aqua utilities florida, inc. naruc staff subcommittee on accounting and finance new orleans, la...
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Aqua Utilities Florida, Inc.NARUC Staff Subcommittee
on Accountingand Finance
New Orleans, LA
April 2, 2008
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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
$0.00
$1.00
$2.00
$3.00
$4.00
Capital Invested per $1 of Revenue
$1.28 $1.07 $1.63 $3.43
Gas-Dist Telephone Electric Water
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
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
3.8% 7.1% 4.0% 2.4%
Gas-Dist Telephone Electric Water
Source: 2003 C.A. Turner Utility Reports
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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
U.S. Water Industry “Factoids”
*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
Company Overview
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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
Aqua America Today
13 Current operationsCurrent operations
Operating Locations
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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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Reliability
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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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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
Aqua America’s Track Record
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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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Comparison of Aqua to Major Florida Electric Utilities
Aqua is NOT an Electric Utility
Company Electric Aqua Aqua FL asAverage Florida % of Elect
Total Revenue 6,184 17 0.3%
Total Customers 2,227,891 37,389 1.7%
Avg Annual Customer Bill 2,776$ 455$ 16.4%
Florida Utility Revenue Comparison(2006; Revenue $'s in Millions)
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Electric Aqua Aqua FL asAverage Florida % of Elect
Florida Employees 5,167 71 1.4%
FL Cust / Employee 431 527 122.1%
FL Rev / Employee 1,196,903$ 239,437$ 20.0%
Florida Utility Employee Comparison
Comparison of Aqua to Major Florida Electric Utilities
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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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Cost of Rate Filings
Proposed NumberCost per of Total
Filing Filings Cost
20 Stand alone filings 18,000 20 360,000
Consolidated filings (20 systems) 95,000 1 95,000
Potential Savings 265,000
Analysis of Filing Consultant Proposals
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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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Summary of State PUC Policies on “STP” for Water
Generally Accepted
Has been approved
Never Approved Never Considered
Connecticut Arizona California IowaMissouri Delaware Maryland KentuckyNorth Carolina Florida Mississippi LouisianaOregon Idaho MainePennsylvania Illinios WisconsinSouth Carolina IndianaTexas MassachusettsWashington New Hampshire
New YorkNew JerseyOhioVermontVirginiaWest Virginia
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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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Questions / Discussion
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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