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Rate and Regulatory Matters

12 Months Ended

Dec. 31, 2012

Note 2 - Rate and Regulatory Matters

Rate Matters

Middlesex - In July 2012, the NJBPU approved an $8.1 million increase in Middlesex’s annual base water rates. A base rate increase request of $11.3 million was filed in January 2012 seeking recovery of increased costs of operations, chemicals, fuel, electricity, taxes, labor and benefits and decreases in industrial and commercial customer demand patterns, as well as capital investment in utility plant. The new base rates are designed to generate sufficient revenue to recover these increased costs and offset the lower customer demands, as well as provide a return on invested capital in rate base of $202.4 million, based on a return on equity of 10.15%. The rate increase became effective on July 20, 2012.

In November 2012, Middlesex filed a petition with the NJBPU seeking approval of foundational information (Foundational Filing) that would allow for the implementation of a Distribution System Improvement Charge (DSIC). A DSIC is a rate-mechanism that allows water utilities to recover investment in capital improvements to their water distribution system made between base rate proceedings. In February 2013, the Foundational Filing was approved by the NJBPU, which allows Middlesex to implement a DSIC rate in September 2013 to recover costs for qualifying projects that are placed in service in the six-month post-approval period. The DSIC rate is allowed to increase in three subsequent six month periods for any additional qualifying projects placed in service during those time periods. The maximum annual revenues allowed to be recovered under the approved Foundational Filing is $1.4 million.

In September 2012, Middlesex filed an application with the NJBPU seeking permission to establish a Purchased Water Adjustment Clause (PWAC) and implement a tariff rate sufficient to recover increased costs of $0.1 million to purchase untreated water from the NJWSA and treated water from a non-affiliated regulated water utility. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request.

In March 2010, the NJBPU granted an increase in Middlesex’s annual operating revenues of 13.57%, or $7.8 million. The increase was necessitated by increased costs, as well as to provide a return on invested capital in rate base of $180.3 million based on a return on equity of 10.30%.

Tidewater – In June 2012, the DEPSC approved a $3.9 million increase in Tidewater’s annual base water rates. A base rate increase request of $6.9 million was filed in September 2011 seeking recovery of increased costs for operations, maintenance and taxes, as well as capital investment. Under DEPSC regulations, Tidewater had implemented interim rates in November 2011, which amounted to approximately $2.5 million on an annual basis. The new final base rates reflect the remaining $1.4 million and became effective June 19, 2012.

Effective January 1, 2013, Tidewater implemented a DEPSC approved $0.1 million DSIC rate increase.

TESI – In November 2012, TESI filed an application with the DEPSC seeking approval to purchase all of the utility assets of the 600 customer wastewater system serving the residents of the Plantations development (the Plantations) in Rehoboth Beach, Delaware. The application also requests the transfer of the wastewater franchise from the current owner to TESI. In connection with this transaction, TESI also filed an application with DEPSC seeking an approximate $0.1 million increase in the Plantations’ residents base wastewater rates. The purchase, and subsequent operation, of the Plantation’s wastewater system is contingent, among other things, upon the DEPSC’s approval of both applications. We cannot predict whether the DEPSC will ultimately approve or deny the purchase and base rate increase. A decision by the DEPSC is not expected until the third quarter of 2013.

In June 2012, the DEPSC approved a $0.6 million increase in TESI’s annual base wastewater rates, a portion of which is to be phased in through 2015. A base rate increase request of $0.8 million was filed in July 2011 seeking recovery of increased operation and maintenance costs, as well as capital investment. Under DEPSC regulations, TESI had implemented interim rates in September 2011, which amounted to approximately $0.1 million on an annual basis. The new final base rates became effective June 5, 2012.

Pinelands – In August 2012, Pinelands Water and Pinelands Wastewater filed petitions with the NJBPU seeking permission to increase base rates by approximately $0.2 million and $0.1 million per year, respectively. These requests were made as a result of capital investments as well as increased operations and maintenance costs for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU is not expected until the second quarter of 2013.

Southern Shores – Effective June 1, 2011, the DEPSC approved a multi-year agreement for a phased-in base rate increase for Southern Shores. This increase was made as a result of capital investment in the upgrade and renovation of Southern Shores’ primary water treatment facilities, as well as by increased operating costs. Under the terms of the agreement, which expires in 2020, customer rates will increase on January 1^st of each year to generate additional annual revenue of $0.1 million with each increase.

Twin Lakes - The PAPUC approved a $0.1 million, three-year phased-in base rate increase effective March 3, 2012. This increase was designed to recover capital investment in the upgrade and renovation of the Twin Lakes System, as well as increased operating costs.

Regulatory Matters

We have recorded certain costs as regulatory assets because we expect full recovery of, or are currently recovering, these costs in the rates we charge customers. These deferred costs have been excluded from rate base and, therefore, we are not earning a return on the unamortized balances. These items are detailed as follows:

	(Thousands of Dollars)
	December 31,				Remaining
Regulatory Assets	2012		2011		Recovery Periods
Postretirement Benefits	$	53,142	$	49,735		Various
Income Taxes		17,866		17,151		Various
Rate Cases, Storm Costs, Tank Painting, and Other		1,823		416		2-9 years
Total	$	72,831	$	67,302

Postretirement benefits include pension and other postretirement benefits that have been recorded on the Consolidated Balance Sheet in accordance with the guidance provided in ASC 715, Compensation – Retirement Benefits. These amounts represent obligations in excess of current funding, which the Company believes will be fully recovered in rates set by the regulatory authorities.

The recovery period for income taxes is dependent upon when the temporary differences between the tax and book treatment of various items reverse.

The Company uses composite depreciation rates for its regulated utility assets, which is currently an acceptable method under generally accepted accounting principles and is widely used in the utility industry. Historically, under the composite depreciation method, the anticipated costs of removing assets upon retirement are provided for over the life of those assets as a component of depreciation expense. The Company recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. As of December 31, 2012 and 2011, the Company has approximately $8.8 million and $8.0, respectively, of expected costs of removal recovered currently in rates in excess of actual costs incurred. These amounts are recorded as regulatory liabilities.

The Company is recovering in current rates acquisition premiums totaling $0.6 million over the remaining lives of the underlying Utility Plant. These deferred costs have been included in rate base as utility plant and a return is being earned on the unamortized balances during the recovery periods.