Testimony before the PUC in opposition to American Water Co.’s requested rate increase

Testimony of State Representative Phyllis Mundy

Pennsylvania American Water Co. Rate Increase Hearing

August 15, 2007

Good afternoon. Thank you all for coming to Wilkes-Barre.

I appreciate the opportunity to testify before you today.

Pennsylvania American Water Co. serves approximately 627,000 customers – including over 130,000 in the Northeast, as well as every municipality in my 120^th 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 nearly 15%, and says such a rate hike will produce additional operating revenues in excess of $59 million. Company officials claim the proposed revenue increase will produce an 11.75% rate of return on common equity.

Under the proposed rate increase, the average Zone 1 residential customer, using 4,500 gallons per month, would see their bill rise from $39.01 to $45.00, or by 15.36%. Also, the monthly Customer Charge for Residential Service would increase from $11.50 to $12.50.

These increases are in addition to the July, 2007 50% increase in their distribution system surcharge – 7.5% up from 5%. That costs the average customer $12 more per year.

If the Public Utility Commission approves the requested increases, this is would be PAWC’s 3^rd rate increase in 5 years. In May of 2003, the company requested an 18% increase and a 9.5% increase was approved… and in January 2002, a requested increase of 12.4% was approved for 7.7%.

That is a substantial increase for customers, many of whom subsist on retirement incomes, who struggle to make ends meet each month.

Distribution system surcharge

As part of their request, PAWC was required to submit a “statement of reasons” for the rate increase. PAWC states, as one of their main reasons, that it is “committed to investing in its…distribution systems to replace aging infrastructure.”

That seems reasonable, and few people would argue against the need to maintain or replace infrastructure, but isn’t that what the July 2007 50% increase in their distribution system surcharge was supposed to cover?

This surcharge was opposed at the time by Administrative Law Judge Wayne Weismandel who said, that the utility had argued the adjustment could lengthen the period between rate increase proposals. Judge Weismandel wrote that “this may result in the establishment of an unjust and unreasonable rate, at least until such time as the utility undergoes a subsequent general rate increase case.” Unfortunately, the surcharge increase was still approved by the PUC.

So to clarify, PAWC requests, and receives, a distribution system surcharge increase, saying that it will allow them to make necessary improvements to their system, as well as lengthen the period between full rate increase requests. Then, within months, they file a full blown rate increase request, claiming that one on the main reasons is necessary repair to their distribution system.

That is a blatant contradiction and consumers are being asked to pay the price.

More worrisome is the fact that PAWC has no system in place to track and monitor line replacements and improvements. Certain service areas in the Northeast have been plagued by repeated water main breaks. There is little here to inspire confidence in the success of their distribution system improvements, and even much less to justify more customer dollars.

Rate increase by Zone

Speaking of customer dollars, PAWC currently has different rate schedules for certain service areas, or Zones. With this request, PAWC is moving swiftly to single tariff pricing. Single tariff pricing, in and of itself, is not a bad thing. But while Zone 1 customers will be facing almost a 15% increase, those in other Zones are facing increases that are far more dramatic. For example, in certain Zones, more than half of residential bills would increase by more than three times the system average – more than 45%! To the residential customers in those Zones, this increase is far from reasonable.

Fair rate of return

In addition, there is a credible, expert contention that PAWC’s rate of return of 11.75% is excessive. On August 3, in expert testimony presented to the PUC, Dr. J. Randall Woolridge, Professor of Finance and Endowed University Fellow in Business Administration at Penn State University… stated that a rate of 9.3% is appropriate for PAWC. Dr. Woolridge’s determination is based on accepted and widely used economic models. He has extensive experience in utility rate cases, and his reputation is impeccable. If he deems the requested rate of return to be unwarranted, I would suggest that this amount should be considered with the utmost scrutiny.

Amount of increase

The total amount of PAWC’s request has also been called into question. Michael A. Bleiweis is an independent financial and regulatory consultant and expert in utility rate cases. He provided testimony to the PUC in which he recommended an increase of approximately $18 million compared to the $59 million that PAWC is seeking. Mr. Bleiweis calls into question PAWC’s costs listed on their pro forma income statement regarding, among numerous items, salaries and wages, overtime and incentive pay, chemical expenses, inflation adjustment, and fines and penalties expenses.

For example, PAWC includes costs for new employees – but only a fraction of the listed total has actually been hired, and there’s no guarantee the others will be. Another example is PAWC’s inflation adjustment - to allow an inflation factor would be to imply that, on average, all expenses not otherwise adjusted by the Company increase every year. This is obviously not the case.

A final example is that PAWC includes the costs of fines and penalties – customer’s rates should not be based upon penalties incurred by the Company. What incentive is there to avoid fines and penalties if a monopoly can simply pass those costs through to customers? These are but three examples that lead one to question the accuracy of their pro forma income statement. It could be called “the $41 million dollar question.” But that is a huge discrepancy – and certainly one that merits the most intense investigation possible.

In closing, there are far too many troubling issues with this request to approve it as is. The matters that I have highlighted are of great concern to me, as the Representative of the 120^th. We in the General Assembly realize that utility rate increases are, from time to time, a necessary part of maintaining important infrastructure in the Commonwealth. But any increase must be fair, reasonable, non-discriminatory, and in accordance with the law. I believe that in light of the information provided to the PUC, there are serious questions as to whether Pennsylvania American Water Company’s request meets any of these criteria. Therefore, I oppose this rate increase and urge the PUC to deny or at least dramatically reduce the amount. I thank you for your consideration.