West Virginia American Water Appeals PSC Order to State Supreme Court; Order Has Significant and Immediate Impact On WVA's Ability to Expand Service.

Business Editors

CHARLESTON, W. Va.--(BUSINESS WIRE)--Feb. 3, 2004

West Virginia American Water yesterday asked the State Supreme Court to review the Public Service Commission's (PSC) order of Jan. 2 arguing that it failed to provide adequate compensation for the company's investment in water utility infrastructure.

"This is a historic moment where the state will decide if we are really committed to providing all people with reliable, quality water service," said Chris Jarrett, president of West Virginia American Water. Because the PSC Order did not authorize what the Company considered an adequate rate of return, expansion of the state's water service could be significantly curtailed. This will mean the West Virginia American Water will have to think twice before deciding to invest in future expansion projects that could bring reliable water service to more than 400,000 people.

Counsel for West Virginia American Water asked the state's highest court to hear arguments related to the return on equity (ROE) granted in the rate case order. West Virginia American Water had asked for a 10.25 percent return on the money its investors committed to expanding water service in the state. The PSC authorized only a 7 percent rate of return, despite the company's track record of investment. West Virginia American Water has invested more than $360 million in the state since 1994.

Jarrett said the company will still comply with all its previous commitments to the PSC which includes an $85 million investment in the state's water system over five years. In 2003 the West Virginia American Water invested more than $20 million toward those commitments.

"We have interpreted this Order to mean that the state does not want utilities regulated by the PSC to invest in West Virginia and that we are an unfriendly place to do business," said Jarrett. "It will cost people jobs, end the expansion of water service and stymie future economic growth dependent on access to quality water."

In its appeal filed with the court, the company said the PSC order:

-- "Is legally wrong and contrary to the public interest" and

"slams the door on utility investment in West Virginia."

-- Does not meet the Constitutional test that says the ROE must

"be adequate to retain and attract continued investment."

-- Ignored critical evidence by the company, and does not meet

the Supreme Court's requirement that all essential elements of

an order be supported by "adequate and substantial evidence."

-- Is substantially out of line with recent ROEs awarded across

the country.

"People who invest their money have a right to expect a return that is comparable with other similar investments," said Jarrett. "The reality is this Order was completely out of line with what investors expect from a utility. In effect, the PSC's Order has placed West Virginia at a competitive disadvantage with the rest of the country. The implication however, is that continued investment in pipes, booster stations and other water treatment facilities, expansion to underserved, as well as un-served areas will be seriously compromised."

Jarrett said another reason the company opted to appeal to the Supreme Court is that the order contradicts the expressed desire of the State Legislature in the mid-1990s to make the necessary investment in water and sewer systems to provide citizens with the basic right of quality water and sewer service. In good faith, the company invested more than $366 million to bring quality water service to approximately 100,000 West Virginians who either had no service or substandard service. Much of this was done through public-private partnerships with local governments, the company's appeal says.

In its appeal, West Virginia American Water says, "In addition to the societal and public health benefits, these public-private projects stimulated economic development, reduced fire insurance rates, increased property values and generated more tax revenues for counties and schools."

"Over the same period of time we made these investments, we held the growth in our operating expenses to approximately 1.36 percent a year, which means we were operating in a very efficient manner," said Jarrett. "While bringing the efficiency of private business to the water industry here, we are now being penalized for making needed investments in our state. That is just not right."

"The reality of water rates is that the PSC sets our rates, and in return for being regulated, we have the right to be treated fairly. The terrain in West Virginia makes it far more costly to provide water service than most places in America, but West Virginia American Water's customers still receive quality, reliable water service for approximately $1 a day, and that is a good value. The Consumer Advocate Division of the PSC has taken the position that rates are too high, but that ignores the true cost of providing water service."

"We have to do a better job of educating our customers about the true cost of water. I have faith that the people of this state will understand that you cannot expect to have quality water without adequate rates to cover the cost of providing that water."