Title of Regulation: 20VAC5-318. Water and Wastewater Infrastructure Service Charge (adding 20VAC5-318-10, 20VAC5-318-20).

Statutory Authority: §§ 12.1-13 and 56-235 of the Code of Virginia.

Public Hearing Information: A public hearing will be scheduled upon request.

Public Comment Deadline: November 7, 2014.

Agency Contact: Frederick Ochsenhirt, Attorney, Office of General Counsel, State Corporation Commission, P.O. Box 1197, Richmond, VA 23218, telephone (804) 371-9070, FAX (804) 371-9549, or email frederick.ochsenhirt@scc.virginia.gov.

Summary:

Pursuant to §§ 12.1-13 and 56-235 of the Code of Virginia, the State Corporation Commission is proposing rules to permit Virginia water and wastewater utilities to apply for commission approval of a water and wastewater infrastructure service charge (WWISC) to recover the costs of replacing aging infrastructure and address primary and secondary water quality by prioritizing the highest risk facilities and replacing these on an accelerated basis. The proposed rules establish (i) the parameters for utilities to apply for a WWISC; (ii) the WWISC plan for investing funds collected from ratepayers; and (iii) the WWISC rider, which is a mechanism for collecting charges from customers. The proposed rules also require eligible utilities to file with the commission an annual reconciliation to reconcile the difference between the recognized eligible infrastructure costs and the amounts recovered under the WWISC rider.

AT RICHMOND, AUGUST 19, 2014

PETITION OF VIRGINIA AMERICAN
WATER COMPANY, AQUA VIRGINIA,
INC., AND MASSANUTTEN PUBLIC
SERVICE CORPORATION

CASE NO. PUE-2014-00066

For Rulemaking to establish a Water and
Wastewater Infrastructure Service Charge

ORDER ESTABLISHING PROCEEDING

On June 27, 2014, Virginia American Water Company, Aqua Virginia, Inc., and Massanutten Public Service Corporation (collectively, "Petitioners"), filed a Petition for Rulemaking ("Petition") requesting that the State Corporation Commission ("Commission") initiate a rulemaking to establish rules allowing water and wastewater companies in Virginia to apply to the Commission for the establishment of a Water and Wastewater Infrastructure Service Charge ("WWISC").

Water and wastewater utilities are obligated to provide safe and reliable service to their customers and to have adequate distribution, treatment and production facilities to furnish this service.¹ According to the Petitioners, much of the water infrastructure in Virginia, and indeed throughout the Country, was installed during the first half of the last century and is quickly approaching the end of its useful life, if it has not already done so.² The Petitioners state that the U.S. Environmental Protection Agency estimates that Virginia drinking water facilities will need $6.7 billion in infrastructure investments over the next 20 years.³

According to the Petitioners, infrastructure replacement does not generate additional revenue as it does not connect new customers to the system and cannot be easily timed with the filing of a base rate case as such work needs to happen on a relatively constant basis.⁴ Thus, the Petitioners request that the Commission initiate a rulemaking that would lead to the adoption of rules that establish a WWISC for water and wastewater utilities. Under the rules, water and wastewater utilities would be permitted to apply to the Commission to establish a plan for investing in eligible infrastructure ("WWISC plan") and for the recovery of the costs of such a program. Through the WWISC plan, utilities would be permitted to replace aging infrastructure and address primary and secondary water quality systematically and to prioritize the highest risk facilities and replace these on an accelerated basis. As part of the WWISC plan, each utility would develop and implement a WWISC rider that would allow for the timely recovery of the costs of these non-revenue producing investments.⁵

The Petitioners assert that promulgation of rules establishing the WWISC and WWISC rider is within the Commission's existing authority under §§ 12.1 and 56-235 of the Code, which charges the Commission with the duty of regulating the rates, charges, services and facilities of all public service companies and gives the Commission the authority to fix just and reasonable rates of such companies. The Petitioners further assert that adoption of the rules proposed in the Petition "is in the public interest as it will establish an efficient mechanism for water and wastewater utilities to accelerate replacement of critical infrastructure to assist the Petitioners in continuing to provide reasonable and adequate service to their customers.⁶

NOW THE COMMISSION, upon consideration of the matter, is of the opinion and finds that a proceeding should be established to consider adopting a regulation to establish a WWISC for water and wastewater utilities. The rules proposed by the Petitioners ("Proposed Rules") are appended to this Order. We direct that notice of the Proposed Rules be given to the public and that interested persons and the Commission Staff be provided an opportunity to file written comments on, propose modifications or supplements to, or request a hearing on the Proposed Rules. We further direct that the Petitioners serve a copy of this Order upon each of their customers and file a certificate of service.

We direct that any person commenting on the Proposed Rules also address the following questions: (1) does the Commission have authority under the Code to issue the Proposed Rules; and (2) assuming the Commission has such authority, is it appropriate for the Commission to exercise such authority absent specific statutory direction from the Virginia General Assembly?

Accordingly, IT IS ORDERED THAT:

(1) This case is docketed and assigned Case No. PUE-2014-00066.

(2) The Commission's Division of Information Resources shall forward a copy of this Order Establishing Proceeding to the Registrar of Regulations for publication in the Virginia Register of Regulations.

(3) On or before September 15, 2014, each Petitioner shall serve a copy of this Order upon each of their customers and file a certificate of service no later than September 22, 2014, consistent with the directive above.

(4) On or before November 7, 2014, any interested person may comment on, propose modifications or supplements to, or request a hearing on the Proposed Rules by filing an original and fifteen (15) copies of such comments or requests with Joel H. Peck, Clerk, State Corporation Commission, c/o Document Control Center, P.O. Box 2118, Richmond, Virginia 23218. Individuals should be specific in their comments, proposals, or supplements to the Proposed Rules. Any request for hearing shall state with specificity why the issues raised in the request for hearing cannot be adequately addressed in written comments. If a sufficient request for hearing is not received, the Commission may consider the matter and enter an order based upon the papers filed herein. Interested parties shall refer in their comments or requests to Case No. PUE-2014-00066. Interested persons desiring to submit comments electronically may do so by following the instructions available at the Commission's website: http://www.scc.virginia.gov/case.

(5) Any person commenting on the Proposed Rules shall also address the following questions: (a) does the Commission have authority under the Code to issue the Proposed Rules; and (b) assuming the Commission has such authority, is it appropriate for the Commission to exercise such authority absent specific statutory direction from the Virginia General Assembly?

(6) The Commission Staff shall file any comments on, proposed modifications or supplements to, or request for hearing on the Proposed Rules on or before December 8, 2014.

(7) This matter is continued.

AN ATTESTED COPY hereof shall be sent by the Clerk of the Commission to:

Richard D. Gary, Esquire, and Timothy E. Biller, Esquire, Hunton & Williams LLP, Riverfront Plaza, East Tower, 951 East Byrd Street, Richmond, Virginia 23219; and C. Meade Browder, Jr., Esquire, Division of Consumer Counsel, Office of the Attorney General, 900 East Main Street, Second Floor, Richmond, Virginia 23219. A copy also shall be sent to the Commission's Office of General Counsel and Divisions of Energy Regulation and Utility Accounting and Finance.

_________________________________________________

¹See Code of Virginia §§ 56-234 and 56-261 ("Code").

²Petition at 2.

³Id. at 3; U.S. Environmental Protection Agency, Drinking Water Infrastructure Needs Survey and Assessment, 5th Report to Congress, at 18 (Apr. 2013).

⁴Petition at 4.

⁵Id. at 5.

⁶Id. at 6-7.

CHAPTER 318
WATER AND WASTEWATER INFRASTRUCTURE SERVICE CHARGE

20VAC5-318-10. Definitions.

The following words and terms when used in this chapter shall have the following meanings unless the context clearly indicates otherwise:

"Commission" means the State Corporation Commission.

"Eligible infrastructure" means a water utility project or wastewater utility project that: (i) maintains and enhances safety, reliability, and efficiency; (ii) addresses primary and secondary water quality standards as defined by the Virginia Department of Environmental Quality, Virginia Department of Health, or U.S. Environmental Protection Agency; or (iii) reduces or has the potential to reduce unaccounted-for water, or mitigates negative environmental impacts. Eligible infrastructure shall not include the investment in water utility or wastewater utility infrastructure included in the water or wastewater utility's rate base in its most recent rate case or include projects that increase revenues by directly connecting the infrastructure to new customers.

"Eligible infrastructure costs" includes the following:

1. Return on investment. The utility's rate of return on rate base approved by the State Corporation Commission in the utility's most recent rate case shall be used in WWISC riders. In calculating the return on the investment, the commission shall use the water or wastewater utility's regulatory capital structure as calculated utilizing the weighted average cost of capital, including the cost of debt and the cost of equity used in determining the water or wastewater utility's base rates in effect during the construction period of the water and wastewater utility project. If the water or wastewater utility's cost of capital has not been changed by order of the commission within the preceding five years, the commission may require the utility to file an updated weighted average cost of capital, or the utility may propose an updated weighted average cost of capital. The utility may recover the external costs associated with establishing its updated weighted average cost of capital through the WWISC rider. Such external costs shall include legal costs and consultant costs;

2. A revenue conversion factor, including appropriate taxes and an allowance for an uncollectable net charge-off percentage, shall be applied to the required operating income resulting from the eligible infrastructure costs;

3. Depreciation. In calculating depreciation, the commission shall use the water or wastewater utility's current depreciation rates specific to the applicable asset;

4. Property taxes;

5. Carrying costs on the over or under recovery of the eligible infrastructure costs. In calculating the carrying costs, the commission shall use the water or wastewater company's regulatory capital structure as determined in subdivision 1 of this definition; and

6. Unreimbursed costs of relocating facilities due to highway projects.

"Investment" means costs incurred on eligible infrastructure projects net of retirements including planning, development, and construction costs and costs of infrastructure associated therewith.

"In-kind replacement" means replacement with new materials or equipment designed, constructed, and sized to meet current industry standards and federal, state, or local regulation.

"Water utility" means an investor-owned public service company engaged in the business of furnishing water service to the public.

"Wastewater utility" means an investor-owned public service company engaged in the business of furnishing wastewater service to the public.

"Water utility project" means (i) in-kind replacement of transmission and distribution system mains, valves, utility service lines (including meter boxes and appurtenances), meters (including radio frequency meters), and hydrants; (ii) nongrowth related main extensions installed to eliminate dead ends that will address primary and secondary drinking water standards; (iii) equipment and infrastructure installed to address primary and secondary drinking water standards; and (iv) unreimbursed costs of relocating facilities due to highway projects.

"Wastewater utility project" means: (i) non growth related collection main extensions installed to implement solutions to wastewater problems; (ii) in-kind replacement of infrastructure necessary to reduce inflow and infiltration to the collection system to comply with applicable state and federal law and regulations; (iii) improvements required by National Pollutant Discharge Elimination System permits; (iv) unreimbursed costs of relocating facilities due to highway construction or relocation projects; and (v) in-kind replacement of pumps, motors, blowers, tanks, and mechanical equipment.

"WWISC plan" means a plan filed by a water or wastewater utility that identifies proposed types of eligible infrastructure projects and a WWISC rider.

"WWISC rider" means a recovery mechanism that will allow for recovery of the eligible infrastructure costs through a separate mechanism from the customer rates established in a rate case.

20VAC5-318-20. Filing of petition with commission to implement a WWISC plan and rider; recovery of certain costs; procedure.

A. A water or wastewater utility may petition the commission for the approval of a WWISC plan. Such a petition for approval of a WWISC plan shall include the following:

1. A description of the categories, types, and cost estimates of eligible infrastructure projects to be included in the WWISC plan.

2. The effective date of the WWISC rider.

3. Sample computation of the WWISC rider.

4. Duration of the WWISC plan.

5. The method by which the utility will provide annual updates of the WWISC rider.

B. The commission may approve the initial petition for establishment of a WWISC plan and WWISC rider after such notice and opportunity for hearing as the commission may prescribe. The commission shall approve the initial petition if the applicant demonstrates that the WWISC is prudent and reasonable. The commission shall approve or deny, within 180 days, a water or wastewater utility's initial petition for approval of a WWISC plan. An application filed pursuant to this section shall not require the filing of rate case schedules under 20VAC5-201.

C. Once the commission approves the initial petition implementing a WWISC Plan and WWISC rider for a water or wastewater utility, that entity may file tariff updates and, if needed, revised long-term plans on a yearly basis. Following approval of the initial petition, the commission may accept annual updates to the WWISC plan that contain the information in subsection A of this section on an administrative basis.

D. The WWISC rider shall be calculated to recover the ongoing eligible infrastructure costs of water utility projects and wastewater utility projects projected to be placed in service during the water or wastewater utility's next fiscal year. The WWISC rider shall be calculated and updated on a yearly basis to reflect eligible infrastructure projected to be placed in service during the upcoming annual WWISC period.

E. Any WWISC petition and rider that is submitted to and approved by the commission shall be allocated and charged in accordance with appropriate cost causation principles in order to avoid any undue cross subsidization between rate classes.

F. No other revenue requirement or ratemaking issues may be examined in consideration of the application filed pursuant to the provisions of this chapter.

G. At the end of each 12-month period the WWISC rider is in effect, the water or wastewater utility shall reconcile the difference between the recognized eligible infrastructure costs and the amounts recovered under the WWISC rider and shall submit the reconciliation and a proposed WWISC rider adjustment to the commission to recover or refund the difference, as appropriate, through an adjustment to the WWISC rider. The commission shall approve or deny, within 90 days, a water or wastewater utility's proposed WWISC rider adjustment.

H. A water or wastewater utility that has an approved WWISC petition pursuant to this chapter shall file revised rate schedules to reset the WWISC rider to zero when new base rates and charges that incorporate eligible infrastructure costs previously reflected in the currently effective WWISC rider become effective for the water or wastewater utility following a commission order establishing customer rates in a rate case.

I. Costs recovered pursuant to this chapter shall be in addition to all other costs that the water or wastewater utility is permitted to recover and shall not be considered an offset to other commission-approved costs of service or revenue requirements.

J. Upon approval by the commission, a WWISC rider shall be considered an automatic rate adjustment clause for purposes of § 56-235.4 of the Code of Virginia.