ARSENIC DRINKING WATER COMPLIANCE: REGULATORY ISSUES, TOOLS

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ARSENIC DRINKING WATER COMPLIANCE REGULATORY
ISSUES, TOOLS PROCESS

• NARUC SUBCOMMITTEE
• SEPTEMBER 21, 2005
• SALT LAKE CITY

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About Arizona American Water

• Over 130,000 connections in 12 water and waste
  water districts mostly in western metro Phoenix.
• 5 of our water districts in Arizona require
  costly new arsenic removal water treatment
  facilities. Other concentrated locations include
  Nebraska, California, Nevada, and New Mexico.
• Gradually transitioning from ground to surface
  water.
• We are one of 23 American Water state affiliates.

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WHAT IS COMPLIANCE ON ARSENIC?

• As per authority in Safe Drinking Water Act, US
  EPA is reducing maximum arsenic concentrations
  from 50 to 10 parts per billion starting in
  January 2006.
• More than 100 public and private water utilities
  in Arizona exceed the new maximum perhaps the
  most of any single state.
• The vast majority of systems in Arizona not
  likely to timely comply.

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Sun City West Arsenic Removal Facility
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Sun City West Arsenic Removal FacilityUnder
Construction
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Arizona Case Study

• Paradise Valley
• - 4,700 customers
• - 19 million arsenic treatment capital
  investment
• - 25 per month typical bill increase
• Sun City West
• - 15,000 customers
• - 10 million arsenic treatment capital
  investment
• - 9 per month typical bill increase.
• Tubac
• - 500 customers
• - 2.5 million arsenic treatment capital
  investment
• - 70 per month typical bill increase

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FINANCIAL REGULATORY ISSUES

• Significant Capital and OM expenses
• Regulatory Lag on historic test years
• Time to process rate cases (e.g., 18 months)
• Erosion of earnings and equity ratios during
  interim
• Customer responses include
• - Drilling new wells to bypass
• - Surprising lack of perceived health benefits
• - Usage price elasticity indirect
  conservation
• Small system compliance is challenging
• Integrating transition from ground to surface
  water

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Tubac, Arizona

• Rate increase necessary to recover costs of
  arsenic removal is 2.2 of median household
  income.
• Company sought 12-month exemption from compliance
  based on compelling economic factors.
• Recently received point of use guidelines - now
  evaluating cost and compliance details. PUC
  encouraged release of this DEQ report.
• Water quality experts concerned over compliance
  with a system of this size (500 customers).
• Public meetings and letters in this rural
  community put strong pressure on Company and
  state PUC.
• Situation not yet resolved.

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Menu of Rates Regulatory Tools

• Temporary surcharges between base rate cases -v
• 12-month deferrals of initial OM-v
• New customer arsenic impact fees -v
• Technology Point of Use - v
• Rate consolidations - X
• Sale of small companies to larger ones - v
• CWIP in rate base - X
• Emergency rate increases- ?

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Looming Regulatory Issues

• Authority to disconnect a customer for not
  allowing a Point-of-Use system?
• Quick processing of Step rate increases as
  promised
• The real compliance date is the Initial
  Monitoring Year. AZ is on a 3-year cycle.
• Inter-agency cooperation penalties
• OM expenses, especially life of media

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Summary

• State PUCs need to contemplate alternative rate
  strategies to encourage compliance.
• Precedents for numerous strategies exist and are
  being refined.
• The January 2006 start is without respect to
  existing rate case cycles.
• Initial deadline will be missed by many -
  progress may be what counts in 2006
• Point of use is an emerging viable option in
  various small system circumstances.