NOTE 9 - REGULATORY PROCEEDINGS

Our water and wastewater utilities generate operating revenue from customers based on rates that are established by state Public Service Commissions through a rate setting process that may include public hearings, evidentiary hearings and the submission of evidence and testimony in support of the requested level of rates by the Company.

We are subject to regulation by the following state regulatory commissions:

•

The DEPSC regulates both Artesian Water and Artesian Wastewater.

•

The MDPSC regulates both Artesian Water Maryland and Artesian Wastewater Maryland.

•

The PAPUC regulates Artesian Water Pennsylvania.

Rate Proceedings

Our regulated utilities periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales. Should the rate case not be completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% of gross water sales, in effect under bond until a final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund customers the portion found to be in excess with interest. The timing of our rate increase requests is therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.

On January 16, 2018, the DEPSC approved the opening of Docket No. 17-1240 requiring Delaware utilities to determine the impact that the TCJA had on their customers and potential rate relief due to customers. The reduction in corporate income tax expense resulting from the TCJA will be passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019. Approximately $3.8 million was refunded to customers during the second quarter of 2019. This amount was previously held in reserve (refund liability) and was not reflected in income.

Other Proceedings

Delaware law permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a DSIC. This charge may be implemented by water utilities between general rate increase applications that normally recognize changes in a water utility's overall financial position. The DSIC approval process is less costly when compared to the approval process for general rate increase requests. The DSIC rate applied between base rate filings is capped at 7.50% of the amount billed to customers under otherwise applicable rates and charges, and the DSIC rate increase applied cannot exceed 5.0% within any 12-month period.

Table of Contents

The following table summarizes (1) Artesian Water’s applications with the DEPSC to collect DSIC rates and (2) the rates upon which eligible plant improvements are based:

Application Date

11/29/2016

05/31/2018

11/28/2018

5/29/2019

DEPSC Approval Date

12/20/2016

06/19/2018

12/20/2018

6/18/2019

Effective Date

01/01/2017

07/01/2018

1/1/2019

7/1/2019

Cumulative DSIC Rate

4.71

3.63

5.55

7.41

Net Eligible Plant Improvements – Cumulative Dollars (in millions)

16.6

24.7

30.4

43.1

Eligible Plant Improvements – Installed Beginning Date

10/01/2014

Eligible Plant Improvements – Installed Ending Date

10/31/2016

04/30/2018

10/31/2018

04/30/2019

The DSIC rate effective July 1, 2019 replaces the DSIC rate effective January 1, 2019. This increased rate reflects the eligible plant improvements installed through April 30, 2019. The DSIC rates effective January 1, 2019 and July 1, 2019 are still subject to audit at a later date by the DEPSC. For the three and six months ended June 30, 2019, we earned approximately $0.9 million and $0.8 million in DSIC revenue, respectively. For the three and six months ended June 30, 2018, we earned approximately $1.8 million and $1.5 million in DSIC revenue, respectively.