HomeMy WebLinkAbout20050512Peseau rebuttal.pdf, L C r'~ 1 \/ E 0 r::
Dean J. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
O. Box 2564-83701
Boise, ill 83702
Tel: 208.343.7500
Fax: 208.336.6912
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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
REBUTT AL TESTIMONY OF DENNIS PESEAU
Please state your name and business address.
My name is Dennis E. Peseau. My business address is Suite 250, 1500
Liberty Street, S., Salem, Oregon 97302.
By whom and in what capacity are you employed?
I am President of Utility Resources , Inc. My firm consults on a
number of economic, financial and engineering matters for various
private and public entities.
On whose behalf are you testifying in this proceeding?
I am testifying on behalf of United Water Idaho Inc.
Are you the same Dennis E. Peseau who prefiled direct testimony in
these proceedings?
Yes.
What is the purpose of your testimony?
As a follow-up to my direct testimony, I will address rate design issues
discussed by Staff witness Sterling and Idaho Rivers United Witness
Wojcik. Additionally, United Water has asked me to analyze and
critique Staff's proposal to employ a 13-month average rate base.
will discuss the rate base issue first, followed by a discussion of rate
design issues.
Please describe the Staff proposal to employ a 13-month average rate
base, as you understand it.
Staff calculates a rate base by averaging the monthly balances from
July 31 2003 through July 31 2004 for Plant in Service, Customer
D. Peseau , Re -
United Water Idaho Inc.
Advances and Contributions in Aid of Construction. Except for
investment associated with the Columbia Water Treatment Plant
(CWTP) post-test year investments, through December 31 2004, are
treated as if it occurred in the last month of the test year, and in
consequence, that investment is included in rate base at 1/13 of the
amount actually invested. (See Harms, Di. Pg 6).
In contrast, how did the Company calculate its proposed rate base?
The Company employed an end of period or year end rate base using
the twelve-month period ended July 31 , 2004. Normalizing and
annualizing adjustments were made to the test period and known and
measurable adjustments to revenue, operating expense and rate base
through May 31 2005. (See Healy, Di. Pg 2). In addition, as
described in the testimony of Company Witness Wyatt at pp. 10-, an
adjustment was made to reflect the impact on revenue and expense of
post test year plant additions, and to match revenue, expense and rate
base, in accordance with the policy stated by the Commission in Idaho
Power.
Is the year end methodology proposed by the Company consistent with
prior Commission orders with respect to United Water and its
predecessor, Boise Water Corporation?
Yes. I have reviewed the previous four rate orders for United
Water/Boise Water, commencing in 1993 with Case No. BOI-93-
Order No. 25062. (See also, Case Nos. BOI-93-3, Order No.
D. Peseau , Re - 2
United Water Idaho Inc.
25640; UWI-97-, Order No. 27617 and Case No. UWI-OO-
Order No. 28585). The year-end with pro-forma adjustments method
proposed by the Company in this case is identical, in all material
respects, to the method proposed by the Company, and accepted by the
Commission in these previous cases.
Is the effect of Staff's proposed change in rate making methodology
material?
Very much so. According to Staff witness Harms, the 13-Month
Average rate base is approximately $12 million lower that the Rate
Base filed by the Company. Solely due to the difference in rate base
Staff's revenue requirement is approximately $2 million lower than the
Company s. A $12 million reduction in rate base, compared to the
Company s total rate base of $140 million represents a 90/0 reduction
solely from a change in rate making methodology.
What conclusions have you reached with regard to Staff's position to
change from the policy of an end of period rate base to a thirteen-
month average rate base for the Company in these proceedings?
I conclude that:
Staff has erred in its conclusion that United Water Idaho
did not normalize revenues completely to May 31 , 2005
and so did not cause a "mismatch of expenses and
revenues" as Staff alleges.
The Company s rate base, expense and revenues treatment
in its filing are consistent, while Staff's are not;
D. Peseau , Re - 3
United Water Idaho Inc.
There is a fundamental test used below that the
Commission can use to distinguish between when to apply
the thirteen month average rate base method it uses for the
electric utilities, and the year end rate base method it has
used for some time for the more capital intensive United
Water Idaho.
Because Staff's case is so inconsistent, and unless the
Commission continues with the methodology it used in the
four previous United Water Idaho rate cases, there will
result an absolute inability for United Water Idaho to earn
its allowed rate of return, and shareholder property will be
confiscated.
United Water Idaho Matches, but Staff Mismatches Revenues and Expenses
What is the issue with respect to the matching of revenues and
expenses in this case?
Staff alleges in this case that the Company s filing, although entirely
consistent with and nearly identical in method to its previous three rate
case filings, does not match normalized revenues with normalized
expenses. The issue here is whether or not it is necessary in the case
of United Water to change from its established end of period rate base
method to a thirteen-month average method proposed by Staff in order
to match revenues and expenses.
I argue that in at least two respects, the year-end or end-of-
period rate base method is more appropriate for a water utility with the
Company s characteristics. I say this knowing that for some time the
Commission has endorsed and approved the thirteen-month average
rate base period for the electrics Idaho Power and A vista, which it
regulates.
D. Peseau , Re - 4
United Water Idaho Inc.
What is the first reason it is appropriate to allow United Water to
establish rates based upon an end-of-period rate base?
The first reason is for accuracy and ease of application. For a water
utility that has its investment, and therefore rate base growing as
quickly as the Company, it is far easier to annualize revenues to end of
period, than to reverse the numerous expense and rate base entries.
the recent Idaho Power rate case No. IPC-03-13, I testified:
How should this mismatch be corrected?
There are basically two alternative remedies available. The
first would be to reverse the annualizing entries and
properly match test year averages on both sides of the
ledger. The second alternative is to annualize revenues in
the same manner as rate base and expenses.
Do you have a preference between these two alternatives?
On the whole, I think annualizing revenues to 2003 year-
end levels is the preferable course for two reasons. First, it
is much simpler to annualize revenues than to back out
Idaho Power s annualizing adjustments from numerous cost
and rate base categories. Moreover, annualizing revenues
produces a more forward-looking result than reversing the
expense and rate base annualizations.
I recognize, however, that when faced with a similar
mismatch problem in the last Idaho Power rate case, the
Commission ordered a reversal of the improper
annualization of expenses. Order No. 25880, pp. 3-4. In
theory this course of action is equally acceptable, but it
poses a greater risk of computational errors just because of
the number of adjustments required. Consequently, I
continue to recommend annualizing earnings instead.
(Peseau direct, Case No. IPC-03-, Pages 5-
Has , in fact, Staff failed to properly match its proposed thirteen-month
expense and rate base estimates with corresponding revenues?
Yes. This can be demonstrated by determining that Staff used
essentially the same level of annualized revenues, those for the period
D. Peseau , Re - 5
United Water Idaho Inc.
ending May 31 , 2005 that are contained in the Company s filing. In
following its suggestion to use the thirteen-month average rate base
Staff should also have reduced the May 31 , 2005 annualized revenues
in the Company s filing back to the actual test year revenues centered
at January, 2004. But Staff did not. The test year revenues used by
Staff are actually the very same test year revenues developed by the
Company for its end of period method, with one very small exception.
On Company Exhibit 8, Page 2 of 2, proposed test year revenues are
$31 534 832. To verify that Staff's case calculates annualized
revenues identically to the end of period May 31 , 2005 calculated by
the Company, I refer to Staff Exhibit 126. On this exhibit (column (6),
line (12)) appears the same annualized revenue levels of $31
534 832.2 In other words, Staff mismatches rate base and expenses on
a thirteen-month average basis, with a higher level of revenues
calculated on a forward annualized period May 31 , 2005. Thus there
is a gross mismatch.
Contrastingly, the Company s filing is consistent, in that it
matches the higher level of end of period May 31 , 2005 revenues with
its end of period expenses and rate base. Staff, on the other hand
mismatches these components by using the smaller than actual rate
base, its thirteen month average, with the 'higher level of end of period
These May 31 , 2005 annualized revenues are derived by adjusting twelve-month ending July 31, 2004
revenues for South County, weather normalization and growth through May 31 , 2005.
This figure is adjusted by $5,628 for Carriage Hill on Staff Exhibit 111 , Page 2 of 2.
D. Peseau , Re - 6
United Water Idaho Inc.
revenues. This is a mismatch that eventually guarantees an under
recovery of revenues sufficient to earn the allowed rate of return.
Again, in my opinion, the most appropriate means by which to most
accurately match the Company s expenses and revenues is to use the
end of period rate base.
For purposes of consistency between the rate base treatment of the
local electrics, and United Water should the Commission require
United Water to use a thirteen-month average rate base?
No, there are significant and peculiar differences here that, in my
opinion, argue strongly for allowing United Water to continue with its
end of period rate base method. This second reason is argued below.
Does not Staff argue that the Commission has recently changed
policies regarding rate base treatment?
Yes. Staff Witness Mr. Lobb, on Pages 6-, suggests that because the
Commission approved the thirteen-month average rate base methods
filed by Idaho Power and A vista, that consistency requires this policy
be extended to United Water.
Did the Commission orders in those cases mandate use of an average
test year for all utilities?
Not as I understand them. Order Numbers 29505 (IPCo) and 29602
(A VU) advised utilities that when proposing post-test year additions to
rate base a corresponding revenue and expense adjustment should be
made. United Water has attempted to comply with that directive in
D. Peseau, Re - 7
United Water Idaho Inc.
this case. Neither order, however, advised utilities that an average test
year must be presented.
Have Order Numbers 29505 and 29602 created some level of
uncertainty among companies regulated by the Idaho Commission.
I believe so. Neither Order identified the calculations used to produce
the proxy adjustment and the IPCo Order indicated that the proxy was
not intended as precedent for use in future cases.
Are the Idaho Power and Avista cases distinguishable in other ways?
Yes. In each case the utility, as part of its initial Application, proposed
use of an average test year, which was, with some modifications
accepted without dispute in each case. In both cases the question of
average versus year-end test year was not a debated issue. Neither
case reflects a conscious policy decision to require an average test year
in all cases for all utilities.
Are there examples of instances in which the Commission has
simultaneously used an average rate base for some companies and a
year-end rate base for others, depending on the circumstances of each
company?
Yes. In Case BOI-93-, filed in December of 1993 and decided in
August of 1994, the Commission employed a year-end test year for
Boise Water. At about the same time the Commission in Case No.
IPC-94-5 (filed in June of 1994, decided in February of 1995)
employed an average rate base for Idaho Power Company.
D. Peseau , Re - 8
United Water Idaho Inc.
Do you agree that requiring United Water to use a thirteen-month
average rate base in setting rates would place the Company in a
position consistent with Idaho Power and A vista?
No. First let me acknowledge that in some if not many circumstances
normalizing and annualizing accounting adjustments can be made that
make the thirteen-month average rate base and year-end rate base
nearly financially equivalent. But such is not the case for United
Water.
Why?
The key determinants of whether use of a thirteen-month average rate
base and a year-end rate base will produce rates that generate revenues
sufficient to keep the utility financially whole for the first year or so
after those rates go in effect are 1) capital intensity and 2) growth in
rate base per customer.
That is, once rates are set in these proceedings , for
example, if each new customer added to the system requires greater
(less) than the average investment per customer then rates charged
each new customer will cause a return shortfall (excess) on average
investment. In the 1990s , many electric utilities , including Idaho
Power, were able to freeze and even reduce existing rates despite
significant annual rates of customer and rate base growth, with no
adverse financial consequences. In fact, some utilities were able
earn returns in excess of allowed returns and agreed to share these
D. Peseau, Re - 9
United Water Idaho Inc.
excess returns with ratepayers. The reason that this was possible was
because new customers were able to be served with incremental
investment or rate base of less than system average rate base per
customer. At fixed rates therefore, these new customers cost less than
system average rate base cost to serve and provide higher than average
revenue margins than set in the prior rate case.
In such cases where the rate base additions to serve a
growing customer base is below or equal to average cost, the
application of either a thirteen month average or year-end rate base
should be nearly financially equivalent. But for capital intensive
utilities that incur above average rate base costs to serve new
customers , the thirteen-month average rate base is far less likely to
produce rates that generate revenues necessary to produce the allowed
returns. This is true simply because a thirteen-month rate base is not
as current or "forward-looking" as the year-end rate base adjusted for
rate base additions.
Under what such capital intensive and growth category does United
Water service fall?
The Company definitely qualifies as a capital intensive utility that
must make higher than average cost incremental rate base additions to
meet its growing load.
The technical term is that the marginal cost to service new customers is less than the average cost to serve,
and existing rates are matched to average, not marginal costs.
D. Peseau , Re -
United Water Idaho Inc.
Do you have evidence that recent customer and usage growth
experienced by the Company has been met with higher than average
rate base costs per customer?
Yes. This is shown in the following table. This table simply
calculates the percentage changes in rate base costs per customer (in
two different ways). As shown, rate base cost per customer has grown
recently by over 20%, while customer or usage growth has been
approximately 2% or less.
Do the high rates of growth in rate base cost per customer reflect the
large cost increment resulting from the Columbia plant addition?
Yes, and Staff has, in my opinion acted responsibly in incorporating
the Columbia plant in rate base for the entire test year. But my point
here is that the recent large rate base additions, and those planned in
the coming years will be at incremental costs higher than rates in
place. Under these circumstances, a forward looking end of period
rate base calculation will do much more to reduce (but will not
eliminate) the Company s earnings attrition than will a thirteen-month
average rate base calculation.
Are there other factual circumstances that United Water faces that
compound this earnings attrition and revenue shortfall?
Yes. Not only is the Company experiencing incremental investment
that is higher than average, it also is adding customers whose revenues
or bills are below system average. I understand that this decrease in
D. Peseau , Re -
United Water Idaho Inc.
revenue per new or growth customer is due largely to a high
percentage of such customers taking service in areas where alternative
sources of irrigation water are available and thus only use United
Water service for domestic purposes. This phenomenon only
accentuates revenue shortfall between rate cases.
United Water Idaho
Change in Rate Base per Billing Unit
Test Year
Ending July Pro Forma
2004 Year Ending Percent
Item Adjusted May 31 , 20005 Change
Rate Base( 1)$113,575,180 $140,148,149 23.40%
Commodity Use (CCF) (2)20,407 679 20,671 823 29%
Rate Base per CCF $5.$6.21.72%
Bills Rendered (3)440,686 450,336 19%
Rate Base Per Bill Rendered $257.$311.20.76%
Source:
(1) Exhibit No., Page 1 of 9. (revised)
(2) Exhibit 6, Schedule 3, Pages 7, 13 and 22.
(3) Exhibit 6, Schedule 3, Pages 9 and 22.
What conclusions do you draw from this?
I conclude that Commission consistency does not and should not
require the same rate base evaluation methods between the electric and
water utilities that it regulates.
In fact, I conclude that consistency, defined as equal
opportunities to earn the allowed rates of return granted, actually
requires maintaining the long-time end of period method used for
D. Peseau , Re - 12
United Water Idaho Inc.
United Water. I am not at all persuaded by Staff's proposal to make
all utilities fit into a thirteen-month average rate base valuation.
Has the Commission in the past relied on analysis similar to yours, as
discussed above?
Yes, in 1993 , when the Commission abandoned use of an average test
year in Order No. 25640 the Commission said:
According to Staff, Boise Water s rate base would be $1,163,281
lower if calculated based on a 13-month average as opposed to
year end. While it might be advantageous to ratepayers to have a
lower rate base, no party challenges Boise Water s proposal to
utilize a year end rate base. Boise Water s customer base and its
investment in plant are both growing rapidly. A year-end
calculation of rate base for a utility experiencing rapid growth is, in
this case, a more accurate reflection of that utility s investment in
plant. In light of the foregoing and the absence of objection, we
find that a year-end calculation of rate base for Boise Water is fair
just and reasonable.
Will the use of Staff's thirteen-month average rate base cause United
Water to suffer rates of return attrition from the very first year rates are
in effect?
Yes.4 This earnings attrition or rate of return shortfall is shown in my
rebuttal Exhibit 17.
What does Exhibit 17 show?
This conclusion is reached even assuming that Staff corrects its revenue mismatch by deducting $752 289
from its normalized revenue estimate.
D. Peseau , Re - 13
United Water Idaho Inc.
Exhibit 17 compares the actual or realized rates of return under Staff's
proposed thirteen month average rate base to the fair or allowed rate of
return that it proposes. The right-most column of the exhibit
summarizes the total rate of return on equity and overall rate of return
that result from Staff's changing from the present year-end method to
the thirteen-month average rate base method. Staff's proposal ensures
an overall rate of return shortfall of 88 basis points , the difference
between the proposed 8.10% overall rate of return and the 7.22% rate
of return that results solely from not including the ending rate base
investment.
Thus, according to this exhibit, Staff's proposal , and the
high marginal cost of serving new customers virtually assures that
United Water will suffer earnings deficiencies from the time that new
rates go into effect.
In your opinion would such an earnings shortfall constitute a denial of
shareholders of an opportunity to earn a fair rate of return
commensurate with investments with commensurate risks?
Yes. In my efforts over the years to estimate fair rates of return for
utilities , I have relied upon the financial interpretations of certain key
court decisions in evaluating the reasonableness of rate making
adjustments. Three key decisions are the Bluefield (Bluefield Water
Works v. Public Servo Comm n, 2672 U.S. (1922)), Hope (Federal Power
Commission V. Hope Natural Gas, 320 U.S. 591 (1944)) and more recent
D. Peseau, Re - 14
United Water Idaho Inc.
Duquesne (Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989))cases
My interpretation has always been that irrespective of the method or
actual estimate for the fair rate of return, a check of reasonableness is
always that the sum of the rate case decisions allow for, or even ensure
the opportunity for the utility to earn the fair rate of return determined
in the case.
In your opinion does Staff's proposed thirteen-month average rate base
method allow United Water the opportunity to earn its allowed return?
, as I have explained, Exhibit 17 shows that Staff's thirteen-month
average rate base causes actual returns to be below the fair or allowed
return. This in my opinion results in a denial of fair earnings and a
confiscation of shareholder property
Turning now to the Staff recommendation to allow in rate base 1/13 of
post test year investment, what is the practical effect of this proposal?
It means, obviously, that the Company is denied a return on up to 92%
of post test year investment in plant that is devoted to public service
during the rate period.
To the extent the proposal is aimed at solving a perceived problem of
mis-matched revenue and expense, does it make sense?
It does not. It cannot conceivably be true that the revenue producing
or expense reducing effects of new investment are of such a magnitude
that 92% of the investment should be disallowed.
D. Peseau, Re - 15
United Water Idaho Inc.
Is the end result of the Staff proposal out of proportion with the end
result of adjustments recently made by the Commission in other cases
to take into account revenue producing, expense reducing effects?
Yes it is. In the recently concluded A vista rate case, the Commission
with some reluctance, employed a variant of a proxy approach
developed in the preceding Idaho Power Company rate case. (See
Order No. 29602, pgs 16-17). This resulted in approximately 12% of
post test year investment being excluded. Without debating the merits
of the adjustment methodology in A vista it is obvious that Staff's
proposal in this case produces an end result totally disproportionate to
the end result believed to be reasonable by the Commission in A vista.
Rate Design and Cost of Service Issues
Are there numerous differences in the cost of service and rate design
issues proposed by you and by Staff witness Sterling?
No. In fact, there is really only one significant difference between the
rate design proposal I offer on behalf of United Water Idaho and that
proposed by Mr. Sterling. That difference is in the level at which to
set the bimonthly customer charge. I propose a bimonthly customer
charge of $19.86 while Mr. Sterling proposes to keep in place the
present bimonthly customer charge of $14.57. I argue this issue
below.
D. Peseau , Re - 16
United Water Idaho Inc.
Is there a significant difference in your cost of service analysis on
seasonal commodity cost differences and the seasonal rate design
proposed by you and Mr. Sterling?
, in fact there is no difference that I can determine. In my direct
testimony, I explained that for the first time we were able in this case
to incorporate an actual seasonal cost of service study to set
parameters for seasonal rate differences. That is, the seasonal rate
design I propose and Mr. Sterling endorses is based on seasonal cost
differences. In this regard Mr. Sterling indicates:
Q. Do you believe that the 25 percent summer/winter rate
differential should be maintained?
A. Yes, I do. By having a commodity rate that is 25 percent
higher in the summer than in the winter, customer are sent a strong
conservation signal that helps to lessen United Water s peak
summertime demands. Furthermore, I agree with United Water
witness Peseau s conclusion from his cost of service study that
there is a substantial difference in commodity costs of service
between the winter and summer.Q. Do you believe that the summer/winter commodity rate
differential should be increased to more than 25 percent?
A. No , I do not ....
(Sterling, Direct, Page 58, Lines 12-25)
I point out the agreement between Staff and Company on the seasonal
rate design issue because both Mr. Sterling and Idaho Rivers United
(IRU) witness Mr. Wojcik go on to discuss possible inverted rate
alternatives to the present seasonal rate design structure. And, while I
strongly believe that, given the initial consumption block design
agreed to between Company and Community Action Partnership
Association of Idaho (CAPAI), and the discussion in rebuttal by Mr.
D. Peseau , Re - 17
United Water Idaho Inc.
Wyatt agreeing to Staff's proposal to move toward monthly billing,
additional rate inversion should be avoided. Additionally, I do not see
the need at this time to follow Mr. Sterling s proposal to begin a
separate docket to review other rate designs until such time as the
present one is evaluated. Any consideration of new, alternative rate
design proposals, perhaps including inverted rates, could be postponed
to a the next general rate case, provided parties express their interests
and undertake discovery early in the process. Inverted rates should not
be attempted in the present proceedings.
Level of Customer Charges
In light of the potential move to a monthly billing cycle, what is your
recommendation with regard to the appropriate level of customer
charges?
I disagree with Mr. Sterling s suggestion that there is any economic
justification for limiting or restraining customer costs to the narrow
definition of "direct costs" of meter reading and billing. The only
other cost categories included in my customer cost of service study are
the direct costs of meters and services. I cannot think of any cost more
directly related to individual customers than those of their own meter
and service line. These two items can serve the individual and only
the individual customer and are the most direct cost imaginable.
Placing these direct and individual customer costs on the
commodity rate in the name of conservation only ensures that these
D. Peseau , Re - 18
United Water Idaho Inc.
fixed costs will not be recovered by the Company between rate cases,
and will be made to be subsidized by customers whose consumption
cannot be shifted (have "inelastic" demand) after subsequent rate cases
attempt to distribute these revenue shortfalls.
What is the problem you see in keeping customer charges far below
actual costs of service?
While I do not favor moving customer charges to full cost of service at
this time, I nevertheless recommend that they be raised to some degree
in every rate case. Absent this, United Water Idaho and the
Commission will be facing significant revenue shortfall and rate equity
problems.
Please explain the revenue shortfall problem.
Both the Staff and IR U discuss keeping customer charges below costs
in order to facilitate conservation. I am absolutely in support of
facilitating any and all conservation that results from rate design based
on costs. This is precisely how so-called "economic efficiency" and
responsible consumption are promoted.
The problem is that collecting the capital costs of physical
fixed customer meters and service lines outside a customer charge by
spreading it as if they were volumetric or commodity costs cannot be
argued to promote economic levels of conservation. This is best done
within the seasonalization of the commodity costs that is contained in
my cost of service study.
D. Peseau , Re - 19
United Water Idaho Inc.
In the context of proper rate design and the recovery of
allowed revenue requirement for United Water
, "
forced" or excessive
levels of conservation do nothing but leave capital costs and therefore
allowed rates of return unrecovered. Taken as a fixed customer
charge, meter and billing costs , both expenses and capital, afford some
level of revenue stability for this extremely capital cost intensive water
utility company.
Has not the Commission recently decided to omit certain fixed costs
from the monthly customer charges of both Idaho Power and Avista?
Yes. However, there is a long history and rationale for this costing
method in the electric utility industry. The proportionately larger
share of variable costs for electric utilities as a percentage of total cost
of service, and the common practice of laying off of some customer-
related costs to the transmission and even generation functions has
allowed for historically lower monthly customer charges.
But for a utility as capital intensive as United Water, the
subsidizing of the cost of dedicated meters and service lines in usage
sensitive commodity rates will lead to revenue shortfalls for Company.
Can the revenue shortfalls caused by a highly subsidized customer
charge be lessened by more frequent rate cases?
Yes. In this instance, however, more frequent rate cases result in the
customer charge subsidy being transferred from United Water
shareholders to other customers. Not only do more frequent rate cases
D. Peseau, Re -
United Water Idaho Inc.
involve higher administrative costs for the Company, the Commission
and others, but are likely to result in more inequitable rates among
customers, over time.
Why does significant under-recovery of customer charges cause
inequities among rates of customers?
The costs of meters and service lines benefit none other than the
specific customer for whom the meter and service is installed. Staff's
limiting of customer charges reflective only of meter reading, billing
and customer accounting results in 65% of customer-specific costs
being shifted to the usage-sensitive commodity rate. Consequently,
those in a position to invest in devices to reduce water consumption
avoid paying their reasonable share of their own meters and service
lines.
Isn t this type of pricing good for conservation?
No. As valuable and socially responsible that the conserving of our
water is, equitable pricing requires that conservation be induced
primarily through rates that reflect costs, in this case commodity costs.
My seasonal commodity rate differentiation accomplishes this.
Further and additional adding on of fixed customer costs to commodity
rates is merely punitive to some degree.
Does the raising of monthly or bimonthly customer charges closer to
actual costs "blunt price signals
D. Peseau , Re - 21
United Water Idaho Inc.
No. All the economic benefits attained through pricing are based on
the theory that rates bring about optimal levels of consumption of a
commodity, water or otherwise, by pricing according to costs. The
seasonal rates I propose are based primarily on seasonal commodity
cost differences and are adequate for inducing conservation.
Do the seasonal commodity rates proposed by you in Exhibit 14
already contain a considerable amount of customer costs not collected
by the $19.86 proposed bimonthly customer charge?
Yes. In my direct testimony and my Exhibit No. 14, Schedule 1 , Page
1 of 2, the implied full cost of service charge would be approximately
$22., which I do not propose.
Would the enactment of monthly rather than bimonthly billing of
customers provide an opportunity to raise the current customer charge?
I believe that it would. Obviously, the commodity portion of a
monthly bill will be approximately one-half of the bimonthly amount.
While the annual amount billed should be same, movement to monthly
billing should make the customer charge more acceptable. The
monthly customer charge under my rate design would be
approximately $9.93.
Please summarize your position on the appropriate level of customer
charge to set in these proceedings.
An increase in the existing customer charge is necessary to maintain
some level of revenue stability for the capital intensive nature of the
D. Peseau, Re - 22
United Water Idaho Inc.
Company s water service. A monthly customer charge of $9., while
significantly below the monthly fixed costs of serving customer, is a
move in the right direction.
Furthermore, this level of customer charge would lessen the
inequities of cross subsidies in rates for customers who do not pay a
fair portion of their specific meter and service line costs.
Alternative Inverted Rates
What is the purpose of your discussing the issue here of an inverted
block rate design?
As I referred to in the introduction, while Staff Witness Sterling agrees
with the level and seasonal design of my proposed rates, he does go on
to indicate that, while not recommending an inverted block rate design
in this case, he offers discussion on same in the event that the
Commission should wish to consider it (Direct, Page 62, Lines 2-11).
Do you believe that an inverted rate design for United Water is
preferable to your proposed seasonal rate design?
No. Before I could endorse an inverted block rate design for United
Water I would need to have the benefit of considerable consumption
elasticity, billing and other information upon which to base inverted
block rates. This information is not available at this time.
Secondly, implementing multi-block inverted rates may
add considerable confusion for customers. I agree with Mr. Sterling
assessment (Direct, Page 58, Lines 2-10) that:
D. Peseau , Re - 23
United Water Idaho Inc.
Any time a new rate design is implemented,
however, there is a period - sometimes a very lengthy one
- during which customers must learn and become aware of
the new rate design. Moreover, even more time is required
for customers to adjust their usage patterns before the
objectives of a new rate design can be achieved. I believe
the decision of whether to implement a new rate design
should be based on an evaluation of whether the advantages
of a new rate design outweigh the tradeoffs.
With study, can new rate designs be adequately evaluated at some
point?
Yes, although the process can be involved. Given the lack of specific
proposals that could be evaluated in these proceeding, and the cost of
administering proceedings on inverted blocks, I recommend that any
such interest be expressed early in the next general rate case.
Do you have comments on the testimony of Mr. Wojcik who testifies
on behalf of Idaho Rivers United?
Only briefly. Mr. Wojcik proposes significant rate design changes
including multiple block inverted rates. However, the justification for
most of the proposals contains no Company or Idaho-specific data.
For the reasons cited by Mr. Sterling and me, these general rate design
suggestions referred to by Mr. Wojcik should be studied thoroughly
for applicability to the Company and its customers before being given
any serious consideration.
D. Peseau , Re -
United Water Idaho Inc.
Do you agree with Mr. Wojcik's suggestion that the initial summer
block be increased by approximately three times the proposed 3CCF
bimonthly quantity? (Wojcik, pg. 7 , lines 16-17)?
No. This proposal is intended to discount usage of water equal to the
average indoor consumption per customer. In my opinion this is an
excessive discount and has no cost or rate design benefit over the
smaller proposed 3 CCF discount. A more prudent policy would be to
begin with the smaller initial block, study customer responses and
assess the acceptability at a later date.
Does the larger initial block proposed by Mr. Wojcik blunt an
appropriate summer price signal?
Yes. This larger initial summer block in effect shields the customer
from facing the consequences of the higher cost summer consumption.
After all , all consumption in the summer contributes to summer peak
and the need for additional supply at higher marginal costs, regardless
of whether the consumption is for inside or outside uses.
Has Company Witness Mr. Wyatt agreed to a higher than 3 CCF initial
minimum block in his rebuttal testimony?
Yes. It is my understanding that in agreeing to transition to a monthly
billing cycle, Mr. Wyatt accepts as a monthly minimum block a 2CCF
quantity. This has the effect of increasing the original bimonthly block
by 33%, from 3 CCF to 4 CCF.
D. Peseau , Re - 25
United Water Idaho Inc.
Mr. Wojcik acknowledged on page 7 , lines 5-6 of his
testimony that the original 3 CCF was slightly higher that average
toilet and shower usage. The 4 CCF initial block would provide a
significantly higher cushion in this initial block.
Do you have any additional comments on the testimony of Mr.
Woj cik?
I have just two comments. One, one Pages 3 and 4 of his testimony,
Mr. Wojcik suggests that higher customer charges may weaken
customers' incentives to conserve because they are unavoidable. This
is true only in a social engineering sense, as the optimal level of
conservation is never attained by adding inappropriate charges to
commodity rates, but rather by properly designing commodity rates.
Two, Mr. Wocjik makes a common, but mistaken
assumption that high-volume water users place the "highest strain on
the water supply system" (Direct, Page 3 , Lines 16-18). This is simply
not true; all water users, whether large or small, who consume during
system peak equally "strain" the system and drive the need for
additional plant and equipment to serve these system peaks. This
usage issue is better understood in terms of usage load factors as in the
electric and natural gas industries. For example, a large, high load
factor user may contribute little to system peak and therefore not be
contributing disproportionately to higher seasonal costs.
Does this conclude your testimony?
D. Peseau , Re - 26
United Water Idaho Inc.
Yes.
D. Peseau , Re - 27
United Water Idaho Inc.
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