WATER DISTRIBUTION SYSTEM INVESTMENT CHARGE DSIC NASUCA Baltimore

WATER DISTRIBUTION SYSTEM INVESTMENT CHARGE (DSIC) NASUCA Baltimore Meeting November 11 -14, 2012 Mark Schuling, Iowa Consumer Advocate

DSIC � First implemented in PA to allow for rate increase outside of a general rate proceeding. � For non-revenue producing investments to replace aging infrastructure. � Eleven states now have DSIC.

States With DSIC-NAWC

Iowa Adjustment Clauses � Iowa has available an electric energy automatic adjustment clause. 199 I. A. C. Section 20. 9. � It does not cover capital infrastructure investment.

Iowa Adjustment Clauses con’t � In 2011 the Iowa Utilities Board promulgated a rule creating a capital infrastructure investment adjustment clause for rateregulated natural gas facilities. � The recovery sunsets in four years.

Iowa Adjustment Clauses con’t � To be eligible for recovery through the capital infrastructure investment automatic adjustment mechanism, the costs shall either: � a. Meet the following criteria: � (1) The costs are beyond the direct control of management; � (2) The costs are subject to sudden, important change in level; � (3) The costs are an important factor in determining the total cost of capital infrastructure investment to serve customers; and � (4) The costs are readily, precisely, and continuously segregated in the accounts of the utility; or

Iowa Adjustment Clauses con’t � b. Be costs for a capital infrastructure investment which: � (1) Does not serve to increase revenues by directly connecting the infrastructure replacement to new customers; � (2) Is in service but was not included in the gas utility’s rate base in its most recent general rate case; and � (3) Replaces or modifies existing infrastructure required by state or local government action or is required to meet state or federal natural gas pipeline safety regulations.

Iowa Adjustment Clauses con’t � There is no water utility adjustment clause. � In Iowa there is only one regulated water utility–Iowa American Water. � The IUB could create an adjustment clause in a rate proceeding.

Iowa American Water Rate Case � In 2011, Iowa American Water (IAW) filed a rate proceeding. IAW files every two years. � IAW requested two adjustment clauses 1. The qualified infrastructure plant replacement surcharge (the “QIP” Surcharge), designed to allow the Company to earn a return of and return on its investments in qualified infrastructure replacement on a timely basis;

IAW Rate Case con’t 2. The revenue adjustment clause (“RAC”), designed to adjust the Company’s revenues on an automatic basis, in the event that they fall below or rise above the levels approved in this case. This issue was dropped before trial.

IAW Rate Case–IAW Position � Aging infrastructure that needs accelerated replacement. � Replacement will come at a substantial cost. � Will only apply to qualified non-revenue investment. � Allows IAW to earn a return on a timely basis. � The surcharge will be calculated every six months and added to base rates at next rate case. � Capped at 5% of revenue and subject to trueup.

IAW Rate Case–IAW Position con’t � Enhanced service. � Reduction of water loss. � Smaller rate increases.

IAW Rate Case–OCA Position � Insufficient proof that the surcharge is needed. � Would allow continuous rate increases every 6 months between rate cases up to 5%. � Eliminates matching of all revenues and costs, and lacks detailed review of charges. � The time between rate cases is a substitute for competition and provides the incentive for cost control. � Reduced risk requires a reduced rate of return.

IAW Rate Case–IUB Order � IAW proposed QIP does not meet the traditional factors recognized by the IUB. � Regulatory lag and infrastructure replacement are not justifications. � Management practices for maintenance and replacement are not adequate. � No benefit to public in reduced rate of return or increased time periods between rate cases. � Insufficient factual support.

QUESTIONS