Impact of Climate Change on the Water Industry and Water Regulation David K. Baker, President Indiana American Water Michigan American Water MARC - Traverse City, MI June 2009

Presentation Overview Interrelationship between Water & Energy Water Industry Greenhouse Gas Profile Impacts of Climate Change on the Water Industry Required Water Utility RE-actions to the impact of Climate Change Midwestern Burden? Cap and Trade impacts on Water Industry Regulatory actions to support consumers and investors Climate Change – Exacerbating the Global Water Crisis 2

Utility Only O&M Only Both Where We Are We 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 3

American Water Subsidiaries 4

Interrelationships Between Water and Energy 5Source: US Department of Energy, Dec 2006

Greenhouse Gas Profile – Water Utilities AW Inventory of GHG Emissions 6 Emissions Source CategoryFuelQuantityUnits Emissions (Metric Tons CO2e) Percent Total Emissions Stationary CombustionNatural Gas5,102,952therms26, % Diesel341,981gallons3, % Mobile CombustionGasoline2,409,305gallons22, % Diesel401,922gallons4, % Purchased ElectricityElectricity1,089,424,091kWh691, % Total Emissions 748, % Emissions in metric tons CO 2 e includes CO 2, N 2 0 and methane emissions Emissions from flared methane gas and HVAC were both <0.5%

Energy costs (primarily Electricity) can range from 20% to 60% of a water utility’s operating budget At INAW/MAW, this translates to over 50% of total production costs per year Most energy is consumed in pumping water According to Scientific American:  Lake or River Source.37kWh/m3 (cubic meter)  Groundwater.48  Wastewater treatment.75  Wastewater reuse1.75  Seawater5.54 Costs of Water Production and Distribution Contributing to Greenhouse Gases 7

Climate Change – Water Related Impacts: Rising Temperatures: 11 of the 12 warmest of the past 150 years have occurred since 1995, with an increase of approx..6 degrees C Increasing Evaporation and corresponding precipitation – regional increases and decreases Melting of polar ice caps - rising sea levels range from m* Increased extreme events: intensified hydrogeologic cycle which increases floods, droughts and tropical storms Anecdotal evidence abounds recently in Midwest with flooding and droughts 8 *Intergovernmental Panel on Climate Change, Fourth Assessment Report, 2007

9 Impacts on the Water Utility Industry Water Quantity Impacts: reduced in-stream flows, earlier and more intense seasonal snowmelt, reduced aquifer recharge  Major increases in demand with peaks coinciding with periods of restricted supply Water Quality Impacts: increased run-off leads to increased sedimentation and pathogen loading, urban storm water runoff, combined sewer overflows, increased algal blooms Unique Coastal Impacts: rising sea levels may lead to salt water intrusion of groundwater Infrastructure Impacts: increased main breaks due to soil shrinkage and settling, reservoir management due to runoff timing and intensity  flood control and water supply considerations

Collaborate, understand, predict: Climate Leaders, a voluntary EPA partnership with US Companies to develop long term, comprehensive strategies Reduce energy consumption:  increased pump efficiencies – VFD’s, testing  SCADA optimization  Storage and pumping management  Conduct energy audits Developing Alternative Water Supplies:  Desalinization - more than 50% of the US population lives within 50 miles of seawater  Making Desalinization more efficient Appropriate Water Industry Actions in Response to Climate Change 10

Appropriate Water Industry Actions – continued 11 Reduce Non-Revenue Water:  enhanced pressure management  leak surveys, cost benefit analysis  enhanced leak detection activities, acoustic technologies Maximize Reuse Opportunities:  reuse of gray water and wastewater for sanitary and irrigation needs  continued research and special projects (Sullair Building, Gillette Stadium) Water Conservation:  customer education, in-home water saving devices  Indiana’s first state-wide comprehensive wise water use plan  promote low-use appliances

Appropriate Water Industry Actions – continued Construction of facilities with enhanced Sustainability:  lower energy use design  reduced waste disposal  efficient, regional approaches  maximization of existing infrastructure Energy Efficiency “Starts at Home”:  Increase efficiency/decrease use of mobile combustion – vehicles  Fugitive Emissions: Refrigeration and Air Conditioning  Stationary Combustion: Water Heaters, on-site generators, pumps 12

13 Results of Previous Energy Audits ( )

14 The “Midwestern Burden?” The controversy is “on” in the Hoosier State – Cap and Trade legislation Production of Midwestern energy is carbon based: 94% of Indiana’s energy is coal produced Impact on electricity rates may be as much as 40% Dependent upon purchase of emissions allowances – dramatic impact on water utility costs

Regulatory support of Climate Change related Utility Actions and Investments Economic support of research and climate change planning Support of NRW reduction studies and leak detection capital Collaboration and support of long-term sustainable infrastructure Expansion of Infrastructure Surcharge Recovery programs to include necessary replacement capital to support response programs Continued and enhanced support of industry consolidation and related efficiencies 15

16 Regulatory support of Climate Change related Utility Actions and Investments Support of Conservation Programs  Appropriate Cost recovery for program investments  Customer rate restructuring to curb demand (inclining blocks, irrigation rates) Revenue levelization to deal with flood/drought cycles Appropriate surcharges/trackers for energy cost recovery between rate cases Long range comprehensive planning rate treatment Establish appropriate rates of return on equity to support new infrastructure investment

The Water Industry is the most Capital Intensive of All Utility types Source: AUS Utility Reports 17

Levelization of Rates Essential to attraction of appropriate investment 18 COSTREVENUE Fixed Cost vs. Fixed Revenue – The Quest for Balance

Climate Change will exacerbate the Global Water Crisis 19 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 Nation’s 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

Impact of Climate Change on the Water Industry and Water Regulation END OF PRESENTATION