20041201Healy Direct.pdf

Dean J. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
O. Box 2564-83701
Boise, ill 83702
Tel: [phone]
Fax: [phone]
ioe~mcdevitt-miller.com
Idaho Public Utilities Commission
Office of the SecretaryRECEIVED
NOY 3 0 200~
Boise, Idaho
Attorneys for Applicant
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF UNITED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN
THE STATE OF IDAHO
Case No. UWI-O4-
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
DIRECT TESTIMONY OF JEREMIAH J. HEALY
Please state your name and business address?
Jeremiah J. Healy, 8248 West Victory Road, Boise, Idaho 83709.
By whom are 1 you employed and in what capacity?
I am employed by United Water Idaho Inc. ("United" or "the
Company ) in the capacity of Coordinator of Planning and Rates.
How long have you been employed by United Water Idaho?
I have been employed by United Water Idaho or United Water
Management and Services Company since February 1980.
Briefly describe your responsibilities during your tenure.
As a Staff Accountant with the Central Region Office in Harrisburg,
P A until April, 1982 I performed general accounting, prepared federal
and state tax returns and public utility commission annual reports. In
May, 1982 I became an Internal Auditor responsible for conducting
financial and special audits on regulated and non-regulated
subsidiaries. From September, 1985 until December, 1989 I was
Accounting Supervisor for United Water Idaho. In this capacity, I was
responsible for accounting and planning functions. In January, 1990 I
became Financial Coordinator for the Western Region of General
Waterworks responsible for accounting, budgeting and strategic
planning for five water and/or wastewater utilities. From August, 1993
until October, 1994 I was Director of Rates at United Water
. Management and Services Company. In this capacity I prepared rate
Healy, Di
United Water Idaho Inc.
filings for various utility subsidiaries. In November, 1994 I assumed
my current position.
What is your educational background?
I was granted a Bachelor of Science degree with a major in accounting
from the University of South Carolina in May, 1977.
Before what regulatory commissions have you appeared and presented
expert testimony?
I have testified in various proceedings before the Idaho Public Utilities
Commission ("IPUC") and I have submitted written testimony before
the regulatory bodies in Illinois and Arkansas.
What is the test year United Water is utilizing in this proceeding?
The Company is using the twelve-month period ended July 31 , 2004.
Normalizing and annualizing adjustments have been made to the test
period and known and measurable adjustments have been made to
revenue, operating expense and rate base elements through May 31
2005. The Company is utilizing a year end rate base in this proceeding,
as is consistent with past IPUC decisions in Cases UWI- W -00-
UWI-97-, UWI-96-, BOI-93-3 and BOI-93-
In connection with the Company s present application for an increase
in rates and charges, what is the scope of your participation and
testimony?
My participation and testimony covers both operating expenses and
rate base. I have analyzed the Company s books and records and
Healy, Oi
United Water Idaho Inc.
prepared the necessary accounting exhibits to adjust operating
expenses. I also have developed and will present testimony on rate base
for the Company, integrating the capital projects discussed by Witness
Rhead. Both operating expenses and rate base are predicated on a test
year ending July 31 , 2004. Also included are known and measurable
adjustments that will occur prior to the time that new rates will become
effective in this case, which was estimated to be May 31 , 2005. In the
early stages of planning the case, this was the best estimate for the in-
service date of the Columbia Water Treatment Plant ("CWTP"), and all
pro forma adjustments were developed consistent with that date. The
Company continues to anticipate that the facility will be in-service on
or before May 31 , 2005. However, the Company was not able to
properly prepare and file the rate case in the period of time which
would have been necessary to have this date and the end of the
Commission s suspension period coincide. The pro forma adjustments
are all projected to May 31 , 2005, the originally planned in-service date
for CWTP, but because of the time necessary to prepare the filing, this
will not coincide with the effective date of the new rates as originally
planned, unless it is possible to resolve the case by then.
Please generally describe the approach you have taken in preparing the
exhibits for operation expenses.
For operation and maintenance expenses, I have relied on information
and data produced within the Company, and my own investigation
Healy, OJ
United Water Idaho Inc.
thereof, as the basis for my adjustments. For depreciation, amortization
of plant held for future use, amortization of utility plant acquisition
adjustments, operating taxes and income taxes, supporting details are
shown which provide the basis for these adjustments.
Have you prepared from the Company s books and records a series of
exhibits depicting the Company s balance sheet and operating income
statement for the test year ended July 31 , 2004?
Yes, I have prepared Exhibits Numbers 4 and 5 illustrating the Company
Balance Sheet (Exhibit No.4) and Operating Income Statement Per
Books (Exhibit No.5). Both of these exhibits are based upon results
for the test period.
Have you prepared an exhibit that indicates the pro forma operating
income for the Company at existing and proposed rates?
Yes. I have prepared Exhibit No.which is titled "Statement of
Operating Income Per Books and Pro Forma under Present and
Proposed rates for the year ended July 31 , 2004". I have also prepared
Exhibit 3 Summary identifying the individual adjustments, except for
revenue adjustments discussed by Witness Gradilone, found on Exhibit
Column 1 of Exhibit 2 identifies the schedule on Exhibit 3 that
details the test year pro forma adjustments indicated in Exhibit 2
Column 2.Column 2 indicates the elements of operating income:
operations and maintenance expense, depreciation and amortization
Healy, Oi
United Water Idaho Inc.
expense, taxes other and income taxes. The amounts therein are per
books, as shown in Exhibit No.5. Column 3 shows a summary of test
year adjustments made to revenues and expenses. The' adjustment to
operating revenue shown on line 4 will be explained by Witness
Gradilone. The adjustments to operation and maintenance expenses
summarized on line 6, are detailed in Exhibit No.3 Summary, Schedule
1 and they will be explained in conjunction therewith. The adjustments
to depreciation expense, amortization of plant held for future use and
amortization of utility plant acquisition adjustments summarized on
lines 7, 8 and 9 are detailed in Exhibit No.3 Summary, Schedule 2
pages 1 to 4, and will be explained in conjunction therewith. The
adjustments to operating taxes summarized on lines 11 and 12 are
detailed in Exhibit No.3 Summary, Schedule 3 , pages 1 to 4, and will
be explained in conjunction therewith. Column 4 shows the adjusted
operating income at existing rates for the test period.Column 5
indicates the adjustments to operating revenues operation and
maintenance expenses, and income taxes under the increased rates
proposed herein. The adjustment to operating revenues of $6 767 870
was computed based on an 8.930/0 rate of return on rate base. Column 6
shows the adjusted operating income necessary to produce the
requested return. The income taxes shown on lines 18 and 19 were
computed as indicated on Exhibit No.3 Summary, Schedule 4, and will
be explained in conjunction therewith.
Healy, OJ
United Water Idaho Inc.
Returning to Column 5 of Exhibit No.3 Summary, please explain the
adjustments to operating expenses?
Operation and maintenance expenses have been increased by
933 193 (Exhibit 3 Summary, line 35).Depreciation and
amortization expense have been increased by $1 598,479 (Exhibit 3
Summary, line 50).Property taxes and payroll taxes have been
increased $72 522 (Exhibit 3 Summary, line 57). Federal income taxes
have decreased $1 453 467 and State income taxes have been decreased
by $680 427 (Exhibit 2, lines 18 & 19).
The detailed support for the operation and maintenance expense
adjustments are shown on the four Schedules following the Exhibit 3
Summary. Schedule 1 , pages 1 to 34, provides detail for adjustments
made to operation and maintenance expense. Schedule 2, pages 1 to 4
provides detail for adjustments to depreciation and amortization
expense. Schedule 3 , pages 1 to 4, provides detail for adjustments to
property and payroll taxes. Schedule 4 page 1 provides detail for
adjustment of State and Federal income tax expense.
Please describe the various normalizing and annualizing adjustments
as well as known and measurable adjustments, made to operation and
maintenance expense.
Adiustment No.increases payroll expense by $232 555
(Schedule 1 , Page 1).This adjustment reflects anticipated pay
increases for salaried employees to be effective April 1 , 2005. For
Healy, OJ
United Water Idaho Inc.
Bargaining Unit employees, the pay rates used reflect those that will
become effective April 1 , 2005 as called for in the current contract. For
all employees, total hours by employee, covering the period August 1
2003 through July 31 , 2004, were determined and applied to the
contractually obligated (for Bargaining Unit employees) and
anticipated pay rates (for non-BU employees, anticipated to be 3.5%).
During the test year, the Company had a fully staffed payroll roster of
88 employees. Three new positions are proposed in the pro forma
period.
Please identify the three staffing additions incorporated into the
Company s filing.
The Company proposes to add one Chief Operator, one Operator, and
one Public Relations Manager, to its current complement of staff. All
staff additions are anticipated to occur prior to hearings in this
proceeding.
Please explain the rational and need for the additional staff.
The two operations positions, Chief Operator and Operator, are
required in order to maintain operations and maintenance activities
related to the Company s increased source of supply, pumping, and
treatment facilities. Treatment and well system technical requirements
have steadily increased due to the addition of chlorine generation and
greensand treatment facilities within the system as well as the addition
of the Columbia Water Treatment Plant (CWTP).The technical
Healy, OJ
United Water Idaho Inc.
requirements include operation and maintenance calibration and
troubleshooting of the 28 chlorine generation units and two greensand
treatment facilities at wells, plus chlorine generation at the Marden
Treatment Plant.The Columbia Water Treatment Plant, with its
membrane filtration and chlorine generation processes adds
additional and unique set of technical requirements of its own.
The Chief Operator will coordinate and support the activities at
Marden, Columbia, and the two greensand facilities, and will also work
as a functional operator at facilities throughout the system.The
Operator position provides staffing needed to support the operations
and maintenance requirements of all water supply, pumping and
treatment facilities throughout the system.
The Public Relations Manager is required to enable the Company
to effectively participate in the business and political community on a
wide range of issues that are vital to the business. Some of these
include quality of service, customer communications, community
involvement, legislative issues, media relations and others.
test year based ratio of labor charged to operation and
maintenance expense was applied to total labor to determine the O&M
component.
Adiustment No.increases the Company s contribution to the
401(K) thrift plan by $1 321 (Schedule 1 , Page 2) based upon historical
participation rates in this supplemental pension plan. The Company
Healy, Oi
United Water Idaho Inc.
payment into the plan of $91 477 represents partial employer matching
of employee contributions into the plan. The Company matches 500/0 of
an employee s contributions up to a maximum of 3% of regular annual
pay for all participating employees.
Adiustment No.increases the cost of providing medical and
dental care, vision care, long-term disability insurance and group term
life insurance coverage to employees by $148 338 (Schedule 1 , Page
3). The pro forma cost of providing the various coverages was applied
to the July 2004 authorized level of employees plus the three new
positions discussed earlier. Contributions from all employees offsetting
Company costs were calculated based on the current level for various
coverage options.
Will the Company s late fall 2004 open enrollment period have any
impact on the pro forma cost of Medical Care?
Yes. As this information becomes available, the cost of providing
medical and dental coverage will be updated to reflect the most current
available information.
Please continue with your discussion of adjustments to operations and
maintenance expense.
Adiustment No.Increases test year expense by $12 279 for
employee pension cost (Schedule 1 , Page 4). This adjustment reflects
the estimated 2005 Financial Accounting Standards Board (F ASB)
cost as developed by the Company s actuary for Bargaining Unit and
Healy, Oi
United Water Idaho Inc.
non-Bargaining Unit employees of the Company and is consistent with
the standard treatment afforded pension expense by the Idaho Public
Utilities Commission.
Adiustment No.decreases test year expense by $145 345 for the
normalization of PBOP (Post Retirement Benefits Other Than Pension)
Schedule I , Page 5. The pro forma level of expense represents the
actual 2005 F AS 106 expense as developed by the Company s actuary
plus a 20-year amortization of the deferred portion of F AS 106
expense.
Adiustment No.decreases test year expense by $52 956 for the
normalization of payroll overheads chargeable to other than Operations
and Maintenance expense (Schedule I , Page 6). The relationship of
employee benefit expense to workday payroll dollars is 63.03%.
Added to this percentage is 16.28% for non-work days, which, when
combined, totals 79.310/0. When 79.31 % is applied to pro forma non-
O&M payroll, the result is a pro forma overhead credit of $912 751.
This is $52 956 larger than the test year overhead credit of $859 795.
Adiustment No.(Schedule I , Page 7) increases test year expense
by $105 526 for the amortization of deferred early retirement cost. In
Case No. UWID-OO-, Order No. 28505 , the Commission allowed
the Company to recover, over 5 years, $761 081 of deferred benefit
cost associated with four employees who participated in the Company
1999 voluntary early retirement program (ERP). The program was
Healy, OJ
United Water Idaho Inc.
offered to all employees who met plan age and length of service
requirements. In year 2000, the Company again offered an ERP
opportunity to employees who met program requirements. Six
additional employees took advantage of the opportunity. The Company
recorded an additional $1 250 617 in deferred benefit cost. (Notice was
sent to the Commission regarding the recording of this expense
deferral). In the current case, the Company is requesting recovery of
the small un-amortized balance of the original ERP ($38 052) along
with the year 2000 ERP cost for a total of $1 288 669. United Water
requests a five-year amortization period, resulting in annual expense of
$257 734. The test year level of expense was $152 208 leading to an
incremental adjustment of $105 526.
What was the Company s rationale for offering ERP?
The intent of the ERP offering was to entice employees to retire early.
The Company expected to and did benefit in several ways from these
programs. The economic and efficiency benefits generated flow
through to our customers at the time rates are determined, and, by
enabling the Company to extend the period between rate-increase
requests.
Please explain the benefits realized by the Company and its customers.
The ERP program allowed the Company to reduce the size of its
workforce, resulting in substantial labor and benefit savings. Coupled
with the smaller workforce, United Water re-aligned responsibilities
Healy, Oi
United Water Idaho Inc.
and increased productivity and efficiency. I will illustrate this point in
several ways: First, the Company s ratio of customers per regular
employee has increased from 608 in 1997 and 605 in 1998 to 845 pro
forma as of May, 2005. This represents an increase of over 390/0.
Secondly, the Company has controlled its operations and maintenance
expense, based on the information provided in the IPUC Annual
Report, to a 3.81% average annual increase from 1997 through 2003. If
employee benefit costs, including the ever-rising cost of medical
coverage are removed, this percentage drops to 2.24%. The ERP and
other cost saving practices have helped the Company maintain expense
growth at this level while, at the same time, the water system has
experienced the addition of nearly 10 000 new customers.
Adiustment No.(Schedule 1 , Page 8) Increases test year
expense by $49 751 for the amortization of deferred enhanced
severance program expenses. In 2002 and in 2003, the Company
offered an enhanced severance package (ESP) that was intended to
entice employees to take advantage of other employment opportunities.
Similar to the ERP discussed above, the intention was to reduce cost
and increase efficiency. A total of four employees took advantage of
the ESP at a cost of $248 753 , the largest component of which was
severance pay. The Company requests a five-year amortization
amounting to $49 751 annually. The test year contained no ESP cost
other than an accounting miscode corrected in adjustment 29.
Healy, OJ
United Water Idaho Inc.
Adiustment No.increases Purchased Water expense by $87 528
(Schedule 1 , Page 9). The Company, in addition to owned water rights
has long and short-term lease and rental agreements with various
entities to use surface water rights. The expense increase is driven by
the opening of the Columbia Water Treatment Plant, which will
necessitate the use of 3 000 Acre Feet of additional water at
estimated $26 per AF.
Adiustment No. 10 increases test year expense by $6 091 for tank
painting amortization (Schedule 1 , Page 10).The Company has
historically received a ten-year amortization of this expense in accord
with prior Commission orders. In addition to existing amortizations
that began amortization in the 2000 case, two additional tanks have
been painted in the interim period, increasing the annual level of
expense.
Adiustment No. increases purchased power cost by $514 265.
(Schedule 1 , Page 11). The 41 % increase is due to three major factors.
First, the Columbia Water Treatment Plant and its associated pumping
station will require an annual level of power expense of $284,400. This
estimate has been developed by Witness Rhead and provided to me.
The CWTP and associated raw water pumping station will be
consumptive power users to the extent of $236 400 of the above
$284 400. The balance of $48 000 is the annual expense of maintaining
a redundant power supply. Secondly, the Company will no longer be
Healy, OJ
United Water Idaho Inc.
subject to the deferred accounting order issued by the IPUC in Case
UWI-OI-, Order No. 28800, once proposed rates go into effect in
this case. Due to the power crisis suffered by the Northwest in 2001
and 2002 and the extraordinary impact the crisis had on Idaho Powers
rates, through the operation of the Power Cost Adjustment mechanism
the IPUC granted the Company permission to establish a deferral
account for incremental cost related to "
.. .
recent and future PCA
related increases in Idaho Power Company electric power rates
beginning May 1 , 2001..... The Company deferred to its balance sheet
the impact of the higher power cost. The balance of this deferred
account as of the end of the test year is $1 363 240 and it is expected to
rise to over $1 550 000 by May 31 , 2005. The recovery in customer
rates of the deferred expense is discussed in Adjustment No. 12 my
testimony. As of the effective date of the new rates put in place in this
case, the Company will revert to full expensing and recovery of power
included in customer base rates. No deferral of expense will be
necessary. Third and finally, in the summer and fall of 2004, Idaho
Power was granted its first base rate increase in approximately ten
years. Idaho Power tariff rates effective July 28 , 2004 for Schedule 7 &
9 usage, as well as schedule 19P "time of use" rates to be effective
December 1 , 2004 (applicable to United's Marden WTP) were applied
to test year power consumption to determine pro forma expense. In a
Healy, Oi
United Water Idaho Inc.
separate adjustment, United reduces power expense due to operational
changes in the system once CWTP comes on-line;
Adiustment No. 12 increases operations & maintenance cost by
$516 667 due to the previously mentioned deferred treatment of
extraordinary power cost incurred from May 1 , 2001 through the
effective date of rate implementation in this case (Schedule 1 , Page 12).
The Company deferred power cost related to Idaho Power s PCA
mechanism above the level of power expense established in Case UWI-
OO-, Order No 28505, dated September 5, 2000.United has
maintained detailed accounting records of the deferral, which includes
a modest carrying charge based on the annual customer deposit interest
rate (currently
%),
as established by the IPUC. The three-year
amortization period was chosen because the impact of the several PCA
increases subject to deferral was heaviest in the early years of the
deferral period. For example, from the base rate established in United'
2000 rate case ($0.026858 per Kwh) the Company experienced a
47.31 % increase in schedule 9S energy cost (Company facilities of any
size were virtually all subject to tariff9S at this time) on May 16 2001.
The PCA for schedule 9S was adjusted again as of Oct 1 , 2001 by an
incremental increase of 9.670/0. This brought the cumulative impact of
PCA adjustments on Schedule 9S energy to over 62%. Again on May
2002 the PCA was increased an additional incremental 4.910/0
raising the cumulative impact to 69.50/0. In May of 2003 some relief
Healy, Oi
United Water Idaho Inc.
was received, but only in the form of a partial PCA decrease that still
left energy rates 19.80/0 above the base rates established in the 2000 rate
case. By December 2003, two-thirds of the balance of the current
deferred asset had been incurred. Carrying charge interest rates have
steadily decreased from the 2001 level of 60/0 to the current 10/0.
Adiustment No. 13 increases operations and maintenance expense
by $78 224 to reflect water treatment chemical usage and pricing over
and above the test year level (Schedule 1 , Page 13). Again, Witness
Rhead supplied me the support for increased chemical expense for
CWTP. This expense is estimated at $57 145. The Company has made
a corresponding adjustment (No. 16) that reflects power and chemical
savings at facilities that are anticipated to produce less water, initially,
due to CWTP operations. The use of phosphate has been normalized
upward from the test year level by $15 000. Company operating
personnel have learned through experience that certain areas of the
system become "unstable" in the winter season, leading to an increased
level of customer complaints, unless phosphate use is continued
through the winter season. The underlying adjustment for chemical
expense utilized test year quantities of the various chemicals at the
most current known prices. Due to price instability in the water
treatment chemical market, the Company may need to update this
adjustment as suppliers reveal 2005 prices.
Healy, Oi
United Water Idaho Inc.
Adiustment No. increases test year expense by $7 662
(Schedule 1 , Page 14) for the normalization and known and measurable
changes to the Company s water quality outside laboratory expense.
The Company follows a sampling regimen required by water quality
regulators. In 2005, the "Long Term 2 Enhanced Surface Water
Treatment Rule" takes effect, raising testing expense by $12 000. An
expired amortization from the previous rate case was normalized out of
the test year.
Adiustment No. 15 increases test year expense $57 210 for known
and measurable operating expense items associated with the operation
of CWTP (Schedule 1 , Page 15). Major expense adjustments associated
with Columbia are included in the individual adjustments to that
particular expense, such as power, chemicals and purchased water. This
adjustment includes communications expense (primarily, operation of a
Tl line), outside laboratory cost and building utilities (natural gas
electricity, landscape and building maintenance, as well as sanitation
and security alarm monitoring services).
Adiustment No. 16 (Schedule 1 , Page 16) decreases the test year
level of variable cost (power and chemicals) by $139 580 as a result of
the operation of the CWTP. Witness Rhead who supplied this
estimate to me, has developed a plan of operations for Columbia that
involves relying less on several groundwater sources. He has calculated
Healy, Oi
United Water Idaho Inc.
a price per million gallons of operating the several facilities and this
adjustment eliminates from expense the expected level of savings.
Adiustment No. 17 increases the test year level of transportation
cost by $43 652 (Schedule 1 , Page 17). Transportation expense
includes net lease cost, fuel cost, vehicle maintenance materials and
outside service expense, payroll and overhead expense for the
mechanic position and vehicle insurance. The primary drivers of the
increasing expense are the addition of two new leased vehicles
increasing fuel prices and increased personnel wage and benefit cost.
Adiustment No. 18 increases test year expense by $8 061 for
customer postage expense (Schedule 1 , Page 18). The Company has
included in this case an expected level of customers as of May 31 , 2005
of 76 907 , an increase of 1 507 customers from the test year-end level.
The amount the Company s billing contractor charges to mail a
customer bill is composed of several pre-sort postal rates, and averages
$0.306. The Company also mails annually thousands (55 000+) of
customer urgent notices through a postage machine resident in the local
office, as well as all general office mail. A small amount of expense
credits erroneously charged to UWID were normalized out of the test
year.
Adiustment No. 19 (Schedule 1 , Page 19) increases expense by
$14 416 related to the Company s outside contractor who prepares
customer bills. The number of bills to be processed was annualized on
Healy, OJ
United Water Idaho Inc.
the same basis as customer postage. In addition to the per item price for
bills and past due notices, the Company incurs a small amount of
programming charges annually. Like customer postage some out of
period credits were normalized into test year expense, while the test
year level of programming charges was normalized downward.
Adiustment No. (Schedule 1 , Page 20) reduces outside
collection expense by $20 125. Outside collection includes bank
service fees for collecting and processing customer payments, and
miscellaneous other payments, be they made in person, through the
mail or electronically. Again, the number of payments processed is
based on the customer count at May 31 , 2005. Test year expense was
normalized resulting in an expense reduction.
Adiustment No. 21 (Schedule 1 , Page 21) reduces expenses for
customer records and collection expense and miscellaneous customer
accounts expense by $10 879. For seven/twelfths of the test year the
Company had a contract temporary "employee" provide services in this
area for $14 466. This expense was eliminated when the position was
filled with a regular employee whose expenses are included in the labor
adjustment. However, the test year is missing the expense ($3 700)
associated with printing United's annual notification to customers of
rules & regulations, and this expense has been normalized. The
remainder is a normal level for supplies and legal services.
Healy, Oi
United Water Idaho Inc.
Ad iustment No. 22 decreases test year expense by $31 661 for the
normalization of uncollectible accounts expense (Schedule 1 , Page 22).
The uncollectible accounts rate of 0.415650/0 was determined by
dividing $498 727 of four-year total net uncollectible expense by four-
year total revenues of $119 986 045. The resultant average
uncollectible rate was applied to pro-forma revenue at existing rates.
Adiustment No. 23 increases test year expense by $3 476 for
normalization of the annual IPUC assessment (Schedule 1 , Page 23).
The most recent Commission billing indicates an assessment rate of
002405%.This assessment rate is then applied to adjusted test year
operating revenue to determine pro forma IPUC Assessment expense
for rate purposes.
Adiustment No. 24 increases test year expense by $81 667 for rate
case expense amortization (Schedule 1 , Page 24).The Company
estimates deferred expense for the instant case to be $245 000. This
deferral is being tracked in detail and an updated cost projection will be
available prior to hearings in the case. The Company proposes a three-
year amortization period to coincide with the anticipated filing of the
next general rate case.
Adiustment No. 25 Increases test year expense of $25 688 by
477 for employee relocation expense amortization, traditionally a
five-year amortization (Schedule 1 , Page 25). The Company incurred
additional relocation expense in early 2003 for the position of Senior
Healy, Oi
United Water Idaho Inc.
Technical Analyst, which was deferred. For rate making purposes the
small balance of unamortized relocation expense that is leftover from
the prior case is being re-amortized over five years.
Adiustment No. 26 increases test year expense for business
Insurance (casualty, property and workers compensation; Schedule 1
Page 26) from $789 765 to $1 083 300, an increase of $293 535. The
test year level of expense was abnormally low due to a large, non-
recurring property insurance credit of $109 271. Property Insurance
coverage for the pro forma rate year is $55 500, a swing of nearly
$165 000. The detail of the Company s business insurance package is
illustrated on Schedule 1 , Page 26.
Adiustment No. 27 eliminates $14 005 of expense recorded as
lobbying, charitable contributions, and memberships, which are not
appropriate for rate-making purposes based upon prior Commission
decisions (Schedule 1 , Page 27).
Adiustment No. 28 (Schedule 1 , Page 28) increases the annual cost
of supporting information technology (IT) infrastructure by $51 046
over the test year level. Operation and maintenance of the IT
infrastructure is a shared responsibility between local personnel and
corporate support. Corporate services include Infrastructure Operations
such as helpdesk services, desktop/server engineering and support and
network services including the local area network, wide area network
internet access (primarily for web-based programs) and remote access
Healy, Oi
United Water Idaho Inc.
as well as e-mail. It also includes Application Support for the customer
billing system, PeopleSoft and operations system services. Vendor and
contract management is also included. Local personnel maintain and
support Oracle, maintain and support local file servers and databases
provide hydraulic model support and maintenance, oversee the
Supervisory Control and Data Acquisition (SCADA) system including
the Intellution software, provide local desktop support and support
radio and telephonic communications systems. The primary drivers of
expense increases are the level of finance system support and frame
relay communications support.
Adiustment No. 29 (Schedule 1 , Page 29) eliminates $2 995 of
expense charged to account 930250 Enhanced Severance Package
during the test year that will not recur in the rate year.
Adiustment No. 30 (Schedule 1 , Page 30) increases test year
expense by $73 022 in recognition of the additional variable operation
and maintenance expense that will be incurred as a result of the
annualizing the impact of test year customer growth, as well as making
a known and measurable change for customers to be added through
May 31 , 2005. The adjustment is based upon the relationship of test
year levels of purchased power, chemicals, transportation, general
insurance and T &D cost excluding payroll (the variable cost) to test
year revenue. The variable cost represents 9.74% of revenue (line 11).
Healy, Oi
United Water Idaho Inc.
The 9.740/0 variable cost factor applied to customer growth revenue of
$535 161 results in additional O&M expense of $73 022.
Adiustment No. 31 (Schedule 1 , Page 31) decreases test year
expense by $8 792 in recognition of lower operating cost associated
with Witness Gradilone s weather normalization adjustment.The
adjustment is based upon the relationship of purchased power and
chemical cost (the variable cost) to test year revenue. The variable
costs represent 4.930/0 of revenue (line 7). The 4.93% variable cost is
applied to the weather normalization revenue impact of ($184 354)
resulting in decreased O&M expense of $9 085.
Adiustment No. 32 (Schedule 1 , Page 32) reduces test year outside
legal expense by $29 094 related to the expiration of an amortization
allowance granted in the prior case for deferred legal expense incurred
to contest property tax valuations.
Adiustment No. 33 (Schedule 1 , Page 33) increases test year
expense by $1 569 due to a three-year amortization of deferred legal
expense related to United's efforts to assist the Commission with the
challenges posed by the Terra Grande Water Company.
Adiustment No. 34 (Schedule 1 , Page 34) decreases test year
expense by $986 due to the cessation of United's operation of the
Carriage Hill non-contiguous system. The adjustment represents annual
power expense. Depreciation expense and property taxes have self-
Healy, Oi
United Water Idaho Inc.
adjusted. There were no chemicals used at Carriage Hill and the
customer accounting expense is negligible.
Please explain Exhibit No., Schedule 2.
Exhibit No.3. Schedule 2 consists of four pages. Page 1 summarizes
the adjustment to depreciation expense in the amount of $1 647 661.
Pro forma depreciation expense amounts to $6 386 509.This is
647 661 greater than depreciation recorded during the test year of
738 848 due to increases in the Company s plant investment. Plant
investment information post July 31 2004 was supplied to me by
Witness Rhead.
Page 2 of Schedule 2 indicates the depreciable basis of Utility
Plant by primary account, net of contributions and advances (advances
for construction were judged as non-depreciable property until the
Company had an investment in the property through the payment of
advance refunds), the depreciation rate for each plant account and the
annual depreciation expense by primary account. Pro forma annual
depreciation expense is carried forward to Page 1 in order to determine
the adjustment needed to test year expense. The depreciation rates
used are the same as those utilized in prior rate case filings with one
exception. The CWTP is a membrane filtration facility rather than a
conventional treatment facility like the Marden WTP. The membrane
filters themselves have a useful life that is not congruent with the 20-
year life associated with other investment in water treatment
Healy, OJ
United Water Idaho Inc.
equipment. Although membrane filter use in the public water supply
field is an emerging technology, there is evidence that supports a
seven- year life. First, USFilter, the manufacturer of the membranes
unconditionally warrants their membranes for one year and provides a
lesser quality of warranty for the next six years. In addition, CDM
Construction Inc., the Design-Build contractor for the CWTP provided
through Witness Rhead, two examples of operating membrane plants.
The Saratoga Plant in the San Francisco Bay area replaced its
membrane filters after seven years of use. The membrane filtration
plant in Marquette, Michigan opened in 1997 and as of 2003 had not
replaced the filters, though an attempt will be made by the Company to
confirm whether replacement occurred in 2004. The Company
requesting permission to depreciate the membrane filters at a 14.00%
annual rate, which is the best evidence of their expected useful life.
Please explain Exhibit No., Schedule 2 , Page 3.
Exhibit No.3. Schedule 2. Page 3 adjusts amortization of plant held for
future use to $0 from a test year level of $51 113. This reflects the fact
that investment in the raw water pumping station related to the CWTP
will be used and useful coincident with the in-service date of the plant.
The IPUC allowed United to recover a return of, but not a return on
the raw water pumping station and pipeline in prior rate case UWI
97 -06. The instant adjustment re-categorizes the amortization of the
investment held for future use to normal depreciation expense and has
Healy, Oi
United Water Idaho Inc.
no impact on the overall revenue requirement.The accumulated
balance of plant held for future use amortization is similarly
reclassified to accumulated depreciation in a rate base adjustment
Please explain Exhibit No., Schedule 2 , Page 4.
Exhibit No.3. Schedule 2. Page 4 increases test year expense by
932 for the amortization of Utility Plant Acquisition Adjustments.
The UPAA account has a gross balance of $600 762 as of July 31 , 2004
and is comprised of acquisition adjustments previously approved by the
IPUC in various cases, all with 20 to 40 year amortization periods. The
small upward adjustment is caused by the normalization of an
accounting error that occurred in the test year.
Please explain Exhibit No., Schedule 3, Page 1.
Exhibit No.3. Schedule 3. Page increases test year property taxes by
$42 245. The schedule details the methodology used to arrive at a pro
forma level of property tax expense. Essentially, historical property tax
expense increases are averaged over a six-year period to derive an
annual increase rate of 4.42%. This factor is applied to the estimated
2004 property tax expense of $1 504 445 to arrive at a pro forma level
of expense, $1 570 941. This is an increase of $42 245 over the test
year level of taxes, $1 528 696. The Company will have further insight
into the level of tax expense with the arrival of the actual Ada and
Canyon County tax bills later this year.
Please explain Exhibit No., Schedule 3 , Pages 2, 3 and 4.
Healy, Oi
United Water Idaho Inc.
Exhibit No.3. Schedule 3. Pages 2. 3 and 4 increase the test year level
of payroll taxes by $30 277 combined. Page 2 indicates an increase in
FICA taxes of $29 425. Page 3 shows an increase of $469 in Idaho
State unemployment taxes. Page 4 reflects an increase of $383 in
Federal unemployment taxes. The test year also included $227 in
unidentified payroll tax that has been normalized out. The respective
payroll tax increases are driven by salary increases and increased
headcount. FICA has been adjusted based on information received
indicating statutory limits and rates for 2005.
Please explain Exhibit No., Schedule 4.
Exhibit No.3. Schedule 4. Page 1 of 1 shows the calculation of state
and federal income taxes at existing and proposed rates. The amounts
shown on line 1 of columns 1 and 2 are the same as the amounts shown
on line 16 of columns 4 and 6 of the summary schedule of Exhibit No.
2. These figures represent operating income before income taxes. From
these figures must be deducted the applicable statutory deductions
when computing the state and federal income taxes.
The first deduction is imputed interest expense and it is deductible
In the computation of both state and federal taxable income. The
calculation for the interest deduction is shown in Note A on lines
through 17. The deduction of interest is shown on line 3 and is self-
exp lanatory.
Healy, Oi
United Water Idaho Inc.
The second deduction is the excess of pro forma tax depreciation
over pro forma book depreciation.The excess tax depreciation is
deducted from state taxable income only since state income taxes are
calculated on the basis of flow through accounting while federal
income taxes are calculated on the basis of normalization accounting.
Lines 19, 20 and 21 indicate the amounts used in determining excess
tax depreciation.
The remaining calculations are self-explanatory except for the
amortization of investment tax credit shown on Line 10.Federal
income tax expense was reduced by the amortization of ITC that
amortized ratably over the lives of the assets and represents 2% of the
ITC claimed from 1971 through 1999.
Please explain the adjustment shown on line 6, Column 5 of Exhibit
No.
The adjustment shown on line 6, Column 5 of Exhibit No.2 represents
additional uncollectible expense and IPUC assessment as a result of the
pro forma adjustment to operating revenue shown on line 4, Column 5
of Exhibit No.
Does this conclude your testimony regarding operating expenses?
Yes.
Please address your rate base testimony.
Rate base is founded on an actual test year ended July 31 , 2004. Also
known and measurable adjustments are made to rate base components
Healy, OJ
United Water Idaho Inc.
through May 31 , 2005, incorporating adjustments that will take place
prior to the time that rates will become effective in this proceeding.
What is the level of rate base the Company is requesting in this
proceeding?
The rate base is $140 062 546. This includes an increase in gross plant
investment of $31 156 521 (net of retirements) that will go into service
prior to the rates effective date in this case. Included in this gross
capital is $2 555 658 associated with the raw water pumping station
which will serve the CWTP. This asset has been resident in plant held
for future use since 1997 but will become used and useful with the
commencement of operations of CWTP. Rate base as determined in the
2000 case was $98 862 937.
Please explain Exhibit 1 , Page 1 of 9.
Exhibit 1 , Page 1 of 9 , Rate Base Summary, indicates the elements of
the Company s rate base as of July 31 , 2004, as reflected on the
financial statements of the Company. The elements are Utility Plant in
Service; Accumulated Depreciation, Accumulated Amortization of
UPAA and Accumulated Amortization of Plant Held for Future Use;
Customer Advances for Construction; Contributions In Aid of
Construction; Utility Plant Acquisition Adjustments; Accumulated
Deferred Income Taxes; Pre-1971 Investment Tax Credits; Deferred
Charges and Working Capital. It is necessary to adjust the "per book"
amounts due to reclassifications and adjustments. These adjustments, if
Healy, Oi
United Water Idaho Inc.
any, are shown in Column (B).As you will note, there are no
adjustments in Column B. The working capital allowance, on line 10
was calculated in accord with past Commission practice and as such
does not require a separate adjustment page. The adjustments in
Column D reflect pro forma adjustments to Plant in Service
Accumulated Amortization Advances forDeprec ia ti on and
Construction, Contributions in Aid of Construction, Accumulated
Deferred Income Taxes, Pre-1971 Investment Tax Credits and Deferred
Charges.
Do you have an Exhibit regarding plant in service additions?
Yes. I have Exhibit 1 , Page 2 of 9. Total plant in service as of
approximately May 31 , 2005 is expected to be $258 639 920. Witness
Rhead has summary and detailed testimony and exhibits regarding pro
forma additions and retirements to plant in service. I have incorporated
these exhibits into rate base.
How do your rate base exhibits treat the Carriage Hill disposal recently
decided before the IPUC?
Original booking entries for Carriage Hills, and subsequent activity has
been "undone in these exhibits. Plant in service, accumulated
depreciation, advances and contributions have all been adjusted to
erase the vestiges of Carriage Hill.
Please explain Exhibit 1 , Page 3 of 9.
Healy, OJ
United Water Idaho Inc.
Exhibit 1 , Page 3 of 9 explains changes in the balance of accumulated
depreciation amortization accumulatedaccumulatedCIAC
amortization of PHFU and accumulated amortization of UP AA for the
period July 31 , 2004 through May 31 , 2005. The major additions
represent ten months of depreciation expense (including projects placed
in service between August 1 2004 and May 31 , 2005) and CIAC
amortization. The primary deduction is pro-forma plant in service
retirements along with associated cost of removal or salvage. The
balance of accumulated amortization of plant held for future use is
simply transferred from its home account into the accumulated
depreciation account, to mirror the treatment of the asset. UP AA debits
and credits are all amortized over twenty or forty year periods, as
approved by the Commission in various decisions.
Please explain Exhibit 1 , Page 4 of 9.
Exhibit 1 , Page 4 of 9 summarizes pro forma changes to advances for
construction. It was necessary to reclassify some advance plant account
designations as of the end of the test year to correct misstatements in
the asset management system. Since the issuance of Order No. 28505
in case UWI - W -00-, the Company does not depreciate advanced
property. This requires the Company to accurately track, by associated
plant account, all additions and refunds impacting the advance account.
On a pro forma basis, the Company has adjusted the balance of
Advances downward by $376 073 for refund activity that will occur
Healy, Oi
United Water Idaho Inc.
from July 31 , 2004 to May 31 , 2005 on existing contracts. Also, the
sale of the Carriage Hill non-contiguous property has been reflected by
un-doing the original booking entries, reducing advances an
additional $330 906. The Company does not foresee any additions to
advances in the pro forma period. Additions, in the last 5 years, have
typically occurred due to special facility agreements or non-contiguous
development agreements. The new business and engineering group are
unaware of any prospective activity in these respective areas.
Please explain Exhibit 1 , Page 5 of 9.
Exhibit 1 , Page 5 of 9 indicates activity in Contributions in Aid
Construction that is all related to CIAC on the books as of July 31
2004. Some of these CIAC dollars, $544 626, are associated with
CWIP. The CWIP is not included in this case as of July 31 , 2004 or in
the pro forma period, and therefore associated CIAC has been removed.
Also, the CIAC balance has been reduced by ten months of
amortization, $954 170. No new investment funded by CIAC has been
included in rate base from the test year-end. The vast majority of new
customers are associated with developer funded mains and services.
Since assets acquired in this manner have no impact on Company
investment, they are not reflected in rate base. However, new
customers added in the pro forma period. contribute revenue, as
discussed by Witness Gradilone. These customers also impact
operating and maintenance expense as noted in many of the expense
Healy, Oi
United Water Idaho Inc.
adjustments. CIAC associated with Carriage Hill has again been
removed.
Please explain Exhibit 9, Page 6 of 9.
Exhibit 9, Page 6 of 9 indicates pro forma adjustments to Utility Plant
Acquisition Adjustments on a gross basis. The UP AA gross balance is
comprised of both debit and credit balances. The gross value of the six
individual adjustments, all approved by the Commission in various
proceedings, is a positive $600 762. Amortization of these Acquisition
Adjustments was previously reflected on Exhibit 1 , Page 3 of 9.
Please explain Exhibit 1 , Page 7 of 9.
Exhibit 1 , Page 7 of 9 indicates the changes to accumulated deferred
income taxes from July 31 , 2004 to May 31 , 2005. The tax depreciation
portion of this account was adjusted through May 31 , 2005 for assets in
service as of July 31 , 2004 as well as assets added in the pro forma
period.
Please explain Exhibit 1 , Page 8 of 9.
Exhibit 1 , Page 8 of 9, represents the pro forma calculation of pre-1971
investment tax credits that are deducted from rate base and amortized at
a rate of $750 annually. The balance at July 31 , 2004 was $16 620.
This is adjusted by $625 to reflect the balance at May 31 , 2005.
Please explain Exhibit 1 , Page 9 of 9.
Exhibit 1 , Page 9 of 9 , identifies the six deferred items the Company
has included in rate base. The most significant item is obviously the
Healy, Oi
United Water Idaho Inc.
deferred power on line 2, encompassing over 76% of the entire balance
of $2 031 692. Again, this power expense was deferred in accord with
Commission Order No. 28800 in Case No~ UWI-01-2. The
Company deserves an opportunity to earn fair return on this
investment while it is being amortized to expense.
Does this conclude your testimony with regard to United Water Idaho
rate base?
Yes.
Healy, Oi
United Water Idaho Inc.