit.” I agree. The requested rate of return is entirely too high and has a very negative impact on water customers.

Purchased Water Adjustment

I am also concerned about Aqua PA’s rider for a purchased water adjustment, which would permit Aqua to increase or adjust customer bills to recover changes in the company’s baseline costs. My specific concerns are these:

· Like the Distribution System Improvement Charge, a purchased water adjustment is fundamentally flawed in that it is an automatic adjustment that does not restrict the frequency of increases – thereby circumventing the normal regulatory and approval process.

· It is single issue rate making – allowing for the recovery of an increase to a specific cost without consideration for off-setting savings. It guarantees recovery of costs, even though those expenses may not be incurred. For example, if Aqua hikes customer bills to adjust for higher purchased water prices from one supplier, but overall costs on a per unit basis do not increase, Aqua would still recover the increase.

· Riders are intended for non-recurring, extraordinary cost or circumstance, not normal cost of service – for a water company, purchasing water is hardly extraordinary.

In closing, there are far too many troubling issues with this request to approve it as requested. The matters that I have highlighted are of great concern to me, as the Representative of the 120th Legislative District. We in the general Assembly realize that utility rate increases are, from time to time, necessary. But these increases must be just and reasonable. While we appreciate that Aqua PA has taken over some troubled small water companies here and has made significant service improvements recently, I believe that there are serious questions as to whether Aqua PA’s rate increase request is just and reasonable. Therefore, I must oppose their request and urge the PUC to consider denying or, at the very least, dramatically reducing the amount. A third substantial rate increase in four years is simply too much rate shock for the Aqua Pennsylvania customers I represent. I thank you for your consideration.