Pa. American Water leader talks capital projects, regulations - Central Penn Business Journal

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For the past fi ve years, Derry Township- based Pennsylvania American Water has spent $150 million or more annually on capital investments due to aging infrastructure, stricter water quality standards and a growing population.

Th e last two years have equated to about $500 million alone, including a $7.5 million upgrade at the company's G.C. Smith Water Treatment Plant in South Hanover Township.

Built in 1992, the plant has been under renovation since September 2010. Th e East Shore facility, which serves about 18,000 customers in the Hershey area, is expected to be fi nished by June, company President Kathy Pape said. Th e plant's production capacity will increase to 11 million gallons per day from 9.3 million.

Pennsylvania American Water, a subsidiary of New Jersey-based American Water Works Co. Inc. and the largest regulated water utility in the commonwealth, also is installing additional pumping systems, a chlorine gas scrubber to improve public safety and a new backup generator, Pape said.

Pape, 59, became president of the company in 2007. She was senior vice president, treasurer and rate counsel at Bryn Mawr-based Aqua America Inc.

She holds a bachelor's degree from Edinboro University, law degree from Dickinson School of Law and a master's in taxation from Villanova University School of Law.

Pape lives in Hampden Township with her husband, Robert Trinkle. Th ey have three children.

Th e Business Journal recently sat down with Pape to discuss several topics, including ongoing capital improvement projects, rate increases and federal regulations. One of those regulations - a transition to chloramine disinfectant - resulted in a legal fi ght between the company and several customers in the Camp Hill area from 2007 to 2010.

Chloramine is a mixture of chlorine and ammonia used to address known health risks that the U.S. Environmental Protection Agency has identifi ed with chlorine's disinfection byproducts. Th e regulation took eff ect this year.

Pennsylvania American Water made the switch on the West Shore in July 2010 and plans to do the same on the East Shore this summer. During the legal fi ght, the company also was dealing with backlash from a series of main breaks in the Camp Hill area following water pressure increases made as part of system upgrades.

Q: Pennsylvania American Water invested about $1.2 billion between 2005 and 2011 to improve infrastructure across Pennsylvania. How much more is needed and what is the timeline for additional improvements?

A: It really depends on the project. In terms of infrastructure - what's underground anyway - we're on about a 1 percent replacement rate. Th at's basically replacing the system over 100 years because pipe lasts about 100 years. We try to address any regulations, any compliance issues fi rst, customer needs for service or reliability, and then any kind of discretionary projects.

We try to balance it out. We have a fi ve-year capital plan.

(In) 1996, the legislature authorized the industry for water projects - anything that is a replacement project (like) pipe, main services, meters and hydrants (that doesn't) generate any new revenue. Th e company can replace them and each quarter recover the cost through rates. Th at (distribution system improvement charge) is paying for that replacement infrastructure.

Just recently the legislature passed and the governor signed House Bill 1294, which permits us to do the same thing for wastewater.

Th e monthly rate on commercial customers was recently raised by an average of 9 percent. How do you balance rate increases with capital investments?

Th e (Pennsylvania Public Utility) Commission authorizes us to earn a certain return on our investment, so we try to achieve that return. What most customers don't realize is the cash we derive from rates is not enough to cover the capital investments that we need to comply with new regulations and to replace infrastructure.

Th at means we have to go to the bond market and the stock market to attract capital. Th e capital that we attract we want to keep as low as possible. For example, we do tax-exempt fi nancing and that keeps that cost to capital low. We also use what's known as Pennvest, (or) Pennsylvania Infrastructure and Investment Authority funding, which usually provides us with rates on certain types of projects between 1 and 3 percent. Once again, that keeps the return on capital down.

What acquisitions have been made over the last year and what role do these deals play in the company's growth and cost strategy?

We did a couple in 2011, one called Applewood (Water Co.) in Lackawanna County and one called Wildcat Park (Water System) in Schuylkill County. (Th ese are) not large acquisitions, but part of what we do is push out from where our systems are. We own a system in Frackville, which is in Schuylkill County, so we can use our existing base of employees to cover any new ones.

We continue to look where we can add value as a wastewater provider (and) to do so at a reasonable price.

New home construction has been fl at and the market is still struggling in many areas. How has the company been impacted by the housing market and lack of new construction?

When housing is booming, we put main extensions into new developments. Overall, in our service area, we're in 36 counties, there was never a big housing boom, so there was never a real big bust either. It's not a signifi cant impact on our business.

Th e way we extend lines so that we don't throw our existing customer base at risk (is) if a developer is going to develop an area, say 1,000 homes, they pay for the pipe to get there and pipe within the development. We put it in or they can put it in under our (specifi cations), and then as customers come online we refund money on a per customer basis. When it does build out, the developer gets his money back because revenue is generated to help reduce rates to everybody else.

Th ings were pretty fl at (in 2009). In 2010, we started to see things come back more. We did more developer agreements last year, so we see it coming back. We certainly see improvement. Right after 2008, I think everyone was so risk averse. Nobody builds on spec anymore.

How has technology changed the way you do business?

In treatment, the big thing is what we call SCADA, or Supervisory Control and Data Acquisition. You can operate and review data related to your tank levels, to your chemical treatment processes, and from here you can see what's going on at West Shore. From West Shore here, you can see it from your home if you were an operator.

In the old days, all chemical measurement, injection, it was all manual. Now the computer can address how much water, the water quality and inject chemicals as needed.

We also are installing throughout the commonwealth automatic meter reading. (Employees) don't have to go into a house anymore. It's similar to your E-ZPass. You can read the meters from the truck. It's basically drive-by reading.

Pennsylvania American Water took some heat over main breaks in the Camp Hill area a few years ago. At the same time, a West Shore transition to chloramine treatment was a controversial issue. How much did those issues impact your public image and/or bottom line?

In retrospect, we probably could have done a better job of communicating with the public, in particular about the system integration. System integration is what generated some of the breaks.

Overall, it (was) best for service (and) reliability (to put) those two pieces of the system together. We had to increase the (water) pressure to implement the integration.

The chloramination, a move from chlorine disinfection to chloramine disinfection, we needed to do that because of the disinfection byproducts. There was a small group of people who didn't want that to occur for a variety of reasons. They made it a bigger issue.

What are some of the new federal drinking water standards that took effect this year and how have they changed treatment, delivery and cost?

Disinfection byproduct, which is the reason to go from chlorine to chloramine treatment, is going into effect this year. That's the regulation that looks at how long your organic matter sits with chlorine and that's why we needed to add ammonia to the chlorine.

We also have going into effect in 2012 the groundwater rule, which really is a data collection rule related (to wells). The new rule requires that we collect data so they can look at chlorine contact time.

There are costs of tracking the data, so if you have well systems, you have to be looking every 15 minutes (and) testing for bacteria and then you're reporting that information. That's costly in terms of capital.

The third biggest one really is dam safety regulations (from the state Department of Environmental Protection) that are creating two or three of our projects - a couple dams in the northeast and one out in the west. Those are the three I think of when I think about what (is) driving capital improvements in 2012, 2013.

It's what causes our increasing rates, our compliance with those regulations.

[Sidebar]

'What most customers don't realize is the cash we derive from rates is not enough to cover the capital investments that we need to comply with new regulations and to replace infrastructure.'

Kathy Pape, Pennsylvania American Water

[Author Affiliation]

By JASon SCoTT

jasons@journalpub com