NARUC Energy Regulatory Partnership Program The Georgian National Energy Regulatory Commission and

1. Regulation of Water Systems in Vermont NARUC Energy Regulatory Partnership Program The Georgian National Energy Regulatory Commission and The Vermont Public Service Board by Geoff Commons Vermont Public Service Department July 2, 2008

2. Areas of Regulation • Economic regulation • Assure financial health of water system • Customers are best served by financially healthy utilities • Assure fairness to customers • Good service at affordable rates • Provide “just and reasonable” rates • Balance between customers, utility

3. Areas of Regulation, continued • Water quality regulation • Prevent and remedy contamination – bacterial, chemical, etc. • Assure physical integrity of system • Guard public health

4. Who regulates public water systems? • Agency of Natural Resources, Water Supply Division – water quality regulation • Executive branch, administrative agency • Responsible for protection of public health • Water quality standards, including chemical and bacteriological quality • Water system engineering and design standards • Source protection • Directs response to incidents of contamination, other threats to public health • Also regulates well drilling, construction

5. Who regulates public water systems? continued • Public Service Board – economic regulation • Quasi-judicial agency • Economic regulation of some (but not all) water systems • Sets rates and terms of service (tariffs) • Reviews borrowing by utilities

6. What systems are regulated? • Water Supply Division (water quality) • Jurisdiction over all public water systems regardless of ownership • Smallest systems – fewer than 15 connections or 25 customers – are exempt

7. What systems are regulated? continued • Public Service Board (economic regulation) • Jurisdiction over privately-owned water systems - statute exempts systems owned by municipalities (towns and fire districts) • No exemption for small systems – even if only one customer! • Systems owned by users are exempt by ruling of Vermont Supreme Court • Economic regulation not needed where customers control water system

8. Systems regulated by Public Service Board • 26 separate systems • Largest has 625 connections • Smallest has 3 • Operators – range from professionals with good management skills, to part-time with minimal skills • Attitudes toward regulation vary

9. Why regulate water systems as utilities? • Safe, affordable water supply critical to life, economy • Natural monopoly • Some – but not all! - customers can “self-generate” by drilling a well, disconnecting from system • Customers leaving system increase costs for remaining captive customers • Rate shock can lead to “death spiral” especially for small, rural systems

10. Regulatory Requirements • Water Supply Division (water quality) • Operating permit – often with conditions • Ongoing testing requirements • Periodic sanitary surveys • Treatment capability usually required (chlorination) • If contamination detected, public notification – “boil notice” • Construction permits and standards • Adequacy of supply for peak demands – pump test, storage capacity • New sources tested before use • Source protection zones – isolation from sources of contamination

11. Regulatory Requirements, continued • Public Service Board (economic regulation) Franchise – Certificate of Public Good (CPG) - criteria: • technical expertise to operate the water system; • providing (or will provide) adequate service to its customers; • demonstrated commitment to maintain facilities; • Management strikes a reasonable balance between the needs of shareholders and the needs of customers; • Financial stability; • ability to obtain adequate capital funding; • good business reputation; • good relationship with customers • history and current status with regard to compliance with WSD's monitoring requirements

12. Regulatory Requirements, continued • Public Service Board, continued • Approval of initial rates – just and reasonable • Terms of service (tariffs) – billing, payment, disconnection, metering, etc. • Review of borrowing • Rate cases – similar to other types of utilities: cost of service, return on rate base • Opportunity for review of service, public input • Public advocate coordinates with WSD – can seek conditions to correct violations, deficiencies • Revocation of franchise possible for chronic mis-management, violations

13. Issues in Water Regulation • Rate design – “you’re not paying for the water” • Several systems serve mostly seasonal residents • Use of “design flows” to set rates • Current users should not pay for system expansion to serve new customers • Economies of scale • Difficult to “grow” systems – may be possible to combine management • Lumpy investments and rate shock • Sinking funds – used by municipalities, others, but not by PSB-regulated systems – intergenerational equity concerns • pipe replacement programs • rate phase-in – only possible with company’s agreement • Owner/operator capabilities vary widely • Reluctance to file rate cases causes degradation of service, eventual rate shock • May lead to “innovative” solutions to problems • Reluctance to file may result from wish to avoid scrutiny, aversion to legal process, having to face unhappy neighbors

14. Issues in Water Regulation, continued • Cost of regulation for small systems • Benefits of customer control • Non-payment issues • Disconnection works! • Not always feasible – multi-unit buildings, lack of shut-offs • Settlements, transfers, other issues?