1. 1 Commodity Cost Adjustment Clauses Steve L. Klick Manager-Rates and Regulation Pennsylvania American Water NARUC Staff Committee on Accounting and Finance October 10, 2007

2. 2 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

3. 3 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

4. 4 What Are Commodity Cost Adjustment Clauses? Rate mechanisms to pass-through periodically increases or decreases in the per unit cost of producing water

5. 5 What Commodities May Be Included? Power Water Chemicals Residuals Handling

6. 6 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 (A&G) or affiliate charges

7. 7 2005 NAWC O&M Expense Source: 2005 NAWC F&O Statistics

8. 8 Who Cares About Commodity Cost Adjustment Clauses? Rating Agencies (S&P, Moody's, Fitch) Investors Commissions

9. 9 Commissions Which Permit Commodity Cost Adjustment Clauses Connecticut Delaware Florida Illinois Indiana Missouri Ohio Pennsylvania New Jersey (PWAC and PSTAC) New York Texas

10. 10 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)

11. 11 Thank you Steve L. Klick, Manager-Rates and Regulation Phone: (717) 531-3253 E-mail: steve.klick@amwater.com