WATER QUALITY ISSUES
The Ratepayer Advocate is becoming increasingly active in protecting the supply of clean, safe, affordable drinking water for all consumers. While most New Jersey residents consider water to be a plentiful, cheap resource, the fact is that supplies of drinking water are under siege. New Jerseys rivers, lakes, reservoirs and have been are subjected to a myriad of pollutants including storm water runoff, acid rain, industrial and manufacturing effluent, fertilizers, pesticides and municipal wastewater discharges, among others. New Jerseys groundwater sources are still quite plentiful, but in recent years some notorious well contamination incidents as well as numerous warnings about aquifer depletion and salt water encroachment have been reported.
Many of the water utility rate increases throughout the state are triggered by the costs incurred by companies complying with the Clean Water Act ("CWA") and the Safe Drinking Water Act ("SWDA"). The CWA and SWDA are federal laws that mandate certain water treatment strategies, which have been implemented in New Jersey in the form of tremendously expensive new water treatment plants. The costs of these new treatment plants are borne almost entirely by ratepayers. The Ratepayer Advocate has been instrumental in reigning in these costs by scrutinizing the engineering plans and accounting methods used by the utilities to "justify" their rate increase petitions. However, the best long-term options for having clean, safe, affordable water are keeping our water sources clean and conserving the clean sources we have.
According to projections, New Jerseys population is expected to rise from a current estimate of 8.1 million to about 9 million by 2020. More residents mean more development, greater demand for water and increased storm water runoff. These factors place a stress upon existing and future water supply needs. The Ratepayer Advocate recognizes the importance of bringing together state officials, businesses, environmentalists and residents to work side by side in developing long-term policies to protect this priceless resource.
The Ratepayer Advocate monitors and participates in the activities of several water supply and water quality organizations including, among others, the Delaware River Basin Commission; the New Jersey Department of Environmental Protections (NJDEP) Watershed Management Public Advisory Committees; the New Jersey Water Supply Advisory Council; and the New Jersey Water Supply Authority.
THE DELAWARE RIVER BASIN COMMISSION
The Delaware River Basin Commission ("DRBC" or "Commission") was formed in 1961 by the signatory parties to the Delaware River Basin Compact (Delaware, New Jersey, New York, Pennsylvania, and the United States Government) to share the responsibility of the Basin. The Commissioners are the Governors of the four states and the Secretary Interior of the United States. The Delaware River makes up the western border of New Jersey, flowing some 330 miles from the confluence of its East and West branches near Hancock, N.Y. south past Port Jervis, through the Delaware Water Gap, past Trenton and Philadelphia to the mouth of the Delaware Bay. The Basin includes 2,969 square miles of New Jersey and encompasses several important New Jersey watersheds.
The Ratepayer Advocate has been an active participant in the DRBCs Flowing Toward the Future Regional Watershed Planning Workshops. Ten workshops, held in April and May, brought together stakeholders and other interested parties from the Upper, Middle and Lower Delaware regions for intense collaborative exercises designed to develop vision components and directions for the Delaware River, the Basin and the surrounding regions. The vision and directions will be the subject of a Delaware River Basin Governors Summit slated for the fall, 1999. After these events, specific plans will be developed to address the most pressing issues facing the Basin. The Ratepayer Advocate will continue to participate in the project to keep safe, clean, affordable drinking water a primary focus of this important multi-state effort.
The Ratepayer Advocate has been monitoring the DRBCs public hearings, which have covered such topics as reservoir releases for flood control; surface water withdrawals for power generation and/or industrial use; and sewage treatment discharge permitting. While not a party to the cases before the DRBC, the Ratepayer Advocates involvement in the hearings allows the Division to gather important information that affects the quality of the water resources used by New Jersey water utilities. The Ratepayer Advocate will submit comments on such matters to the DRBC when indicated.
In February, 1999, the DRBC published a Notice of Proposed Rulemaking regarding the assimilative capacity of the tidal portion of the Delaware River (from Trenton to the Delaware Bay) for certain toxic pollutants. Public hearings on this matter, held in early May, were attended by the Ratepayer Advocate, who are now in a better position to evaluate water utility investments related to the removal of these toxins from surface and ground water supplies, as well as from wastewater treatment plant discharges. The information gathered at the hearings will assist the Commission in developing effluent limitations which will, in turn, be used by the NJDEP and its counterparts in the other three states as guidelines for the issuance of effluent discharge permits.
MUSCONETCONG WATERSHED MANAGEMENT AREA #1 PUBLIC ADVISORY COMMITTEE (PAC)
Among the twenty Watershed Management Areas ("WMAs") designated by the NJDEP is the Upper Delaware Zone, which features the Musconetcong River tributary of the Delaware River. This watershed encompasses a large geographic area in the northwest corner of the state, including all of Warren County and parts of Sussex, Morris and Hunterdon. Several large reservoirs are located in this part of the state, and there are many recreational opportunities that rely on clean water in the many creeks and lakes that dot the area. This is also an area with a rapidly growing population. The NJDEP is in the process of guiding PACs in each WMA through a focus group approach to developing a plan for the future of each watershed and for the protection of clean water for the state as a whole.
The Musconetcong PAC is far along in the process, having chosen a list of goals that are important to the stakeholders in the region. The Ratepayer Advocate is an active member of two important subcommittees, the Water Resources work group and the Non Point Source Pollution work group. These work groups are identifying specific issues that must be addressed if the goals of the PAC are to be met, such as remedying the lack of a water resources database, reducing the impact of land use decisions on water supplies, and buffering water resources with natural greenways that can absorb excess soil, pesticide, fertilizer or parking lot/roadway runoff. The issues developed by each work group will be prioritized and submitted to the PAC as a whole for discussion and voting at the June 24, 1999 meeting. Work plans will then be created throughout the summer and submitted for approval at the September 9, 1999 meeting of the PAC. The finalized work plans will be presented at the Delaware River Basin Governors Summit, which is planned for the fall, 1999.
BASE RATE CASES
NJ AMERICAN WATER COMPANY - RATE INCREASE PETITION
BPU File Number:
OAL File Number: PUC 699-98S
The New Jersey American Water Company ("the Company") is New Jerseys largest investor-owned water utility, providing water and wastewater service to approximately 346,000 customers in 120 municipalities spread among fifteen counties in the State. On January 12, 1998, the Company filed a petition seeking to increase rates by $29,894,474 or 13.2%. The matter was referred to the Office of Administrative Law as a litigated case. After approximately fifteen days of evidentiary hearings before an Administrative Law Judge ("ALJ") and the filing of initial and reply briefs, the parties were able to reach agreement on certain issues. These agreements were incorporated into two Memorandums of Understanding. The unresolved issues were fully litigated before the ALJ, who issued an Initial Decision on January 7, 1999. The parties filed initial and reply briefs on exceptions to the Initial Decision with the Board of Public Utilities ("BPU"). Some of the more important issues which were the subject of the litigation and subsequent Board order were as follows:
Revenue Requirement - treatment of acquisition adjustments, appropriate level of deferred revenues for the Companys new water treatment plant, bulk purchasers sales revenues and expenses, charitable donations;
Rate Design - the approval of a demand-commodity contract with the Bulk Users Coalition and whether Manasquans and South Orange Villages rates should be based upon stand alone cost of service studies or be subject to State-wide rates.
On March 31, 1999, the Board issued its Decision & Order, granting NJ-American a $13.1 million or a 5.6% increase over present rates. The Board issued a very detailed Decision & Order, portions of which will be highlighted below detailing some of the major issues.
Regarding acquisition adjustments, the Board, in its Decision & Order, placed all water companies in the State on notice regarding a change in the standard of review for acquisitions of water and wastewater systems. In view of the growing trend toward regionalization and consolidation, the Board will now require, on a going forward basis, acquisitions to be supported by two separate independent appraisals. These appraisals will be submitted to the Board prior to finalization of the acquisition agreement and, in the absence of a timely submittal, the acquiring company proceeds at its own risk with respect to rate treatment of those acquisitions. The Board will initiate a rulemaking to establish formal procedures and guidelines for the review process. The new data requirements will allow the Board to adjudicate the proper rate treatment of such acquisitions prior to the actual closing of these transactions.
Regarding the appropriate level of water sales to assign to bulk-purchase customers, including the Bulk Users Coalition who were parties to the case, the Board imputed an average sales level of 7.0 Million Gallons per Day (MGD). The Bulk customers comprised municipalities who were under New Jersey Department of Environmental Protection (NJDEP) water curtailment restrictions. The NJDEP ordered those municipalities located in Critical Area #1 to cutback on their water withdrawals from their wells so as not to further deplete the aquifer, which was threatened by salt water intrusion. As a result of these water cutbacks, the affected municipalities were to find alternative sources of water supply. The Companys Delaware River Regional Water Treatment Plant, a surface water supply project, was constructed, in part, to meet the needs of those municipalities located in Critical Area #1.
The Company, in its last rate case, successfully argued that its new water treatment plant was constructed on a scale that allowed the Company to provide 10 MGD of water to Bulk customers. However, the Company has since been unable to execute contracts with the Bulk customers. This failure to sell water to the Bulk customers, as envisioned by the Company, resulted in the Companys inability to meet its revenue projections. In the present case, the Company was trying to shift this revenue loss to its franchise customers. The Ratepayer Advocate opposed this shift and argued that the Company should have to abide by its projections and thus its shareholders should be responsible for any shortfall in revenue due to the Companys inability to sign up Bulk customers.
The Company was seeking to set the level of Bulk customers sales at 4.49 MGD, and recover the difference between 4.49 MGD in bulk sales and 10 MGD in bulk sales from its franchise customers. The Ratepayer Advocate argued that the level should be set at 10MGD-the level the Company based its case on in its prior rate proceeding. The ALJ and the Board determined that the Companys 4.49 MGD level was too low and that setting the level at 10MGD would unfairly penalize the Company for the apparent unwillingness of the municipalities to execute bulk water contracts with the Company. The Board adopted the ALJs recommendation of setting the Bulk sales level at 7.0 MGD.
Regarding charitable donations, the Board rejected the Ratepayer Advocates position that shareholders should pay for any charitable donations made by the utility, and that the costs of those donations should not be passed onto ratepayers. The Board upheld its current policy of a 50/50 sharing of charitable donations between shareholders and ratepayers. On May 11, 1999, the Ratepayer Advocate filed an appeal on this issue with the Appellate Division based on constitutional grounds that it is an infringement of ratepayers free speech rights. The Ratepayer Advocate also argues in its appeal that charitable donations are not germane to the utility business of providing water in a safe, adequate and proper manner. The Ratepayer Advocate appeal is pending.
MIDDLESEX WATER COMPANY- RATE INCREASE PETITION
BPU File No.:
OAL File No.: PUCRL08776-98S
Middlesex Water Company provides water service to approximately 53,000 customers on a retail basis and several municipalities and entities on a contractual basis. On September 17, 1998, the Company filed for a base rate increase of $7.9 million or 22%. The majority of the increase is due to the expansion of the Carl J. Olsen Water Treatment Plant. The project was determined prudent in the last rate case but the issue as to costs remained open for examination in this case. The other issues were rate of return, revenue requirement and rate design.
Upon conclusion of the first day out of nine scheduled days of evidentiary hearings, the Company, Ratepayer Advocate, Board Staff and various Intervenors, entered settlement negotiations. As a result of the settlement discussions the parties were able to reach an acceptable agreement as to all issues in the case. The return on equity was set at 10.8% with the overall rate of return being 8.21%. The parties agreed that the Company is entitled to an increase over present revenues of $4.3 million or approximately 11.5%. The parties were able to reach an equitable resolution without the need to conduct extensive cross-examination during the remaining evidentiary hearings and to submit legal briefs, avoiding additional expenses that are passed onto ratepayers. On May 12, 1999, the BPU approved the Stipulation of Settlement reached by the parties.
MERGERS & ACQUISITIONSPHILADELPHIA SUBURBAN CORPORATION & CONSUMERS NEW JERSEY WATER
BPU File No.: WM98080706
OAL File No.: N/A
On August 20, 1998, Philadelphia Suburban Corporation, the parent company of Philadelphia Suburban Water Company, filed a joint petition with Consumers New Jersey Water Company ("CNJWC") seeking to acquire the ownership of Consumers Water Company, the parent of CNJWC, via a stock swap. Consumers Water Company owns subsidiaries in five states: New Jersey, Pennsylvania, Ohio, Illinois and Maine. The transaction costs to complete this deal in the five states were over $8 million. It was the joint petitioners proposal to pass along the share of the transaction costs attributable to the New Jersey operations to Consumers ratepayers - costs that were approximately $500,000. The joint petitioners also contemplated a change in the allocation methodology currently being utilized by Consumers Water Company.
The Ratepayer Advocate had significant concerns with the terms of the transaction, which it set forth during a settlement meeting with the Companies. Among the Ratepayer Advocates concerns was the firm position that the transaction costs should not be passed onto New Jersey ratepayers. On January 14, 1999, the Board agreed with our position and did not allow Consumers to recover any transaction costs from New Jersey ratepayers.
The rates for water service did not increase as a result of the merger nor were there any changes in any tariff provisions or terms and conditions of service. The savings as a result of the merger, if any, will be reviewed in the context of the Companys next base rate proceeding to determine whether or not those savings can be allocated to ratepayers.
AQUASOURCE UTILITY INC. AND MAXIM SEWERAGE COMPANY - ACQUISITION
BPU Docket No.: WM98121465
OAL Docket No.:N/A
On December 24, 1998, AquaSource Utility, Inc. filed a joint petition with Maxim Sewerage Corporation requesting approval to transfer all of Maxims stock to AquaSource.
AquaSource provides water and wastewater service to customers in portions of seven states: Texas, Rhode Island, Indiana, Missouri, Connecticut, Florida and South Carolina. DQE, Inc., the parent company of AquaSource, is a Pennsylvania based energy services company with assets of more than $4.6 billion and annual revenues in excess of $1.2 billion. Maxim is a New Jersey public utility which operates a sewerage collection and transmission system. It serves approximately 2,540 customers within its service territory.
On April 28, 1999, the Board approved the transaction which resulted in a change of ownership of Maxim, but not in the manner in which it provides wastewater service to its customers. There will be no changes in rates, terms or conditions of service provided to customers. Also, AquaSource did not seek recovery of any acquisition costs. The Board also agreed with the Ratepayer Advocates position that the Company is prohibited from recovering any transaction costs from its customers.