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Water Companies Will Earn Faster ROI on Infrastructure Upgrades

BPU OKs new regulations for water utilities, declines to do same for gas companies

Wednesday, October 24, 2012

Heavy clamps for connecting pipes lay on the ground. Heavy clamps for connecting pipes lay on the ground.

A state agency on Tuesday voted to allow three water utilities to recoup their investments in upgrading aging infrastructure more quickly and without extensive regulatory review. The change, advocates say, will improve reliability and reduce costs to consumers in the long run.

The New Jersey Board of Public Utilities passed the new rules after a nearly decade-long push on the part of state-regulated water companies, who want to adopt the policies used by other states to rapidly replace aging water systems. Some of New Jersey's conduits and valve are more than a century old.

The agency -- in a separate matter before it -- rejected a similar proposal from the gas utilities. Many of these companies face the same problems: how to overhaul infrastructure that contains corroding pipelines, which are more vulnerable to leaks and ruptures.

Nevertheless, the BPU did approve a four-year, $130 million program to upgrade the New Jersey Natural Gas pipeline system. Customers are not expected to see any increases in their bills until the utility’s next rate case, which is not likely to be decided before the end of 2015.

The BPU's decision not to initiate a similar mechanism for gas utilities is significant. It blunts an effort by natural-gas companies to benefit from the same type of quick recovery of investments when replacing aging infrastructure.

In May, after the BPU approved a new regulation allowing water utilities to more rapidly recoup investments in their water mains, the chief executive officer of the state’s largest gas utility, Public Service Electric & Gas, said his company would seek the same type of treatment.

“It is a really good opportunity to take advantage of low gas prices and available labor to make investments that will have to be made at some point,’’ said Ralph Izzo, president, CEO, and chairman of Public Service Enterprise Group, the owner of PSE&G.

BPU President Robert Hanna argued that the two issues are separate and distinct. “We need to see the details,’’ he said after the meeting in the Statehouse Annex, referring to the gas utilities. “It’s a very company-specific inquiry.’’

There was no such hesitation in approving requests from United Water New Jersey, Aqua New Jersey, and New Jersey–American Water Company to speed up spending on infrastructure improvements and more quickly bill customers for the costs. Each of the filings won unanimous approval from the commissioners.

The price of repairing and replacing state’s water and sewage pipes and treatment plants is estimated at more than $20 billion, according to the American Society of Civil Engineers. With the average age of sewer lines being more than 70 years and the estimated life expectancy of pipe at 50 years, the state is approaching a time when unanticipated failures may occur.

For ratepayers, the approvals will cause only a modest rise in water bills, according to the agency.

The most customers will pay due to the accelerated investments in upgrading pipelines, replacing valves and other projects will range from $1.77 a month for United Water, $2.04 a month for Aqua, and $2.97 a month for New Jersey-American Water, according to the stipulations agreed to with the BPU and the state Division of Rate Counsel.

“It is just another step in enhancing the overall infrastructure of water companies,’’ said BPU Commissioner Joseph Fiordaliso, who noted a recent report found some water companies loses as much as 20 percent of their water supplies due to infrastructure problems, such as leaking main pipelines. “It is something that has to be addressed across all the utilities,’’ he added.

The financing mechanism, dubbed a distribution improvement system charge, or DISC, would have significant positive impact on the long-term reliability of the water delivery system, as well as the additional benefit of creating jobs, proponents said.

According to officials at New Jersey-American Water, the utility -- the state’s largest with 645,000 customers -- would spend about $100 million a year over the next three years improving its delivery system. The spending could create up to 700 jobs annually, company officials said.

Initially pushed by the Voorhees-based company, the rule change allows a utility to pass along the cost of routine infrastructure upgrades, such as water main replacements, as long as the projects do not cause customers’ bills to exceed a cap of 5 percent of its revenue.

New Jersey-American has more than 8,700 miles of underground water pipeline, the majority of which was put in shortly after World War II, according to Peter Eschbach, director of communications for the company.

Fifteen percent of the company’s infrastructure is more than 100 years old, Eschbach said.

“It’s aging faster than we can replace,’’ he said. “The challenge we’re facing it is out of sight and out of mind -- until something goes wrong.’’

New Jersey American Water customers will not see any increases in their bills until next June at the earliest, company officials said. They projected a boost in monthly bills much smaller than the BPU, averaging about 30 cents for the typical residential customer.

United Water expects to ramp up spending between $14.2 million a year and $27.9 million a year over the next four years, according to Greg Reinert, a spokesman for the BPU.

NJ Spotlight is an online news service providing insight and information on issues critical to New Jersey, with the aim of informing and engaging the state’s communities and businesses. Read more From New Jersey Spotlight.

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