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NARUC Staff Committee on Accounting and
FinanceOctober 10, 2007
Commodity Cost Adjustment Clauses Steve L.
KlickManager-Rates and RegulationPennsylvania
American Water
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Facts at a Glance

• Wholly-owned subsidiary of American Water Works
  Company, Inc.
• Largest regulated water and wastewater service
  provider in Pennsylvania
• Communities Served 378 in 35 counties
• Customers Served
• 628,000 water
• 92 residential
• 7 commercial
• 1 institutional/other
• 14,500 wastewater
• Population Served 2.1 million

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Facts at a Glance

• Treatment Facilities
• 36 surface water
• 28 facilities received 5-Year Directors Award
  from Partnership for Safe Water
• 63 groundwater treatment plants
• 4 wastewater plants
• Avg. daily delivery 215 MGD
• Source of supply 92 surface, 6 wells and 2
  purchase
• Distribution system over 9,200 miles
• Customer Assistance H2O - Help to Other program

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What Are Commodity Cost Adjustment Clauses?

• Rate mechanisms to pass-through periodically
  increases or decreases in the per unit cost of
  producing water

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What Commodities May Be Included?

• Power
• Water
• Chemicals
• Residuals Handling

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Commodity Cost Adjustment Clauses Are Not

• Not a pass through of the cost of increased units
  of the commodity. For example, increases in
  greater sales of water requiring greater power,
  chemicals or sludge hauling.
• Not a pass through of increases in commodity
  costs because of growth.
• Not a pass through of commodity costs if the
  water company is earning in excess of its last
  allowed rate of return.
• Not a pass through of Administrative and General
  Costs (AG) or affiliate charges

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2005 NAWC OM Expense
Source 2005 NAWC FO Statistics
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Who Cares About Commodity Cost Adjustment
Clauses?

• Rating Agencies (SP, Moody's, Fitch)
• Investors
• Commissions

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Commissions Which Permit Commodity Cost
Adjustment Clauses

• Connecticut
• Delaware
• Florida
• Illinois
• Indiana
• Missouri

• Ohio
• Pennsylvania
• New Jersey (PWAC and PSTAC)
• New York
• Texas

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What is the Incentive to Keep These Costs As Low
As Possible?

• Purchased Water and Power Rates are typically set
  by the same utility commission that regulates the
  water company
• Chemicals, Sludge Hauling and Property Taxes
• Pass through only a portion (85/15) to provide
  incentive to challenge costs. (NY PSC and
  property taxes)

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Thank you

• Steve L. Klick, Manager-Rates and
  RegulationPhone [phone]E-mail
  steve.klick_at_amwater.com