Cheryl Norton
Executive Vice President and Chief Operating Officer at American Water Works
Thanks John and good morning everyone. On, slide 18, I'll start by talking about our updated capital plan. I want to first acknowledge that our teams have done a, great job executing on our accelerated capital investment plan in 2022. We're on pace to meet our overall capital plan of $2.5 billion this year which includes acquisition investments. Looking ahead to 2023, we plan to again step-up our investment level.
This time to roughly $2.9 billion, which will generally be our new annual threshold for the next several years. As John just mentioned, over the next five years we expect to invest approximately $14 billion to $15 billion, an increase of about $1 billion over our previous plan. This increase is mostly driven by including the increased investment for 2027 in the Five-Year window as well as, about $250 million of inflationary impacts expected in the near-term.
We expect this pace of spend to drive our current pipe replacement cycle plan lower and much better than the industry average. On the longer horizon, you can see that we plan to spend approximately $30 billion to $34 billion in our regulated business over the next 10 years. We see this capital plan to be largely in-line with last year's plan, reflecting the higher annual run-rate as well as modestly higher costs for pipe and other capital goods.
Turning to slide 19, this graph illustrates that our continued execution on capital investments both infrastructure projects and acquisitions are succeeding and growing the regulated business at a long-term rate of 8% to 9%. Rate base growth of course will drive earnings growth as long as we continue to prudently invest in our systems and successfully execute the regulatory process. Moving onto our regulatory recovery strategy on slide 20.
Our theme here is around timely consistent recovery of investments and operating costs. When we achieve timely and consistent recovery, it levels out bill increases to our customers, which helps promote affordability. It's beneficial to our customers that we operate in states that have constructive regulatory mechanisms. We've engaged with policymakers and regulators for well over a decade to find the best ways to invest in water and wastewater infrastructure while putting the customer-first.
In the states where we operate, 27 new mechanisms have been added over the past 12 years. As water and wastewater industry challenges grow, we'll continue to focus on constructive regulatory and legislative outcomes. I'd also like to discuss timely recovery of our investments across our footprint with the pie-chart on the right-side of the page. Through capital recovery mechanisms and forward test years, we were able to reduce regulatory lag and lessen the reliance on general rate cases.
This enables us not only to earn our allowed return but also to mitigate the size of the general rate increases for our customers. We expect about 45% of capital investments over the next five years to be recoverable through infrastructure mechanisms which is the key to unlocking a more consistent annual earnings growth pattern for the long-term. Turning to slide 21, Our focus on operating efficiency has been a part of our company's DNA for many years.
As you know, we've historically used O&M efficiency as one of our benchmark metrics to measure our success at managing costs as we grow the business. This focus positioned us well to manage through much of the pressure over the last couple of years on the supply-chain and even cost increases brought about by the effects of the pandemic. As we look-ahead we've been asked if we can go below the 30% efficiency threshold.
While, we're continuing to evaluate that question, we've continued to emphasize that revenue growth has been just as important to our success with O&M efficiency as managing costs. So with that realization in mind there may very well be additional opportunity to go below the 30% threshold. However we're analyzing whether this is the best metric by which to judge our effectiveness at managing costs and running inefficient business.
Moving to slide 22, one of the most difficult challenges we face in-the-water and wastewater industry is balancing customer affordability with the magnitude of the system investments that are needed. Thankfully as we sit here today, our industry and our company are in very good relative positions in terms of affordability or wallet share. In fact as investors and analysts study the sustainability of American Water's long-term earnings growth potential, we believe our affordability proposition is an important consideration.
We realize though that we must continue to evolve our strategies around rate design and programs to assist our customers who are challenged with affordability. We must also consider our focus on technology, efficiencies of scale and a sharp focus on cost management in order to deliver on values around customer affordability. Moving on to slide 23, and as Susan mentioned earlier we are excited to announce our new science-based greenhouse gas emission reduction goals and our first disclosure of estimated Scope 3 emissions.
Before we dive in, I'll walk you through our greenhouse gas emissions profile in a bit more detail. As an essential service provider, American Water is often compared to the broader utilities sector emissions included, which can be misleading. As Susan noted earlier, is an important distinction that our emissions footprint as a water utility is much smaller than most publicly-traded gas and electric companies on both an absolute and per customer basis.
To help put it into context, American Water represents just 0.1% of the total Scope 1 and Scope 2 emissions produced by the top 20 largest US utilities measured by Market Cap. As we show on the slide, our total emissions footprint is made-up of 7% direct Scope 1 emissions such as heating, cooling and fleet. 44% indirect Scope 2 emissions are our purchased power and 49% estimated Scope 3 emissions which for us largely includes purchase goods and services, capital goods and fuel and energy-related activities.
Framing it in a different way, more than 90% of our overall emissions footprint is generated from external sources, which is another key differentiator for most other utilities. Turning to slide 24, there's a lot to unpack here. Let me say first, at a high-level, we believe it is prudent for our company to focus our efforts on environmental initiatives that are in the purview of a water utility and aligned with our core mission.
Our view is that greenhouse gas emission reductions fit as part of our sustainability strategy that over-time will help protect customers against service disruptions for more severe weather patterns such as droughts and floods. We believe we've set forth new compelling goals to support this strategy. First we, expect to reduce our absolute Scope 1 and Scope 2 emissions, 50% by 2035 from a 2020 baseline.
Second, we expect to achieve net zero Scope 1 and Scope 2 emissions by 2050. We believe these new medium and long-term emissions goals are rooted in science and aligned with the Paris Agreement. We also believe our approach is a responsible path that considers all of our stakeholders' interests, including doing our part by setting ambitious reduction goals. Our approach here will allow us to stay on course with our customer affordability metrics as we continue to deliver clean, safe, affordable and reliable water to our customers. This was a foundational component of our analysis and recent discussion with our Board Level SETO Committee, which oversees our safety, environmental, technology and operations efforts. It's also important to note that as we deliver water and wastewater solutions to more customers over time through acquisitions and organic growth, our energy usage is going to increase.
We will re-baseline each year to account for our growth through acquisitions of systems, which is an acceptable practice under the standards of the science-based targets initiative, or SBTI. We did consider making a commitment to SBTI as part of our analysis this year. However, we concluded that some of SBTI's expectations around Scope 3 commission commitments mostly around timing were not in the best interest of our stakeholders. We do expect, though, to continue to work with our suppliers and vendors to consider what can be done to reduce Scope 3 emissions over time. And as I stated, we are confident that our new medium- and long-term Scope 1 and Scope 2 goals are science-based and aligned with the Paris Agreement.
As you can see at the bottom of the slide, these are more than just goals. We have plans in place and capital ready to deploy to achieve these goals, obviously, with greater visibility to the path to 2035. Since our footprint is heavily weighted by Scope 2 emissions, the continued greening of the electric grid is a significant component of our reduction plan. We hope to see that transition continue by our fellow utilities and other providers.
For us though, we know that it is cost prohibitive and outside of our core competencies to self-generate all or even a significant portion of our power needs. We will, though, continue to look to enter into clean purchase power agreements or partner on renewable investments, where appropriate, similar to our engagement with New Jersey Resources on the floating solar array at one of our treatment plants in New Jersey. Lastly, we will continue to focus on emissions reduction activities that we can control within our operations. This includes water efficiency and operational efficiency gains in order to reduce the energy and emissions associated with the pumping of water, which we disclosed previously is by far the largest driver of our purchase power needs.
Capital projects will include the deployment of additional leak detection technologies and more efficient water pumps across our systems as well as converting some of our fleet vehicles and other assets to more efficient options. These are small, but important pieces of our plan. And in large part, these capital investments will align perfectly with some of our existing reliability and resiliency goals.
Next, let's turn to Slide 25 and discuss some new disclosures related to our continued ESG journey. First, soon, we will release summary results of our most recent Pay Equity study on our ID&E website, diversityataw.com. This is our third such pay equity study, and each time we have engaged a third-party consultant to conduct an objective pay equity analysis, I'm pleased to share that you will see that we're very close to achieving pay parity across employee groups, including gender.
Our performance is a testament to American Water's Commitment to fair and equal pay, and how our teams have leveraged findings from these regular assessments to correct inequalities and update processes around compensation. We will also share some initial summary findings of our internal labor market analysis that began in 2021. This analysis was also led by a third-party firm and was commissioned because we believe the factual and statistical analysis of our workforce was needed to support a holistic evidence-based inclusion, diversity and equity strategy.
Lastly, I'd like to touch on two of our new goals that were established earlier this year in our annual performance plan. The first is to increase representation of female employees at American Water and the second is to increase ethnic and racial diversity among American Water employees. Both of these goals complement existing safety and environmental sustainability goals that are tied to annual performance plan compensation for all employees. As mentioned earlier, these goals reflect our Company's focus on social benefits that we believe will help us operate as a stronger company, ultimately for the benefit of our employees and to help us better reflect the customers and communities we serve. Whether it's our ESG leadership or consistent execution on our earnings growth goals or our leading safety culture, our team at American Water has consistently raised the bar for success in the water and wastewater industry. We have full confidence in our ability to achieve the goals we talked about today for 2023 and beyond.
So with that, I'll stop and turn it back over to our operator to begin Q&A and take any questions you may have.
