Healy Rebuttal Testimony.doc

Dean J. Miller
Chas. F. McDevitt
McDEVITT & MILLER LLP
537 W. Bannock, Suite 215
P.O. Box 2564-83701
Boise, ID 83702
208.343.7500
208.336.6912 (Fax)

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION )
OF UNITED WATER IDAHO INC. ) CASE NO. UWI-W-00-1
FOR APPROVAL OF INCREASED RATES )
FOR WATER SERVICE )

REBUTTAL TESTIMONY OF JEREMIAH J. HEALY

ON BEHALF OF UNITED WATER IDAHO INC.

JULY 2000

Please state your name and business address.
Jeremiah J. Healy, 8248 W. Victory Road , Boise, Idaho, 83709
Are you the same Jeremiah J. Healy who sponsored direct testimony in this case?
Yes, I am.
What is the scope of your rebuttal testimony?
My rebuttal testimony will address the following items:
Update of the adjustment made in my direct testimony to the Company’s cost of providing medical, dental and vision care, long term disability insurance and group term life insurance to employees. I mentioned in my direct testimony that this expense adjustment would be updated when the latest cost information was available in early 2000.
Update of the adjustment made in my direct testimony to the Company’s purchased power cost. Again, I mentioned in my direct testimony that the impact of Idaho Power’s Annual Power Cost Adjustment would be known prior to the hearing date in this case and the tariff prices that impact UWID would be updated.
Update the status of the pending acquisition of United Water Resources by Suez Lyonnaise des Eaux and a response to Staff Witness Smith’s elimination of UWID’s share of investor relations expense.
Update the status of Ad Valorem tax expense.
Response to Staff Witness Smith’s adjustment to depreciation expense and rate base regarding the calculation of depreciation expense on property advanced by developers.
Update of depreciation expense related to Company Witness Brown’s update of expenditures on project C00A001-Collector #3 rehabilitation.
Have you prepared an exhibit summarizing the Company’s position on rebuttal?
A. Yes. Exhibit No. 26, consisting of five pages summarizes the Company’s position. Page 1 of 5 restates Company rate base downward from $98,992,133 as originally filed to $98,881,234. Pages 2 and 3 of 5 indicate revenue and operating expense adjustments the Company has agreed to or updated and restates the necessary revenue adjustment as $2,988,877 or 11.32%, down from the originally filed request of $3,057,100 or 11.57%. Page 4 of 5 calculates income taxes at existing and proposed rates and page 5 of 5 calculates the necessary revenue increase as well as proofs the calculation. Exhibit No. 26 incorporates adjustments discussed in the rebuttal testimony of Company Witnesses Wyatt, Linam, Brown and Hanley as well as adjustments made in my own rebuttal. Uncontested Staff adjustments are also incorporated into Exhibit No. 26.
Update of Cost to Provide Health Care Benefits
You mentioned in your direct testimony that the Company’s late fall 1999 “ Open Enrollment Period “ would impact the cost to provide health care benefits to UWID employees. Have you had an opportunity to update this adjustment?
Yes, I have. The bottom line is that the cost to provide UWID employees with health, dental and vision care, long term disability and group term life insurance coverage has decreased from $571,567 noted in my direct testimony to $537,746, a decrease of $33,821. This is due primarily to a shift of employees, during the recent “ Open Enrollment Period” from the “Comprehensive” medical plan to a local HMO at a less expensive premium to the Company. I have prepared amended workpapers and an amended Exhibit No. 27, to support this change. This adjustment appears on summary Exhibit No. 26, Page 3 of 5, Column H.
Impact of Annual PCA on Purchased Power Cost
When the Company filed its’ case, what Idaho Power tariff rates were used to price out test year usage on tariffs 7,9, & 40?
I utilized applicable Idaho Power tariff rates that were effective at that time of filing in February 2000, rates that were effective May 16, 1999.
Q. Has there been a change in these tariff rates?
A. Yes. Effective May 16, 2000, the Idaho Public Utilities Commission approved higher tariff rates for Idaho Power based on the annual power cost adjustment mechanism.
Does this impact the adjustment you made in this case? And if so, to what extent?
A. Yes it does. The impact is an increase of pro forma purchased power cost from $1,000,945 to $1,090,227, an upward change of $89,282. This is driven by kWh increases on Schedule 9 from $0.024007 to $0.026858 and on Schedule 7 from $0.057506 to $0.060649. I have prepared amended workpapers and an amended Exhibit No. 28 to support this change. This adjustment appears on summary Exhibit No. 26, Page 3 of 5, Column I.
Acquisition of UWR/ Investor Relations
Do you agree with Staff Witness Smiths’ elimination of investor relations expense?
No. I highlighted in my direct testimony the investor relations expense item, however, I did not make an adjustment at that time because the acquisition of UWR by Suez Lyonnaise des Eaux was not complete. I indicated that I would update the position on this expense item as more information became available.
Is the acquisition complete as of as of the submission your rebuttal testimony?
No. Necessary approvals from the New York and New Jersey Commissions have not yet been received.
What do you recommend with respect to this issue?
Even though United Water Resources stock will not continue to be listed on the New York Stock Exchange and therefore it will not be obligated to comply with associated SEC regulations, UWR is not being acquired by a private entity. The new parent is and will continue to be listed and will incur investor relations expense and will likely allocate a share of that expense to its subsidiaries. I therefore recommend that the expense remain unchanged.
Ad Valorem Expense
Are you comfortable with the adjustment made to property tax expense in the Company’s direct case?
No. The Company based its’ property tax adjustment in its direct case on the 1999 appraised value of $67,964,422 and increased it by 2.25% to estimate the 2000 appraised value of $69,493,621. The 2000 Appraisal report I referred to above places the value at $77,291,072. The difference ($77,291,072 less $69,493,621) is $ 7,797,451. That amount priced out at the 1999 levy rate of 1.7355% increases UWID property tax expense by $135,325 over what was proposed in our initial filing.
Have you made a rebuttal adjustment to reflect the 2000 property tax expense based on this latest known appraisal information?
Yes, I have. See Exhibit No. 30, and this adjustment appears on summary Exhibit No. 26, Page 3 of 5, Column J. As Staff witness Smith has indicated, the proper level of property tax expense to reflect in this case is difficult to determine because events will occur over the next several months that determine the actual 2000 appraised value.
Do you have a recommendation as to how this issue should be treated in this case?
A. I do. I believe that in a dynamic situation like this the latest information available just prior to the hearing should be utilized in fixing the most reasonable level of expense. This would ensure the fairest treatment to the customers as well as the Company. If any event occurs that impacts property tax expense prior to the hearing, the Company will provide an update at the hearing.
Depreciation Expense on Advanced Property
Staff Witness Smith has removed $218,637 of depreciation expense from the Company’s revenue requirement representing the depreciation allowance on property advanced by developers. He has also asked the Commission to view this as a policy issue since he is not aware of any case in which this subject was addressed. Do you agree with this adjustment?
No.
Please explain your disagreement.
First of all, I do not think it is appropriate that policy issues be addressed in the context of a rate case involving only one regulated Company. I assume this issue applies to several regulated utilities in Idaho and, as such, perhaps the Commission should globally address this issue and seek input from all interested parties. It would have been enlightening if Staff Witness Smith had surveyed the depreciation practices with regard to advanced property of several Idaho regulated utilities to provide additional perspective on this issue.
Q. United Water Resources has utility properties in several jurisdictions around the Country. Were you able to find any common thread among the various jurisdictions regarding their depreciation practice with regard to advanced property?
No. It appears some states permit depreciation expense on advanced property in the revenue requirement and some do not. There does not seem to be a consensus or preferred methodology.
What would be the impact on United Water Idaho if Staff Witness Smith’s treatment were adopted?
A. Several impacts occur to me. First, the Company would suffer diminished cash flow. Secondly, at least temporarily, the Company would have a mismatch between rate and book treatment of this issue. I assume the Company would match its book treatment to the rate treatment allowed, as long as it was in conformance with generally accepted accounting principles. Third, the Company has had accounting practices in place for many years to handle advanced property refunds. The administration of these refunds is quite time consuming and requires a significant administrative effort. Changing depreciation practices would place an additional administrative burden on the Company.
Q. Do you agree, in theory, with Staff Witness Smith’s assertion that the principal goal of the various advance mechanisms in place at United Water through the years has always been to protect existing customers from the risk of speculative investment?
A. Customers have always been protected with regard to rate base treatment of advanced property by virtue of the fact it has never been included in rate base. Also, with regard to depreciation expense, customers do receive the benefit of no depreciation expense when expired advances are transferred to contributions in aid of construction.
Q. Given that you disagree with the disallowance of depreciation expense on advanced property, do you have any comment on the methodology utilized in developing the adjustment?
A. Yes. Staff Witness Smith, on his Exhibit 112, page I of 2, assumes advanced property is entirely composed of source related investment, i.e. wells & springs, power pumping equipment and structures and improvements. In fact, much of the $5.9 million advanced is related to old contracts, some dating back to the 1970’s, and contracts the Company inherited with its acquisition of South County Water. These contracts advanced mains and services, not source and pumping equipment, and the associated depreciation rates are significantly lower than the rates Witness Smith uses to calculate the $218,637. I believe Witness Smith should have determined the nature of the property involved before proposing this adjustment. My research indicates that approximately $4,000,000 of the advance balance is related to mainline, reservoir and serviceline investments that carry 2% to 2.5% depreciation rates. Therefore, the adjustment to depreciation expense is closer to $155,000, rather than the $218,637 Witness Smith calculates.
Q. Please summarize your testimony with respect to this issue.
A. I believe any change in methodology in this area should be globally approached and, if a change in methodology is granted, the calculation of reduced expense should be properly calculated.
Q. Does the National Association of Regulatory Commissioners’ (NARUC) Uniform System of Accounts for Class A Water Utilities provide any guidance on this issue?
A. I reviewed the 1996 Uniform System of Accounts for Class A Water utilities. In their discussion of account 403, Depreciation Expense, they specifically refer to the fact that this account shall be credited with amortization debited to account 272, Accumulated Amortization of CIAC. Likewise, in their discussion of account 271, Contributions in Aid of Construction and account 272, they specifically refer to depreciation practices with regard to contributed property. However, in the discussion of account 252, Advances for Construction, there is no mention of a similar practice for advanced property. I infer from this that NARUC did not contemplate a mechanism for offsetting depreciation expense with an amortization of advances for construction.
Depreciation Expense Adjustment
Q. Company Witness Brown in his rebuttal testimony updates the Company’s rate base calculation by adjusting project CC00A001 from $300,000 to $360,100. Have you reflected the depreciation expense increment associated with this revised plant addition?
A. Yes. Additional depreciation expense of $1,719 has been added.
Q. Does this conclude your rebuttal testimony?
A. Yes.

Healy, Reb 10
United Water Idaho Inc.