Wyatt 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 GREGORY P. WYATT

ON BEHALF OF UNITED WATER IDAHO INC.

JULY 2000

Are you the same Gregory P. Wyatt who submitted direct testimony in this case?
Yes.
Regarding what areas will you be submitting rebuttal testimony?
I am submitting rebuttal testimony regarding Mr. Smith’s testimony on United Water Idaho’s (UWID’s) affiliated relationships and Mr. Lobb’s testimony on South County Water rate phase-in.
Beginning on page 10, line 24 of Mr. Smith’s testimony, he suggests that the Idaho Commission consider retaining a consulting firm to assist the Commission Staff in a study of the economic efficiencies or inefficiencies of the M&S services provided to United Water Idaho. Do you have any comments about this recommendation?
Yes I do. In the Company’s previous rate case Company Witness Linam described numerous management audits that had been performed at various times over the last 22 years to answer questions like these proposed by Mr. Smith. These audits consistently came to the same conclusion: allocation methods are quite sophisticated, well documented and services are provided at a reasonable cost.
Did Staff Auditor Smith come to a different conclusion?
A. No. Actually he states on page 8, line 19 that the Accounting System is good and the charges are well documented. He states that he reviewed numerous transactions and found no evidence of any inappropriate charges.
Q. What is Mr. Smith’s recommendation after he reviewed the charges from the M&S Company, the allocation methods, the accounting of the transactions and the results of the three most recent management audits?
A. Mr. Smith recommends no adjustment to the charges but, as previously stated, recommends a management audit because he is not convinced that the services provided couldn’t be provided locally at a lower price.
Is this a reasonable recommendation?
A. No. Many of the management audits performed by professional accounting firms previously analyzed this same area and consistently came to the conclusion that the services were performed at a reasonable rate. In light of the many prior management audits and the fact that Mr. Smith does not point to any specific facts that would suggest that further investigation is needed, there is no credible evidence that an additional study is warranted.
Q. Are you familiar with any of the independent studies Mr. Smith referenced?
A. Yes, I am very familiar with the Vista Consulting Group’s Stratified Management and Operations Audit conducted on United Water Pennsylvania (UWPA) at the request of the Pennsylvania Public Utility Commission. I was the General Manager of UWPA at the time of the audit.
Did Vista’s investigation into the UWM&S allocation result in any findings related to the reasonability of the costs?
Yes. Vista found that, “Hourly rates of M&S employees are based on annual cost projections which are periodically updated using actual costs, and are reasonable.”
In addition Vista found, “For the most part, although not in every case, these (billing) rates are lower than that which would be charged by outside contractors and consultants delivering comparable services.”
On page 9, beginning with line 14, Mr. Smith seems to imply that the New York, New Jersey and Pennsylvania companies are in a similar economic environment. Do you agree with this assessment?
A. No
What reason does Mr. Smith give for not being convinced that the services may not be provided at a reasonable rate?
No specific reasons, but Mr. Smith seems to base this on the proximity of the M&S Company to the three audited areas.
Q. Please elaborate.
Based on my familiarity with the cost of living in the UWPA area, having lived in the Harrisburg, PA area from 1995 to 1999, I am confident that the economic environment is not similar to that of New York and/or New Jersey. It is my experience that the Harrisburg, PA area is more similar to the Boise, Idaho area where I have lived since January 2000, than to either the New York or New Jersey metropolitan areas.
Q. On page 9, beginning on line 17, Mr. Smith states that the companies in New York, New Jersey, and Pennsylvania “….may also enjoy a proximity advantage in the access to M&S Company employees.” Do you have any comments on this statement?
Yes. I assume Mr. Smith is making the proximity comparison in relation to Idaho’s proximity to the M&S Company offices in Harrington Park, NJ. Both the New York and New Jersey companies offices are within a drive time of less than an hour, however the drive time from UWPA’s offices to the M&S offices is just over three hours one way.
The issue here seems to be one not so much of office distances, but of access to M&S Company employees. It has been my experience both in Pennsylvania and now in Idaho that current day technology, i.e. phone, fax, email, etc., enables a substantial level of access without requiring face-to-face meeting. Granted there are times when face-to-face access is necessary, but I have not experienced any measurable loss of access to M&S employees as a result of being in Idaho as compared to my five-plus years spent in Pennsylvania. On the contrary, I suspect costs to Idaho may even be somewhat held in check since we, because of distance, utilize electronic means of communication more so than costly travel and face-to-face interaction.
Q. Please continue.
The professional services provided by UWM&S to UWID are required on a regular and timely basis and would have to be obtained from some other source if not provided by UWM&S. Benefits to UWID and ultimately our customers relate to UWID being part of a larger corporation. Some examples include the benefit derived from our treasury function whereby UWID enjoys a lower cost of debt than would otherwise be afforded on a stand-alone basis. The work performed by the UWM&S Treasury department in debt refinancing has allowed reduced interest expense which can be considered an off-set to the expense levels of which M&S billing is one. Another example is that insurance premiums are lower with greater levels of coverage than would otherwise be available. Additional examples include the economies of scale achieved in purchasing contracts and other nationwide contracts executed by UWM&S for the benefit of the companies served.
Q. Do you have any further comments?
A. Yes. It must be realized that the M&S Company operates as an integrated group of professionals who together are able to provide the quality services to others in the group at a rate that only recovers its cost. If a study were done to analyze costs of similar services, as suggested by Mr. Smith, and it were found that in one or two functional areas services could be obtained at a lower cost, it doesn’t then follow that UWID should automatically always use the lowest price as its decision criteria; total overall benefit must be considered.
The M&S services performed are vital and could not be procured on the outside without careful oversight on the part of UWID. Thus, if any of the services now provided by UWM&S were contracted to outside providers, UWID would possibly have to add additional positions in order to ensure the same quality service. A substantial portion of this position’s time would be spent coordinating the activities of the outside providers. The salary of the added positions would further add to the cost of contracting with outside providers.
Lastly, if UWID required additional personnel to oversee the activities of outside providers, additional costs for furniture, office equipment and computers would be necessary. Therefore there would most certainly be incremental costs associated with the services provided by outside providers that will be an added cost to UWID and its customers. Other than Mr. Smith’s general assertion that the economics of the M&S arrangement are “questionable” (Page 10, line 24), he does not point to any specific facts that would suggest that further investigation is needed.
While the company would certainly cooperate if an investigation is ordered, we request the Commission to carefully consider the complexity of the task, the direct and indirect expenses associated with it and the likelihood that it would lead to a similar result as all past audits and studies have.
Q. Does that complete your discussion of the affiliated relationships?
A. Yes.
Please explain your understanding of Mr. Lobb’s proposal to adjust South County revenues that commences on page 24, line 9 of his testimony.
Mr. Lobb is proposing to impute projected revenue to be received during 2001 into the 1999 test year. South County is under a 6-year, 5-step rate phase-in plan. During the first year of the phase-in (January 1 to December 31, 1999) the customers in the South County area were charged under the rate schedule that existed in South County at the time of the acquisition. On January 1, 2000, the second year of the phase-in began, where rates were pegged at 60% of the UWID rate. On January 1, 2001, the third year of the phase-in will begin at which time South County rates will be at 70% of UWID rates.
What is your response to this adjustment?
A. I oppose this adjustment for three reasons. First, assuming the Commission authorizes new rates to go into effect in late August of this year there will be four months before the company begins receiving revenues produced by the third year rates. During this period it is a certainty that the company will not receive the revenue Mr. Lobb proposes to impute and, by definition, the company will not have the opportunity to earn its allowed return. Second, while the formula for calculating rates in future phases is known, the revenue to be produced by those rates is not known and measurable because it not known to what extent the higher rates may induce customers to reduce consumption. Finally, imputing future revenues results in a mismatch of revenue and expense and violates the commission’s precedent for reliance on historic test periods.
Please elaborate on your first reason for opposing the adjustment.
A. On page 24, beginning at line 16 Mr. Lobb contends that the downward revenue adjustment of $136,118 is appropriate because “….the second phase of the rate increase scheduled for the year 2000 will be essentially past by the time that new rates from this case are effective.” With hearings on this case scheduled for July 11 and 12, we could reasonably expect this rate proceeding to be concluded by the beginning of September. With almost four months remaining in the year at that point, the second phase rate increase can in no way be classified as being essentially past and thus Mr. Lobb’s claim is inappropriate. The third year phase–in (70% of UWID rates) becomes effective January 1, 2001, almost six months after hearings on this case. It is UWID’s opinion that if the Commission were to approve this adjustment to revenues then UWID would in effect be prevented from earning it’s authorized rate of return granted in this case during that intervening period.
Q. Please explain why revenues for the period commencing January 1, 2001, are not known and measurable.
A. While the formula for calculating rates for subsequent steps of the phase-in may be known, the revenue to be produced by those rates beyond the January 2000 phase is not fully known and measurable since no forward looking consumption projections were made. As noted in the Commission’s Order approving the South County acquisition the rate phase-in was designed to permit customers to “assess their water usage, to possibly adjust their water consumption habits and to connect (if available) to other irrigation sources.” (Order No. 27798, pg. 10). It is thus anticipated that during and following the second step of the phase-in period per customer consumption will decrease in amounts that cannot be quantified with a resulting decrease in revenue, the amount of which also cannot be quantified. Therefore, to attempt to project uncertain and very possibly declining consumption and revenue beyond the current year would be premature at this time.
Q. Please explain why the adjustment is contrary to the preference for historic test periods.
A. Mr. Lobb contends that the adjustment is appropriate because the second-step increase will occur during the first full year after the new rates for this case are established. Although the formula for and the timing of the second-step increase may be known and measurable, I do not agree that this adjustment is legitimate because it is significantly outside of the test period for this case. It seems that Mr. Lobb is redefining the concept of what constitutes a “test period” for a rate proceeding. Typically, the test period has been understood to include a 12-month test year adjusted for certain sufficiently known and measurable items occurring up through the time of rate case hearings. Mr. Lobb’s proposal to include an adjustment that occurs almost six months beyond this time frame is clearly more akin to a future test year approach rather than historical test year and should not be allowed at this late date in the case. Traditionally, known and measurable adjustments to rate case test year revenues and expenses have been allowed in order to somewhat mitigate the effect of “regulatory lag.” In addition, if this negative revenue adjustment for an event occurring in the year 2001 is appropriate, then it begs the question, “Should the Company be allowed to include known and measurable expense increases during the same period?” One example of this might be the Company’s contract labor increases scheduled for April 1, 2001 of over $40,000. Others might include Capital investments, depreciation, operating expenses under contract, etc. through the year 2001. Another question arises then as to when does the “test period” end? Clearly these kinds of “out of period” adjustments have not generally been favored by this Commission in the past and neither should Mr. Lobb’s proposed adjustment be considered in this case.
Q. Is Mr. Lobb’s proposed adjustment consistent with staff positions on similar issues in other cases?
A. My understanding is that staff is generally skeptical of forward-looking adjustments to test period revenues. For example, in Case No. UWI-W-98-3 staff opposed UWID’s proposal to adjust revenues to be received from Micron Technology to take into account anticipated reductions in consumption. In that case the Commission accepted the staff position and rejected the company’s proposed adjustment. (See Order No. 28043). In other contexts staff has argued that in determining whether revenues are sufficient to support an investment, test year revenue should by used, unadjusted for expected future revenue increases due to customer growth. (See Case No. UWI-W-97-6, relating to Redwood Creek investment).
Q. What is the Company’s proposal with respect to South County revenues?
In the revenue analysis for the case, the Company reasonably and in good faith included the impact of the January 2000 phase increase. This was done since the impact of this increase was effective within what has been generally understood as the test period for the case even though Idaho Commission past practice has generally not supported forward looking rate making. The Company thought it made sense to use the second year phase-in rates to price water services in South County, since any change in rates resulting from the case would be implemented during the year 2000.
Q. Does this conclude your remarks on the proposed South County revenue adjustment?
A. Yes.
Q. Does this conclude your testimony?
A. Yes.

Wyatt, Reb 12
United Water Idaho Inc.