XVIII. Summary of Earnings

Our adopted Summary of Earnings is shown in Appendix A. It reflects the operating revenues that would be provided at present rates and those that will be required to produce the 10.10% ROE we are authorizing for the test years.

Contrasting the Operating Revenues set forth in Appendix A, it is apparent that the rate of return which we are authorizing AVR will produce additional revenues of $1,473,900 in 2003, an increase of 13.71% over the revenues produced by existing rates. In 2004, an additional $259,700 will be produced, an increase of 2.10%. In conformity with our requirement that Class A water utilities not file general rate applications more frequently than once each three years, a third set of rates in the form of a step increase for year 2005 will be authorized to allow for attrition after 2004.⁴⁸ This attritional step increase will be $279,526, or 2.20%.

On or after November 5 in the years 2003 and 2004, AVR will be authorized to file advice letters (with appropriate work papers) to justify implementation of the step increase herein postulated for each of years 2004 and 2005. The supplemental filings will permit review of achieved rates of return before each step rate is authorized.

⁴⁸ An attrition allowance is needed when increases in revenues and productivity to offset increases in expenses (including the effect of cost of capital) are insufficient, thereby causing a decline in the rate of return for the following year. Attrition consists of two factors - financial and operational. Financial attrition occurs when there is a change in the company's cost of capital. Operational attrition is the result of changes in operating categories, e.g. revenues, expenses, and rate base.