..

VOLUME 22, NUMBER 1 SPRING, 1981

OFFICERS CHAIRMAN OF THE BOARD

J. V. LaFrankie American Water Works Service Company

PRESIDENT Earl H. Graham

Philadelphia Suburban Water Company

1ST VICE PRESIDENT Anton C. Garnier

Southwest Water Company

GENERAL VICE PRESIDENTS

Michael Zihal Long Island Water Corporation

John van C. Parker Consumers Water Company

Robert A. Gerber Hackensack Water Company

Ralph D . Lindberg California Water Service Company

TREASURER Theodore Jones, Jr.

Virginia-American Water Company

SECRETARY Frederick N. Allen

STAFF Frederick N. Allen Executive Director

C. Robert Morris Associate Executive Director

Carol A. Egan Business Manager

Nancy L. Gore W PS Operator

Teri D. McPherson Bookkeeper

Pamela J. Gardiner Secretary

VOLUME 22, NUMBER 1 SPRING, 1981

CONTENTS 4 PRESIDENT'S MESSAGE

5 THE INVESTOR OWNED WATER INDUSTRY

SPECIAL FINANCING NEEDS

7 SPECIAL FEATURE

8 ALLEN'S ALMANAC

10 WASHINGTON WATER WORD

11 COME TO SAN FRANCISCO

12 COMMITTEE CORNER

13 ANNUAL MANAGEMENT IDEAS WINNER

14 URBAN WATER SUPPLY- THE

CINDERELLA OF THE

WATER RESOURCES FAMILY

17 REGULATORY REPORT

18 LETTER TO THE EDITOR

19 POTPOURRI

QuarterlY-published four times each year by the National Association of Water Companies, Suite 1110, lOI9 19th Street, N.W., Washington, D.C. 20036 . NAWC is a non-profit trade association dedicated to serving the needs of the investor-owned state regulated, public water supply industry. The Quarterly is circulated to all Active and Associate Members of the Association, members and staff of public utility commissions, federal and state of­ficia ls concerned with our industry and will be sent to other qualified persons upon written request. Requests and changes of address should be sent to NAWC, Suite 1110, lOI9 19th Street, N.W., Washington, D.C. 20036.

PRESIDENT'S MESSAGE by

Earl H. Graham

It seems these days we can't get through one crisis without being confronted by another. Interest rates soar. Energy costs leap. Inflation exacerbates both.

And just to make matters worse, now we are hit with a drought. This means water companies can no longer worry only about how interest rates, energy costs and in­

flation will restrict their ability to provide service. Now they must be equally concerned with how they will recover revenues reduced by drought-related water use restrictions .

While many of you are not directly affected by this current situation, my purpose in bringing it to your attention is to emphasize the need for us to use NA WC to create an impact upon various regulatory bodies and the public in general. Before the current economic situation worsens , we must get word out about the problems our water industry faces and the possible solutions.

Since good external communication is built upon good internal communication, I am greatly en­couraged by some recent developments. During the current drought, member companies have sought in­formation and assistance from one another. This has been a very useful tool for one dealing with drought problems . A solution must lie ultimately in rate relief to compensate affected companies for lower-than­normal customer use.

I'm also happy to report most of our committees have met and have developed programs I believe are ambitious attempts to further the objectives of NA We. For example, our government relations commit­tee, under the direction of J . James Barr, is submitting NAWC's revised version of the Safe Drinking Water Act (H . R. 4509). The committee also has been studying the status of the National Water Utility Bank, but under the President's economic program a successful solution appears unlikely.

I would be remiss if I did not applaud the communications efforts of two more of our members-Fred Allen, our executive director, and John Boyer, chairman of my own company .

Fred has been working diligently to make sure the water industry is represented in all National Association of Regulatory Utility Commissioners (NARUC) conferences. And John recently spoke out for the industry at a meeting of the Utility Financing Conference in New York. Presently, I feel these are great steps forward not only for the Association but for our industry as well.

Upcoming events include mid-year meetings of the executive committee and board of directors April 29-30 at the Hyatt Regency Hotel in Washington, D.e. The day before the board meeting, a reception will be held in the Rayburn House Office Building.

While we already have agendas for these meetings, I invite you to write to me regarding any matter which has not yet come to the attention of the executive committee . And I want to remind committee chairmen to be prepared to report to the board Thursday, April 30 on their accomplishments and plans .

4 SPRING 1981

"THE INVESTOR OWNED WATER INDUSTRY

SPECIAL FINANCING NEEDS"

I was delighted when Paul Russell asked me last fall to speak at your Second Annual Utility Financing Conference. It is so infrequent that the investor owned water industry gets the chance to talk about its special characteristics, its problems and its financing needs that I was grateful for the opportunity. How­ever, at that time I did not anticipate that water would be the important regional issue that it has become in the last three months. All of us who are in the water industry in the east are thankful for the excellant rainfall in February. However, those of you who reside in the New York City area are going to experience conservation conditions during 1981. Above average rainfull between now and June will not overcome the drought conditions of 1981 although it may ease this spread of rationing. All of you who reside in this area will suffer discomfort of change as a result of the water shortage this summer. I will have more to say about this later.

Editor's Note: We are delighted to have re­

ceived permission to present this speech given by John W. Boyer, Jr., on February 27,1981, before the Utility Financing Conference at the Waldorf-Astoria in New York . A native of Delaware and educated at the University of Virginia and the University of Pennsylvania, Wharton Gradu­ate Division, Mr. Boyer has held many important executive posi­tions and is currently serving as Chairman and Chief Executive Officer of the Philadelphia Suburban Water Company.

Presention By John Boyer

At Utility Financing Conference

February 27, 1981

In last Sunday's business section of the New York Times, there was a front page article on American Water Works Company. This holding com­pany which earned $23.0 million in 1980 is the giant of our industry. As you all know, such earnings are small for any other stationery utility. The article referred to the investor owned water business as the "forgotten utili­ty." That unfortunately has been the correct label. It is my view that the closet approach to the investor owned water industry must change.

I am going to amend my talk from special financing developments to special financing needs. Before you can deal with the needs, however, you must examine the profile of the in­vestor owned water industry . The En­vironmental Protection Agency says that there are over 60,000 community water systems. Of this group, the Na­tional Association of Regulatory Utility Commissioners regulates 5,034 investor owned water com­panies. It follows that investor owned water utilities are the most numerous fixed utility. However, the largest 20 of these concerns account for approx­imately 80070 of the revenues, assets and net income of our industry. The balance of the industry is made up of a few medium size companies and many very small water utilities. In Pennsylvania for instance, where our company is located, the Public Utility Commission regulates 396 water utilities . More than 250 of this group have 115 or less customers so you can see that the investor owned water utility industry is made up of a few large companies and many, many uneconomic smaller companies .

JOHN W. BOYER

However, when you compare the so-called larger companies to other utilities, another difference is very evident. The Philadelphia Suburban Water Company with which I am associated, is the largest singly operated investor owned water utility in Pennsylvania. In 1979, it had revenues of $36 million. This com­pares to Columbia Gas of Pennsyl­vania, the largest gas company, with revenues of $346 million, Bell of Pa. with 1979 revenues of $1.85 billion or Philadelphia Electric Company, the state's largest electric utility with 1979 revenues of $1.6 billion. It is obvious from these comparisons that the state's largest water utility is a dwarf compared to its comparable brothers in the gas, telephone and electric business . These comparisons become even more unfavorable if one ex­amines the capital investment per dollar of revenues in these four com­panies . For 1979, Philadelphia Suburban Water Company had $4.64 of plant investment per dollar of revenue compared to $3.32 for Philadelphia Electric, $2.45 for Bell of Pa. and 63¢ for Columbia Gas of Pa. From these profiles, we can

NAWC QUARTERLY 5

deduce two things: (1) that the largest water companies are quite small com­pared to other stationery utilities and (2) that the water utility business is the most capital intensive of all sta­tionery utilities .

Because I have been the manager of the Philadelphia Suburban Water Company for 5 years, I would like to give a first hand account of our finan­cial results since 1976 which point up the present plight of the water utility industry. First, Philadelphia Subur­ban Water Company operates in a suburban area surrounding Phila­delphia experiencing relatively little growth so that our sendout or water delivery has been relatively flat over the last five years . Additionally, because our company has excellent sources of surface water, we do not hav the environmental problems with the attendant capital requirements of many other water utilities. Thus, we are blessed by only having capital needs necessary to maintain our mature company.

In 1976 when I joined the com­pany, it had revenues of approx­imately $31.5 million . By the end of 1980, these revenues had risen to $40,250,000 or a compound growth rate of 6070. During the same five year period, our net income which was $6,750,000 in 1976 went sideways to $6,725,000 for 1980. This lack of growth was because our operating ex­penses increased at a compound growth rate of over 12070 during the same five years. In this five year period, we received rate relief through four rate orders. It is obvious that the rate relief was inadequate to keep up with the rapidly rising operating expenses. Worse, during this same period our equity increased from $56 million to almost $63 million, a compound annual gain. of slightly more than 3070. Also, our net plant account went from $146 million to $163 million. It is obvious that every additional dollar we invested in replacement or new plant during this five year period produced a negative return. I would like to add that the Philadelphia Suburban Water Com­pany is considered a well managed in­vestor owned water utility and is viewed by our utility commission as aggressive in its pursuit of tariff in­creases. I think we can conclude from this case study that the impact of dou­ble digit inflation on the most capital intensive of the stationery utilities, water, is disasterous.

6 SPRING 1981

The financial tools available to provide for these special needs of water utilities are well known to all of you. They are bank credit, private and public financing as well as in­dustrial revenue bond financing in most states. Last year our National Association of Water Companies assisted in sponsoring the introduc­tion of legislation that would create a water bank. This bank would be able to lend money at lower interest rates to small investor owned utilities which would be similar to govern­ment sposored financing vehicles which are presently operative in the rural electic field and for the smaller telephone companies. In the current political environment that exists in Washington, it is my view that this proposal which will be reintroduced during this session of congress, has one of two chances, slim and none.

The fundamental needs of the water utility industry are not for specialty financing vehicles but for a different regulatory environment. The regulators must perceive the dif­ferences in the water utility industry. As the manager of the Philadelphia Suburban Water Company- the flagship water company of Penn­sylvania- I have to ask myself the question as to how long can we con­tinue to provide the present quality of service with a negative return on in­cremental investment? The regulatory authorities must come to the conclu­sion that the water industry is the forgotten utility which has special

needs because of its size and capital intensity.

The underlying problems of the in­vestor owned water utility industry will not be solved through govern­mental takeover. The problems of our industry are insufficient capital to maintain their facilities or add needed new facilities. The real solution to the problem, no matter what financing vehicles are available, is an adequate return on shareholder equity that will permit the attraction of both long term debt and equity capital to an in­vestor owned water utility. Because of the small size of water utilities and their extreme capital intensity, I sub­mit that the achieved return on capital must be higher than for other utilities. It is my view in today's money market that this achieved return on common equity should be at least 15070. There is one investor owned water utility which has been earning that kind of return on its common equity. It is the Indianapolis Water Company. Its common stock has regularly sold at or above its book value. Such a price permits the order­ly financing of their needs. The Public Utility Commission in the state of Indiana believes financially strong utilities are the necessary basis of consistent state wide economic growth.

The investor owned water utility in­dustry faces enormous capital expen­ditures in the decade of the 80's relative to their present size. These considerable needs are the result of aging utility plants and the additional

1

~

---~------------------------

environmental requirements under the Safe Drinking Water Act. In order for the managements of these enterprises to fulfill the needs of their customers, an achieved equity return of 150,10 on common stock is necessary to attract the funds to do the job. It is up to the leaders of this forgotten utility industry to make their case for higher earning power in order to pro­vide for their customers' legitimate needs. At present, for comparative purposes, investor owned water utilities are returning an average of 10% on equity which is totally inade­quate. Unless there is a 50% increase in achieved returns on equity capital, the quality of water service will deteriorate at what I believe will be an alarming rate. Our industry must make the public conscious that potable water is too cheap.

Before I close, I would like to com­ment on the present water emergency problem that exists in Connecticut, New York and New Jersey. It has been made clear by the press that the drought of 1980-81 is a causitive fac­tor in the present water shortage. What has not been adequately enun­ciated is the actions of state govern­ments over the last five years that have made the water industry unable to deal with this drought problem. In addition to inadequate rate relief, I cite two instances of today's critical problems. The first is the deplorable financial condition of the investor owned water companies in Connec­ticut. Connecticut water companies have historically distributed their pro­duct from protected water sheds . The Environmental Protection Agency's regulations under the Safe Drinking Water Act of 1974 require that water be processed through a treatment plant prior to distribution . The Con­necticut water industry's strategy to comply with these requirements was to sell some of its water shed lands and reinvest the proceeds in new water treatment plants. However, the Connecticut utilities control authority ruled that any profit from such a sale should be returned to the rate payer. In addition, a moratorium has been declared on water land sales. The result of these two actions is that the water industry in Connecticut has been beggared and water treatment construction projects and other need­ed improvements cannot be financed or have been deferred.

The second instance occurred in 1975 when governor Brendon Byrne

of New Jersey cast a negative vote that for all intents and purposes ter­minated the development of the Tocks Island Dam on the upper Delaware River. At that time, he had his picture in Time Magazine waving a paddle from a canoe on the river . At present, there are 22 million peo­ple using the Delaware River Basin as their primary source of water . The Tocks Island Dam was and is the most economic solution to adequate water supplies for this population. At the time governor Byrne rejected the project, it was to be federally financ­ed . It is infrequent that an important act of an elected political official such as opposing Tocks Island backfires so dramatically while he is still in office . Governor Byrne has proposed a $345 million emergency capital program to offset New Jersey's vulnerable water position to be financed by taxes from the citizens of the state of New Jersey. This is a bandaide approach to the problem. The fact remains that without a large impoundment or a series of costlier small impoundments along the upper Delaware, our region will continue to remain vulnerable to the whims of nature. Those of you who are canoers should send gover­nor Byrne a thank you card. I submit it is appropriate for the rest of us to pose the question , when are we going to address the fundamental problem.

Each of us needs water every day for sanitation and life itself. Our water resources in the east have been sq uandered for years th rough mismanagement. It is time we de­mand a long range solution to the problem-not just dealing with the drought of 1980-81.

The increasing demand on our east­ern water resources over recent years means that the margin between nor­malcy and emergency has narrowed.

The investor owned water utility, much of which is located in the east, must become financially viable if it is going to be able to deal with its share of increasing customer needs in the 1980's.

The only solution is for the regulators to permit much higher rate i;tructure for this special utility . Such rates will generate a sufficient profit on shareholders equity to attract the large amounts of capital needed to provide adequate supplies of safe drinking water.

I appreciate the opportunity to be with you today and will welcome any questions . ~

SPECIAL

FEATURE

PARTICIPATE ACTIVELY IN YOUR

MAGAZINE For years we 've been sending the

NA we Quarterl y to members across the country, keeping you up-to-date on developments in our field and our Association. We have always invited and encouraged members to submit ed itorial copy. Now we'd like to invite the artists in the Association to partici­pate. Your entry could end up on the cover of the NA we Quarterly, plus win $200 cash. Here's how the contest works:

I.) Submit a drawing or photograph which relates to water or any facet of our field. Art or photo­graphs must be no sma ller than 4"x4", no larger than I O"x 10". Reproduction size wi ll be 7W'x7Y2".

2.) Entries must contain the following information: name of contributor, address, state, water company and daytime phone number. All original copy becomes property of N A We.

3.) Entries must be in six weeks before publication dates , as fo llows: Sp rin g issue - Dead line: 2 / 2 / 81 Summer issue - Dead line: 5 / 4 / 81 Fall issue - Deadline: 8 / 4 / 81 Winter issue - Dead line: 11 / 4 / 81

4 .) The editoria l staff of N A we will select a winning illustration to be featured on the cover of each Quarterly in 1981. Each cover illustration will feature a by-line and brief descri ption of the contributor.

5.) All four winning illustrations will be displayed in the W inter issue of 1981. N A we readers will then be invited to judge the illustrations and choose a winner.

6.) The winning contributor will be contacted by February 15, 1982 and announced in the S pring issue of that year. The winner will receive a cash award of$200.

Keep your eyes open for attractive photographs - or sketch an illustration yourse lf. Either way let us hear from you. You could be a winner!

NAWC QUARTERLY 7

Those of you who read John Steinbeck's book East of Eden will remember that he said, "During the dry years, the people forget all about the rich years, during the wet years they lost all memory of the dry years. It was always that way."

Yes, it has been a dry year, a very dry year and people throughout the country have suffered because of it, and the millions of people who live between Boston, in the north, and Washington, in the south, have seen reservoirs, streams, and lakes dry up to the point where there was literally a question as to where the next drop was coming from. Governors of the middle Atlantic states, state and federal water authorities, utility commissions and the industry have suffered all year trying to stretch the thin supplies, just a little further un­til the rains come.

As we go to press, the rains did come to a degree, but, certainly, not nearly enough to compensate for the worst drought in fifteen years in some places and in fifty years in others. In fact, this has been a dry year from coast to coast and the ef­fects will be felt well into 1982 and beyond.

They say that every cloud has a silver lining, and I guess perhaps that's true because, at least, here in Washington the people up on the Hill are more aware than they have ever been of the water supply in­dustry, which has traditionally, of course, been a forgotten "country cousin" . In the state legislatures and the state utility commissions there is a new awareness of the problems of the water utilities.

SAN FRANCISCO CONFERENCE Tony Garnier flew into Washing­

ton in February to go over, with the Washington staff, plans for our An­nual Conference in San Francisco,

8 SPRING 1981

ALLEN'S ALMANAC

by

FREDERICK N. ALLEN

which for the first time will be back­to-back with the Annual NARUC Convention. Both the commissioners and we feel that this should enhance both meetings. The NARUC meet­ings open at the St. Francis Hotel on Monday afternoon, November 16th and close with their traditional banquet on Thursday night, November 19th. Our meeting will open, just across Union Square, at the Hyatt-Union Square on Wednes­day night, November 18th, and ad­journs on Saturday night with our traditional dinner dance. We are working very closely with the Wash­ington NARUC office to coordinate our efforts . We hope that many of our people plan to attend their con­vention, and conversely, of course, that many of the commissioners will stay over a couple of days to come to the NA WC Conference.

Tony is planning some real in­novations for 1981 which will be an­nounced in the next issue of the magazine. Certainly, one of the popular features will be the fact that our seminars and workshops will be spread over two days instead of one, which will make it possible for our people to attend more than one meeting. All in all this will be a big week in San Francisco and as my friend, Paul Rodgers, the NARUC General Counsel say, "the double­header should be of benefit to both our organizations" .

NARUC MID-YEAR MEETINGS The last week in February, is the

traditional time for NARUC' s mid­year meetings and scores of state utility commissioners came to Wash­ington for three days of meetings in­volving their Executive Committee and several standing committees of their Association.

Commissioner John Winters of North Carolina, Chairman of the

NARUC Water Committee, called a meeting for Thursday here in Wash­ington and spent a great deal of time with his group making plans for the NARUC Water Seminar in Utah for this spring, and the 9th Annual School to be held in Florida in November. Representing the in­dustry, I have been very appreciative of the opportunity of working with Commissioner Winters and his group in supplying faculty and students from the industry. In order for a seminar of this type to be ef­fective, it is necessary to have dialogue between the regulated and the regulators.

We all are excited, certainly, about the first western school to be held the week of May 17th at the University of Utah at Salt Lake City.

THE REAGAN YEARS Since our last issue of the maga­

zine, the fortieth President has been well established in Washington, the bureaucrats of the town have been shaken to their very boots, and there is something new popping every minute of every day. Prob­ably, never has there been a more fundamental change in the philosophy of one administration from another since Franklin Roose­velt came to the Presidency in 1933 . As far as this effects NA WC's pro­gram .on the Hill, is hard to say. We feel hopeful that substantial amend­ments can be made to the Safe Drinking Water Act as Represen­tative Gramm (D-Texas) rein­troduces his bill, which the industry feels is vitally important for realistic regulation of the industry.

The Water Bank Bill is something else again. But, Representative Wes Watkins (D-Okla.) is gung-ho to push for enactment of this legisla­tion which most feel is a necessary

---- - --- - - ----------------------------------------------- --------,

financing vehicle if the small privately-owned water supply utilities are to survive into the next century. Of course, the Water Bank Bill flies in the face of the ad­ministration policy of cutting back on any type of financing vehicles in which a government guarantee is in­volved. I am sure that Bob Morris' column on Washington Water Word, has more to say on our pro­gram in the Congress.

NA WC COMMITTEES ARE REALLY ACTIVE

In all of the four issues of this magazine, we try our best to publish some of the activities of our impor­tant standing committees, and at least from my observations, our committees are more active with substantial projects than in any time in recent years .

The Regulatory Law Committee, chaired by Fred Laurino, is develop­ing a monitoring system whereby it will be possible to collect and screen commission decisions and court cases throughout the country and zero in on those which are national­ly important and which the industry can and should be informed and take action. This, if it meets the ap­proval of the Executive Committee, would involve the part-time use of an outside attorney and put us in close contact with what is going on from coast-to-coast.

As reported by Ed Bastian in another part of this publication, the important Customer Service Train­ing Program, which we have under license from Stone & Webster, has already graduated 800 students in 1980. This program is in full swing now, not only in the East, but in the Middle West, and in California as well. We have found 100070 endorse­ment by students who have taken the course and the enthusiasm is bound to be reflected in the better customer relations throughout the industry.

IN THIS ISSUE We have a variety of very interest­

ing material this month in the maga­zine. First of all, we're certainly delighted to be able to publish a very excellent paper delivered by Dr. Abel Wolman of Johns Hopkins University . Certainly, Dr. Wolman is one of the most eminent and world-respected experts on water in the United States over many years

and our thanks to him for permit­ting us to reproduce his paper in this issue of the magazine .

john Boyer, Chairman and Chief Executive Officer of Philadelphia Suburban Water Company, pre­sented a fine paper at a prestigious financial conference at the Waldorf­Astoria in New York, and this , too, appears in the magazine.

Our thanks to John and the im­portant visibility he gave to our in­dustry by his appearance on the New York program.

Although we never have had a "Letters to the Editor" section, it looks as though we are inaugurating one. In a recent issue, we had a letter from Charlie Woods, head of the former New Haven Water Com­pany, and now we have a thought provoking letter from Henry Payne of the North Carolina Utilities Com­mission, responding to that recent article by Bob Symonds in the last issue .

We' re glad to present, at any time, opposing views or comments concerning the material which is published in this magazine. I think that it ' s vitally important that all sides of an argument be presented, and if the QUARTERLY magazine is such a forum, we're delighted.

Hyatt on Union Square San Francisco, Cali fornia

Our thanks to Mr. Payne for tak­ing the time to write us .

REGULATORY NEWS From a personal point of view,

the biggest news of the month from the regulatory commissions is the successful attempt of a group in Maine to gain enough signatures to force a referendum next fall which would require that the three members of the Public Utilities Commission be elected for four year terms, rather than appointed by the Governor as they are now for terms of seven years .

Having served 14 years on that Commission, and knowing the motive behind the drive, I can say that from our point of view here, we take a dim view of the efforts. Sponsors say that they will be assured of lower utility rates if Maine elects the commissioners. Ob­viously, they are not thinking about economic regulation, but about social regulation. The Democratic Governor of Maine, Joe Brennan, has come out with an alternate plan which would merge energy with the utility commission and set up a public staff in the Commission. If this goes through the legislature suc­cessfully, that will mean that there will be three issues on the ballot next fall , namely, to keep the status quo, elect commissioners, or set up a public staff. The latter two, would require over a 50070 majority of votes for passage.

The major newspapers in the state have come out strongly in editorials in favor of the present system. This is just an example of "violent" leg­islation which has been and is being filed in all the states by groups who are concerned with rising utility rates . From this corner, it certainly looks like real danger to be monkey­ing with a quasi-judicial tribunal and I am sure that utility rates in Maine, as with the rest of the coun­try, have not risen any where near as fast as some other products or services.

There also appears to be a rash of legislation in many states that would " hamstring" the state commissions in their performance of their func­tions by specifically writing into the law prohibitions against filing within a certain time frame, mandatory ceilings on rates, and other restric­tions which defeat the very purpose of the regulatory process.

NAWC QUARTERLY 9

ashington ater ord

by C. Robert Morris

WASHINGTON UPDATE The big news occupying almost

everyone's time in Washington these days is President Reagan's economic recovery program. Almost every committee in the Congress is holding hearings on the budget and tax cuts proposed by the new administration. There has been a steady parade of Cabinet members and other adminis­tration personnel up to Capitol Hill outlining the program and answering questions. The lead on economic policy so far has been taken by the Director of the Office of Manage­ment and Budget, David Stockman, who appears to have the best grasp of the issues in the new budget. Stock­man is a former Congressman from Michigan and was a cosponsor of HR 4509 when he served on the Health and the Environment Subcommittee of the old Interstate and Foreign Commerce Committee.

The consensus of thinking is that the President will get very close to the budget requests he is seeking but possibly the cuts might come in areas other than that spelled out in his pro­gram. The tax-cut proposals are receiving less general acceptance and it appears doubtful at this time that the so-called Kemp-Roth 10% across­the-board cuts for three years will pass, but some form of tax cuts will come out of this session of Congress. The proposal for business tax cuts is receiving favorable consideration. The Democrats, in particular, are having a hard time agreeing with the supply side economic theory being advocated and question whether the increased income for those in the higher tax brackets will end up in in­creased savings and investment. They perceive that this is Robin Hood in reverse, taking from the poor and giv­ing to the rich. OMB Director Stock­man claims they looked very hard but

10 SPRING 1981

couldn't find any welfare programs that were benefiting the rich. Although the liberals are having a hard time swallowing the cutbacks in many social programs built up over many years, they recognize the need for drastic measures and don't want to appear to be obstructionists.

To give a little flavor of the current mood in Congress, at a recent hearing of the Senate Environment and Pub­lic Works Committee, EPA's budget was considered. By almost unanimous roll call votes, substantial cuts were made in the construction grants pro­gram for sewage treatment plants under the Clean Water Act. With one exception they followed all of the recommendations outlined in Presi­dent Reagan's proposal and in this one case, three of the Republican members voted to make the total cut as recommended but failed . to over­turn the majority. One Senator re­marked that he wanted as much cut in EPA's budget as possible because he completely mistrusted the Agency . At another time when it was proposed to cut money from one program and fund two other programs the same Senator commented that if the cuts can be made, let's make them but not pass it on to another agency.

Many of the Presidential appoint­ments in the new administration are still being made. Of interest to NA WC, President Reagan has selected Anne M. Gorsuch to be Ad­ministrator of EPA and John Her­nandez to be Deputy Administrator. Gorsuch is an attorney from Denver, Colorado, currently employed by Mountain Bell Telephone Company, who previously served in the Colo­rado State House of Representatives. Hernandez is a professor at New Mexico State University with a broad background in sanitary and environ-

mental engineering. He is well-known to and highly respected by NA WC Director Jim Williams from New Mexico. Confirmation hearings for these appointments had been sched­uled before the Senate Environment and Public Works Committee for March 10, 1981, but were cancelled until a later date pending submission of documentation.

The committee assignments in the Senate and House have now been made and the chairmanships of the committees and subcommittees im­portant to NA WC are as reported in this column in the last issue of the QUARTERLY. Of particular in­terest, the Senate Environment and Public Works Committee formed a new Subcommittee on Toxic Sub­stances and Environmental Oversight and placed jurisdiction of the Safe Drinking Water Act with this sub­committee. It is chaired by freshman Senator Slade Gorton of Washington with majority membership consisting of Simpson (Wyo.), Abdnor (S.D.) and Murkowski (Alaska); minority membership made up of Baucus (Montana), Burdick (N.D.) and Hart (Colo.). In the House Subcommittee on Health and the Environment which has jurisdiction for the SDW A several members have been added to replace those from the last Congress who lost in the election or otherwise did not return. These additions in­clude majority members Scheuer (N.Y.), Florio (N.J.), Moffett (Conn.) and Wyden (Ore.) and minority members Madigan (Ill.) (minority leader), Brown (Ohio), Whittaker (Kan.), Ritter (Pa.), Bene­dict (W. Va.) and Bliley (Va.). Con­tacts have been made with several of these new members to acquaint them with NAWC and our interest in amendments to the SDW A.

- - -------~~~--------

AMENDMENTSTOSDWA As previously reported, Con­

gressman Phil Gramm intends to re­introduce a revised version of HR 4509 in this session of Congress. The draft of the new bill is very similar to HR 4509 except for deletion of those sections which were included in the provisions of PL 96-502 passed last year. Meetings with A WW A and CSSE have been held to coordinate the efforts for reintroduction of this legislation. Attempts are also being made to have legislation amending the SDW A introduced in the Senate. Once this has been accomplished another all-out effort seeking support in both houses of Congress will be essential.

WATER BANK The business community is indi­

cating its total support for the President's economic program. One aspect of the program is the elimina­tion of off-budget items which in­cludes many govermentally spon­sored loan and loan guarantee banks. It also includes elimination of the

Mark Your Calendar Now ... Don't Miss NA WC's

"Big Event"! The National Association of

Water Companies 85th Annual Conference

at the Hyatt on Union Square

San Francisco, California November 18-21, 1981

• Information packed seminars and workshops covering such diverse sub­jects as water shortages, public relations, risk management, office automation and much more

• Prominent speakers addressing general assemblies

• Social opportunities for informal con­tact and discussion-chapter luncheons, hospitality center, meet and greet reception

• Free time and tours to see the great sights of San Francisco

Watch your mail for further information!

Economic Development Administra­tion and the Appalachian Regional Commission as well as cutbacks in such programs as Farmers Home Ad­ministration, Rural Telephone Bank, National Consumer Cooperative Bank and the Export-Import Bank. Although the National Water Utilities Bank is not designed to be off-budget and it will be self-supporting with the government's financial investment fully protected, it is not the type of legislation that the administration is looking for with enthusiasm. Con­gressman Wes Watkins has indicated his intent to reintroduce the bill in this session of Congress. He is now serving on the Appropriations Com­mittee which prevents his continued membership on the Banking Commit­tee but he has urged support from his colleagues on that committee. The bill has been revised principally to reflect a lower infusion of govern­ment funds which should make it more palatable in these times of austerity. There has also been some interest in the Senate for the concept of a Water Bank.

GOVERNMENT RELATIONS The Government Relations Com­

mittee held its first meeting of the new year on February 18, 1981, in Washington, D.C. The meeting was well attended and all legislative and regulatory matters of interest to the Association were thoroughly dis­cussed. A luncheon with guests from Capitol Hill was a part of the pro­gram. The committee has plans for holding quarterly meetings through­out the year, indicative of its active participation in the government af­fairs of NA WC.

As part of the mid-year Board of Directors meeting, the Association is sponsoring a reception for Represen­tatives, Senators and Congressional Staff on Wednesday evening, April 29, 1981 . All members are urged to invite their Congressmen using invita­tions which will be furnished by the Washington office. If any of you who are not on the Board of Directors would like to attend this reception, please contact the Washington office for details.

Camera captures the grandeur of a man-made wonder, the Golden Gate Bridge, arching gracefully toward the hills of Marin County, its red towers rising 716 feet (the height of a 65-story building) above the swirling tides at the mouth of San Francisco Bay.

NAWC QUARTERLY 11

=

OMMITTEE

ORNER CUSTOMER SERVICE COMMITTEE

"A Better Way" is well on its way. That's what Fred Eckardt's Customer Service Committee learned from a telephone survey of ten member com­panies in the Midwest and in Califor­nia.

"Utility Customer Relations: A Better Way" is a program especially designed by Stone and Webster Management Consultants, Inc. for training utility employees to achieve better relations with customers by more accurately and quickly respond­ing to and resolving customers' prob­lems. More than 10,000 employees of major electric and gas utilities across the country received this training and have proven its value.

This program has been licensed to the National Association of Water Companies by Stone and Webster for use by member companies . More than 800 water utility people have been trained under the NA WC­licensed program, mostly in the eastern part of the United States . This highly-regarded training program now is under way on the West Coast and in the Midwest and additional courses are planned for both these areas .

TYPICA

12 SPRING 1981

In early February California­American Water Company started a class of thirty-eight people in Monterey to be followed by classes in the Los Angeles and San Diego areas . Other California companies that would like to send their employees to the California-American classes in Los Angeles or San Diego should contact Larry Foy for dates and details (714) 477-2707.

Southwest Suburban Water Com­pany expects to begin classes this Fall of from 10 to 12 people each for training of approximately 50 employees. They also would be will­ing to accommodate other nearby water companies that might wish to send people for training. Contact Vern McNeese (2l3) 918-1231 .

Tennessee-American Water Com­pany started their first class of 10 people the first week in February and have every expectation of continuing with additional classes.

Kokomo Water Works Company hopes to get a class started; perhaps in April, and eventually to train about 30 of their employees in "Utili­ty Customer Relations : A Better Way".

Companies that have trained their employees under this program have all expressed their enthusiastic ap­proval of the training and the results it has achieved. NA WC member com­panies seeking to reap the many benefits this unique training course provides and wanting more informa­tion should telephone Mrs. Elaine Kremer, Philadelphia Suburban Water Company (215) 525-1400.

PUBLIC RELATIONS COMMITTEE

The NA WC Public Relations Com­mittee is considering the purchase of a mobile display, animated with polar animation, to sequentially show the water treatment process from source to consumer.

The proposed cost of the display is approximately $6,000 . . Prior to undertaking such an expenditure, the Association is interested in learning whether or not member companies would have a need for it.

A New Jersey display firm has sub­mitted plans which indicate that the basic shell housing would be made of heat bent expanded foam (approx­imately 1/ 81/ thickness). All lighting would be fluorescent and a stepper switch sequential (cumulative build up) shows the treatment process. At each step of treatment, the polar disc rotates to animate the action area. There would be eight different points of action.

This display would be shipped in two custom made fiber containers and the estimated weight would be about 50-65 pounds .

The initial unit would probably be purchased by NA WC and made avail­able to member companies on a rental or loan basis. Thereafter, if there is sufficient interest, larger companies or regional areas may want to pur­chase such a display for their own use within their areas of operation .

SAND FILTER PLAN Your Choice Water Company

/

r

...

REGULATORY REPORT

East Yolo Community Services District

vs .

Washington Water and Light Company

Submitted by Charles J. Weiss

Editor's Note: Certainly one of the most im­

portant commission and court cases in recent years has involved the condemnation proceedings involving the East Yolo Com­munity Services District vs. Washington Water and Light Company in California. We ap­preciate, very much, this up-to­date report on that proceeding by Charles Weiss, a member of the NA WC Board of Directors, and an official of Citizen's Utilities, the parent company of Washington Water and Light Company.

Washington Water and Light Com­pany is a wholly-owned subsidiary of Citizens Utilities Company providing water service to approximately 25,000 customers in West Sacramento, directly across the Sacramento River from the California capital. The serv­ice area has grown rapidly and facilities of the Port of Sacramento are located within the service area. The East Yolo Community Services District seeks to acquire by eminent domain the facilities of Washington. The District and various community groups began to discuss the acquisi­tion of the system and held meetings with the California Public Utilities Commission staff. They also pro­cured special legislation directed sole­ly at Washington, prohibiting it from improving its facilities.

The Commission delayed a pending rate increase application for over two years. The Administrative Law Judge finally found that service was reason­able under the circumstances barring improvements, and he recommended

a normal rate of return. Nevertheless, in its long-delayed decision the Com­mission penalized the Company for alleged service deficiencies, notwith­standing the legislation which prevented the Company from under­taking further improvements to its system. These unusual actions prompted Commissioner Symons to file a written dissent in the rate case, in which he stated: " . .. The major­ity's action is no more than a covert means of suppressing the earnings to which this utility is rightfully entitled because of the pendency of condem­nation proceedings which have been brought against it. . . It is unjust and unlawful for the government, on the one hand, to prohibit this utility from doing what is necessary to improve service, and on the other hand to penalize it for service."

In California a condemnor may elect that valuation be determined either in Superior Court where rights to jury trial and appeal are granted by statute, or at the Commission with the statute providing for the Superior Court to adopt without further con­sideration the Commission's finding. If the Commission valuation method is selected by the condemnor, there is no right to jury trial nor any statutorily-guaranteed right to appeal. .-

The District, following its con­ferences, proceeded at the Commis­sion. The Commission, which had previously announced a policy favor­ing public ownership of water utilities, ignored all evidence of reproduction cost new less deprecia­tion and valued the system based on the earnings of Washington which it had previously set. The Commis­sion's own staff of experts did not

present evidence in the valuation pro­ceeding, although in past pro­ceedings , the staff had participated. The Commission determined the sys­tem's value to be $3 ,OOO,OOO- about half of the original cost and about 25 percent replacement cost less depreciation.

The District failed to initiate action for authorization to take in Superior Court within the period precisely set by statute. In accordance with the rights of Washington as set forth in the statute, an action to nullify the valuation finding was brought before the Commission. The Administrative Law Judge who heard the case recom­mended nullification, but the Com­mission, departing from the recom­mendation , asserted that the statutory mandate that it "shall" nullify the valuation finding was in fact discretionary. The Company has petitioned the California Supreme Court for a Writ of Review of the Commission's action; review by the Court is discretionary, and it has not yet acted.

On February 24 a judgment was entered in Superior Court determin­ing that the District had the right to take at the value found by the Com­mission. There is a 60-day period in which the Company may file a notice of appeal from this judgment.

In August of 1980, the Company filed an action in Federal District Court challenging the California laws relating to condemnation of utility property as constitutionally defective because utilities alone are denied and rights to jury trial and to appeal. The Company also alleged bias by the Public Utilities Commissioners, and they were made defendants.

Morgan, Lewis and Bockius has filed briefs on behalf of the Associa­tion as this matter is one of national significance. The Commission's ac­tion is a radical departure from prece­dent. At issue is whether a state can, through its various branches, prevent a utility from improving its property, minimize the earnings of the utility and then have another entity of the state acquire the property at a value based upon state-imposed depressed earnings. Also in question is the power of the state to deprive a certain group (investor-owned utilities) of protections of law such as a jury trial and right of appeal when all other classes from whom property may be taken are afforded these protections .

NAWC QUARTERLY 17

Mr. Frederick N. Allen Executi ve Director National Association of Water Companies Suite 1110,1019 19th Street, N.W . Washington, D.C. 20036

Dear Mr. Allen:

~tute of ~ortq QIarolimt Juhlic ~taff

;llitilities QIommission J.®. l!iox 991 ~aleigq 27602 January 30, 1981

I was unable to find who the editor was, so I am address ing thi s message to you. I am not sure your magazine a llows equal time for differing views, especially from the regulatory side, but I felt compelled to write anyway.

A fter reviewing M r. Symonds' article published in the NA WC Quarterly and the editorial comments about it , I felt that a response to some of the issues raised would be helpful.

Two of the points made by Mr. Symonds concerned depreciation: (I) he would like depreciation rates based on replacement costs and (2) he would like depreciation of contributed property to be allowed . I di sagree with both of these suggestions, and present the followin g arguments.

Depreciation is not designed to be a sinking fund to provide for new plant. Rather , depreciation is the practice of spreading the cos t of a capital item over its useful life . The resulting annual depreciation allowance is an allowable expense for rate-making purposes. The undepreciated plant would be a portion of the utilit y's investment upon which it is granted a return.

To allow depreciation based on replacement costs would reimburse the utilit y for money not spent. In the same way, the undepreciated portion added to plant would cause a return to be paid on a nonexistent , or overstated investment. Obviously thi s state of affairs would be blatantly unfair to the consumer and should not be allowed.

The second aspect of depreciation Mr. Symonds would like changed is to allow contributed plant to be depreciation . Thi s too , would unfairly saddle the consumer with higher rates, for where does the "contributed plant " come from? It surely doesn ' t fall like manna from the heavens. The most probable source is a developer , who only installs a wate r system because no one else will. But the developer is not a philanthropist giving away hi s property, with no thought of how to get hi s money back. H e most assuredly recovers hi s costs for the utility plant the same way he recovers hi s other development costs; through the sa le of property. Therefore , the end user , the water cus tomer , is paying for hi s share of the utility plant through hi s monthly mortgage payment. To allow the new owner of the property, the utility company, to recover the cost of the plant through the rat es is to charge the customer twice for the same plant!

As added impetus for hi s recommendation , Mr. Symonds conjures up a hobgoblin "hypothetical" company that has no rate base, being 100 070 contributed. According to Mr. Symonds, thi s company would have no cash flow, and would cease operation if any un­foreseen expense arose. I am not familiar with the makeup of small water companies around the country, but in North Carolina , of the 400 water companies regula ted by the Commiss ion , probably half have entirely contributed sys tems. In fact, one company with approximately 2000 customers, and a plant with an original cost of 1.1 million dollars, has a nega ti ve net investment of a $ 19,000. Yet all these companies do earn a return based on operating expenses, rather than it s net inves tment, and are providing sa ti sfactory serv­ice . An operating ratio (OR) of expenses to revenues is used, with the OR being ro ughl y related to the Rate of Return (RR) thusly: OR = (I - RR). T herefore, a company earning a 15% RR would have an OR of 85% (.85 = I - .15). There are other factors which invali­date thi s simple direct comparison, but it gives the fee l for the relationship of the two. I am sure that thi s OR procedure is not unique to North Carolina, yet Mr. Symonds apparently isn't aware of thi s alternate way a utilit y with no rate base may earn a return .

I am assuming that the purpose of Mr. Symonds' sugges tions was to provide the utilit y with fund s for unforeseen expenses . From m y point of view, small increases that are occurring constantly should be absorbed out of operating revenues. When these mount up and sta rt to effect the profitability of operation, a rate increase request wo uld be called for. Should a catastro phic event occur, requir­ing a large expenditure, financing would be required. If worse comes to worse and no one is willing to loan the water company funds, and there is a clear need for an expenditure, then the utilit y would have the option of assessing the customers directly. The difference between thi s approach and that suggested by Mr. Symonds is that if assessed, at least the customers wo uld benefit by not having thi s newl y contributed plant added to the rat e base and paying a return on it. Under Mr. Symonds' proposal, the customers wo uld be pro­viding the capital for a utilit y to acquire new plant, a nd in addition be required to cover the depreciation and return cos ts of this new plant. This wo uld not be equitable and should not be allowed. If a utilit y is unable to make the necessa ry invest ment to upgrade or replace plant on its own, it should not expect to earn a return on plant that is contributed to it.

One other point I basically di sagree with, is Mr. Symonds' recommendation to deregulate any utilit y with fewer than 50 connec­tions. While I wo uld personally welcome such a change from a workload point of view (North Carolina regula tes companies with \0 connections), I do not feel it wo uld be of benefit in the long run. These tiny systems a re the ones with most of the pro blems. I would rather assist ve ry small systems by using simplified procedures to ease the burden of obtaining rat e reli ef, filing reports, etc. , and st ill have them regula ted so tha t we could both monitor effec tiveness o f service and be ab le to assist with problems.

So that this letter will not be entirely negati ve, I would like to say that I agree with Mr. Symonds' suggestion with rega rd to the need for a Federal Water Bank, different procedures for regulating water companies, simplified repo rt s, a nd possibly to the need for index­ing certa in uncontrollab le expenses. With rega rd to thi s last it em , I qualify my endorsement because I have yet to see a workable cost e ffec ti ve method of indexing expenses.

18 SPRING 1981

Sincerely yo urs,

Henry Payne PUBLIC STAFF-Water Division North Carolina Utiliti es Com miss ion

p

POTPOURRI DATES TO REMEMBER

NARUC:

Southeastern Association of Regulatory Utility Commissioners

The Galt House Louisville, Kentucky May l7-21 , 1981

-NARUC 1st Western Annual Seminar on Regulation of Water Utilities

University of Utah Salt Lake City, Utah May 18-22, 1981

New England Conference of Public Utilities Commissioners

Balsams Resort Hotel Dixville Notch, New Hampshire June 14-17, 1981

Mid-America Regulatory Commissioners

Marriott Inn Clarksville, Indiana June 21-24, 1981

Western Conference of Public Service Commissions

Outlaw Inn Kalispell, Montana June 21-24, 1981

Great Lakes Conference of Public Utilities Commissioners

The Greenbrier Hotel White Sulphur Springs, West Virginia July 5-9, 1981

NARUC 9th Eastern Annual Seminar on Regulation of Water Utilities

Florida Atlantic University Boca Raton, Florida November 2-6, 1981

NARUC 93rd Annual Convention The St. Francis Hotel San Francisco, California November 16-19, 1981

NAWC:

NA WC New England Chapter Meeting

Harvard Club of Boston Boston, Massachusetts April 24, 1981

NA WC Mid-Year Board Meeting The Hyatt Regency Washington, D.C. April 28-29, 1981

NA WC 85th Annual Conference Hyatt on Union Square San Francisco, California November 18-21, 1981

INDUSTRY:

A WW A lOOth Annual Conference St. Louis Convention Center St. Louis, Missouri June 6-11, 1981

National Water Well Association 33rd Annual Convention

Kansas City , Missouri September 13-16, 1981

ON THE MOVE

General Waterworks Management and Service Company, the Associa­tion's second largest holding com­pany with operations in fourteen states, moved on December 22nd from downtown Philadelphia to their new headquarters building in Bryn Mawr, Pennsylvania, not far re­moved from another member com­pany, Philadelphia Suburban Water Company.

Congratulations and best wishes to General in their new operations head­quarters.

EPA SYMPOSIUM

The EPA is sponsoring an Inter­national Symposium on Health Ef­fects of Drinking Water Disinfectants and Disinfectant By-Products, April 21-24,1981, at the Marriott Inn, Cin­cinnati, Ohio. For a registration form and agenda, please contact the United States Environmental Protection Agency, Center for Environmental Research Information, Cincinnati, Ohio 45268. ~

" ILL"" Bob ~orri ~ " A"ociale I)IIl"ll," "I , \ \\ ( • '1«1 Ihe Ill:" U niled OUR MAN ON THE H " J" A bel l o r I 1l()~IIIC 1111 I ' qH< <11.11" 1I,IIhu (o nab lc

S f S th Dak Ola 1111 I " c States enator rom Oll _' I . H ,\'<1'\ dllli \l l.111 l 1111111111< II" rhllill" 1\ Id~cn a l (R-NY) , ranking Illinont y Ill e illbe l of 11C Ol"C a recent recept ion on the Hill.

NAWC QUA RTER LY 19

Publi shed by the

National Association of Water Companies Suite 11 10, 1019 19th Street , N.W.

Washington, D.C. 20036

BULK RATE U.S. POSTAGE

PAID Permit No. 43846 Washington , D.C.

Your voice in the nation's capital