Water Infrastructure Meeting the Long Range Challenge

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Water Infrastructure Meeting the Long Range
Challenge

• David K. Baker, President
• Indiana American Water
• Michigan American Water
• MARC - Oklahoma City
• June 17, 2008

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Water Infrastructure Meeting the Critical Long
Range Challenge

• Objective Overview
• Water Industry What is the infrastructure
  challenge?
• Unique Characteristics Water industry
  infrastructure
• 4 Prong approach to meeting the water
  infrastructure challenge
• The Global, Human Challenge

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Where We AreWe manage more than 350 individual
water systems across the country

• Every day we operate and manage
• 45,000 miles of distribution and collection
  mains
• And more than
• 80 surface water treatment plants
• 600 groundwater treatment plants
• 1,000 groundwater wells
• 40 wastewater treatment plants

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• Largest Investor Owned Water Utility in State
• Serve 1.2 million people across the state through
  regulated operations
• Serve 123 Communities in Indiana
• 4,200 miles of main
• 351 Employees
• 21 operating districts
• 55 ground water 45 surface water

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Water Sector Interdependencies
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The Water Industry Unique Characteristics

• US 54,000 systems supply 107 Trillion
  gallons/day
• Water Utilities are unique distinct sources of
  supply, finite distribution systems, limited
  transportability, non-homogeneous commodity
• Treated for distinct properties of source water
  turbidity, minerals, surface, ground,
  temperature, etc.
• Water is treated and monitored for 98
  contaminants EPA expanding with scientific
  knowledge and environmental challenges
• Only utility ingested by humans average family
  consumes 72 Thousand gallons per year
• Indiana American Water provides water service at
  average cost of less than 1 Penny per gallon
• Source USEPA.gov

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The Water Industry is the most Capital Intensive
of All Utility types
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Water/Wastewater Industry Challenges

• CHALLENGE OF CAPITAL ATTRACTION
• Infrastructure Replacement and Compliance with
  increasing SDWA CWA Quality Requirements
• 2002 USEPA Clean Water and Drinking Water GAP
  analysis
• - Drinking Water 154 billion - 446 billion
  through 2019 (pt.est. 274 billion)
• - Clean Water 331 Billion - 450 billion
  through 2019 (pt. est 388 billion)
• - Total 485 billion 896 billion through
  2019 (pt. est 662 billion)
• June 2005 USEPA Drinking Water Infrastructure
  Needs Survey and Assessment
• 276 billion over 20 years (former estimate 154
  Billion)
• 20 year water/wastewater infrastructure costs
  could exceed 1 trillion

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(1980-2005)
Index 1980 1.0
--- Net Plant Investment per Customer ---
--- Unit Price of Water ---
--- Inflation Index ---
--- Water use per Customer ---
Although average water use per customer has
declined, the amount invested per customer has
risen dramatically, leading them to question,
Why is my water bill increasing when I am using
less water?.
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Drivers of Increased Water Capital Spending

• Aging Infrastructure replacement costs are
  multiples of current books costs
• Approximately 75 Miles of Main will be replaced
  over 5 years
• Population migration, reduction in people per
  household
• Material Costs are increasing faster than
  revenues/rate of inflation

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Long Term Infrastructure investment management is
key to meeting customer needs in future decades
Pipe was installed at the highest rate between
1930 and 1970
T/D, Mains replacement needs increase most
dramatically between 2010 and 2040, as a result
of the 75 year average age
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Source USEPA
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Fixed Cost vs. Fixed Revenue The Quest for
Balance
COST
REVENUE
Source American Water (example)
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Prong 1 Progressive Regulatory Practice to
support infrastructure investment

• Continued Application of fair Infrastructure
  Surcharge programs to help reduce regulatory lag,
  generate revenue for non-revenue producing
  Distribution replacements
• The Decoupling of water revenues from customer
  demand (sales) may help facilitate steady
  investment in infrastructure regardless of
  revenue trends (weather)
• Establishment of appropriate rates of return on
  equity - important for the attraction of
  investors
• Institution of Tracker Charges to mitigate the
  regulatory lag associated with rising power and
  chemical costs

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Prong 1 Progressive Regulatory Practice to
support infrastructure investment

• Major capital expenditure regulatory pre-approval
  programs (e.g., Indiana) can help reduce risk of
  non-recovery
• Single tariff pricing can help lessen burden on
  smaller systems, but can be met with customer and
  political challenges
• Continued consumer education on the value of
  water services relative to all other utilities
  and budgetary items the average water bill for
  an Indiana American Water customer is less than
  30 per month
• Forward looking test year can help mitigate
  regulatory lag

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Prong 2 Consumer Water Consumption Demand
Management

• Indiana American Water is developing Indianas
  first comprehensive water conservation plan for
  its 21 operating utilities will be submitted
  for IURC approval
• While residential consumption per customer has
  steadily declined over the past 10 years, the
  need for residential peaking reserves has not
  declined
• However, reserve water treatment capacity must be
  maintained up to 100 in order to meet outdoor
  watering needs
• Customer Education is key conservation measures
  for outdoor water reduction
• Comprehensive Demand Management Plans for each
  water utility, with local municipal enforcement
  capability in time of enhanced water restriction
• Financial disincentives for greater water
  consumption the establishment of inclining rate
  blocks
• Customer Incentive programs for water conservation

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Prong 3 Infrastructure Investment Reduction via
Industry Consolidation - Synergies

• Fragmentation
• 54,000 community water systems
• 16,000 wastewater systems
• By comparison 3,200 electric, 2,700 gas
• Regionalization of Water/Wastewater Utilities can
  promote more efficient use of investment in
  treatment plant, source of supply and T/D
• Acquisition adjustments for proven benefits
• Proposition If and to the extent a business
  combination produces identifiable savings,
  service improvements or other benefits to
  customers, shareholders should have the
  opportunity to recover and earn a return on the
  investment required to produce those benefits

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Prong 4 Integrated View of Capital Asset
Management and Planning
Sustainability . . .meeting the needs of the
present without compromising the ability of
future generations to meet their own
needs. Source World Commission on Environment
Development
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Prong 4 Integrated View of Capital Asset
Management and Planning

• Sustainability planning for water infrastructure
  reduction in life cycle costs for water
  treatment plants, LEED certification, etc.
• Careful asset investment prioritization modeling
  based upon Comprehensive Planning Studies
• Reduction of Non-Revenue Water leak detection,
  careful cost/benefit analysis of costs for
  detection and repair versus resource conservation
  and avoided capital expenditure
• Reduction in energy consumption 3 of nations
  energy supply goes to water/wastewater
• Equivalent to 45 million tons of greenhouse gases

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Water Infrastructure Investment is a Global
Challenge

• Water is the basic key to life human and
  economic sustainability
• Water resources are the foundation of economics
  arid countries battle for the water resource
• Our Nations Security is directly linked to water
• Worldwide, 1.1 Billion people lack access to safe
  drinking water
• 2.6 Billion people lack access to proper
  sanitation
• Water related illnesses kill over 2 million
  people per year, most of them children

Source www.cdc.gov
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Water Infrastructure Meeting the Long Range
Challenge

• - - - END OF PRESENTATION - - -

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