NOTE 13

REGULATORY PROCEEDINGS

Overview

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.

Our water and wastewater utility operations are also subject to regulation under the federal Safe Drinking Water Act of 1974, or Safe Drinking Water Act, the Clean Water Act of 1972, or the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges. Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state regulatory commissions as appropriate for inclusion in establishing rates.

Water and Wastewater Rates

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. As of December 31, 2018, approximately $3.3 million is being held in reserve and is not reflected in income. This amount is required to be refunded to customers in the second quarter of 2019.

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.

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	11/24/2015	05/31/2016	11/29/2016	5/31/2018	11/28/2018
DEPSC Approval Date	12/15/2015	06/28/2016	12/20/2016	6/19/2018	12/20/2018
Effective Date	01/01/2016	07/01/2016	01/01/2017	7/1/2018	1/1/2019
Cumulative DSIC Rate	1.57%	2.30%	4.71%	3.63%	5.55%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)	7.0	10.3	16.6	24.7	30.4
Eligible Plant Improvements – Installed Beginning Date	10/01/2014	10/01/2014	10/01/2014	10/1/2014	10/1/2014
Eligible Plant Improvements – Installed Ending Date	10/31/2015	04/30/2016	10/31/2016	4/30/2018	10/31/2018

The DSIC rate effective July 1, 2018 replaces the DSIC rate effective January 1, 2017. This reduced rate reflects the TCJA impact to customers, partially offset by eligible plant improvements installed through April 30, 2018. The DSIC rates effective July 1, 2018 and January 1, 2019 are still subject to audit at a later date by the DEPSC. For the years ended December 31, 2018, December 31, 2017 and December 31, 2016, we earned approximately $2.8 million, $3.2 million and $1.3 million in DSIC revenue, respectively.