Aqua Utilities Florida, Inc. NARUC Staff Subcommittee on Accounting and Finance New Orleans, LA April 2, 2008

2 Troy Rendell Manager of Rates Aqua Utilities Florida, Inc

3 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

4 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

5 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

6 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)

7 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 Source: 2003 C.A. Turner Utility Reports

8 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 Source: 2003 C.A. Turner Utility Reports

9  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”

10 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

12  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 operations Current operations Operating Locations

14 Aqua Utilities Florida (AUF or Aqua Florida)  AquaSource – July 2003  Florida Water – August 2004  System Characteristics: –Piecemeal systems Examples: »Stone Mountain10 customers »Morningview 34 customers »Raven’s Wood45 customers »Sebring Lakes73 customers –Aging infrastructure –“Unwanted” systems

15 Reliability

16 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

17  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

18 Consolidation of Water Rates Single Tariff Pricing (“STP”)

19 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”

20 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

21 Analysis Comparative Utility Size

22 Comparison of Aqua to Major Florida Electric Utilities Aqua is NOT an Electric Utility

23 Comparison of Aqua to Major Florida Electric Utilities

24 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

25 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

26 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

27 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

28 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

29 Best Example of “STP” The Postage Stamp

30 Best Utility Example of “STP”  Great Britain –In 1989, formed 10 large Investor Owned Water Utilities –Tariffs established within each system are uniform

31 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

32 Differences Between Systems  Water Supply  System characteristics  Economies of scale (system size)

33 Rate Structure Goals and Objectives  Simplicity, Understandability  Revenue Stability  Fairness (to the extent subsidies occur)  Efficiency  Affordability for all customers

34 Rate Structure Goals and Objectives (cont.)  Ease of Administration  Rate Continuity  Resource Protection (Conservation)  Effect on Future Acquisitions

35 One Definition of Price Discrimination  Charging different rates for customers receiving a consistent level and quality of service

36 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

37 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

38 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

39 Cost of Rate Filings

40 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

41 Summary of State PUC Policies on “STP” for Water

42 Considerations  Cost-of-service principles  Subsidization  Affordability

43 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

44 Questions / Discussion

45 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