Office of the Attorney General: TENNESSEE AMERICAN WATER RATE CASE

FROM THE OFFICE OF THE ATTORNEY GENERAL

August 19, 2008

The Tennessee Attorney Generalˇ¦s Office, Consumer Advocate (AG) has intervened in the Tennessee American Water (TAWC) rate case before the Tennessee Regulatory Authority (TRA). The AG participates in matters before the TRA, state courts, and federal agencies to represent the interests of consumers in the areas of telecommunications, energy, sewer and water issues.

The TRA defines its mission as the promotion of the public interest by balancing the interests of utility consumers and providers, while facilitating the transition to a more competitive environment. In the present matter, there are no competitors providing water service to the customers of TAWC. As a monopoly, TAWC does not face the same pressures a fully developed market would place on the rates TAWC charges consumers. As a result, the Tennessee Legislature placed companies like TAWC under the jurisdiction of the TRA. At the end of the rate case, the TRA will set the amount TAWC may charge each customer for water service.

This Office has pre-filed testimony of numerous experts supporting the need for an approximate $1.49 million rate reduction for Chattanooga residents. We look forward to representing the ratepayers of Tennessee to urge the TRA to reject the rate increase of approximately $7.93 million sought by TAWC. The hearing on the merits starts Monday, August 18, in Chattanooga at the Hamilton County Courthouse. Sharon Curtis-Flair, the Director of Communications for the Tennessee Attorney Generalˇ¦s Office, will be available at the hearing on Monday and Tuesday and by telephone [(615) 741-5860] for comments or questions from the media. The public will have an opportunity to comment on Monday, August 18, from 6:30 to 8:30 PM and Tuesday August 19, from 8:30 to 9:30 AM.

The following is a summary of the major differences in the positions taken by the AG and TAWC:

„X The AGˇ¦s expert, Terry Buckner, asserts that TAWC will collect about $2.4 million more in operating revenue than TAWC has estimated in its rate increase petition. 2 „X The AGˇ¦s expert, Terry Buckner, is projecting that TAWCˇ¦s operation and maintenance expenses should be $1.7 million less than the amount TAWC has projected in its petition. „X The AGˇ¦s expert, Charles W. King, has calculated depreciation expenses as approximately $400,000 less than TAWC.

„X The AGˇ¦s expert, Terry Buckner, has calculated $100,000 less in Taxes Other Than Income than that sought by TAWC. „X The AGˇ¦s expert, Terry Buckner, has calculated $1 million less in federal and state income taxes than income tax estimates of TAWC. „X The AGˇ¦s expert, Dr. Stephen Brown, has calculated about $3.4 million less is needed for TAWC to make a fair profit due to the AGˇ¦s lower cost of capital. „X The AGˇ¦s proof indicates that about $400,000 less is needed in revenues for TAWC to earn a fair profit; this is due to the AGˇ¦s lower Gross Revenue Conversion Factor calculation. The Gross Revenue Conversion Factor takes into account the fact that a utility does not receive all of each dollar it collects. In other words, for each dollar collected the company must pay taxes. In order for a company to generate revenues of a certain amount, the companyˇ¦s net income must be converted up. The difference between the company and the AGˇ¦s case rests on the fact that TAWC has used a Gross Revenue Conversion Factor that is too high.

GENERAL BACKGROUND INFORMATION

Normally, a rate case is initiated by a utility requesting that the revenues it collects from customers be changed. The filing is made at the TRA in the form of a petition, with attached direct testimony and exhibits from the company witnesses. By law, the TRA has nine months to consider its petition. Most rate cases are finished within six months. At the six month interval, the company may put the new proposed rates into effect, subject to refund. Within the six month period, parties may intervene, especially those that oppose the rate increase. The parties file a petition to intervene but must wait until the TRA grants the petition and grants the request of the parties to seek discovery from the company.

During the initial discovery phase, the parties submit written interrogatories or data requests to each other seeking information that is not contained in the testimony and exhibits filed at the TRA. The company seeking the rate increase normally is the party with most of the information necessary to evaluate the need for the requested revenue change. This stage of the discovery process is sometimes contentious in nature. Prior to the hearing, the intervenors present their own direct testimony, which is followed by a second round of discovery and the filing of rebuttal testimony by the company.

At the hearing, witnesses provide a summary of their written testimony and are tendered for cross examination by other parties and oftentimes questioned by the TRA staff and the directors 3 deciding the issues of the rate case. The parties present closing arguments either at the hearing or in post hearing briefs. The TRA then evaluates the evidentiary record presented and makes its decision after public deliberations. A contested case such as a rate case is heard by a panel of three of the four directors. A majority of the panel [two directors] is required to decide each issue.

BACKGROUND INFORMATION ON THE TAWC CASE

For the fourth time in six years, TAWC has filed a request to increase rates with the TRA. The rate increases received in the three prior cases total 23.4 % for consumers. The last rate case resulted in new rates effective May 22, 2007. In that case, the AG sought a decrease of $2 million, and TAWC sought an increase of $6.4 million in its rates. The TRA ultimately ordered a $4.1 million increase in rates. The AG has intervened in each of these prior cases and in the current case to represent the interests of consumers.

In the current rate case, TAWC is seeking an approximately $7.93 million increase in rates. The AG has filed evidence in the rate case supporting the need for an about $1.49 million decrease in rates. The AGˇ¦s filings can be found at http://www.state.tn.us/tra/dockets/0800039.htm. Basically there is an approximate $9.42 million difference in the proof filed by TAWC and the AG. The City of Chattanooga and the Chattanooga Manufacturers Association have also intervened in the case to oppose the rate hike. By way of summary, the AGˇ¦s testimony filed in the rate case indicates TAWC has requested about $9.4 million more in customer charges than the company actually needs to meet its expenses and to provide a fair rate of return to shareholders while providing quality water services to its customers.

TAWC is requesting an average rate increase rate of approximately 22.3%, and the AG is requesting the rate be lowered by approximately 4.2%. The AG is concerned that the rates proposed by TAWC would result in the City of Chattanoogaˇ¦s residents having a higher water rate than five other major Tennessee cities (Memphis $12.47, Nashville $12.12, Jackson $12.85, Knoxville $18.22 and Murfreesboro $18.32). If approved, Chattanooga rates would be about $23.83 per 5,000 gallons of water.