20200622Cooper Direct.pdf

Michael C. Creamer (ISB No. 4030)
PrestonN. Carter [ISB No. 8462]
Givens Pursley LLP
601 W. Bannock St.
Boise,lD 83702
Telephone: [phone]
Facsimile: (208) 388-l 300
mcc(a) sivenspursley. com
pnc@ eivenspursley.com
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Attorneys for SUEZ Water ldaho Inc.
BEFORE THE IDAIIO PTJBLIC UTILITIES COMMISSION
IN THE MATTER OF THE PETITION OF
SUEZ WATER IDAHO INC. FOR
AUTHORIZATION TO ELIMINATE
COLLECTION OF GROSS-UP PAYMENTS
ASSOCI,ATED WITH CONTRIBUTIONS
TN AID OF CONSTRUCTION
CaseNo. SUZ-W-20-01
DIRECT TESTIMOIYY OF CATHY COOPER
ON BEHALF OF STIEZ WATER IDAIIO INC.
JUNE 22,2020
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Please state your name and business address.
My name is Cathy Cooper, P.E. My business address is 8248 West Victory Road,
Boise, Idaho 83709.
By whom are you employed, and in what capacity?
I am the Director of Engineering for SUEZ Water Idaho Inc. ("SUEZ" or
"Company").
Please summarize your professional experience and educational background.
I am a graduate of the University of Colorado at Boulder with a Bachelor of
Science in Civil Engineering. I completed my Master of Science in Civil
Engineering at the Universrty of Washington in Seattle. I have been a licensed
Professional Engineering in the State of Idaho since 1999.
I have been employed as a civil engineer for 26 years. My work experience
includes 22years at Boise area consulting firms where I focused my work on
water system engineering. My experience includes preparing detailed hydraulic
calculations; designs for storage tanks, pump stations, pressure reducing stations,
pipelines, and well houses; water system Master Facility plans; hydraulic models;
and project cost estimates. I was an Owner and the Managing Partner at my last
consulting frm.
I have been employed by SUEZ since July 2016 as the Director of Engineering in
Idaho.
Please describe your duties as Director of Engineering.
A. I have oversight over the Company's capital expenditure budget and short
and long-term facility and water supply planning. SUEZ' engineering group
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includes several staffmembers whose time is dedicated to working with
developers and potential future SUEZ customers to implement new projects and
new water service connections. As the supervisor of these staffmembers, I have
frequent interactions with developers and potential new customers.
What is the purpose of your testimony?
The purpose of my testimony is to support SUEZ's proposal to no longer collect
the federal and state income tax gross-up amount related to Contributions in Aid
of Constnrction (CIAC).
Would you please summarize your testimony?
My testimony describes the SUEZ developer process and how CIAC tax gross-up
costs fit in; impacts that SUEZ has seen locally since collection of the CLAC tax
gross-up started in mid-2018; data and calculations that SUEZ pre,pared to
determine that developer projects generate sufficient annual revenue to cover the
revenue requirement of the CIAC tax gross-up; specific examples of trvo outlying
large developments related to CLAC tax gross-up costs; and a surnmary of impacts
to small developers and individual homeowners due to collection of the CIAC tax
gross-up.
Would you please explain the current SUEZ process for developers and how
CIAC tax gross-up costs fit in?
The process that a SUEZ developer project follows is lengthy and complex. This
process is illustrated in the flowcharts included as Exhibit 1 that show the three
process phases: l) Planning and Approval; 2) Construction Cost and Agreement;
and 3) Construction and Completion.
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The CIAC tax gross-up is calculated and presented to the developer as part of the
cost analysis SUEZ performs during Phase 2, Steps 3 or'7, and then is collected
from the developer during Phase 2, step 10. Full payment of the costs due to
SUEZ (including CIAC tax gross-up) must be received before project
construction commences.
Once construction is complete, SUEZ reconciles the actual costs for project
completion, provides the developer with a memo summarizing actual costs and
the supplemental agreement. Once the developer returns the signed agreement,
the completed cost reconciliation is finalized and the developer is given a refund
of any initial costs collected that were in excess of the actual project costs.
a. What impacts from collection of the CIAC tax gross-up has SUEZ seen with
local developers?
A. Unlike most of our neighboring municipally-owned water systems, SUEZ does
not charge a connection fee to homeowners. Instead, costs that may typically be
covered through a connection fee are covered as a part ofthe overhead and
inspection charges the developer agrees to pay in Phase 2, Steps 3 or 7. These
overhead and inspection costs are tlpically twenty to twenty-five percent of
project constnrction costs. These overhead and inspection fees are quite unpopular
with developers because they must be paid up-front prior to the start of project
construction, unlike a connection fee that is paid by a homeowner or home builder
at the time water service is requested. At twenty to twenty-five percent of
construction costs, though, these fees have been tolerated by most developers
although not without complaints. In June 2018 SUEZ started including the2l.56
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percent CIAC tax gross-up on the project cost (a portion of which is attributable
to Overhead and Inspection fees). These additional fees collected by SUEZ
including Overhead, Inspection and now the CIAC tax gross-up represent
between forty-five to fifty percent of the project construction cost. The impact to
developers of having to pay up to an additional 50-percent of construction costs
prior to project construction commencing has been substantial and SUEZ has
experienced heavy pushback from developers.
Specifically, I have seen that the larger developments on the borders of SUEZ's
service area have the most flexibility in choosing whether to request water service
from SUEZ or from a neighboring City, or are choosing to set up their own water
system. With the addition of the CIAC tax gross-up, SUEZ has become a less
desirable water service provider than neighboring municipal or nonprofit, user-
owned providers that do not collect the CIAC tax gross-up.
I know of one large development that will be seeking future water service for
much of their development area from another entity. Another large new
development was planning to obtain water service from a neighboring
municipality despite being located largely within the SUEZ service area
boundary. My understanding is that only the Municipality's shortage of future
supply, with other large developments in the area contemplated, ultimately pushed
the development to seek water service from SUEZ. Another large development
has proceeded with setting up its own water system (prior to SUEZ'
implementation of the collection of CIAC tax gross-up), due to its objection to
SUEZ's collection of overhead and inspection fees in advance of project
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construction. Clearly the addition of the CIAC tax gross-up charges would have
been an additional disincentive for this development to seek water service from
SUEZ rather than develop its own water system.
In addition to the above negative impacts to large developments, we also have
seen small project owners unable to proceed with projects because they simply
cannot afford the additional2L56 percent CIAC tax gross-up. Examples include
homeowners whose well has run dry, or who wish to have a service on their lot
relocated. We have one example of a small developer (i.e. - three homes)
choosing to put in individual wells rather than complete a main extension because
of the additional CIAC tax gross-up costs, and other small developers that have
been unable to proceed with their project due to overall costs being too high,
which includes an additional2l.56 percent due to CIAC gross-up.
Municipalities, schools, and other tax-exempt entities that tlpically complete
multiple projects per year with SUEZ have seen negative impacts to their project
budgets. A tax-exempt entity having to pay tax that SUEZ owes is difficult for
them to accept, regardless of the IRS regulations.
Exhibit 3 (CONFIDENTIAL) includes specific information on the above
mentioned customers.
What data did SUEZ investigate to determine that new developments generate
enough annual revenue to cover the annual revenue requirement for the CIAC
tax?
I supervised the assembly of data for each developer project completed (as of
May 2020) from January 2016 through the end of March 2020 (Exhibit 2). The
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data assembled included the Actual Project Cost and number of
domestic/commerciaVirrigation services included with the project of different
sizes - 3/e" , l" , 2" , 4" ,6", and 8"; and the number of fire services of different sizes
-2",4",6", and 8". The State and Federal Tax amount was calculated as 26.47
percent of the Actual Project Cost, in accordance with our approved tariff. The
Annual Revenue Requirement for State and Federal Tax was calculated utilizing a
9.31 percent calculated rate of return in accordance with Section 85 of the
Company's approved tariff.
An estimated Annual Revenue for each project was calculated using average bill
data from 2019 and monthly tariff rates for fire services. This analysis produced
the following results for domestic/commerciaVirrigation (non-fire) services.
For 2" or smaller non-fire services a $370 average annual water bill; for non-fire
services larger than2", average bills from 2019 for services of the same size were
used to calculate an average:
4" service - $15,154 average annual water bill
6" service - 933,627 average annual water bill
8" service - $98,369 average annual water bill
For fire services, the monthly tariffamounts were used.
The difference between Annual Revenue and the Revenue Requirement was
calculated.
The 4.25 year period included 201 projects. Of these projects, 174, or 86 percent,
generated more revenue than the revenue requirement of the CIAC tax obligation.
The average over the 4.25 year period of "difference between annual revenue and
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revenue requirement" for each project was $12,888. The average annual amount
of revenue generated in excess of the revenue requirement was $609,500.
Did you also prepare calculations for any specific outlying developments as an
example?
Yes. We specifically looked at two large outlying developments. The calculations
are included in Exhibit 2.
Both developments made substantial investrnents in backbone infrastructure. The
development that is closer to build-out shows a "difference between annual revenue
and revenue requirement" of approximately $428,000. The other development
shows a positive difference of approximately $42,800, but with substantial capacity
left in their backbone infrastructure investment to support approximately 1700
additional revenue-generating connections. The calculations show that both large
developments generate more than enough revenue annually to cover the revenue
requirement of the CIAC tax obligation.
Could you please summarize your testimony?
The collection of federal and state income tax gross-up related to Contributions in
Aid of Construction (CIAC) has had negative impacts for SUEZ customers because
it is a barrier to growth. Collection of the CIAC tax gross-up is driving large
developers on the edges of SUEZ's service area to seek service from neighboring
municipalities that don't collect the CIAC tax gross-up. The large developments
would bring substantial numbers of new customers into the SUEZ system, which
benefits existing customers by spreading costs over a larger customer base. We
expect there will be more examples than those mentioned here of developers that
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choose to set up their own small water system to avoid paylng the CIAC tax gross-
up, which could cause long-term issues as they face water quality regulation
changes and may not have the funding necessary to keep investing in facility
infrastructure, maintenance, and replacement.
Homeowners who have a well dry up and wish to connect to the SUEZ system, or
who want to relocate a service have been unable to afford these projects with the
additional CIAC tax gross-up costs. Small developers of several lots have been
unable to complete projects, or are choosing to install individual wells rather than
connect to the SUEZ system.
Tax-exempt entities such as cities and schools have seen negative impacts to their
project budgets from the collection of CIAC tax gross-up charges.
Our analysis of all SUEZ developer projects completed from January 2016 through
March 2020 indicate that developer projects generate more than enough annual
revenue to cover the revenue requirement of the CIAC tax obligation.
The proposed change to the Company paylng the tax obligation on CIAC rather
than collecting it from developers will remove a barrier for growth and help keep
customer charges low. Because growth is self-sustaining and benefits existing
customers by spreading costs over a larger customer base, the Company asserts that
the requested change will ultimately benefit existing utility customers.
Does this conclude your testimony?
Yes.
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Case No. SUZ-W-20-01
DIRECT TESTIMONY OF
CATITY COOPER
EXHIBIT 1
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DIRECT TESTIMONY OF
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EXHIBIT 2
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