Statement of Reasons

We have asked the Pennsylvania Public Utility Commission (PUC) to approve a tariff that, if fully implemented, would increase Pennsylvania American’s present annual operating water revenues of $464 million by $58 million, or 12.5 percent. From our past experience, it is likely that the PUC will suspend and investigate this request and that any changes in rates are not likely to occur until January of 2010.

The primary reasons for the rate increase are as follows:

• The Company must construct and replace the treatment facilities, infrastructure and equipment needed to provide high-quality water service and continue to meet state and federal drinking water standards.
• Since Pennsylvania American’s last base rate increase was approved in November 2007, Pennsylvania American will have invested over $310 million through December, 2009 to replace and upgrade its treatment and distribution facilities statewide. While customers are already enjoying the benefits of many of these improvements, only a portion of the cost to finance them is covered in the Company’s current water service charges.
• Pennsylvania American is committed to investing in its water treatment facilities and distribution systems to replace aging infrastructure, because we are a utility that provides a service that is ultimately consumed.
• To finance needed plant investments, the Company must be able to raise capital on reasonable terms. Unless adjusted, the Company’s present rates will not provide current or prospective investors with an adequate return.
• Also included in the rate request are increased costs associated with chemicals, power, labor and labor related expenses, and pensions.