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INTRODUCTION AND ACKNOWLEDGEMENT

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INTRODUCTION AND ACKNOWLEDGEMENT Powered By Docstoc
					PENNSYLVANIA-AMERICAN WATER
         COMPANY



    IMPLEMENTATION PLAN
         in Response to the

2007- 08 STRATIFIED MANAGEMENT

    AND OPERATIONS AUDIT




                              September 2008
Pennsylvania-American Water Company
         Implementation Plan
                                                         September 2008


                                                       Table of Contents




Introduction .................................................................................................................................................... 1

Chapter II – Executive Management, External Relations, and Human Resources ....................................... 3

Chapter III – Financial Management ........................................................................................................... 24

Chapter IV – Support Services .................................................................................................................... 30

Chapter V – Water Operations .................................................................................................................... 88

Chapter VI – Corporate Governance ........................................................................................................... 94

Chapter VII – Corporate Culture, Management Structure, and Staffing Levels ........................................ 103

Chapter VIII – Affiliate Interests ................................................................................................................. 109

Chapter IX – Diversity and EEO ................................................................................................................ 118

Chapter X – Customer Service .................................................................................................................. 127

Chapter XI – Operational Performance ..................................................................................................... 142

Chapter XII – Phase III Water Operations – Distribution Business Systems ............................................ 156

Chapter XIII – Phase III Human Resources .............................................................................................. 177




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Pennsylvania-American Water Company
         Implementation Plan
                               September 2008




INTRODUCTION AND ACKNOWLEDGEMENT


        The Pennsylvania Public Utility Commission (“PaPUC” or “the
Commission”) engaged the services of Schumaker & Company to conduct a
Stratified Management and Operations Audit of Pennsylvania-American Water
Company (“PAWC” or “the Company”). The audit was conducted pursuant to
Section 516 of the Pennsylvania Public Utility Code requiring that the
Commission periodically examine the management effectiveness and operating
efficiency of certain jurisdictional utilities.

      In response to the Stratified Management and Operations Audit Final
Report, issued August 2008, Pennsylvania-American Water Company is pleased
to submit its Implementation Plan.

       The Implementation Plan is organized to address each recommendation
contained in the Final Report, and states whether the recommendation is
accepted, accepted in part, or rejected. For each recommendation accepted or
accepted in part by Pennsylvania-American Water Company, the Implementation
Plan describes the actions to be taken, the individuals responsible, and the
expected completion dates. For each recommendation that is rejected, the
Implementation Plan contains a complete explanation as to why the
recommendation is not accepted.

       It is important to note that the actual field work for Phase I and Phase II
began July 13, 2007 and continued through December 31, 2007; and the actual
field work for Phase III began February 4, 2008 and continued through April 30,
2008. Accordingly, many of the findings relate to the Company’s management
and operations prior to December 31, 2007, and do not reflect the current state of
the Company’s operations. Significant changes have been made since that time,
including the initial public offering of Pennsylvania-American Water Company’s
parent company, American Water Works Company, Inc. on April 23, 2008.

       Pennsylvania-American Water Company further notes that throughout the
Final Report, Schumaker & Company identifies what it describes as various
opportunities to achieve quantifiable cost savings. These are summarized as
estimated one-time savings and annual savings, and are characterized as
benefits. In order to avoid confusion, however, it is also important to note that



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Pennsylvania-American Water Company
         Implementation Plan
                               September 2008


Schumaker & Company did not estimate the expense impact of implementing the
audit recommendations, although it acknowledged that the short term cost impact
“could be considerable.” By contrast, Pennsylvania-American Water Company
necessarily considers the expense of implementing the recommendations, both
short term and long term, in addition to quantifiable benefits. In many instances,
there are significant expenses associated with implementing recommendations
which have the potential to fully or partially offset any cost savings. Therefore,
both cost benefit and expense must be considered in the Company’s responses.

        Pennsylvania-American Water Company notes that some aspects of the
recommendations pertain to American Water Works Company, Inc., American
Water Works Service Company, Inc., or other American Water entities over
which the Commission does not have jurisdiction. The boards of directors and
managements of these entities have legal obligations, fiduciary duties and
responsibilities separate from and different than Pennsylvania-American Water
Company. The Company believes that the recommendations pertaining to these
entities are outside the appropriate scope of the management audit. Responses
to the recommendations affecting those entities have been considered in that
context.

       Finally, Pennsylvania-American Water Company expresses its
appreciation to the Commission, the Commission’s Bureau of Audits, and
Schumaker & Company for their efforts in conducting this Stratified Management
and Operations Audit. The Company has accepted in full 106 recommendations,
accepted in part 7 recommendations, and rejected 1 recommendation. We are
confident that the Implementation Plan demonstrates our commitment to take
appropriate actions resulting from this important effort.




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Pennsylvania-American Water Company
         Implementation Plan
               September 2008




               Chapter II



Executive Management, External Relations,
          and Human Resources




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   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                               Executive Management

Recommendation II-1            Develop a systematic organizational-planning and
                               development process.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

In concert with the continued refinement of the strategic planning process discussed
in the implementation plan for Recommendation II-2, the Company will review the
organizational planning process. Appropriate enhancements will be made to ensure
that all aspects of the organization are aligned with the strategic plan, that the
organization is appropriately defined, that triggers are established for organizational
reviews, and that all discussions and decisions regarding organizational planning are
appropriately documented.


Milestones / Full Implementation Date

                          Milestone                                        Date
   Complete review of current organizational planning
   process                                                          March 2009 (E)
   Finalize enhancement recommendations                              July 2009 (E)
   Full implementation                                             December 2009 (E)


Personnel Responsible

Sean G. Burke, Senior Vice President, Human Resources, AWWSC
Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                               Executive Management

Recommendation II-2            Develop a formal and integrated strategic-planning
                               process.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

During 2008, in preparing the 2009-2013 Strategic Business Plan, an enhanced,
formal, and integrated strategic planning process was implemented. The process
incorporates subsidiary company operating needs assessment and strategic/key
initiatives. A formal review process has been established to help ensure alignment
between American Water and subsidiary company initiatives. Key performance
indicators have been identified. The process more fully integrates and aligns
strategies and initiatives. Refinement and enhancement of the strategic planning
process, which continues to incorporate performance indicators and initiatives into
the planning process, will be ongoing.


Milestones / Full Implementation Date

                            Milestone                                     Date
   Full implementation                                             August 2008 (A)


Personnel Responsible

John L. Settelen, Vice President, Planning & Reporting, AWWSC
Rochelle Kowalski, Vice-President, Finance, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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   Pennsylvania-American Water Company
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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  External Relations

Recommendation II-3            Develop a regional/state operational external
                               communications plan.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

Implementation of this recommendation is in progress. Since completion of audit
fieldwork, American Water’s Corporate Communications and External Affairs
Department has developed detailed and integrated communications plans for each
state within the American Water system, including Pennsylvania. These plans
provide for a monthly summary of communications activities that address external
affairs as well as customer communications, internal communication, government
affairs and other related areas.

The plan for Pennsylvania-American Water Company (PAWC) details the project
names, a description of the activity, month it is to begin, the project due date, who is
responsible, what approvals are necessary and anticipated costs for each project.
The plan and supporting action items are detailed by month and address customer
bill inserts; newsletters; customer letters; direct mail; customer communications
materials, such as a brochure; community events; plant tours; web site updates;
media-related activities to educate customers on the value of water as well as
important infrastructure investments PAWC is making in the community; relationship
development meetings with key community leaders; and general community
meetings.

The Company also implemented a staffing structure that effectively and efficiently
supports this plan. Staff resources are dedicated to PAWC to specifically support
the external affairs activities across the entire state. Additionally, the American
Water Works Service Company (AWWSC) leverages one internal communication



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   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


Recommendation II-3


manager and one customer communication manager that support the specific needs
of the state in these respective areas. This is a very efficient and cost-effective
structure in that these two AWWSC positions also support the states of New Jersey
and New York, with their respective costs properly allocated across the three states.


Milestones / Full Implementation Date

                           Milestone                                    Date

   Develop / begin implementing integrated communications         August 2008 (A)
   plan for PAWC
   Continue implementing integrated communications plan         December 2008 (E)
   Update integrated communications plan for 2009               Q4 ‘08 - Q1 ‘09 (E)
   Implement 2009 integrated communications plan                Jan - Dec 2009 (E)



Personnel Responsible

Laura L. Monica, Senior Vice President, Corporate Communications and External
Affairs, American Water
Terry M. Maenza, Manager, External Affairs, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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   Pennsylvania-American Water Company
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                                  September 2008


                                        Chapter II
               Executive Management, External Relations and Human Resources
                                 Human Resources


Recommendation II-4           Strengthen HR accountability to the PAWC President.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

Human Resources (HR) accountability will be strengthened in multiple ways.
PAWC’s president will have input into the performance evaluations of American
Water Works Service Company’s (AWWSC) regional HR director serving PAWC as
well as PAWC’s HR manager, who reports to the regional HR director. Additionally,
the regional HR director will meet regularly (at least once per month) with PAWC’s
president.

The Company will also consider appointing an HR director for PAWC.


Milestones / Full Implementation Date

                            Milestone                                    Date
   Monthly meetings with PAWC president occur                     September 2008 (E)
   Annual input into performance appraisals                       February - March


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-5            Assess PAWC’s HR needs and staff accordingly.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

Together, American Water Works Service Company and Pennsylvania-American
Water Company (PAWC) will assess whether additional HR staff is required to meet
the HR needs of PAWC and/or implement HR-related audit recommendations.

Where the Company determines that gaps exist, additional resources will be
provided to the function taking into consideration the timing and magnitude of
expenditures.


Milestones / Full Implementation Date

                       Milestone                                           Date
   Assess PAWC’s HR needs                                           Sep - Dec 2008 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                        Chapter II
               Executive Management, External Relations and Human Resources
                                 Human Resources

Recommendation II-6           Develop an HR service level agreement with
                              AWWSC.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

Service level metrics between American Water Works Service Company’s HR
Department and PAWC, containing relevant qualitative and quantitative measures,
will be developed. Performance reporting will occur via the new balanced scorecard
which is being developed in response to Recommendation II-7, as well as by
developing other appropriate measures.


Milestones / Full Implementation Date

                           Milestone                                          Date
   Develop HR service level metrics                                   June 2009 (E)
   Report service level performance to PAWC                       September 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                        Chapter II
               Executive Management, External Relations and Human Resources
                                 Human Resources

Recommendation II-7           Develop a Pennsylvania-specific HR scorecard.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

This recommendation is complete. The scorecard was developed during the Phase
III work of this audit.


Milestones / Full Implementation Date

                           Milestone                                       Date
   Develop scorecard                                                  April 2008 (A)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                        Chapter II
               Executive Management, External Relations and Human Resources
                                 Human Resources

Recommendation II-8           Align HR services to the strategic priorities of PAWC.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

Human Resources will participate in PAWC’s strategic planning process to ensure
that the HR function is aligned with the Company’s strategic priorities. Detailed
plans with timelines will be developed to specify HR support.


Milestones / Full Implementation Date

                           Milestone                                      Date
   Develop detailed plan                                          December 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-9            Consider outsourcing technical training.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

Human Resources will work with operations personnel to evaluate the outsourcing
options and support required for future technical/operational courses to determine
whether outsourcing is appropriate. Operational training courses that are unique to
American Water system companies may require instructional design expertise
and/or train-the-trainer design and delivery.


Milestones / Full Implementation Date

                        Milestone                                        Date
   Complete outsourcing option analysis                              June 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-10           Implement a learning management system.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

Implementation of this recommendation is in progress. American Water’s (AW) ITS
Department recently filled the newly defined role of manager, training and analysis.
This role defines a training and development strategy that encompasses
technologies, tools, blended learning solutions and instructional materials.

American Water is considering the options available for implementing a learning
management system (LMS). These options include leveraging existing technologies
in the AW environment, including the LMS components as part of an ERP
replacement that encompasses end-to-end HR needs; or acquiring an LMS
application that would integrate with our existing tools and a future application that
supports HR.

The manager, training and analysis, will partner with other AW training managers to
evaluate the current landscape and potential LMS solutions that would support all
types of training in the AW business, i.e., application training, safety training,
operations training. AW’s intent is to have an LMS solution that will have the ability
to manage enrollment, content delivery, progress, testing, employee development
plans and training completion tracking across a broad range of delivery methods.




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   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation II-10


Milestones / Full Implementation Date

                            Milestone                                 Date
   Analyze current state environment                         October 2008 (E)
   Determine training strategy                               October 2008 (E)
   Evaluate LMS options                                      December 2008 (E)
   Selection of learning solution                            March 2009 (E)
   Standardize training content and approach                 June 2009 (E)
   Full implementation of new learning management solution   December 2009 (E)
   (depending on alternative selected)                       (earliest)
                                                             December 2011 (E)
                                                             (if ERP/HRIS
                                                             dependent)


Personnel Responsible

Emily Ashworth, VP and CIO, American Water Works Service Company
Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-11           Conduct comprehensive workforce planning for all
                               levels of the organization and provide necessary
                               resources for implementation.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

Implementation of this recommendation includes several components. Establishing
leadership competencies and succession planning will be accomplished as outlined
in the Company’s implementation plan for Recommendation II-12.

Establishing competencies for non-management workforce, incorporating diversity
and taking action regarding future retirements will be accomplished via the workforce
planning and replenishment model developed during audit Phase III work (refer to
the Company’s implementation plan for Recommendation XIII-1).

PAWC anticipates that implementation of the recommendation will require significant
additional financial and / or human resources. Although the Company accepts the
recommendation, the timing of the implementation will be dependent on the
magnitude of the expense that will be incurred.


Milestones / Full Implementation Date

                          Milestone                                      Date
   Complete leadership capability review (see II-12)               December 2009 (E)
   Implement workforce planning / replenishment (see XIII-1)         June 2010 (E)

Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company
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   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-12           Complete the organizational capability review for all
                               levels of PAWC management.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

A leadership capability review for senior executives will be completed in late 2008 /
early 2009. Plans will then be developed to conduct a similar review process for all
PAWC management levels in alignment with the process used at the executive level.


Milestones / Full Implementation Date

                        Milestone                                       Date
   Complete executive capability review                           December 2008 (E)
   Plan PAWC management capability review                           June 2009 (E)
   Complete PAWC management capability review                     December 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-13           Implement a leadership-development program and
                               provide sufficient resources to sustain.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

In coordination with corporate Human Resources, plans will be developed to conduct
a leadership development program subsequent to the executive-level leadership
capability review. Resources will be identified, whether human, material, technology
or consulting, to initiate and sustain this effort.


Milestones / Full Implementation Date

                          Milestone                                       Date
   Assess leadership development needs                               March 2009 (E)
   Identify and obtain needed resources.                            June 2009 (E)
   Design program                                                   March 2010 (E)
   Pilot program                                                    June 2010 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-14           Implement position control.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

Human resource management, including position control, is included within the
scope of the Company’s implementation plan in response to Recommendation III-1,
research and develop plans for an enterprise resources planning (ERP) system
replacement or upgrade. The Company expects that American Water will either
upgrade or replace the current ERP. This new software solution would include
support of the entire set of HR processes including core HR, benefits, payroll,
compensation, performance management and reviews, time and attendance, and
succession planning. This implementation would provide the needed tools to
support position control, title administration, compensation administration, job
description management, tracking of employee counts, employee organizational
assignments, actual positions versus budgeted position management, employment
law compliance and workforce planning.

Prior to implementation of the ERP solution, the HR organization will examine all
positions and begin the analysis process to standardize, rationalize and normalize
positions, titles and associated job descriptions. The next step will be to map
employees to the normalized positions before data conversion and software
implementation. The HR organization will also establish the process by which
positions may be added, budgeted, modified and tracked in the organization and
identify who has the responsibility to manage the administration of positions.




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   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation II-14


Milestones / Full Implementation Date

                             Milestone                           Date
   Identify available alternatives for current ERP            May 2008 (A)
   Commence process definition for HR area                  October 2008 (E)
   Define requirements for each HR process area            December 2008 (E)
   Evaluate ERP alternatives against requirements          February 2009 (E)
   Select ERP upgrade or replacement option                  March 2009 (E)
   Select implementation integrator                          April 2009 (E)
   Commence position rationalization, normalization work     June 2009 (E)
   Map employees to positions                               October 2009 (E)
   HR software solution configuration design                 June 2009 (E)
   Configuration and interface development                 December 2009 (E)
   Implement ERP replacement or upgrade to include HR       2010 – 2011 (E)
   process areas


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter II
               Executive Management, External Relations and Human Resources
                                 Human Resources

Recommendation II-15          Evaluate the costs and benefits associated with a
                              more sophisticated time and attendance system.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

Human resource management, including time and attendance, is included within the
scope of Recommendation III-1, research and develop plans for an enterprise
resources planning (ERP) system replacement or upgrade. The Company expects
that American Water will either upgrade or replace the current ERP. This new
software solution would include support of the entire set of HR processes including
core HR, benefits, payroll, compensation, performance management and reviews,
time and attendance and succession planning. This implementation would provide
the needed tools to support time recordation, time tracking for projects, leave
administration, and more automated integration to payroll.

Prior to implementation of the HR solution, American Water will examine items such
as time and attendance codes and pay types and begin the analysis process to
standardize, rationalize and normalize these time and attendance data elements.
American Water will also establish more streamlined processes for time and
attendance capture, management and reporting that will be enabled by the new
solution.




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   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation II-15


Milestones / Full Implementation Date

                             Milestone                            Date
   Identify available alternatives for current ERP            May 2008 (A)
   Commence process definition for HR area                  October 2008 (E)
   Define requirements for each HR process area            December 2008 (E)
   Evaluate ERP alternatives against requirements          February 2009 (E)
   Select ERP upgrade or replacement option                  March 2009 (E)
   Select implementation integrator                          April 2009 (E)
   Commence rationalization, normalization work of codes     June 2009 (E)
   HR software solution configuration design                 June 2009 (E)
   Configuration and interface development                 December 2009 (E)
   Implement ERP replacement or upgrade to include time       2010 – 2011
   and attendance process


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Doneen S. Hobbs, Vice-President, Shared Services, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                   September 2008


                                         Chapter II
                Executive Management, External Relations and Human Resources
                                  Human Resources

Recommendation II-16           Analyze the recruitment and selection process,
                               implement process improvements, measure
                               performance and provide additional resources, if
                               necessary.


PAWC Response                  The Company accepts this recommendation.


Priority                       Low


Discussion

Due to reporting capability limitations in the applicant tracking system used by
Pennsylvania-American Water Company, the Company is unable to determine the
length of time required for specific stages of the recruitment process. The Company
will initially conduct a manual sampling to attempt to identify recruiting stages that
take the greatest length of time. When additional reporting capability from the
applicant tracking system is available, a more thorough analysis will be conducted.


Milestones / Full Implementation Date

                           Milestone                                    Date
   Manual sample and report                                        December 2008 (E)
   Full implementation (from applicant tracking system)            December 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




                                            23
     Chapter III



Financial Management




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   Pennsylvania-American Water Company
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                                   September 2008


                                        Chapter III
                               Financial Management

Recommendation III-1           Research and develop plans for upgrading or
                               replacing the current ERP system.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

American Water has begun the process of evaluating alternatives for upgrading or
replacing the current enterprise resources planning (ERP) system, JDE World 7.3.
The current ERP supports core finance, HR and purchasing processes. Through the
first half of 2008 two alternatives were identified. They include upgrading the current
version of JDE to the JDE Enterprise One product and the second option is to
replace the ERP entirely with one of the leading ERP solutions.

The approach for determining an upgrade or replacement path will commence with
defining best practices for finance, HR and purchasing processes in the utility
industry. For each process set a comprehensive set of requirements will be
established. Available ERP alternatives will be evaluated against the ability of the
alternative to comprehensively meet the requirement set.

Following the selection of the alternative that best meets American Water’s
requirement set, a selection process for a systems integrator and implementer will
commence to lead the upgrade or replacement effort.




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                                 September 2008


Recommendation III-1


Milestones / Full Implementation Date

                             Milestone                          Date
   Identify available alternatives for current ERP           May 2008 (A)
   Commence process definition for finance, HR and        October 2008 (E)
   purchasing
   Define requirements in each process area              December 2008 (E)
   Evaluate ERP alternatives against requirements        February 2009 (E)
   Select ERP upgrade or replacement option               March 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Rochelle Kowalski, Vice-President, Finance, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                     September 2008


                                          Chapter III
                                 Financial Management

Recommendation III-2            Investigate why key PAWC financial statistics have
                                been deteriorating; develop and implement a plan for
                                improving PAWC’s financial health, as appropriate.


PAWC Response                   The Company accepts this recommendation.


Priority                        High


Discussion

The financial statistics referenced are from 2002 through June 2007. Company
management understands the deteriorating trend over the historical period. As
noted in the audit report, prior to the Company’s filing for rate relief in April 2007
there had not been a filing since April 2003.

Formal processes have been implemented and are in place to monitor business and
financial performance including determining, as applicable, corrective actions.
Corrective actions may be multi-faceted, including activities necessary to help
ensure an appropriate return on investments and cost recovery in addition to
expense containment/reduction initiatives.


Milestones / Full Implementation Date

                           Milestone                                       Date
   Establish business and financial metrics and a formal             September 2008 (A)
   review process, including quarterly and monthly reviews.


Personnel Responsible

Rochelle Kowalski, Vice-President, Finance, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                       Chapter III
                              Financial Management

Recommendation III-3          Assess the need for internal audits of American Water
                              regulated utility operations and develop and
                              implement plans to meet the internal audit
                              requirements.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

Internal Audit uses the Committee of Sponsoring Organizations’ (COSO) control
model as a framework to evaluate risks and controls throughout the American Water
(AW) enterprise. This framework addresses accurate financial reporting, operational
effectiveness & efficiency, compliance with laws & regulation, and safeguarding
assets. The development of the annual audit plan is based on this framework and
prioritizes audits based on perceived risk. Inputs gathered and incorporated into the
annual plan development process are past audits, changes in the organization, past
or existing Company-related events (internal and external), financial materiality of
operations, effectiveness of SOX controls, external auditor management comments,
future company initiatives, etc. Information regarding these areas is collected
through a number of channels throughout the year with more intense focus in
September and October – i.e. Board member and executive interviews, financial
statements, business performance reviews, management strategy sessions, past
audits, SOX status reports, etc.

For 2008, the internal audit plan defined 27 audits to be performed as 60% of its
overall plan. The remaining 40% of the plan is broken down into 20% for SOX
control testing and 20% for special management requests (i.e. investigations, status
reviews of significant projects, etc.). The plan consists of 1,590 workdays for 8
auditors, which results in 198 workdays per auditor.



                                           28
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008



Recommendation III-3


Emphasis is also placed on not duplicating efforts of the external auditors, but
relying on their efforts regarding the accuracy of the business units and consolidated
financial statements per GAAP, regulatory, and SEC guidelines. Internal Audit
focuses on financial accuracy, but with more detailed focus on the processes,
performance measures, management practices, and organizational accountability
supporting the AW business model. This also includes Internal Audit reviewing AW
Service company allocations to the business units or states.


Milestones / Full Implementation Date

                            Milestone                                  Date
   Completed                                                       August 2008 (A)




Personnel Responsible

Andrew S. Twadelle, Vice-President, Internal Audit, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




                                           29
Pennsylvania-American Water Company
         Implementation Plan
             September 2008




             Chapter IV



          Support Services




                   30
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-1            Expedite efforts to develop a long-range IT plan, and
                               subsequently perform yearly review and update
                               activities.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

Work on a strategy for ITS and associated long-range plan commenced in 2008,
after the management audit field work was completed. The strategy covers a five-
year time horizon and includes improving and replacing elements of the core
infrastructure, business applications, the integration of software and technologies
that have been independently deployed across American Water’s state operations, a
fully-integrated data strategy and the implementation of ITIL and CMMi processes
within ITS.

The plan is aligned in a way that balances the business needs across back office
functions, customer service and field operations so that work can simultaneously
occur to benefit diverse areas of the business without consuming too many business
or ITS resources in any one area. This alignment increases the opportunity for
greater project success.

The plan begins with the elements of architecture, infrastructure and data to ensure
that the right foundation is in place before adding new applications and infrastructure
components into the environment.




                                            31
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


Recommendation IV-1


Milestones / Full Implementation Date

                             Milestone                                Date
   Identify broad business need areas that require                 May 2008 (A)
   technology solutions and support
   Develop a plan for building out the appropriate application     June 2008 (A)
   and infrastructure architecture including standards, design
   templates, and tools
   Align business needs into projects to deliver solutions         July 2008 (A)
   Identify infrastructure requirements to support business       October 2008 (E)
   application projects
   Develop strategy for timing of solution development and        October 2008 (E)
   deployment and identify dependencies
   Develop financial plan to deliver on ITS strategy             December 2008 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                           32
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-2            Update ITS documentation as part of an ongoing
                               program to include all aspects of a well-managed
                               technology organization including, but not limited to,
                               operational, governance, and project management /
                               QA functions.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

The ITS Project Management Office (PMO) will review the ITS project delivery
methodology and make revisions as appropriate. The methodology will include
traditional development lifecycle elements, including initiate, plan, design, execute
and implement; and will include specifics for each element with overarching
governance.

Supporting corporate policies and practices will be updated as appropriate. When
the project delivery methodology is finalized, the PMO will undertake an initiative to
create or update the template library necessary to support the methodology.

Initial training will be offered to the entire ITS organization through a number of on-
site sessions as well as a series of Web-hosted presentations. The project delivery
methodology will be shared with the business through inclusion in a series of
planned “roadshows”.

Continuing training and reinforcement will be accomplished through mentoring and
coaching of both business and ITS project team members on a project-by-project
basis.

Post-completion, the methodology and templates will be reviewed annually for
effectiveness and revised as warranted.


                                             33
   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation IV-2


Milestones / Full Implementation Date

                            Milestone                            Date
   PMO methodology reviewed / updated                    November 2008 (E)
   Templates reviewed and updated                        December 2008 (E)
   Corporate policies and practices updated               January 2009 (E)
   Training sessions (on-site and web-hosted) complete   February 2009 (E)
   Roadshows complete                                       April 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                         34
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-3            Address organizational issues involving vacancy of
                               director positions, the appropriateness of staffing size
                               of the various ITS groups, and the reporting location
                               of the information systems’ security function within
                               American Water’s organization structure.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

Two open positions, director of Project Management Office (PMO) and director of
Strategy and Architecture, were filled shortly after completion of audit field work.
Both positions were filled by candidates with extensive experience in their respective
area.

American Water began reviewing benchmarks of IT organizations in the utility
industry and planning for adjustments in resources in specific areas. Initial areas of
review include server support, data base administration and training. The ITS
organization made certain structural changes in the areas of Business Application
Development and Infrastructure and Operations. The changes helped streamline
and better allocate work and enable the identification of areas requiring resource
augmentation.

The reporting relationship of the IT Security group will be revised in the Fall of 2008
and the group will be integrated into the ITS organization. The two directors within
the group will report directly to the CIO.




                                             35
   Pennsylvania-American Water Company
            Implementation Plan
                                     September 2008


Recommendation IV-3


Milestones / Full Implementation Date

                                Milestone                               Date
   Fill the Director of PMO                                     February 2008 (A)
   Fill the Director of Strategy and Architecture               March 2008 (A)
   Review Benchmarks                                            January 2008 (A)
   Initial identification of areas requiring staffing           March 2008 (A)
   modifications
   Restructure organization in two phases (Phase I)             June 2008 (A)
                                                   (Phase II)   October 2008 (E)

   Plan and budget for needed resources                         September 2008 (E)
   Add resources                                                February 2009 (E)
   Modify reporting structure of IT Security                    October 2008 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                               36
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                       Chapter IV
                                     Support Services
                      Information Technology and Systems

Recommendation IV-4           Expand American Water’s commitment to project-
                              management principles by requiring all ITS
                              employees who are actively involved in project work
                              to achieve PMP certification and by closely monitoring
                              related activities to ensure that timely progress is
                              made.


PAWC Acceptance               The Company accepts this recommendation.


Priority                      High


Discussion

American Water’s PMO is fully committed to strong project management principles
and will be 100% staffed with PMP-certified personnel by mid-year 2009. Currently,
5 of 10 PMO staff members, including the director, are PMP-certified. The
remainder of the staff is anticipated to be certified by mid-2009. For future hires,
PMP certification upon hire, or within 6 months of hire, will be required.


Milestones / Full Implementation Date

                          Milestone                                     Date
   3 career project managers achieve PMP certification           November 2008 (E)
   Vacancy filled by PMP-certified or equivalent experience     September 2008 (E)
   applicant
   Master Project Manager obtains PMP certification                June 2009 (E)
   Full implementation                                             June 2009 (E)

Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company


                                           37
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                       Chapter IV
                                     Support Services
                      Information Technology and Systems

Recommendation IV-5           Enhance the American Water network to enable
                              electronic deployment of software updates to PAWC
                              employees.


PAWC Acceptance               The Company accepts, in part, this recommendation.


Priority                      High


Discussion

PAWC agrees with the recommendation, but not the associated projected savings.
American Water currently employs 5 full-time ITS support specialists who are
located at Pennsylvania-American Water Company offices and .25 FTE located in
NJ providing SE PA support. PAWC requires a complex support model to support
the 80+ physical locations which are in many case over 4 hours round trip to visit.
These 5 employees perform a variety of functions such as hardware and software
support for network, telephony, desktops, laptops, servers and mobile devices. This
team also holds the responsibility for the local office and state level project
management and financial planning for IT related investments.

A very small portion of the support specialist’s time is actually spent performing
software installations as the majority of computers ship from the Company’s
hardware vendor pre-loaded with an American Water image. There may be specific
role-based software applications installed on these computers as a result of specific
user needs. The impact of remote software and image deployment would yield a
potential of 10%-20% reduction in time on an annual basis for this team.

American Water’s WAN is not currently optimized for a true remotely managed or
virtual solution. Although network improvements are currently underway and are
planned through the end of 2009, a significant investment would be required on an
annual basis to cover the increased operational expense of the improved WAN
infrastructure.



                                           38
   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation IV-5


Remote software and image deployment will be standardized across American
Water using Microsoft’s Service Center Configuration Manager (SCCM). A project is
currently in place to deploy SCCM in the American Water environment. This project
will allow improved management of images, patches, updates and packaged
application deployments to PCs at locations that have networks robust enough to
support the traffic.


Milestones / Full Implementation Date

                             Milestone                           Date
   SCCM Infrastructure & Network Design                     August 2008 (A)
   Application packaging                                    August 2008 (E)
   SCCM Design Testing                                     September 2008 (E)
   SCCM implementation to AW domain                        September 2008 (E)
   Application Deployment Testing for PAW                    March 2009 (E)
   Ability to deliver full packaged desktop software       September 2009 (E)
   PA American WAN Upgrades complete on existing           December 2009 (E)
   facilities


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                         39
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                      Information Technology and Systems

Recommendation IV-6            Improve training and development efforts for ITS
                               employees.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

With the introduction of new management within the ITS organization, employee
training has a renewed focus. In 2008, training and development plans for each
employee tailored to each employee’s current skills and the technologies they
support have been identified. A variety of training has been utilized through the year
making use of a global supplier, American Water’s vendors and partners,
conferences and seminars and professional organizations. Additionally, all
employees at the level of manager and above have completed the ITIL Foundations
course giving the leadership team a common language and basis for process
improvements in service delivery.

Training and development plans are now reviewed twice a year as part of the interim
and year-end employee review processes.

Milestones / Full Implementation Date

                              Milestone                                  Date
   Identify employee training and development needs,                 April 2008 (A)
   identify specific training classes and create training and
   development plans for each employee
   Review status (past and future needs) at interim and          July and January
   annual reviews

Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company
                                            40
   Pennsylvania-American Water Company
            Implementation Plan
                                    September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-7             Develop a plan to regularly conduct ITS client-
                                satisfaction surveys and implement the first survey in
                                a timely manner.


PAWC Acceptance                 The Company accepts this recommendation.


Priority                        Medium


Discussion

The first step in implementing this recommendation is to revamp the automated
survey embedded in the e-mail communication sent to customers when a request for
service is fulfilled. This survey will be redesigned to focus on customer satisfaction
as it relates to speed of resolution, first contact resolution, and satisfaction with the
service provided.

Additionally, on a semi-annual basis, a broader customer survey will be conducted
that includes a review of all types of ITS services and support. Examples of the
survey topics will include project performance, incident resolution, outage
communications, customer interaction and business support. This will allow us to
target areas of improvement as indicated by our internal customers and focus on
any weakness that the survey may uncover. Survey results will be shared with the
ITS organization. Quarterly review sessions will be instituted with ITS leadership to
formulate plans to address any deficiencies.


Milestones / Full Implementation Date

                             Milestone                                    Date
   Re-design current service call survey                           September 2008 (E)
   Institute quarterly ITS review sessions                         December 2008 (E)
   Design bi-annual customer satisfaction survey                    February 2008 (E)
   Implement bi-annual customer satisfaction survey                  March 2008 (E)


                                             41
   Pennsylvania-American Water Company
            Implementation Plan
                              September 2008


Recommendation IV-7


Personnel Responsible

Emily A. Ashworth, VP & CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                      42
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-8            Establish ITS service-level agreements with major
                               client groups.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

American Water’s ITS organization is actively working to create valued service level
metrics with the operations across American Water, including both state operations
and other shared services organizations. These metrics will encompass categories
such as application performance, network operations, financial performance and
work order productivity; and be based on the services the business needs and the
expected performance of each service.

Once targeted metrics are identified, ITS will collect data required to measure and
report on the metrics. Ideally, the collection of the data will be fully automated. ITS
will baseline the metrics for an initial quarter and then measure performance every
month afterwards. Monthly review meetings will be held to review the performance
against the metrics and identify areas for improvement.


Milestones / Full Implementation Date

                            Milestone                                      Date
   Discuss what metrics the business expects                          May 2008 (A)
   Identify categories and candidate metrics                       September 2008 (E)
   Determine of the candidate metrics what can be                   October 2008 (E)
   measured given the tools and technologies
   Design data collection mechanisms                               December 2008 (E)
   Review new metrics with the business constituents               December 2008 (E)
   Implement new metrics                                            March 2009 (E)


                                             43
   Pennsylvania-American Water Company
            Implementation Plan
                              September 2008


Recommendation IV-8


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                      44
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-9            Implement a relevant ITS scorecard.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

As a first step toward fulfilling this recommendation, the ITS organization established
an enterprise set of goals for 2008. ITS’ goals were aligned with the enterprise
goals set forth by the American Water executive management team. The goals are
aligned around customer, finance, process, and employee. Each director and
employee then had key performance indicators tied to these overall goals. Creating
this cascading goal structure provided focus and clarity on the focus areas for ITS
for 2008. ITS has monitored progress against these goals quarterly.

The next step is to redefine the performance metrics scorecard to reflect
performance and progress against the ITS goals. The ITS scorecard needs to
reflect progress toward the goals, but also provide information that indicates
performance trends over time. In addition to tracking progress against the ITS
goals, the intention of the redefined scorecard is to track the performance of ITS
work that supports efforts to run and maintain the environment, enhance our existing
applications and environment and, lastly, deliver innovation (new projects,
applications and systems).




                                            45
   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation IV-9


Milestones / Full Implementation Date

                            Milestone                            Date
   Define the ITS enterprise goals                         February 2008 (A)
   Establish director and employee KPIs                    March 2008 (A)
   Establish quarterly review process                      June 2008 (A)
   Redefine ITS scorecard                                 October 2008 (E)
   Establish scorecard data collection processes         December 2008 (E)
   Publish revised scorecard                               March 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                         46
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-10           Begin routinely reviewing and testing disaster-
                               recovery plans and documenting results.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       High


Discussion

In preparation for reviewing and testing disaster recovery plans, American Water
performed a formal business impact analysis (BIA) on its top tier business
applications. Using information gathered from the BIA and other input from the line-
of-business owners, recovery time objectives (RTO) and recovery point objectives
(RPO) were established and documented. Using RTO and RPO information,
technical designs for Disaster Recovery (DR) were established. Disaster recovery
designs include server and network infrastructure and associated software required
to perform a recovery of American Water’s top five applications.

A first phase disaster recovery test is planned for the first quarter of 2009 for two
top-tier applications. Another disaster recovery test is scheduled for the third quarter
of 2009 for the remainder of the top-tier business applications. Results of the
disaster recovery tests will be documented by American Water’s Quality Assurance
(QA) team.

After disaster recovery plans are documented and appropriate DR infrastructure
established, American Water plans to review its disaster recovery plans quarterly
and perform annual disaster recovery tests. The results of those tests will also be
documented.




                                            47
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


Recommendation IV-10


Milestones / Full Implementation Date

                            Milestone                          Date
   Conduct BIA                                             March 2008 (A)
   Complete installation of phase one infrastructure     December 2008 (E)
   Conduct phase one DR test                               March 2009 (E)
   Complete installation of phase two infrastructure     September 2009 (E)
   Conduct phase two DR test                             September 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




                                           48
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                       Information Technology and Systems

Recommendation IV-11           Perform a server consolidation study and implement
                               study recommendations.


PAWC Acceptance                The Company accepts, in part, this recommendation.


Priority                       High


Discussion

American Water agrees with the recommendation, but not the associated projected
savings. While virtualization is an important priority to American Water, it is
important to understand the infrastructure environment currently in place. While
many organizations are pursuing virtualization due to server sprawl, American Water
has not had the same level of server sprawl due to the AS400 equipment supporting
the primary applications (current ERP, customer information system and e-mail).
Before American Water experiences further introduction of servers into the
environment the goal is to virtualize to minimize the future space requirements as
additional applications and storage are added.

American Water’s Information Technology Services (ITS) staff members are
preparing to engage a leading virtualization vendor to perform a server consolidation
assessment study. The virtualization assessment study will provide ITS with a clear
view of server consolidation opportunities within American Water’s existing physical
server infrastructure. The virtualization assessment study will determine potential
cost savings and better prepare ITS to deploy a virtualized infrastructure. American
Water plans to start the consolidation study in the third quarter of 2008 with an
estimated completion time frame being the fourth quarter.

ITS will review the results and recommendations of the virtualization assessment
report. Based on the results of the report, a lab environment will be built in early
2009 to test and validate the recommendations.




                                            49
   Pennsylvania-American Water Company
            Implementation Plan
                                    September 2008


Recommendation IV-11


After lab testing is successfully completed, a pilot of the virtualization infrastructure
will be deployed in American Water’s production environment. Low-risk server
workloads, that have minimal business impact, will be selected for the first virtualized
deployment. These low-risk workloads will be migrated from the physical
environment to the new virtual infrastructure. Depending on the results of the lab
testing, American Water plans to start the pilot deployment in the third quarter of
2009.

When the virtualized infrastructure is deployed and stable, all new server workloads
required by the business will be placed in the new virtualized environment if it is
deemed these workloads are good virtualization candidates. In order to provide a
server consolidation for those workloads that are not good virtualization candidates,
those workloads will be consolidated onto blade servers in blade center chassis.

American Water believes that the underlying assumptions used in the calculation of
the savings potential of this recommendation were not validated with actual
American Water expense, and did not appropriately consider the costs to virtualize
when calculating the benefits. American Water believes that the primary benefit of
virtualization given the current infrastructure and server environment is cost
avoidance in reducing the need to further expand the data center, and not a
significant annual operating savings.


Milestones / Full Implementation Date

                                Milestone                                  Date
   Select virtualization vendor                                         Sep 2008 (A)
   Determine potential server inventory of virtualization               Sep 2008 (A)
   candidates
   Perform virtualization assessment                                    Dec 2008 (E)
   Build test and validation lab                                       March 2009 (E)
   Begin pilot rollout                                                 Sept 2009 (E)
   Transition other servers                                             Dec 2009 (E)
   All existing potential virtualization servers converted             March 2010 (E)

Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company
                                             50
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                       Chapter IV
                                     Support Services
                      Transportation and Fleet Management

Recommendation IV-12           Initiate a formal procedure requiring an annual review
                               of the requirements for each employee to have an
                               assigned vehicle based on his or her current job
                               assignment.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

Initially, a formal review of the job requirements for all employees having an
assigned vehicle will occur. Following the initial review, subsequent reviews will
occur annually. The basis for the subsequent annual reviews will be a listing of
management employees who changed jobs during the year.


Milestones / Full Implementation Date

                            Milestone                                   Date
   Complete initial review of vehicle requirements                December 2008 (E)
   Subsequent annual reviews of vehicle requirements                 January (E)


Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




                                            51
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                       Chapter IV
                                     Support Services
                      Transportation and Fleet Management

Recommendation IV-13           Develop a formal procedure that details a requirement
                               for the performance of a regularly scheduled annual
                               physical inventory of the vehicles leased from ARI.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

PAWC will recommend that American Water add to its Fleet Policy a formal
requirement that its operating subsidiaries, including PAWC, conduct an annual
physical inventory.

PAWC will conduct its annual physical inventory in the March/April/May timeframe.
This timeframe permits the Company to verify its fleet status after vehicles ordered
the previous summer or early fall arrive and old vehicles are disposed; and before
the current year’s replacements are identified.

PAWC’s performance manager will reconcile Automotive Resources International
(ARI)-assigned vehicle numbers and vehicle VINs collected in the field, by field
personnel, with similar information obtained from ARI’s active vehicles database.


Milestones / Full Implementation Date

                            Milestone                                    Date
   Field personnel collect ARI vehicle numbers and VINs           Mar to mid-Apr (E)
   Performance manager matches field info to ARI database         Mid-Apr to May (E)
   Adjustments made and physical inventory completed                   June (E)

Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company
                                           52
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                       Chapter IV
                                     Support Services
                      Transportation and Fleet Management

Recommendation IV-14           Develop an exception report that would clearly identify
                               excessive fuel usage by specific vehicles or employees
                               on a weekly or monthly basis.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

Beginning in September 2008 PAWC’s fleet management company, Automotive
Resources International (ARI), will provide PAWC with a monthly report that details,
by vehicle in each general vehicle class, total fuel purchases for the preceding
month. Average purchases for each general vehicle class will also be provided.

PAWC’s performance manager will determine the most efficient and effective
manner to analyze the data. Initially, the highest 5 – 10% of vehicles in each
general class will be reviewed. Alternatively, vehicles that exceed the average
purchases by a determined percentage, i.e., 25% or 50%, may be investigated.

PAWC will work with ARI to potentially factor miles driven in a particular month, not
currently available, into ARI’s monthly report to refine the exception parameters.

Milestones / Full Implementation Date

                           Milestone                                     Date
   ARI provides fuel purchases report to PAWC                    September 2008 (A)
   PAWC analyzes current and potential future parameters         Sept 08 - Jun 09 (E)
   Recommendation implemented using most efficient and           December 2009 (E)
   effective parameter

Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company
                                            53
   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter IV
                                      Support Services
                      Transportation and Fleet Management

Recommendation IV-15           Perform an internal audit of the ARI contract and the
                               resultant invoices using the AWWSC internal auditing
                               group.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

AWWSC’s Internal Audit Department will include an audit of the Automotive
Resources International (ARI) contract and resultant invoices on the proposed 2009
audit schedule, which must be approved by the Audit Committee of American Water
Company. The Audit Department will seek 2009 audit schedule approval at the
February 2009 Audit Committee meeting, which is the normal annual scheduled
meeting for the review and approval of Internal Audit’s planned audits for the year.

The scope of the audit will include a review of ARI’s contract, services provided to
American Water, including Pennsylvania-American Water Company; and
appropriateness of charges per the agreed contract terms.


Milestones / Full Implementation Date

                             Milestone                                   Date
   Receive approval from Audit Committee to conduct audit        February 2009 (E)
   Complete audit fieldwork, draft audit report                  Apr – June 2009 (E)
   Final audit report available for review                       August 2009 (E)


Personnel Responsible

Andrew S. Twadelle, Vice-President, Internal Audit, AWWSC
Kathy L. Pape, President, PAWC

                                            54
   Pennsylvania-American Water Company
            Implementation Plan
                                  September 2008


                                      Chapter IV
                                    Support Services
                     Transportation and Fleet Management

Recommendation IV-16          Perform a cost/benefit analysis to determine whether
                              the continued use of the two PAWC mechanics in the
                              Pittsburgh District is cost-effective.


PAWC Response                 The Company accepts this recommendation.


Priority                      Low


Discussion

A cost / benefit analysis to determine whether continued use of two mechanics in the
Company’s Pittsburgh District is cost-effective will be completed.


Milestones / Full Implementation Date

                          Milestone                                  Date
   Complete the cost / benefit analysis                        September 2009 (E)




Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




                                          55
   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


                                      Chapter IV
                                    Support Services
                     Transportation and Fleet Management

Recommendation IV-17          Perform a reassessment of the PAWC policy relating
                              to the use of employer-provided vehicles that are
                              used for personal purposes in order to be in
                              compliance with IRS regulations.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

Corporate fleet management personnel have presented a Draft Fleet Utilization
document to AWWSC’s vice-president of operations services. The document is
designed to create uniform guidelines across American Water and its subsidiaries,
including PAWC, for use of employer-provided vehicles consistent with IRS
regulations.

The document is intended to address all aspects of employer-provided vehicles.


Milestones / Full Implementation Date

                           Milestone                                 Date
   Draft document presented to VP, Operations Services           May 2008 (A)
   Present for review and comment                              December 2008 (E)
   Approval                                                      June 2009 (E)


Personnel Responsible

Robert D. Allen, Fleet Manager – Operations Services, Supply Chain, AWWSC
Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company


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                                         Chapter IV
                                       Support Services
                      Transportation and Fleet Management

Recommendation IV-18            Develop a computerized tracking system that is
                                capable of monitoring the completion of the annual
                                state vehicle inspections for the individual vehicles in
                                compliance with the established schedule.


PAWC Response                   The Company accepts this recommendation.


Priority                        Medium


Discussion

This recommendation is fully implemented. Beginning in September 2008 for the
12-months ended August 31 PAWC’s fleet management company, Automotive
Resources International (ARI), will provide to PAWC monthly, on a rolling 12-month
basis, a report that lists all active vehicles for which a purchase order for the annual
state inspection was not issued by ARI in the past twelve months.

To produce the report ARI will query, by American Trucking Association (ATA) code,
its computerized tracking database. ARI’s database contains a programmed and
unscheduled service history for every PAWC vehicle. All active vehicles not having
an ATA code of 1G001009, state inspection, in the most recent 12 months will
appear on the report and be investigated.


Milestones / Full Implementation Date

                             Milestone                                     Date
   ARI develops and tests the state inspection query               August 2008 (A)
   ARI provides initial state inspection report to PAWC            September 2008 (A)


Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company
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                                        Chapter IV
                                      Support Services
                       Facilities and Property Management

Recommendation IV-19           Establish a single point of responsibility for the
                               facilities and properties management function at
                               PAWC.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

Responsibility for the facilities and properties management function has been
assigned to PAWC’s performance manager. This individual will be involved in
significant facility and property-related operations and maintenance (O&M) and
capital projects. Day-to-day facilities management will be performed by local site
managers with the support of the performance manager.


Milestones / Full Implementation Date

                            Milestone                                    Date
   Single point of responsibility identified                         May 2008 (A)
   Function structure, responsibilities identified and               June 2009 (E)
   communicated
   Functional group fully operational                             December 2009 (E)


Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter IV
                                      Support Services
                       Facilities and Property Management

Recommendation IV-20           Develop a set of formal policies and procedures to
                               guide the performance of the facilities and properties
                               management function at PAWC and American Water .


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

PAWC will survey and analyze property management policies and practices existing
at other organizations, both inside and outside the utility industry, to preliminarily
help identify the Company’s own strategies and practices needs. Existing American
Water policies, strategies and practices will then be reviewed to determine if they
address the identified needs and, if so, cross-referenced.

PAWC will then recommend the formation of an American Water working committee
to develop common strategies and policies to address identified needs. PAWC will
develop PAWC-specific strategies and practices if American Water determines not
to form a working committee.


Milestones / Full Implementation Date

                           Milestone                                   Date
   Survey policies and practices, summarize PAWC needs             March 2009 (E)
   Mobilize American Water working committee                     September 2009 (E)
   Approval of strategies and practices developed                December 2010 (E)


Personnel Responsible

Louis P. Tschachler, Performance Manager, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                       Chapter IV
                                     Support Services
                     Procurement & Materials Management


Recommendation IV-21          Initiate a software identification, selection and
                              evaluation process for a new integrated procurement /
                              materials management application.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

Purchasing and Supply Chain management is included within the scope of
Recommendation III-1, “research and develop plans for an ERP replacement or
upgrade.” The Company expects that American Water will either upgrade or replace
the current ERP. This new software solution will include support of the entire set of
purchasing and supply chain processes including procurement, inventory
management, supply planning, receiving, supplier management, contract
management, accounts payable, and sourcing. This implementation will provide the
needed tools to support the purchasing and supply chain function in its entirety.

The purchasing and supply chain organization, as part of this process, will
rationalize, normalize and standardize procurement processes, purchase orders, sku
numbers, inventory stores, vendors, material types, catalogues, etc.




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                                 September 2008


Recommendation IV-21


Milestones / Full Implementation Date

                             Milestone                            Date
   Identify available alternatives for current ERP             May 2008 (A)
   Commence process definition for supply chain area         October 2008 (E)
   Define requirements for each supply chain process area   December 2008 (E)
   Evaluate ERP alternatives against requirements           February 2009 (E)
   Select ERP upgrade or replacement option                   March 2009 (E)
   Select implementation integrator                           April 2009 (E)
   Commence materials, inventory, sku rationalization,        June 2009 (E)
   normalization work
   Supply chain software solution configuration design        June 2009 (E)
   Configuration and interface development                  December 2009 (E)
   Implement ERP replacement or upgrade to include supply   December 2011 (E)
   chain and purchasing process areas


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Deborah A. Emposimato, Director, Supply Chain, American Water Works Service Co.
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                      Chapter IV
                                    Support Services
                     Procurement & Materials Management

Recommendation IV-22         Evaluate in detail the impacts of not mandating the
                             use of national contracts with preferred vendors by
                             the state-operating companies, especially in terms of
                             the financial impacts, and determine whether
                             mandating this practice would be beneficial to the
                             operating companies.


PAWC Response                The Company accepts this recommendation.


Priority                     Medium

Discussion

An analysis of PAWC spend is completed monthly to determine if there are
occurrences and/or trends in non-compliance in the use of preferred vendors.
PAWC’s compliance rate with preferred vendors in 2007 was 93%. Through May
2008, the compliance rate improved to over 95%. Both rates are well above the
industry average of 85% as reported by the Institute of Supply Management.

Supply Chain will analyze the financial impact of non-compliance, and determine
whether mandating the use of national contracts would be beneficial. Beginning with
June 2008 YTD data, Supply Chain will analyze Policy non-compliance biannually
and communicate results to PAWC management.


Milestones / Full Implementation Date

                         Milestone                                   Date
   Analyze non-compliance, communicate results to mgmt          September 2008


Personnel Responsible

Deborah A. Emposimato, Director, Supply Chain, American Water Works Service Co.
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                       Chapter IV
                                     Support Services
                     Procurement & Materials Management

Recommendation IV-23          Initiate a study to determine how best to present the
                              operational and performance data on a state
                              company basis and to evaluate the potential benefits
                              of such reporting changes.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

This recommendation is fully implemented. While audit fieldwork was ongoing, the
Company studied how best to present operational and performance data and
determined that KPIs previously reported on a region basis would be reported on a
state operating company basis.

Benefits of state operating company reporting include both a clearer and closer view
of procurement compliance; identification of operating company-specific savings, as
well as potential areas for further state-specific sourcing opportunities; and, state
level Supply Chain return on investment.


Milestones / Full Implementation Date

                            Milestone                                   Date
   Procurement operational and performance data reported        January 2008 (A)
   on state operating company basis.
   Benefits of state operating company reporting evaluated      January 2008 (A)


Personnel Responsible

Deborah A. Emposimato, Director, Supply Chain, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                        Chapter IV
                                      Support Services
                      Procurement & Materials Management

Recommendation IV-24           Perform an internal audit of the inventory data that is
                               produced and used by PAWC to determine the
                               accuracy thereof.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

AWWSC’s Internal Audit Department will include an audit of inventory data that is
produced and used by PAWC to determine its accuracy. The audit will be
incorporated into the 2008 PAWC audit, which is scheduled to be performed in the
fourth quarter of 2008. Results of the review will be reported to PAWC senior
management as part of the normal Internal Audit reporting process.


Milestones / Full Implementation Date

                              Milestone                                Date
   Internal Audit notification memo to PAWC senior               November 2008 (E)
   management and kick-off meeting
   Complete audit fieldwork, draft audit report                  December 2008 –
                                                                 January 2009 (E)
   Final audit report available for review                       January 2009 (E)


Personnel Responsible

Andrew S. Twadelle, Vice-President, Internal Audit, AWWSC
Kathy L. Pape, President, PAWC




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                                       Chapter IV
                                     Support Services
                     Procurement & Materials Management

Recommendation IV-25          Initiate an ERP materials management module
                              evaluation and selection process with the intention of
                              identifying a fully-integrated ERP application that
                              would serve the needs of the PAWC materials
                              management function.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

Purchasing and Supply Chain management is included within the scope of
Recommendation III-1, “research and develop plans for an ERP replacement or
upgrade.” PAWC expects American Water to either upgrade or replace the current
ERP. This new software solution will include support of the entire set of purchasing
and supply chain processes including procurement, inventory management, supply
planning, receiving, supplier management, contract management, accounts payable,
and sourcing. This implementation will provide the needed tools to support the
purchasing and supply chain function in its entirety.

The purchasing and supply chain organization, as part of this process, will
rationalize, normalize and standardize procurement processes, purchase orders, sku
numbers, inventory stores, vendors, material types, catalogues, etc.




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Recommendation IV-25


Milestones / Full Implementation Date

                             Milestone                            Date
   Identify available alternatives for current ERP             May 2008 (A)
   Commence process definition for supply chain area         October 2008 (E)
   Define requirements for each supply chain process area   December 2008 (E)
   Evaluate ERP alternatives against requirements           February 2009 (E)
   Select ERP upgrade or replacement option                   March 2009 (E)
   Select implementation integrator                           April 2009 (E)
   Commence materials, inventory, sku rationalization,        June 2009 (E)
   normalization work
   Supply chain software solution configuration design        June 2009 (E)
   Configuration and interface development                  December 2009 (E)
   Implement ERP replacement or upgrade to include supply   December 2011 (E)
   chain and purchasing process areas


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter IV
                                     Support Services
                     Procurement & Materials Management

Recommendation IV-26          Establish a central point of management and
                              responsibility for the materials management function
                              at both AWWSC and PAWC.


PAWC Response                 The Company accepts, in part, this recommendation.


Priority                      High


Discussion

PAWC recognizes the importance of consistent and accurate material management
across its business. In 2007, an inventory management strategy was adopted by
American Water and communicated to PAWC. As part of this adopted strategy,
clear roles and accountability for inventory management are identified.

PAWC identified its managers of field operations as being responsible and
accountable for implementing the inventory management strategy in their respective
operating districts; as well as ensuring that all operating procedures, housekeeping,
and physical security measures for inventory are adopted consistently. The
managers report to two senior directors of field operations for PAWC. Ultimate
responsibility for the materials management function falls to the Company’s vice-
president of operations.

PAWC’s management team will ensure all adopted inventory operating procedures
and strategies are in place and adhered to within each operating district. PAWC
does not have the authority to establish a central point of materials management at
AWWSC.




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Recommendation IV-26


Milestones / Full Implementation Date

                         Milestone                              Date
   Inventory management strategy adopted                  November 2007 (A)
   Inventory management strategy review and training        June 2009 (E)
   Full implementation                                    September 2009 (E)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                      Chapter IV
                                    Support Services
                     Procurement & Materials Management

Recommendation IV-27          Develop a comprehensive and detailed materials
                              management procedures manual that is specific to
                              PAWC.


PAWC Acceptance               The Company accepts this recommendation.


Priority                      Medium


Discussion

In 2007, an inventory management strategy was adopted by American Water and
communicated to PAWC. The strategy defines inventory management business
objectives, strategy statements and directives, and establishes clear roles and
accountability for inventory management.

Currently, procedure guidelines are contained in several software modules and
Word documents. They include, but are not limited to, an inventory scorecard users
guide document, inventory management PowerPoint, inventory cycle count
PowerPoint, and inventory scorecard spreadsheets. All of these documents were
used in the training and distribution of the inventory management strategy.

PAWC will consolidate all supporting guidelines documents to form a comprehensive
inventory procedures training manual and place in each warehouse/storeroom
location.


Milestones / Full Implementation Date

                          Milestone                                  Date
   Inventory management strategy adopted                       November 2007 (A)
   Consolidate current documentation and material                June 2009 (E)
   Full implementation                                          August 2009 (E)



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Recommendation IV-27


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter IV
                                      Support Services
                      Procurement & Materials Management

Recommendation IV-28            Establish a formalized training program at PAWC for
                                the personnel who have been designated as being
                                responsible for the materials management function at
                                the various storerooms.


PAWC Acceptance                 The Company accepts this recommendation.


Priority                        Medium


Discussion

In 2007, an inventory management strategy was adopted by American Water and
communicated to PAWC. The strategy defines inventory management business
objectives, strategy statements and directives, and establishes clear roles and
accountability for inventory management.

PAWC initially conducted training on the strategy following its adoption, but
recognizes the need to continually reinforce this strategy at all levels of operations
management.
Field operations personnel will work with human resources’ training and
development team to perform state-wide, in-depth training on inventory
management.

Milestones / Full Implementation Date

                             Milestone                                  Date
   Inventory management strategy adopted                           November 2007 (A)
   Meet with training & development team to identify                 May 2009 (E)
   inventory training objectives and planning
   Full implementation                                             December 2009 (E)

Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company
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                                      Chapter IV
                                    Support Services
                     Procurement & Materials Management

Recommendation IV-29         Adopt and expeditiously implement at PAWC the
                             standardized part-number format that is being
                             developed by the Part Number Standardization
                             Committee.


PAWC Acceptance              The Company accepts this recommendation.


Priority                     Medium


Discussion

The AWWSC Part Number Standardization Committee continues to work on the
standardized parts numbering plan. The Committee is working with AWWSC’s IT
Department to provide consistency across American Water. PAWC’s standardized
parts numbers list is targeted to be completed by the end of 2008. Upon completion,
each warehouse will match its physical inventory to the standardized part numbers,
and re-categorize as necessary. Parts cycle counts will be conducted to reconcile
inventory against the new standardized part numbers.


Milestones / Full Implementation Date

                           Milestone                                Date
   Global IT standardized parts list to all warehouses         December 2008 (E)
   PAWC warehouses verify physical inventory matches new       December 2009 (E)
   part numbers
   Full implementation                                           March 2010 (E)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company


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                                        Chapter IV
                                      Support Services
                      Procurement & Materials Management

Recommendation IV-30           Design and implement a standardized inventory-grid
                               location system at all PAWC storerooms.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

PAWC will design, develop and implement a standardized inventory-grid system
approach for each storeroom location. A team will be created to evaluate each
storeroom location and identify its best and most efficient parts functionality, as well
as identifying standardized efficiencies across PAWC’s storerooms. The grid
system will include a schematic/grid of each storeroom identifying the location of
parts. It will also identify the best storage methods for keeping parts separated,
including separate bins, rows and storage compartments. Color-coding functionality,
cross-referenced to the standardized grid system, will be considered.

Current parts lists will be maintained and used as part of the schematic key, or
legend, for each storeroom.


Milestones / Full Implementation Date

                                Milestone                                Date
   Identify PAWC team and conduct kick-off meeting                 December 2008 (E)
   Initial rollout and facilities review                             June 2009 (E)
   Design and cost preparation for capital investment               August 2009 (E)
   Implementation                                                    June 2010 (E)

Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                      Chapter IV
                                    Support Services
                     Procurement & Materials Management

Recommendation IV-31         Develop and implement a standardized procedure for
                             performing cycle counting that is to be used at all
                             storerooms.


PAWC Acceptance              The Company accepts this recommendation.


Priority                     Medium


Discussion

This recommendation has been implemented. In November 2007, an inventory
cycle count procedure was adopted by American Water, and subsequently
implemented by PAWC. Training occurred early in 2008. The procedure clearly
describes the inventory cycle count process to be followed.


Milestones / Full Implementation Date

                            Milestone                             Date
   Inventory cycle count procedure adopted                   November 2007 (A)
   Cycle count roll-out and training                            March 2008 (A)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter IV
                                     Support Services
                      Procurement & Materials Management

Recommendation IV-32           Develop an inventory management plan that
                               addresses how to identify and handle obsolete and
                               excess material.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

In November 2007, an inventory management strategy was adopted by American
Water and communicated to PAWC. Included in the strategy are procedures to
identify and dispose of obsolete and excess inventory (Financial Accounting
Standard No. 151). The directors of field operations and engineering are
responsible for implementation of this strategy.

PAWC will develop a detailed plan that is aligned with this strategy to fully implement
the identification and handling of obsolete and excess material.


Milestones / Full Implementation Date

                          Milestone                                      Date
   Inventory Management Strategy adopted                           November 2007 (A)
   Planning process development and training                       August 2009 (E)
   Full Implementation                                             January 2010 (E)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                      Chapter IV
                                    Support Services
                     Procurement & Materials Management

Recommendation IV-33          Incorporate maintenance items into the current
                              materials management application to gain better
                              inventory control over these items.


PAWC Acceptance               The Company accepts this recommendation.


Priority                      Medium


Discussion

American Water’s inventory management strategy references future evaluation of
inventory control measures for maintenance items. As part of the ERP material
management module, the new software solution will include the entire set of
purchasing and supply chain processes, including inventory management. The
implementation will provide the needed tools to support the purchasing and supply
chain functions in their entirety. With the implementation of the ERP, a
recommendation will be made to include non-inventory maintenance materials to
efficiently and effectively determine on-hand balances of maintenance items.


Milestones / Full Implementation Date

                          Milestone                                 Date
   Inventory Management Strategy adopted                       November 2007 (A)
   Implement ERP replacement or upgrade to include supply      December 2011 (E)
   chain and purchasing process areas


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                        Chapter IV
                                      Support Services
                      Procurement & Materials Management

Recommendation IV-34           Establish a system of a few centralized storerooms
                               that are to be used for strategic parts storage.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

PAWC’s two largest warehouses have been identified as centralized strategic
warehouses/storerooms for western and eastern Pennsylvania, respectively. The
Company will not only use these locations for strategic parts, but also for identified
non-strategic parts. Smaller districts’ warehouses/storerooms are not currently
deemed as strategic and draw upon the larger two warehouses for strategic parts.

The Company will routinely re-evaluate its operations and warehouses/storerooms
to determine if additional strategic warehouses/storerooms and parts are warranted
due to growth and operational effectiveness.


Milestones / Full Implementation Date

                          Milestone                                      Date
   Strategic warehouse/storerooms identification                  January 2007 (A)
   Identify PAWC team and facilities review                       June 2009 (E)
   Full implementation                                            December 2009 (E)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                       Chapter IV
                                     Support Services
                     Procurement & Materials Management

Recommendation IV-35           Implement a program at PAWC to standardize the
                               inventory maintenance and control procedures across
                               the PAWC storerooms.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

PAWC currently has an internal control program to manage warehouse inventory.
An inventory scorecard is prepared monthly to assist storeroom supervisors manage
inventory levels. Storeroom supervisors access warehouse inventory data through
the JDE system.

PAWC developed and implemented SOX key control PTP-C16 for each warehouse
receiving and receipting material. This state-wide control is used by all warehouse
supervisors and monitored monthly for consistency.

In November 2007, an inventory management strategy was adopted by American
Water and communicated to PAWC. As part of this strategy, standardized control
procedures and practices were identified and implemented by PAWC.

PAWC will review its current practices for proper inventory control, ensure consistent
storeroom security, and recommend that American Water adopt an automated
system for tracking inventory items. Additionally, the Company will develop and
implement proper training of all storekeepers to ensure procedures and methods are
followed consistently.




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Recommendation IV-35


Milestones / Full Implementation Date

                          Milestone                              Date
   Inventory management strategy adopted                   November 2007 (A)
   Planning process development and training                August 2009 (E)
   Full implementation                                      January 2010 (E)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter IV
                                      Support Services
                      Procurement & Materials Management

Recommendation IV-36            Install computer terminals in secure locations at all of
                                the PAWC storerooms.


PAWC Acceptance                 The Company accepts this recommendation.


Priority                        Medium


Discussion

PAWC recognizes the importance of consistent and accurate data entry, knowledge
and interpretation of inventory control. Most of the Company’s larger operating
districts have computer terminals at, or very near, storeroom locations. Additionally,
designated personnel are assigned and responsible for recording inventory receipts
and issues.

In the smaller operating districts, supervisors have sole responsibility for inventory
transactions and control, and have personal computers in their respective office.
Quite often, offices are located in the same facility as, and very near, storerooms.

PAWC will evaluate each operation and identify both management best operating
practice and advantages of having a designated computer at the specific storeroom
location, evaluate the person(s) who is directly responsible for inventory control, and
ensure that the processing of inventory occurs in a timely and accurate manner.
Additionally, with the implementation of a new or updated ERP system, consistent,
accurate transactions will reduce and ultimately eliminate any transcription or
interpretation errors.


Milestones / Full Implementation Date

                           Milestone                                     Date
   Review all PAWC storerooms and current practices                  June 2009 (E)
   Provide draft recommendation to management                      September 2009 (E)
   Full implementation of best operating practices                 December 2009 (E)

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                               September 2008


Recommendation IV-36


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter IV
                                     Support Services
                      Procurement & Materials Management

Recommendation IV-37           Develop and implement a procedural modification that
                               stipulates that material is decremented from the
                               inventory at the time of issue from the storeroom, and
                               not at the time that it is used in the field.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

PAWC’s current practice for issuing inventory from warehouses/storerooms consists
of issuing and charging material directly to specific jobs or work orders. The practice
also provides for rolling stock located on PAWC’s vehicles for use in the field. Once
rolling stock is used in a job the item(s) are charged from stock, and not at the time
of issuance from the warehouse/storerooms. Reconciliation of all inventories occurs
annually for both warehouse/storerooms and rolling stock.

The Company recognizes that on-hand balances, at any time, are difficult to
determine actual inventory count for reordering. Inventory counts are visually
measured and compared against minimum reordering levels. PAWC acknowledges
this manual method for real-time tracking of inventory is not an effective means and
may lead to inaccuracies in inventory count.

PAWC will create a team to evaluate its current process and develop a better
method of real-time tracking of inventory.




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Recommendation IV-37


Milestones / Full Implementation Date

                           Milestone                              Date
   Create team and identify alternative processes             June 2009 (E)
   Pilot new process                                      September 2009 (E)
   Evaluate results and modify if necessary               November 2009 (E)
   Full role-out and implementation                       December 2010 (E)


Personnel Responsible

William C. Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                      Chapter IV
                                    Support Services
                                Risk Management

Recommendation IV-38         Develop a formal implementation plan for changing
                             the focus of the ERM process to include SEC/SOX
                             compliance.


PAWC Response                The Company accepts this recommendation.


Priority                     Medium


Discussion

American Water is developing a formal implementation plan for changing the focus
of the enterprise risk management (ERM) process to include SEC/SOX compliance.
Pennsylvania-American Water Company will be integrated into American Water's
ERM process, which will include identification of its operational, financial and
regulatory risks; and actions to mitigate such risks. ERM will be reported and
reviewed by American Water senior management with all of its subsidiary
companies.


Milestones / Full Implementation Date

                          Milestone                                 Date
   Schematic presented to American Water senior                 June 2008 (A)
   management
   Revisions considered and alternatives presented            August 2008 (A)
   Implementation                                            December 2010 (E)


Personnel Responsible

Jim Li, Director, Financial Risk Management, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                      Chapter IV
                                    Support Services
                                        Legal

Recommendation IV-39          Establish a formal mechanism for developing a pre-
                              qualified list of external legal firms by periodically
                              reviewing proposals from potential candidates.


PAWC Response                 The Company accepts this recommendation.


Priority                      Low


Discussion

Pennsylvania-American Water Company’s Law Department will develop an analysis
of the Company’s legal needs and the basis on which those needs would best be
met in the context of a pre-qualification procurement solicitation and approval
process. It will then incorporate that needs assessment in its design of a formal
process to solicit proposals and evaluate qualifications of law firms interested in
providing external counsel services to the Company. A network of pre-qualified,
preferred law firms will be developed and updated periodically as potential law firm
providers are evaluated and selected.


Milestones / Full Implementation Date

                              Milestone                                Date
   Complete needs assessment and process design                 December 2008 (E)
   Solicit and evaluate RFQ’s                                   Jan – May 2009 (E)
   Identify pre-qualified firms                                 June 2009 (E)


Personnel Responsible

Velma A. Redmond, Divisional General Counsel – Eastern Division, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                       Chapter IV
                                     Support Services
                                         Legal

Recommendation IV-40          Perform a formal cost / benefit analysis regarding
                              standardization of legal management software
                              throughout the American Water system.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

As with any other software implementation, the first step in pursuing this
recommendation is to define the legal process and associated requirements that a
software solution would support. Defining the standardized processes is key to
identifying benefits and opportunities for improvements and efficiency gains and
quantifying what these benefits are likely to be. These benefits and the associated
costs should, of necessity, take into account any needs and expectations of other
American Water subsidiaries in the light of the expectations and requirements of the
other regulatory authorities that have jurisdiction over them. Once a set of
requirements is established then an evaluation of applicable solutions and
respective costs can be conducted. Based on the initial benefit expectations and
the costs of solutions that meet the identified requirements, an appropriate
investment decision will be made that considers the return on investment and the
priority of implementing a legal management system compared with other system
implementations and priorities that may be happening simultaneously in other areas
of the business.




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Recommendation IV-40


Milestones / Full Implementation Date

                             Milestone                          Date
   Identify standard legal processes                       December 2009 (E)
   Identify benefits associated with improved processes,   December 2009 (E)
   information flow and legal case management
   Identify requirements for a legal management system       June 2010 (E)
   Identify potential legal management system candidates   December 2010 (E)
   Evaluate candidates against requirements                  June 2011 (E)
   Determine estimated costs of purchasing and               June 2011 (E)
   implementing software solution
   Business case analysis – cost/benefit analysis          September 2011 (E)
   Determine merits of pursuing implementation based on    December 2011 (E)
   cost/benefit analysis


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
George W. Patrick, Senior VP, General Counsel & Secretary, AWWSC
Velma A. Redmond, Divisional General Counsel – Eastern Division, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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             Chapter V



          Water Operations




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                                        Chapter V
                                  Water Operations

Recommendation V-1             Aggressively pursue the identification and
                               implementation of technology-based best practices
                               among the water districts.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

ITS will work with American Water’s best operating practices (BOP) group to
formulate standardized business processes and look for technologies to automate,
monitor and manage those business processes. Over time, PAWC will integrate
those BOPs with the rest of the Company’s processes. The Company will continue
to strive for standard processes balanced with unique, differentiated processes that
may be specific to a region or district.

The approach will be to first identify the BOP, apply a standard business process
modeling approach, identify the differentiating factors and then look to technology to
enhance the processes where needed.

Milestones / Full Implementation Date

                             Milestone                                   Date
   Create standard business process modeling approach                June 2009 (E)
   Identify key business processes for standardization           September 2009 (E)
   Begin to standardize in scope processes                       December 2009 (E)
   Begin rollout of possible automation of standard                March 2010 (E)
   processes where applicable

Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                        Chapter V
                                  Water Operations

Recommendation V-2             Develop a business process for addressing
                               aggressive identification of the most beneficial main
                               segments for replacement based on an expectation of
                               potential leak impact.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

PAWC uses a performance-based management approach for the allocation of
infrastructure investment. District-level leak history has been used as a key indicator
of pipeline performance. As referenced in the Company’s implementation plan to
Recommendation XII-8, the process will be enhanced to utilize pipe segment
performance factors captured with the development of the operational productivity
suite (OPS). The Company will continue to further develop its methodology to
consider other performance and service factors associated with the main asset.


Milestones / Full Implementation Date

                            Milestone                                    Date
   Full implementation                                               June 2010 (E)


Personnel Responsible

David Kaufman, Vice President, Engineering, PAWC
Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter V
                                 Water Operations

Recommendation V-3            Implement a computerized maintenance management
                              system in conjunction with the proactive production
                              equipment maintenance program.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

PAWC is working with Maintenance Services and ITS on the plan, design, pilot and
rollout of the computerized maintenance management system (CMMS). The
Company is looking to broadly leverage this capability with its GIS capabilities to
ultimately benefit customer service. Long-term plans include the integration of
CMMS, GIS, workforce distribution, ERP and CRM systems. The rollout will require
extensive planning and coordination of the various groups to truly realize the full
benefit of a CMMS.


Milestones / Full Implementation Date

                           Milestone                                   Date
   Planning                                                     September 2008 (A)
   Initial rollout / Pilot                                     December 2008 (E)
   Rollout prioritization                                      December 2008 (E)
   Evaluation and next phase integration                         June 2009 (E)
   Rollout complete                                            September 2011 (E)


Personnel Responsible

Raymond J. Delo, Senior Director, Maintenance Services
Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                        Chapter V
                                 Water Operations

Recommendation V-4           Continue to develop a risk-assessment-based
                             approach for identifying main replacement projects.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

PAWC has developed a quantitative approach for main replacement prioritization
which incorporates a risk assessment-based approach for identifying projects. The
process will become more automated with the development of the GIS and CMMS
portions of the operational productivity suite (OPS) referenced in the Company’s
implementation plan to Recommendation XII-8.


Milestones / Full Implementation Date

                           Milestone                                 Date
   Full implementation                                        June 2010 (E)


Personnel Responsible

David Kaufman, Vice President, Engineering, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter V
                                 Water Operations

Recommendation V-5            Continue to periodically perform CPS studies.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

The Company recognizes the importance of planning studies in making informed
investment decisions. It will continue to conduct these studies using a combination
of Company planning engineers and outside engineering consultants. A screening
tool will be developed to document the formal review process and assist in
prioritizing the scheduling of planning study updates.


Milestones / Full Implementation Date

                        Milestone                                      Date
   Development and implementation of screening tool                June 2009 (E)
   Conduct CPSs                                                      Ongoing


Personnel Responsible

David Kaufman, Vice President, Engineering, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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             Chapter VI



        Corporate Governance




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                                        Chapter VI
                              Corporate Governance

Recommendation VI-1           Require contractors, vendors, and others doing
                              business with American Water to conduct themselves
                              ethically when dealing with American Water entities.


PAWC Response                 The Company accepts in this recommendation.


Priority                      Low


Discussion

Copies of American Water’s Code of Ethics will be made available to the Company’s
vendors and suppliers, either in hard copy or by referral to the Company’s website.
Through American Water’s centralized procurement process, Pennsylvania-
American Water Company will seek to inform its vendors that it expects that their
business dealings with the Company will be conducted in accordance with the
Code’s underlying principles (The Company notes that while the recommendation
references action to be taken by American Water, Pennsylvania-American Water
Company is the appropriate jurisdictional entity.)


Milestones / Full Implementation Date

                           Milestone                                Date
   Full implementation                                        December 2008 (E)


Personnel Responsible

Velma A. Redmond, Divisional General Counsel – Eastern Division, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                          Chapter VI
                                Corporate Governance

Recommendation VI-2             Expand the American Water Board in anticipation of
                                going public and review Board compensation as soon
                                as possible.


PAWC Response                   The Company accepts this recommendation.


Priority                        Medium


Discussion

Expand the American Water Board

American Water Works Company, Inc. (AWK: NYSE) is the parent company of
Pennsylvania-American Water Company. The former’s business and affairs are
managed under the direction of its board of directors, which has a fiduciary duty to
exercise its authority and judgment in the best interests of its shareholders. Its board
of directors currently consists of nine members, five of whom, Martha Clark Goss,
George MacKenzie, William J. Marrazzo, Julia L. Johnson and Richard R. Grigg,
have been determined by that board of directors to be independent under currently
applicable listing standards of the NYSE and applicable SEC rules.

The nominating/corporate governance committee of the American Water Board
under its charter has responsibility for, among other things:

          establishing criteria for the selection of new directors to serve on the
           American Water board of directors;
          identifying qualified candidates to serve on the American Water board of
           directors and recommending their election to that board of directors;
          making recommendations to the American Water board of directors as to
           whether members of the American Water board should stand for re-
           election; and
          developing and recommending corporate governance guidelines to the
           American Water board of directors, assessing those guidelines annually
           and making recommendations to that board in light of such assessments
           as may be appropriate.
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Recommendation VI-2


In contemplation of expanding the American Water board, that board has engaged
Russell Reynolds Associates, an executive search firm, to assist in the identification
of potential board candidates. Several potential candidates have been identified,
resulting in the recent appointments of Julia L. Johnson and Richard R. Grigg to the
board of directors and members of the American Water board’s
nominating/corporate governance committee with effect from August 1 and August
27, 2008, respectively.

Further, it is anticipated that within one year of listing on the NYSE, American
Water’s board of directors will consist of 10 members, at least six of whom will be
independent under applicable SEC rules and currently applicable listing standards of
the NYSE.


Review Board Compensation

The Compensation Committee of the American Water Board under its charter has
responsibility for, among other things, reviewing and recommending to the board of
directors the form and amount of director compensation (including perquisites and
other benefits), and any additional compensation to be paid for service on board
committees or for service as a chairman of a committee.

In contemplation of evaluating and recommending the form and amount of directors
compensation, the Compensation Committee of the American water board has, with
the board’s approval, engaged DolmatConnell & Partners, a compensation
consulting firm, to (i) develop appropriate Peer Group(s) for comparative purposes;
(ii) prepare a board of directors compensation analysis; and (iii) recommend total
compensation framework, covering all elements for pay including board retainer,
meeting fees, committees fees and equity. The results of DolmattConnell’s report
are expected by mid-September 2008.

American Water’s board of directors has undertaken these actions in the exercise of
its fiduciary duty to its shareholders, and in fact had embarked on this course of
action as part of its commitment to become a publicly held company well before the
conclusion of the Pennsylvania-American management audit. American Water has
permitted its subsidiary Pennsylvania-American to agree with this recommendation
because it already coincided with the direction taken by American Water’s board of
directors and should not be construed as an admission that American Water is
subject to the regulatory jurisdiction of a public utility commission.

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Recommendation VI-2


Milestones / Full Implementation Date

                          Milestone                                                Date
    Expansion of American Water board of directors                               On-going
    Complete compensation study                                             September 2008 (E)
    Full implementation                                                       April 2009 (E)


Personnel Responsible *

George Patrick, Senior Vice-President & General Counsel, American Water Works
Company, Inc.
Kathy L. Pape, President, Pennsylvania-American Water Company


* Personnel Responsible will monitor the implementation of this recommendation; however,
  implementation is solely within the authority of the Board of Directors of American Water Works
  Company, Inc.




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                                        Chapter VI
                               Corporate Governance

Recommendation VI-3            Implement a process to periodically perform cost
                               comparisons for external audit services.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

American Water’s controller will perform cost comparisons for external audit services
in connection with the annual external audit fee negotiation and approval process.
External audit fees are reviewed and approved annually by the Company’s Audit
Committee.

The comparison will include audit fees of publicly-traded peer water companies and
other utilities (electric, natural gas) of similar size and operating characteristics.

A formal competitive bidding process may be conducted on a periodic basis as
deemed appropriate by management and the Audit Committee.


Milestones / Full Implementation Date

                           Milestone                                      Date
   Receive external audit 2009 annual fee estimate                    May 2009 (E)
   Perform cost comparison                                           June 2009 (E)
   Audit Committee review and approval                               July 2009 (E)


Personnel Responsible

Mark N. Chesla, Vice-President and Controller, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                         Chapter VI
                               Corporate Governance

Recommendation VI-4            Modify the Internal Audit Department reporting
                               structure so that it no longer administratively reports
                               to the American Water CFO.


PAWC Response                  The Company rejects this recommendation.


Priority                       Medium


Discussion

The Company carefully considered the recommendation concerning Internal Audit’s
reporting relationship and respectfully declines to make any changes to the existing
reporting relationship.

Internal Audit reports directly to the Chair of the Audit Committee as is defined in the
Audit Committee and Internal Audit Department charters. The VP of Internal Audit
has a direct reporting relationship with the Chair of the Audit Committee and a
dotted-line relationship with the CEO and CFO of American Water. There are
checks and balances in the VP of Internal Audit’s reporting relationships. For
example, all department resource needs, budgeting, planning, performance, etc. are
consistently reviewed with the CEO and Chair of the Audit Committee throughout the
year during established meetings, thus creating transparency. Also, the VP of
Internal Audit meets with the Chair of the Audit Committee each quarter in a one-on-
one session two weeks before the quarterly Audit Committee meeting to openly
discuss audits conducted, results, related management actions and any other items
of significance.

In addition, the annual Internal Audit Plan that is approved by the Audit Committee is
developed based on the Committee of Sponsoring Organizations’ (COSO) control
model framework and prioritizes audits to be performed based on perceived risk.
Inputs gathered and incorporated into the annual plan development process are past
audits, changes in the organization, past or existing Company-related events
(internal and external), financial materiality of

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Recommendation VI-4


operations, effectiveness of SOX controls, external auditor management comments,
future company initiatives, etc. Information regarding these areas is collected
through a number of channels throughout the year with more intense focus in
September and October – i.e. Board member and executive interviews, financial
statements, business performance.

The role the CFO has in its interaction with Internal Audit is more of a formal
administrator to ensure various internal company requirements are signed off and
included in the company’s formal processes (i.e. budget approval, performance
review sign-off and filing, etc.).

Also, per the Audit Committee Charter, the Audit Committee:

    - Reviews annually the budget, staffing, structure and performance of the
      Internal Audit function to identify opportunities to strengthen or improve the
      function.

    - Reviews and approves the Internal Audit annual audit plan at an established
      Audit Committee meeting

    - Meets with the VP of Internal Audit at least once a quarter to review Internal
      Audit staffing, activities, findings and management actions, as well as the
      status or progress against the approved audit plan. Also, during these
      meetings, the Audit Committee meets privately with the VP of Internal Audit
      during executive sessions.


Lastly, the VP of Internal reports each quarter to the Pennsylvania-American Water
Company Audit Committee, which is made-up of independent outside PAWC Board
members. The VP of Internal Audit reviews internal audit activities, results, and
management actions that either directly or indirectly impact PAWC.

It is the Company’s position that all the above activities ensure enough transparency
to mitigate any potential concerns regarding undue pressures from financial
management to alter Internal Audit resources and/or efforts.


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Recommendation VI-4


Also, the current practice of having the VP of Internal Audit report directly to the
Audit Committee along with the above mentioned activities, ensures Internal Audit’s
independence and objectivity. Such a practice maintains compliance with the
Institute of Internal Auditors (IIA) standards, the governing body for the Internal Audit
profession.

As discussed above, Internal Audit’s reporting structure, activities and transparency
ensure independence and objectivity, and mitigates any potential undue influence.


Milestones / Full Implementation Date

                             Milestone                                     Date
   Not applicable


Personnel Responsible

Andrew S. Twadelle, Vice President, Internal Audit, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                 Chapter VII



Corporate Culture, management Structure, and
               Staffing Levels




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                                        Chapter VII
           Corporate Culture, Management Structure, & Staffing Levels

Recommendation VII-1           Expedite efforts to define and support a high-
                               performing organizational culture.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

PAWC’s senior management team, including HR, will work together to further clarify
the values, strategies and leadership practices that support the Company’s efforts to
serve its customers and key stakeholders. Plans will then be developed to
communicate and reinforce those values, strategies and leadership practices.
Operations will encourage the implementation of best operating practices throughout
PAWC.


Milestones / Full Implementation Date

                              Milestone                                Date
   Clarification of values, strategies & leadership practices      March 2009 (E)
   Communication and reinforcement plans developed and
   implemented                                                   September 2009 (E)
   Implementation of best operating practices                         Ongoing


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
William Kelvington, VP Operations, Pennsylvania-American Water Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VII
           Corporate Culture, Management Structure, & Staffing Levels

Recommendation VII-2         Implement an employee survey process with
                             appropriate feedback and action – planning
                             components.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

American Water will conduct an employee engagement survey for all employees,
including PAWC employees, prior to the end of 2008. Feedback and action-planning
in response to the survey will commence in 2009.


Milestones / Full Implementation Date

                          Milestone                               Date
   Plan employee engagement survey                          September 2008 (E)
   Conduct survey                                           December 2008 (E)
   Feedback and action planning                               March 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VII
           Corporate Culture, Management Structure, & Staffing Levels

Recommendation VII-3           Implement a formal management development
                               process.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

American Water’s corporate Human Resources Department will lead a system-wide
initiative to implement a management development program subsequent to the
executive-level leadership capability review, as set forth in the implementation plan
for Recommendation II-13.

Resources will be identified, whether human, material, technology or consulting, to
initiate and sustain this effort.


Milestones / Full Implementation Date

                           Milestone                                     Date
   Assess management development needs                              March 2009 (E)
   Identify and obtain needed resources.                           June 2009 (E)
   Design program                                                September 2009 (E)
   Pilot program                                                 December 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VII
           Corporate Culture, Management Structure, & Staffing Levels

Recommendation VII-4         Fill open organization development (OD) positions in
                             American Water and assess the need for additional
                             change management resources for PAWC.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

American Water Water Works Service Company intends to conduct a search for a
director of organization development (OD) in 2009. PAWC will continue to assess
the need for additional change management resources.


Milestones / Full Implementation Date

                            Milestone                               Date
   Fill AW director of organizational development position    December 2009 (E)
   Assess additional change management resources needs         ongoing through
   in PAWC                                                    December 2009 (E)


Personnel Responsible

Sean G. Burke, Senior Vice-President, Human Resources, AWWSC
Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VII
           Corporate Culture, Management Structure, & Staffing Levels

Recommendation VII-5         Implement workforce management processes at
                             PAWC.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

PAWC agrees to implement workforce management processes, as outlined in the
Company’s implementation plans for Recommendations II-12 and II-13.


Milestones / Full Implementation Date

                          Milestone                                  Date
   Complete PAWC management capability review                  December 2009 (E)
   Pilot program                                                 June 2010 (E)
   Implement workforce planning / replenishment (see XIII-1)     June 2010 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources
Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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             Chapter VIII



          Affiliate Interests




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                                        Chapter VIII
                                  Affiliate Interests

Recommendation VIII-1         Develop formal, comprehensive documentation for
                              affiliate relationships and cost allocation, and assign
                              the responsibility for affiliate transactions to the
                              appropriate manager.


PAWC Response                 The Company accepts, in part, this recommendation.


Priority                      High


Discussion

The Company will develop formal documentation for affiliate cost allocations. An
inter-company team will be formed to review existing documentation for affiliate cost
allocations and update existing documentation, as necessary. A final draft
document will be presented to executive management for approval.

The Company believes that the assignment of a single person with responsibility to
manage affiliate relationships is not feasible. These relationships include a number
of different aspects, such as compliance with individual state reporting or other
requirements associated with affiliated entities, state approval proceedings regarding
affiliate transactions, relationships among affiliated non-regulated entities and
others. The broad term “affiliate relationships/transactions” encompasses a number
of functional areas with cross functional implications.


Milestones / Full Implementation Date

                             Milestone                                Date
   Form an inter-company team to update its existing             December 2008 (E)
   documentation for cost allocations
   Inter-company team prepares the documentation of cost         September 2009 (E)
   allocations
   Approval of final cost allocations documentation               December 2009 E



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Recommendation VIII-1


Personnel Responsible

John L. Settelen, Vice President, Planning & Reporting, AWWSC
Rochelle Kowalski, Vice-President, Finance, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VIII
                                  Affiliate Interests

Recommendation VIII-2          Perform a detailed analysis to verify that the use of
                               the number of customers for allocating AWWSC costs
                               among regulated utilities is reasonable and
                               reasonably approximates the use of cost-causative
                               factors; subsequently make modifications, as
                               appropriate.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

The Company will perform a detailed analysis to verify that using number of
customers is reasonable in allocating costs among regulated utilities. The study will
be led by the Corporate Financial Planning & Analysis Department. It will address
the use of number of customers as an approximation (considering cost-benefit) to
the use of other/multiple cost-causative factors.


Milestones / Full Implementation Date

                           Milestone                                    Date
   Determine approach and structure of study                       March 2009 (E)
   Complete study and determine whether modifications are          June 2010 (E)
   appropriate.
   Timing of full implementation is dependent on the study          Undetermined


Personnel Responsible

John Settelen, Vice-President, Planning & Reporting, AWWSC
Rochelle Kowalski, Vice-President, Finance, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company


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                                        Chapter VIII
                                 Affiliate Interests

Recommendation VIII-3        Regularly evaluate the cost of services provided to
                             PAWC by its affiliates so as to verify that PAWC
                             ratepayers are not being harmed by charging these
                             services at cost rather than market.


PAWC Response                The Company accepts this recommendation.


Priority                     Medium


Discussion

An evaluation of cost-to-market price for services provided to PAWC by AWWSC will
be periodically conducted.


Milestones / Full Implementation Date

                Milestones/Full Implementation                        Date
   Complete an evaluation of cost-to-market for services      December 2009 (E)
   provided to PAWC by AWWSC


Personnel Responsible

Rochelle Kowalski, Vice-President, Finance, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VIII
                                   Affiliate Interests

Recommendation VIII-4          Update the AWWSC / PAWC affiliate agreement, as
                               necessary, and submit it to the PA PUC for review
                               and approval.


PAWC Response                  The Company accepts, in part, this recommendation.


Priority                       High


Discussion

PAWC will submit to the PaPUC an informal information update regarding the
AWWSC/PAWC affiliate agreement. Specifically, PAWC will provide a list of existing
major services and current nomenclature. PAWC does not believe that a re-
approval of the existing agreement or a wavier from filing a revised affiliate interest
agreement for formal review and approval is necessary. AWWSC is providing
essentially the same substantive services today that were contemplated when the
services agreement was signed in 1989. The fact that tier 1 allocations are utilized
for non-regulated companies does not render the existing agreement out of date. To
the contrary, the existing agreement contemplates that the AWWSC can provide
services to entities other than regulated water companies, and the tier 1 allocation
ensures that a fair share of AWWSC costs are apportioned to the non-regulated
entities.

The existing affiliate agreement was drafted to have the flexibility to accommodate
reorganizations, changes in phraseology or nomenclature and technologies that
occur routinely and in the normal course of business, and to accommodate the
provision of services by AWWSC to entities other than regulated water companies.
Rather than rendering the existing contract outdated, the flexibility inherent in the
service agreement is a major strength of the contract. Nevertheless, it is appropriate
to periodically update the description of services in a separate explanatory
document, and PAWC will do so as necessary.




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Recommendation VIII-4


Milestones / Full Implementation Date

                             Milestone                           Date
   Submit initial information update to the PUC            February 2009 (E)
   Provide periodic updates                                   As needed


Personnel Responsible

Velma A. Redmond, Divisional General Counsel – Eastern Division, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VIII
                                  Affiliate Interests

Recommendation VIII-5         Provide ongoing training updates to AWWSC
                              employees on proper use of billing numbers for
                              charging affiliates when reporting time.


PAWC Response                 The Company accepts this recommendation.


Priority                      Low


Discussion

AWWSC is currently enhancing the training program. Once completed, it will be
integrated into the orientation for new AWWSC employees and offered to existing
AWWSC employees periodically as refresher training.


Milestones / Full Implementation Date

                          Milestone                                 Date
   AWWSC completes training program enhancement                 March 2009 (E)
   AWWSC offers training to new and existing employees        September 2009 (E)


Personnel Responsible

John Settelen, Vice-President, Planning & Reporting, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter VIII
                                   Affiliate Interests

Recommendation VIII-6          Regularly conduct internal audits of affiliate
                               transactions and associated cost allocations.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

AWWSC’s Internal Audit Department has incorporated into its annual audit plan a
review of affiliate transactions and their allocations. A sample of the type and actual
transactions will be reviewed for appropriateness based on the company’s policy
and practices for capturing and allocating affiliate costs. The sample will be based
on materiality and volume of transactions. The 2008 audit in this area is underway
and results will be reported to American Water Works senior management with a
copy to PAWC senior management as part of the normal Internal Audit reporting
process.


Milestones / Full Implementation Date

                               Milestone                                 Date
   Notification to AWWC management of Internal Audit’s            August 2008 (A)
   review of affiliate allocation process
   Complete audit fieldwork, draft audit report                   September 2008 (E)
   Final audit report                                             October 2008 (E)


Personnel Responsible

Andrew S. Twadelle, Vice-President, Internal Audit, AWWSC
Kathy L. Pape, President, PAWC




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             Chapter IX



          Diversity and EEO




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                                        Chapter IX
                                Diversity and EEO

Recommendation IX-1          Update the diversity action plan, provide resources,
                             and implement the plan in a timely manner and give
                             consideration to a Pennsylvania-specific initiative.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

PAWC will request that American Water update its Diversity Action Plan and seek
executive support to identify and acquire the necessary resources to implement the
plan. Depending on the outcome, PAWC will consider undertaking a Pennsylvania-
specific initiative.


Milestones / Full Implementation Date

                          Milestone                                  Date
   Update the American Water diversity action plan             December 2008 (E)
   Determine resources                                          March 2009 (E)
   Consider and plan a PA-specific initiative                    June 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                         Chapter IX
                                  Diversity and EEO

Recommendation IX-2            Complete efforts to assure data integrity in the JD
                               Edwards human resources information system.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

In order to enhance the integrity of data used to create EEO-1 Reports and
Affirmative Action Plans, PAWC is taking the following actions.

The Company established a weekly change report to track changes, modifications
and deletions to employee records in JDE. The report is reviewed by PAWC’s HR
group, approved via signature by the director, human resources, and tracked by
date.

Work to update locality and physical location codes within Edwards is complete. HR
is currently in the process of obtaining updated contact information, including
location, from all system users.

Employees will be surveyed to capture current, relevant information regarding race,
veteran’s status and disability. Participation is strictly voluntary in accordance with
applicable laws and regulations.




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Recommendation IX-2


Milestones / Full Implementation Date

                             Milestone                          Date
   Review changes made in JDE weekly to assure accuracy     August 2008 (A)
   of additions, modifications or deletions
   Establish a control to assure JDE changes are tracked.   August 2008 (A)
   Weekly report regarding missing or late change
   verification reports
   Update primary contact information and location          October 2008 (E)
   Complete survey of employees regarding EEO and            March 2009 (E)
   veteran data; load data into JD Edwards


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter IX
                                Diversity and EEO

Recommendation IX-3          Develop and implement a standard data-verification
                             process for EEO-1 reporting.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

The HR group will develop and document a standard data verification process.
PAWC’s HR manager will ensure this process is followed at all Company locations.


Milestones / Full Implementation Date

                            Milestone                              Date
   Develop verification process                               December 2008 (E)
   Process used for 2009 EEO-1 reporting                       August 2009 (E)



Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter IX
                                Diversity and EEO

Recommendation IX-4          Require the AWWSC Human Resources Vice
                             President to review and approve EEO-1 reports prior
                             to submission.


PAWC Response                The Company accepts this recommendation.


Priority                     High


Discussion

EEO-1 Reports will be reviewed and approved by American Water’s senior vice-
president, human resources, prior to submission to the EEOC.


Milestones / Full Implementation Date

                        Milestone                                  Date
   Annual SVP HR review and approval of EEO-1 reports        September 2008 (E)


Personnel Responsible

Sean Burke, Senior Vice-President, Human Resources, AWWSC
Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                          Chapter IX
                                 Diversity and EEO

Recommendation IX-5           Define, document and implement more aggressive
                              hiring plans for women and minorities.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

PAWC will review its current outreach efforts to women and minorities. The
Company will identify additional sources and methods that will provide more
aggressive outreach and develop a plan to utilize those sources and methods. The
Plan will include specific goals for outreach efforts; and results will be reported
against those goals.


Milestones / Full Implementation Date

                           Milestone                                   Date
   Develop plan for additional outreach                         December 2008 (E)
   Implement plan                                               Jan – Dec 2009 (E)
   Report results                                                January 2010 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter IX
                                Diversity and EEO

Recommendation IX-6          Formalize the supplier diversity program and explore
                             the use of spend targets in the Supply Chain
                             performance objectives.


PAWC Response                The Company accepts, in part, this recommendation.


Priority                     Medium


Discussion

American Water’s current supplier diversity policy statement will be updated and
enhanced to formal policy status. Also, a practice will be developed to guide
Company personnel involved with diverse suppliers in the procurement process, and
to ensure compliance with the policy.

The Company rejects the use of spend targets as performance measures for Supply
Chain’s strategic sourcing group. The Company explored spend targets in the past
and found that a participative process works to increase the Company’s spend with
diverse suppliers. Managing to spend targets could result in inappropriate contract
awards, which should be based solely on the competitiveness and merits of the bids.


Milestones / Full Implementation Date

                            Milestone                                 Date
   Create supplier diversity policy and practice                Jul – Sep 2008 (E)
   Policy and practice receive AWWSC Board approval           September 2008 (E)
   Communicate and implement approved policy and              Oct – Nov 2008 (E)
   practice

Personnel Responsible

Deborah A. Emposimato, Director, Supply Chain, American Water Works Service Co.
Kathy L. Pape, President, Pennsylvania-American Water Company


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                                        Chapter IX
                                 Diversity and EEO

Recommendation IX-7            Submit comprehensive diversity reports to the PaPUC
                               annually.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

PAWC, like other major PaPUC jurisdictional utility companies, is encouraged to file
annual reports to the Commission detailing diversity program activity pursuant to 52
Pa. Code § 69.809. It is the intent of the Company, which filed reports for the years
2006 and 2007, to continue to file comprehensive reports detailing both employee
and procurement activities in accordance with filing guidelines.


Milestones / Full Implementation Date

                          Milestone                                     Date
   Complete comprehensive diversity report annually                   Jan – Mar
   File comprehensive diversity report with the PaPUC                   March
   annually


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSCo.
Deborah A. Emposimato, Director, Supply Chain, American Water Works Service Co.
Kathy L. Pape, President, Pennsylvania-American Water Company




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             Chapter X



         Customer Service




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                                         Chapter X
                                  Customer Service

Recommendation X-1             Invest in new customer interfacing technology,
                               including IVR, electronic billing, and web self-service
                               capabilities.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       Medium


Discussion

The Customer Service group is working with ITS and other groups to implement
multiple parallel technology initiatives to address technology systems related to
customer service. The approach is to tactically bring current technology
components up to date while at the same time invest in new enabling strategic
systems specifically around web self-service.

The first project is to address the call center system and surrounding related
technologies. This will also enhance the IVR system. American Water is also
conducting a planning effort to enable web self-service for our customers.
Initial web self-service capabilities will provide web enablement for 80% of the call
types the call center receives. These include online bill payment, account
maintenance, turn on and turn off requests and account balance inquiry. In
subsequent phases, electronic bill presentment, service requests and other online
capability will be added.


Milestones / Full Implementation Date

                           Milestone                                    Date
   Complete core call center system upgrades                      December 2008 (E)
   Core call center network infrastructure upgraded                 March 2009 (E)
   Web self-service planning and design                           September 2008 (A)
   Web self-service Phase 1 implementation                        September 2009 (E)
   Web self-service Phase 2 implementation                          March 2010 (E)


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Recommendation X-1


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Meg Neafsey, Interim Lead, Customer Service, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter X
                                 Customer Service

Recommendation X-2            Analyze employee turnover at the Pensacola Call
                              Center and develop strategies to reduce turnover.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

Effective immediately, exit surveys will be conducted to obtain real data on why
employees are choosing to leave the Pensacola Call Center. To be effective in
combating turnover, information is needed that is accurate and that explains the root
cause(s) of why employees leave, not what they tell their supervisors or HR to avoid
"burning bridges." This data will help the organization target development programs
and develop the people that will have the most impact on turnover and retention.
Once data analysis is complete, the American Water will develop strategies to
reduce turnover.


Milestones / Full Implementation Date

                           Milestone                                 Date
   Complete exit interviews for employees who have left         December 2008 (E)
   within the past 18 months
   Analyze data and develop strategies                             March 2009 (E)
   Implementation of strategies                                    June 2009 (E)


Personnel Responsible

Kimberlee S. Legg, Director, Human Resources, Customer Service Centers, AWWSC
Meg Neafsey, Interim Lead, Customer Service, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company



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                                         Chapter X
                                  Customer Service

Recommendation X-3             Strengthen recruitment, selection, and training
                               practices to improve the quality of new CSR hires.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

The Human Resources and Training & Educational Development functions are
undertaking a critical initiative in 2008 to produce significant increases in employee
performance and retention and deliver the highest return on investment through
improved hiring practices. Goals of the initiative include reducing interview time,
turnover rate, absenteeism and job-related errors while increasing employee
satisfaction and customer service ratings. To that end, the Company wants to
ensure it is utilizing the appropriate pre-employment screening tests and employee
assessment solutions that will assist the customer call center (CSC) in connecting
hiring decisions with business results. The goal is to adequately predict on-the-job
performance and support fair hiring practices through cognitive and job fit
assessments.

The Human Resources Department within the CSC will be evaluating a minimum of
four (4) vendors. A summary report with recommendations will be presented to the
director of Human Resources. The summary report, at a minimum, will include the
pros/cons of each vendor, scope of work to implement, cost of execution and
references/results from companies who have utilized the assessment tools. Vendor
tools to be utilized for new hires, as well as assessing the necessary competencies
to advance to billing, collections and supervisor positions, will be analyzed.




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Recommendation X-3


Milestones / Full Implementation Date

                           Milestone                           Date
   Evaluation of vendors                                 November 2008 (E)
   Presentation of summary report                        December 2008 (E)
   Decision regarding ‘path forward’                     December 2008 (E)
   Implementation                                         January 2009 (E)


Personnel Responsible

Kimberlee S. Legg, Director, Human Resources, Customer Service Centers, AWWSC
Meg Neafsey, Interim Lead, Customer Service, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter X
                                 Customer Service

Recommendation X-4            Develop a Pennsylvania-specific customer service
                              scorecard and regularly report associated metrics to
                              the PAWC President.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

The Company agrees that PAWC-specific metrics and reporting should be provided.
The ability to capture and report such data is being considered as part of American
Water’s overall information technology plan. The implementation time frame for this
recommendation will be aligned with the implementation time frame for the overall
technology plan to assure alignment of functionality and related components.

In the meantime, the Company expects to implement an interim PAWC-specific
scorecard that will capture and report some meaningful customer service metrics.
The metrics will measure the performance of all aspects of customer service, from
the call center to field operations.


Milestones / Full Implementation Date

                           Milestone                                 Date
    Design interim scorecard criteria                          December 2008 (E)
   Test and begin interim tracking of PA scorecard metrics     June 2009 (E)


Personnel Responsible

Meg Neafsey, Interim Vice President Customer Service, AWWSC
Traci A. Follmer, Regional Director, Customer Relations, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                        Chapter X
                                  Customer Service

Recommendation X-5            Perform an analysis of the increase in complaint
                              trends that PAWC is currently experiencing.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

PAWC will perform an analysis of the increase in complaint trends as described,
below.

The first activity is to extract and categorize complaints utilizing a database
indicating the types of complaints received. Each account will be further analyzed to
determine the root cause contributing to the complaint. This will be accomplished by
reviewing Company reports and information captured in the electronic customer
information system (ORCOM).

The second step will be to develop, evaluate and implement the most effective
solutions to mitigate the increased trend in complaints. Solutions will be developed
to address each category, accordingly, and will require involvement from PAWC
operations personnel, customer relations, customer service representatives at the
call center, and other key stakeholders.

The timeframe to implement solutions will vary based upon the category and solution
chosen.




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Recommendation X-5


Milestones / Full Implementation Date

                           Milestone                             Date
   Extract and categorize complaints                       December 2008 (E)
   Develop and evaluate solutions                          September 2009 (E)


Personnel Responsible

Traci A. Follmer, Regional Director, Customer Relations, AWWSC
Meg Neafsey, Interim Lead, Customer Service, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter X
                                 Customer Service

Recommendation X-6            Perform an analysis of the growth in PAWC disputes.


PAWC Acceptance               The Company accepts this recommendation.


Priority                      Medium


Discussion

The Company will perform an analysis of disputes as recommended and institute
measures to improve the handling of disputes by Pennsylvania customers.

To improve the handling of disputes by PAWC’s customers, five new positions have
been added at the call center. The positions were filled by individuals who are
former customer service representatives with Pennsylvania-specific experience.
The group is called the Pennsylvania Escalations Group, and now performs the
following functions:

          Outbound calling to customers who have unanswered questions about
           billing charges, fees, etc.

          Waiving late charges, service activation fees, and issuing courtesy
           adjustments, when appropriate. The group conducts outbound calling to
           these customers, informing them of the decision and assessing customer
           satisfaction with the actions taken.

          Outbound calling to customers who have been given billing adjustments to
           determine if the customers are satisfied with the billing department
           decision.

          Outbound calling to customers who have been given adjustments by the
           collections department, such as transfer of funds, to determine if
           customers are satisfied with the action.




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   Recommendation X-6


         Expediting resolution of field issues, such as restorations, to ensure that
          customer concerns are addressed.

         Issuing Utility Reports to customers when actions taken by PAWC are not
          satisfactory to the customer even though the Company took all reasonable
          and appropriate actions to satisfy the customers’ concerns.


Milestones / Full Implementation Date

                            Milestone                                   Date
   Gather available data on disputes from 2002 to present          October 2008 (E)
   Review data and identify processes and practices that          November 2008 (E)
   contribute to customer disputes
   Review identified processes and potential changes that         December 2008 (E)
   could reduce disputes
   Full Implementation                                              March 2009 (E)
   Explore potential practice and process improvements to              Ongoing
   reduce customer disputes
   Continue to track disputes and contributing issues, and              Ongoing
   compare historical results to results following
   implementation of Pennsylvania Escalations Group
   Continue to review dispute issues for potential change               Ongoing
   and improvement


Personnel Responsible

Meg Neafsey, Interim Lead, Customer Service, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter X
                                  Customer Service

Recommendation X-7             Initiate actions to lower the number of over-estimates
                               in meter reading.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

The strategy to initiate actions to lower the number of over-estimates in meter
reading is to partition the effort into three components. The objective of the first
component will be to complete investigative discussions and root cause analysis of
the elements contributing to the over-estimates (system estimating routines, unit of
measure discrepancies, frequency of meter reading, etc.).

The second component will be to develop, evaluate and determine potential solution
alternatives and to select the most effective option to lower the number of over-
estimates in meter reading (modify current estimating routine, implement a new
estimating routine, implement AMI, etc.).

The final component will be to implement a solution to remediate issues surrounding
the high number of over-estimates in meter reading. This solution will be delivered
using a phased project lifecycle approach of Initiation, Planning, Analysis/Design,
Build/Configure, Test, Deploy, and Close.

All three components of this effort require involvement and feedback from the user
community including Field Service representatives in operations, Customer
Relations, and the CSC – Billing Service team. The implementation timeframe will
vary based upon the solution chosen.




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Recommendation X-7


Milestones / Full Implementation Date

                            Milestone                            Date
   Investigative discussions complete                     October 2008 (E)
   Problem root cause analysis complete                  December 2008 (E)
   Solution alternative analysis complete                 January 2009 (E)
   Development of alternative estimates complete         February 2009 (E)
   Solution selection complete                             March 2009 (E)
   Implementation planning complete                         April 2009 (E)
   Full implementation                                   Will vary based on
                                                         final solution decision


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Traci A. Follmer, Regional Director, Customer Relations, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter X
                                  Customer Service

Recommendation X-8             Complete the upgrade project for Advantex.


PAWC Acceptance                The Company accepts this recommendation.


Priority                       High


Discussion

The strategy for completing the Ventyx (formerly Advantex) upgrade requires
partitioning the project into two components. The objective of the first component
will be to complete an analysis of the ITS operating environment/infrastructure
requirements to support the Ventyx Service Suite R8.x upgrade and then address
identified deficiencies and gaps. The operating environment/infrastructure analysis
will include, but is not limited to, hardware, software, operating systems, storage,
network, high availability and security refinement.

The second component will be to implement the Ventyx Service Suite R8.x upgrade
to include both feature/functionality enhancements contained within the application
as well as additional functional requirements stated in the business requirements.
The initial work will require extensive involvement and feedback from the user
community including field service representatives in operations, Field Resource
Coordination Center (FRCC) personnel, and customer service representatives at the
call centers.

The Ventyx upgrade project will be delivered using a phased project lifecycle
approach of Initiation, Planning, Analysis/Design, Build/Configure, Test, Deploy, and
Close.

It must be noted that most of the planning and analysis activities for both
components of the project can occur in parallel through coordination of activities and
cross-flow of information. However, the build/configure and subsequent lifecycle
phases for the implementation of the feature/functionality enhancements of the
Ventyx Service Suite R8.x upgrade cannot be delivered until the operating
environment/infrastructure environments are in place.


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Recommendation X-8


Milestones / Full Implementation Date

                         Milestone                              Date
   Business Case complete                                 October 2008 (E)
   Funding approval                                       October 2008 (E)
   Planning complete                                     December 2008 (E)
   Design complete                                       February 2009 (E)
   Development complete                                    April 2009 (E)
   Testing complete                                        May 2009 (E)
   Training complete                                       July 2009 (E)
   Pilot complete                                         August 2009 (E)
   Full implementation                                   December 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Traci A. Follmer, Regional Director, Customer Relations, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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             Chapter XI



       Operational Performance




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                                   September 2008


                                         Chapter XI
                              Operational Performance

Recommendation XI-1            Develop a comprehensive damage prevention
                               program.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

Pennsylvania-American Water Company (PAWC) will develop and implement a
comprehensive damage prevention program to specifically address damages to
subsurface facilities. Damage encompassed by the program will include third-party
damage to Company-owned facilities and damage to third-party facilities that is a
result of PAWC’s activities.

PAWC will review, build upon and improve its current Buried Facility Damage Report
procedure. Development and implementation of the business process will consider
and address the following items.

      Development of a procedure and system to measure and track the volume of
       utility locations performed by the company on a district basis. The procedure
       shall also measure the volume of locates where damage has occurred to
       measure the effectiveness of the program. It is expected that this procedure
       will incorporate statistics from the Pennsylvania One Call system and internal
       measures to determine the overall effectiveness.

      Development of a Buried Facility Damage Report to document and track
       damage to the facilities. Refinement of the report will specifically address the
       applicable items outlined in Finding XI-2. These items include:

           o Responsible party for initiating the report
           o System utilized and the responsible party for tracking the report
           o Procedure utilized and the responsible party for tracking restitution for
             damages resulting from the incident


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Recommendation XI-1


          o Consideration of the coding types identified
          o Implementation of the procedure in each PAWC district
          o Utilization of the program on a statewide and/or company level


It is anticipated that the implementation plan will result in a business process that will
utilize a Buried Facility Damage Report to document the incident. The process shall
then track the status of the incident and restitution utilizing a database to efficiently
manage the process. During the development of the business process, alternative
options will be explored and considered to enhance and improve efficiencies of the
company’s plan.


Milestones / Full Implementation Date

                            Milestone                                     Date
   Development of a detailed Implementation plan for the              March 2009 (E)
   business process
   Rollout of the process throughout each PAWC district               June 2009 (E)
   Full implementation of the program                               September 2009 (E)


Personnel Responsible

William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                          Chapter XI
                               Operational Performance

Recommendation XI-2             Improve business-continuity planning.


PAWC Response                   The Company accepts this recommendation.


Priority                        Medium


Discussion

PAWC will continue to make improvements to business continuity planning. The
Company maintains plans to ensure disruption to water service is minimized.
Contractor lists, extra materials, staffing plans, use of portable water facilities, media
communications, etc. are all part of the plans.

Operation and maintenance (O&M) manuals and emergency response plans are
tested annually. Business continuity processes are contained within these manuals.
PAWC’s annual tabletop exercises specifically discuss the above as part of the
Company’s emergency response and business continuity efforts.

PAWC will review potential deficiencies in business continuity processes via the
annual tabletop exercises. The Company will ensure that any deficiencies identified
are discussed and addressed as needed in subsequent annual tabletop exercises.


Milestones / Full Implementation Date

                           Milestone                                        Date
   Complete annual tabletop exercises.                              November 2008
   Review tabletop exercise report with recommendations.            March/April 2009
   Include scenarios to address deficiencies.                       August/September
                                                                    2009

Personnel Responsible

John C. Ihli, Regional Director, Operational Risk Management, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                        Chapter XI
                             Operational Performance

Recommendation XI-3           Perform a review and incorporate better technologies
                              for preparing, distributing, and updating the
                              emergency and the operations and maintenance
                              manuals, including the intranet site.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

Pennsylvania-American Water Company (PAWC) is confident that its Emergency
Response Plans (ERPs) and Operations and Maintenance Manuals (O&M Manuals)
meet the regulatory requirements of the Pennsylvania Department of Environmental
Protection (DEP). However, there may be opportunities to improve the consistency
and accessibility of these documents within the Company.

PAWC will perform an initial review of the ERPs and O&M Manuals to evaluate the
consistency of content and format. Opportunities to improve the consistency of
these documents will be identified, including standardized table of contents and table
of exhibits. The evaluation and any subsequent revisions to the documents will be
made concurrently with the scheduled annual updates required by DEP, which are
done in the first quarter of the calendar year.

PAWC will also investigate potential document-management systems for
maintaining the information. The investigation will include an evaluation of
commercial, off-the-shelf (COTS) software, and the Company’s Quickplace intranet
site where some of the standard documents are presently stored.

Depending on the results of the above evaluation, the Company will implement a
new document management system or enhance the use of the current Quickplace
site. The desired outcome will be to provide electronic sharing of the plans and
manuals for easy, quick access across the state operations.



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Recommendation XI-3


Milestones / Full Implementation Date

                             Milestone                         Date
   Perform initial review of document consistency          March 2009 (E)
   Evaluate document-management systems                    March 2009 (E)
   Revise documents to incorporate standardization         March 2010 (E)
   recommendations
   Implement document-management system or other           March 2010 (E)
   means for electronic sharing of documents


Personnel Responsible

William C. Kelvington, Vice-President, Operations
Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                         Chapter XI
                              Operational Performance

Recommendation XI-4            Continue to strengthen the unaccounted-for water
                               program.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

PAWC agrees that additional work is required to reduce non-revenue water (NRW)
and, accordingly, unaccounted-for-water across the Company. In the most recent
capital expenditure budgeting process (for 2009), and moving forward in the Five-
Year Plan, the Company has emphasized the replacement of leaking waterlines
within districts having high break levels and/or high levels of NRW.

One way this is being accomplished is through an increase in staffing levels. In
2008, authorization was given to add additional staff in the Pittsburgh District to
facilitate increased waterline replacement activities.

As additional leak/break data history becomes available it will be incorporated into
the capital expenditure program. The Company agrees that a robust database is
needed to replace the linked spreadsheets and various databases currently in use
throughout the state that are repositories for most of the NRW data. A better
database will provide consistency to the data being generated and allow for better
comparisons across various parameters.

Having this information in a common database repository will assist management in
comparing and contrasting districts across the state. While it is clear that certain
districts have significantly higher numbers of leaks/breaks, there are also various
reasons why this is true. Factors such as age of pipe, pipe material, system
pressures, aggressive soil conditions, etc., can all have a major impact on the
number of leaks and breaks. A central data base will allow for the collection of more
raw data to assist in the evaluation process.



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Recommendation XI-4


The creation of reduced pressure zones, as well as district meter areas (or zoned
metering areas), have proven to assist in successfully reducing NRW.


Milestones / Full Implementation Date

                           Milestone                                 Date
   NRW database development                                      March 2009 (E)
   NRW database full implementation across PAWC                 December 2009 (E)
   Analyze leak\break history by district to assist in
   budgeting decisions                                               Ongoing
   Analyze operational staffing relative to NRW Progress           Annual/Yearly


Personnel Responsible

William C. Kelvington, Vice-President, Operations
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                          Chapter XI
                               Operational Performance

Recommendation XI-5             Incorporate the methodologies in the currently
                                evolving UFW spreadsheets into a more appropriate
                                technology; specifically, a backend database with a
                                client server or web interface.


PAWC Response                   The Company accepts this recommendation.


Priority                        High


Discussion

As PAWC continues to develop the spreadsheets and enhances the business
process, ITS will continue to build the technology foundation. ITS is in the process
of establishing technology standards and capabilities that will facilitate the transition
from a spreadsheet-based prototype to a database-driven ITS managed application
service. American Water looks to begin this transition in 2009.


Milestones / Full Implementation Date

                            Milestone                                     Date
   Finalized spreadsheet prototype                                    March 2009 (E)
   Establish applicable ITS standards and capabilities                June 2009 (E)
   Begin transition from prototype to ITS managed services          September 2009 (E)
   Begin GIS & CMMMS Integration                                      March 2010 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                         Chapter XI
                              Operational Performance


Recommendation XI-6            Refine the reporting of unaccounted-for water to the
                               PaPUC.


PAWC Response                  The Company accepts, in part, this recommendation.


Priority                       Medium


Discussion

The recommendation appears to not agree with the concept of unavoidable annual
real losses (UARL) within the Company’s non-revenue water (NRW) and
unaccounted-for water (UFW) calculations as reported annually to the Commission.
The Company rejects this portion of the recommendation for several reasons. The
UARL concept is an accepted practice world-wide in the water business. The
American Water Works Association, which is the water industry trade organization,
has embraced the UARL concept as well. The AWWA Research Foundation
(AWWARF) is preparing to release its final draft of No. 4109, Water Accountability &
Loss Control Report, which includes the UARL concept.

Given the parameters of water flowing through a pipeline with the connections and
types of materials involved, it is unavoidable that some losses will occur even if there
are no other NRW factors involved. The overall tolerances do not allow for a
completely “tight” water distribution system. The UARL, therefore, makes
allowances for these unavoidable real losses through a calculation that factors in
miles of waterline, number of connections, average service connections length, and
average system pressure.

Additionally, Schedule 500 contained in the PUC’s annual report, titled “Water
Delivered Into System During Year,” agrees with this concept in that it allows for a
UARL calculation to be included in the reporting of water system delivery.
Therefore, the Company believes its methodology for calculating Commission-
defined UFW has been applied correctly.

The Company agrees that further investigation needs to occur with respect to the
average system pressure and average service line length calculations. In addition,
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Recommendation XI-6


UARL should also be calculated on a district basis as well as a state-wide basis.
The Company has used an average pressure of 100 psi as a reasonable
approximation state-wide of system pressures. This number should be confirmed by
a more in-depth analysis. Calculating a district-specific UARL will allow more
meaningful comparisons within the Company to focus on systems with problematic
NRW issues.


Milestones / Full Implementation Date

                           Milestone                               Date
   Verify average system pressure statewide                    March 2009 (E)
   Calculate UARL by district                                September 2009 (E)


Personnel Responsible

William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                          Chapter XI
                               Operational Performance

Recommendation XI-7              Investigate the reasons for the increase in overtime
                                 that has occurred in the Production Department.


PAWC Response                    The Company accepts this recommendation.


Priority                         Medium


Discussion

PAWC will investigate the apparent increase in overtime that occurred in the
Production Department; specifically, in the districts in the eastern part of the state.
The Company will analyze overtime hours for the last five years in each of the
eastern districts. If the analysis confirms the apparent increase, reasons for the
increases will be determined and potential solutions developed. To the extent that
the increased overtime is caused by factors that could be addressed by increasing
staffing levels in individual districts, plans for additional hiring will be developed and
implemented.


Milestones / Full Implementation Date

                            Milestone                                     Date
   Evaluate overtime hours                                           December 2008 (E)
   Determine cause and develop potential solutions, if                March 2009 (E)
   necessary
   Develop additional hiring plans, if necessary                       June 2009 (E)
   Implement additional hiring plans, if necessary                   September 2009 (E)


Personnel Responsible

Daniel J. Hufton, Senior Director, Production, PAWC
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company


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                                        Chapter XI
                             Operational Performance

Recommendation XI-8           Implement standard systems for monitoring and
                              reporting key statistical information in network
                              operations.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

This effort will entail three key initiatives over the next 2-4 years. The first key
initiative is CMMS, which will be rolled out over the next 3-4 years. The second
initiative is replacement of the Company’s operational parameters database (OPD).
The third initiative is the integration of GIS. The replacement of OPD will have
multiple phases and address operational reporting needs, enterprise reporting needs
as well as business intelligence and information analysis needs. ITS is establishing
an operational reporting standard and set of enabling technologies.


Milestones / Full Implementation Date

                           Milestone                                 Date
   CMMS planning                                               September 2008 (A)
   CMMS rollout prioritization                                 December 2008 (E)
   CMMS initial rollout / pilot                                September 2008 (E)
   CMMS rollout complete                                       September 2011 (E)
   Operational reporting standards                               March 2009 (E)
   Operational reporting capability                            September 2010 (E)
   GIS planning                                                  March 2009 (E)
   GIS rollout prioritization                                  September 2009 (E)
   GIS Initial rollout / pilot                                  September 2009
   OPD data migration                                             March 2011
   GIS rollout complete                                         September 2011



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Recommendation XI-8


Personnel Responsible

Emily Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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               Chapter XII



 Phase III Water Operations – Distribution
            Business Systems




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                                       Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-1          Structure the design of business applications for the
                              distribution operations function as shown in Exhibit
                              XII-5.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. American Water will assess the gaps between Exhibit XII-
5 and its business process model.

ITS is planning an application portfolio review (APR) to determine the gaps between
the Company’s current applications and its potential process model. While this is
performed, a parallel initiative to establish application integration standards and
capabilities as well as operational reporting standards and capabilities will be
conducted. The APR assessment, along with the other ITS efforts, will be combined
with the current GIS, CMMS, asset management and workforce distribution efforts.
This combined program is identified as the operational productivity suite (OPS). In a
separate phase, OPS will ultimately be integrated with the ERP and CRM systems.




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Recommendation XII-1


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                        March 2009 (E)
   APR                                                    March 2009 (E)
   Application integration capability                      June 2009 (E)
   Start GIS rollout                                      March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                   March 2012 (E)
   Conclude CMMS rollout                                 December 2012 (E)
   Leak tracking database (Phase I)                      December 2009 (E)
   Reporting                                              March 2010 (E)
   OPS                                                   December 2010 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                          Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-2             Develop the leak tracking and reporting database as a
                                 part of a larger, long-term effort to integrate with other
                                 supporting performance reporting business processes
                                 such as NRW, permits, pavement cuts tracking, and
                                 hit facilities.


PAWC Response                    The Company accepts this recommendation.


Priority                         High


Discussion

Leak tracking will be addressed as part of ITS’ Operational Productivity Suite (OPS),
as well as part of the operational reporting capability being developed by ITS. The
Company will conduct a planning, design, development and implementation effort to
move from its many leak tracking systems to a leveraged Managed Services built
upon ITS standard technologies and capabilities. Design and implementation of this
system will be based on American Water technology standards and integrated with
the enterprise architecture plan.


Milestones / Full Implementation Date

                            Milestone                                        Date
   Initiate planning effort                                         March 2009 (E)
   Initiate design effort                                           June 2009 (E)
   Initiate development effort                                      September 2009 (E)
   Initiate rollout effort                                          December 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company

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                                        Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-3           Adopt the multi-organizational reporting structure
                               (upon which CMMS is being implemented) across
                               both the workforce management business process
                               and supporting performance business processes.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. ITS is planning an application portfolio review (APR) to
determine the gaps between the Company’s current applications and its potential
process model. While this is performed, a parallel initiative to establish application
integration standards and capabilities as well as operational reporting standards and
capabilities will be conducted. The APR assessment, along with the other ITS
efforts, will be combined with the current GIS, CMMS, asset management and
workforce distribution efforts. This combined program is identified as the operational
productivity suite (OPS). In a separate phase, OPS will ultimately be integrated with
the ERP and CRM systems.

In addition to these efforts, ITS designed and maintains an Org Unit data model
describing the organizational units within American Water. This Org Unit data model
is being used for CMMS and is leveraged across other efforts as well. This model
will continue to be developed as part of the master data management strategy to
address workers and employees and the ultimate integration with an ERP and HRIS
solutions.




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Recommendation XII-3


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                        March 2009 (E)
   APR                                                    March 2009 (E)
   Application integration capability                      June 2009 (E)
   Start GIS rollout                                      March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                   March 2012 (E)
   Conclude CMMS rollout                                 December 2011 (E)
   Leak tracking                                         December 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-4           Engage AWWSC ITS to assist in the development of
                               the supporting performance reporting process
                               systems identified in Exhibit XII-5.


PAWC Response                  The Company accepts this recommendation.


Priority                       High


Discussion

ITS is engaged in discussions at all levels of management regarding the operational
productivity suite (OPS). ITS hired new resources and will add staff to engage in
this effort as well as other strategic efforts.

ITS is setting American Water enterprise reporting standards and creating an
enterprise reporting capability. This capability will be built based on ITS reporting
standard technologies, approaches and tools. The reporting capability will utilize
separate operational data stores to bring information together from different sources.
This capability will enable a system to be built to support performance reporting.

Milestones / Full Implementation Date

                             Milestone                                   Date
   Hire director of enterprise architecture                         March 2008 (A)
   ITS assigned data architect to effort                         September 2008 (A)
   Hire enterprise application solution architect                December 2008 (E)
   Enterprise reporting tools selected                             March 2009 (E)
   Reporting requirement analysis                                December 2009 (E)
   Enterprise reporting capability                               December 2010 (E)




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Recommendation XII-4


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-5          Address the deficiencies in the current plans
                              regarding the incorporation of leak tracking and
                              reporting into the design of CMMS.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. American Water will assess the gaps between Exhibit XII-
5 and its business process model.

ITS is planning an application portfolio review (APR) to determine the gaps between
the Company’s current applications and its potential process model. While this is
performed, a parallel initiative to establish application integration standards and
capabilities as well as operational reporting standards and capabilities will be
conducted. The APR assessment, along with the other ITS efforts, will be combined
with the current GIS, CMMS, asset management and workforce distribution efforts.
This combined program is identified as the operational productivity suite (OPS). In a
separate phase, OPS will ultimately be integrated with the ERP and CRM systems.

Application analysis results will determine how best to pursue the ultimate leak
tracking reporting design and migration of data from existing systems. The
Company will determine what solution is required and appropriate for leak tracking
and which will be appropriate for leak reporting.




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Recommendation XII-5


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                        March 2009 (E)
   APR                                                    March 2009 (E)
   Application integration capability                      June 2009 (E)
   Start GIS rollout                                      March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                   March 2012 (E)
   Conclude CMMS rollout                                 December 2011 (E)
   Leak tracking (Phase I)                               December 2009 (E)


Personnel Responsible

Raymond J. Delo, Senior Director, Maintenance Services, AWWSC
William C. Kelvington, Vice-President, Operations, PAWC
Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-6          Consider integration of leak tracking and reporting
                              with the eventual GIS system versus integration with
                              CMMS.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. American Water will assess the gaps between Exhibit XII-
5 and its business process model.

ITS is planning an application portfolio review (APR) to determine the gaps between
the Company’s current applications and its potential process model. While this is
performed, a parallel initiative to establish application integration standards and
capabilities as well as operational reporting standards and capabilities will be
conducted. The APR assessment, along with the other ITS efforts, will be combined
with the current GIS, CMMS, asset management and workforce distribution efforts.
This combined program is identified as the operational productivity suite (OPS). In a
separate phase, OPS will ultimately be integrated with the ERP and CRM systems.

Application analysis results will determine how best to pursue the ultimate leak
tracking reporting design and migration of data from existing systems. This will
combine the GIS and CMMS efforts with the leak tracking efforts.




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Recommendation XII-6


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                        March 2009 (E)
   APR                                                    March 2009 (E)
   Application integration capability                      June 2009 (E)
   Start GIS rollout                                      March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                  December 2012 (E)
   Conclude CMMS rollout                                 December 2012 (E)
   Leak tracking database (Phase I)                      December 2009 (E)
   Reporting                                              March 2010 (E)
   OPS                                                   December 2010 (E)


Personnel Responsible

Raymond J. Delo, Senior Director, Maintenance Services, AWWSC
William C. Kelvington, Vice-President, Operations, PAWC
Emily A. Ashworth, VP and CIO, American Water Works Service Company
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-7          Ensure that the leak history is migrated into the
                              eventual leak tracking and reporting database from all
                              existing databases with good data.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. American Water will assess the gaps between Exhibit XI-5
and its business process model.

ITS is planning an application portfolio review (APR) to determine the gaps between
the Company’s current applications and its potential process model. While this is
performed, a parallel initiative to establish application integration standards and
capabilities as well as operational reporting standards and capabilities will be
conducted. The APR assessment, along with the other ITS efforts, will be combined
with the current GIS, CMMS, asset management and workforce distribution efforts.
This combined program is identified as the operational productivity suite (OPS). In a
separate phase, OPS will ultimately be integrated with the ERP and CRM systems.

Leak tracking will be addressed as part of ITS’ OPS, as well as part of the
operational reporting capability being developed by ITS. The Company will conduct
a planning, design, development and implementation effort to move from its many
leak tracking systems to a leveraged Managed Services built upon ITS standard
technologies and capabilities. The design and implementation of this system will be
based on American Water technology standards and integrated with the enterprise
architecture plan.

Application analysis results will determine how best to pursue the ultimate leak
tracking reporting design and migration of data from existing systems. Leak tracking
history data will be loaded into a historical data repository to allow for historical
summary-level reports.

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Recommendation XII-7


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                      December 2008 (E)
   APR                                                    March 2009 (E)
   Application integration capability                      June 2009 (E)
   Start GIS rollout                                      March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                   March 2012 (E)
   Conclude CMMS rollout                                 December 2011 (E)
   Load leak history into data repository                December 2009 (E)
   Leak history reporting                                 March 2010 (E)
   OPS                                                   December 2010 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-8           Electronically connect leak and other records to the
                               main prioritization model.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. American Water will assess the gaps between Exhibit XI-5
and its business process model.

ITS is planning an application portfolio review (APR) to determine the gaps between
the Company’s current applications and its potential process model. While this is
performed, a parallel initiative to establish application integration standards and
capabilities as well as operational reporting standards and capabilities will be
conducted. The APR assessment, along with the other ITS efforts, will be combined
with the current GIS, CMMS, asset management and workforce distribution efforts.
This combined program is identified as the operational productivity suite (OPS). In a
separate phase, OPS will ultimately be integrated with the ERP and CRM systems.

Leak tracking is a key component of OPS. Leak tracking and history will be
combined with the reporting and analytics of mains failure history. Failure history
reporting and analytics will be built on the standard reporting framework defined by
ITS.




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Recommendation XII-8


Milestones / Full Implementation Date

                             Milestone                          Date
   High-level business process model                     December 2008 (E)
   APR                                                   March 2009 (E)
   Application integration capability                    June 2009 (E)
   Start GIS rollout                                     March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                  March 2012 (E)
   Conclude CMMS rollout                                 December 2011 (E)
   Load leak history into data repository                December 2009 (E)
   Leak history reporting                                March 2010 (E)
   Failure history reporting                             June 2010 (E)
   OPS                                                   December 2010 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
David R. Kaufman, Vice-President, Engineering, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                        Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-9          Allocate infrastructure improvement budgets on a
                              state-wide basis, and not just district-by-district.


PAWC Response                 The Company accepts this recommendation.


Priority                      High


Discussion

The Company’s performance-based approach to asset management is based on
numerous factors, such as current and future service needs, physical condition
assessment, economic and risk factors, performance characteristics, and regulatory
compliance. A statewide prioritization of main replacement projects will occur and
consider these factors and other issues, such as coordination with municipalities and
other utilities in joint improvement projects, when PAWC makes determinations of
funding allocations for infrastructure investment.


Milestones / Full Implementation Date

                           Milestone                                    Date
   Full implementation                                             January 2009 (E)


Personnel Responsible

David R. Kaufman, Vice-President, Engineering, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                       Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-10         Consider the eventual implementation of the parts
                              and inventory component of CMMS.


PAWC Response                 The Company accepts this recommendation.


Priority                      Medium


Discussion

The fundamental components of Exhibit XII-5 are in alignment with the Company’s
business process model. American Water will assess the gaps between Exhibit XII-
5 and its business process model.

ITS is planning an application portfolio review (APR) to determine the gaps between
the Company’s current applications and its potential process model. While this is
performed, a parallel initiative to establish application integration standards and
capabilities as well as operational reporting standards and capabilities will be
conducted. The APR assessment, along with the other ITS efforts, will be combined
with the current GIS, CMMS, asset management and workforce distribution efforts.
This combined program is identified as the operational productivity suite (OPS). In a
separate phase, OPS will ultimately be integrated with the ERP and CRM systems.

As the OPS and ERP efforts evolve in their design and planning phase, the
integrated solution regarding inventory management will be established.




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Recommendation XII-10


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                        March 2009 (E)
   APR                                                    March 2009 (E)
   Application integration capability                      June 2009 (E)
   Start GIS rollout                                      March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                   March 2012 (E)
   Conclude CMMS rollout                                 December 2012 (E)
   Leak tracking database (Phase I)                      December 2009 (E)
   Reporting                                              March 2010 (E)
   OPS                                                   December 2010 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
William C. Kelvington, Vice-President, Operations, PAWC
Raymond J. Delo, Senior Director, Maintenance Services, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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                                  September 2008


                                       Chapter XII
           Phase III Water Operations – Distribution Business Systems

Recommendation XII-11         Recognize that a more robust distribution workforce
                              management application may eventually be required
                              to support future business processes.


PAWC Response                 The Company accepts this recommendation.


Priority                      Low


Discussion

The combined efforts regarding GIS, CMMS, asset management and workforce
distribution is part of ITS’ operational productivity suite (OPS) and is managed as
one large effort. As the Company determines solutions to the needs of each area it
will look to determine the appropriate implementation for workforce distribution. As
described, workforce distribution may be part of CMMS, but the Company may look
to alternatives as it establishes master data around employees. The Company will
look to leverage the ERP and ultimate HRIS solution as well.




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   Pennsylvania-American Water Company
            Implementation Plan
                                 September 2008


Recommendation XII-11


Milestones / Full Implementation Date

                            Milestone                           Date
   High-level business process model                     March 2009 (E)
   APR                                                   March 2009 (E)
   Application integration capability                    June 2009 (E)
   Start GIS rollout                                     March 2009 (E)
   Start CMMS rollout                                    December 2008 (E)
   Conclude GIS rollout                                  March 2012 (E)
   Workforce management requirements                     December 2009 (E)
   Alternative analysis                                  December 2009 (E)
   Conclude CMMS rollout                                 December 2012 (E)
   Reporting                                             March 2010 (E)
   OPS                                                   December 2010 (E)
   Start ERP planning                                    March 2009 (E)


Personnel Responsible

Emily A. Ashworth, VP and CIO, American Water Works Service Company
Carole Dascani, Regional Director, Human Resources, AWWSC
William C. Kelvington, Vice-President, Operations, PAWC
Kathy L. Pape, President, Pennsylvania-American Water Company




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Pennsylvania-American Water Company
         Implementation Plan
              September 2008




              Chapter XIII



      Phase III Human Resources




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   Pennsylvania-American Water Company
            Implementation Plan
                                   September 2008


                                        Chapter XIII
                            Phase III Human Resources

Recommendation XIII-1          Provide resources and perform timely implementation
                               of the six deliverables developed as part of the Phase
                               III project.


PAWC Response                  The Company accepts this recommendation.


Priority                       Medium


Discussion

Although the recommendation references six deliverables, they can be consolidated
into three tasks requiring implementation. Task areas include a human capital
scorecard, workforce planning and replenishment, and strategic alignment. A plan
summary for each task follows.

Human Capital Scorecard Individual measures on this scorecard were identified in
Phase III work and will be implemented at various times.

Workforce Planning and Replenishment Start of the project is contingent upon
obtaining necessary human and financial resources. Resources are anticipated to
be approved in the fourth quarter of 2008, at which time the detailed project plan will
be updated. Phase I of this project is estimated to take a total of fifteen months.

Strategic Alignment The strategy matrix that was delivered as part of the Phase III
work incorporates other recommendations, including workforce planning and
replenishment and leadership competencies. The matrix includes a list of other
Human Resources objectives tied to the strategic focus of PAWC. Human
Resources will work with PAWC senior management to develop a detailed plan to
achieve those objectives not covered under other recommendations contained in the
audit.

PAWC anticipates that implementation of this recommendation will require
significant additional financial and/or human resources. As noted in Finding XIII-2,
PAWC Human Resources does not have the resources necessary to implement all


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                                 September 2008


Recommendation XIII-1


of the projects defined in the Phase III HR effort. Although the Company accepts
this recommendation, the timing of implementation will be dependent on the
magnitude of the expense that will be incurred. Task implementation dates are
estimated contingent upon obtaining the necessary resources.


Milestones / Full Implementation Date

                           Milestone                                 Date
   Implement human capital scorecard                           December 2009 (E)
   Implement workforce planning and replenishment                June 2010 (E)
   Develop detailed strategic alignment plan                    March 2009 (E)
   Implement detailed strategic alignment plan (excludes
   workforce planning and replenishment)                       September 2009 (E)


Personnel Responsible

Carole Dascani, Regional Director, Human Resources, AWWSC
Kathy L. Pape, President, Pennsylvania-American Water Company




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