20050609Post hearing brief.pdf

ORIGINAL
. .".. "'.
+~tC
. .. .
. Y
t"""n
L...
(2)
Dean 1. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
O. Box 2564-83701
Boise, ID 83702
Tel: [phone]
Fax: [phone]
oe~mcdevitt -miller .com
2mB5 JUrt - ""11 2:
IDAHO PUBLIC
UTILI TIES COMMISSION
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-
POST-HEARING BRIEF
TABLE OF CONTENTS
INTRODUCTION ......................................................................................................................................................
A. THE COMMISSION SHOULD REJECT, FOR THIS CASE, USE OF A THIRTEEN MONTH
AVERAGE RATE BASE..............................................................................................................................
1. Neither Order No. 29505 nor Order No. 29602 requires use of an average rate base for all
utilities. ............................................................................................................................................................ 2
2. United's proposal to match post test year revenue and expense with post test year
investment complies with Commission directives.
............................ ....................... ...... ...............
..... 3
3. Staff's application of a thirteen month methodology creates a significant mis~match
investment with revenues. ..........................................................................................................................
4. The cost characteristics of United Water Idaho justify use of a year~end test year. ............
5. Staff's proposal to include post test year investment at 1 /13 of its actual amount is
arbitrary. ...........................................................................................................................................................
6. Staff's proposal to cut~off allowed investment five months after the test year is arbitrary
and contrary to prior ratemaking practice. ............................................................................................
7. The rates proposed by Staff are unreasonable, unjust and confiscatory and their
enforcement would deprive United of its property in violation of the Constitutions of the
United States and the State of Idaho.
....................................................................................................
B. UNITED WATER'S INVESTMENT IN ITS FINANCIAL ACCOUNTING AND ASSET
MANAGEMENT SYSTEM SHOULD BE ALLOWED IN RATES............................................... 9
1. Staff's complete disallowance of this investment is extreme ...................................................... 9
C. UNITED WATER SHOULD BE ALLOWED TO RECOVER ITS PENSION EXPENSE
DEVELOPED USING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ..............
1. Staff's recommendation is inconsistent with its treatment of post employment benefits
other than pension (0 PEB)
...................................................................................................................... .
2. Staff's Recommendation Is Contrary to the Express Purpose of FAS 87 and of this
Commission to Avoid Expense Volatility
.............. ........................................... ................................... .
3. Staff's Recommendation does not Allow United Water the Opportunity to Achieve its
Authorized Rate of Return .......................................................................................................................
D. STAFF'S RECOMMENDATION TO DENY RECOVERY OF CERTAIN KNOWN AND
MEASURABLE EXPENSE IS NOT BASED ON FACT ..................................................................
E. BUSINESS INSURANCE COSTS SHOUD BE ALLOWED ..................................................................
F. FULL RECOVERY OF ELECTRIC POWER COSTS DEFERRED PURSUANT TO ORDER
NO. 28800 SHOULD BE ALLOWED.
.......... ............. ............ ............... .............. ............ ....... ...............
G. THE COMMISSION SHOULD CONTINUE TO ALLOW FOR THE TAX IMPLICATIONS
ASSOCIATED WITH THE ALLOWANCE FOR FUNDS USED DURING
CONSTRUCTION (AFUDC) ................................................................................................................
H. RATE RECOGNITION OF INCENTIVE PAY SHOULD BE ALLOWED TO CONTINUE......
1. THE CURRENTLY APPROVED CUSTOMER CHARGE IS UNREASONABLY LOW AND
SHOULD BE MOVED CLOSER TO ITS ESTIMATED COST. ....................................................
INTRODUCTION
COMES NOW, United Water Idaho Inc.
, ("
United
" "
United Water " the "Company
and submits the following Post Hearing Brief. Included in this Brief are issues United believes
may benefit from further explanation. There are additional issues which remain disputed but
which, in the Company s opinion, are adequately discussed in the hearing record. The fact that
an issue is not discussed in this Brief should not be construed as acquiescence in any other
party s position.
THE COMMISSION SHOULD REJECT, FOR THIS CASE, USE OF A
THIRTEEN MONTH AVERAGE RATE BASE.
In this case, Staff proposes a dramatic, and crippling, change from past ratemaking practice
with respect to United Water Idaho. In each of United's past four rate cases, rate base was
calculated on a year-end basis with post-test year adjustments for known and measurable plant
additions. (See Case No. BOI-93-, Order No. 25062; Case No. BOI-93-, Order No.
25640; UWI-97-, Order No. 27617 and Case No. UWI-OO-, Order No. 28585). Now
Staff calculates a rate base by averaging the monthly balances from July 31 , 2003 through July
, 2004 for Plant in Service, and Customer Advances and Contributions in Aid of Construction.
Except for investment associated with the Columbia Water Treatment Plant (CWTP), post-test
year investment through December 31 , 2004 is treated as if it occurred in the last month of the
test year. In consequence, that investment is included in rate base at 1/13 of the amount actually
invested. (See Harms, Di. Tr.575-577). Additionally, Staff proposes to cut-off investment
allowed in rate base five months after the end of the test year, with the result that any investment
made after December 31 , 2004 is not recognized in rate base at all. (See Lobb, Di. Tr.790).
Solely due to a change in ratemaking methodology, the Company will have no opportunity
to earn a return on more than Fourteen Million Dollars of investment now providing service to
Post-Hearing Brief-
customers. (See Peseau Reb. Ex. No. 17). For the reasons discussed below, the Commission
should decline Staff s invitation to embark on this sudden, and devastating, detour from
established ratemaking practice for United Water Idaho.
1. Neither Order No. 29505 nor Order No. 29602 requires use of an average rate
base for all utilities.
Staff s apparent rationale for changing to an average test year rests on the assertion that
United's use of a year-end test year in this case is inconsistent with the Commission s recent
decisions in Idaho Power (Case No. IPC-01-13) and Avista (Case No. A VU-04-10) rate cases.
(Lobb, Di Tr.785). In both of those cases, however, the utility in its initial filing proposed use of
an average rate base and the choice between the average and year-end methods was not a
contested issue. Moreover, 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
matching adjustment should be made. As discussed below, United has complied with this
directive. Neither order declared that the average rate base method was the only or necessary
solution to the mismatching problem.
Wisely, the Commission has never, to United's knowledge, pursued a one-size-fits-all policy
with respect to rate base methodology. In fact, there are 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. For example, in Case BO I W -93 - 3
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.
2. United's proposal to match post test year revenue and expense with post test year
investment complies with Commission directives.
In Order No. 29505 (IPCo), the Commission said
, "
Generally speaking, the Commission
expects all utilities to attempt to identify expense saving and revenue producing effects when
proposing rate base adjustments for major plant additions." United complied with this guidance
by adding annualized customer growth revenue at current rates to the Company s base revenues
for all customers anticipated to be added to the entire system from the test year through May 31
2005. (See Wyatt Di. Tr.16; Gradilone Di. Tr. 233; Exhibit No.6). The Company s approach
thereby matches the higher level of end of period May 31 , 2005 revenues with the higher level of
rate base as of the same date. The Company also reflected post test year expense savings (See
Healy Di. Page 79 and Exhibit No., Schedule 1 , Page 16 of34). This method fully addresses
the Commission s concerns expressed in the Idaho Power and Avista cases.
3. Staff s application of a thirteen month methodology creates a significant mis-
match of investment with revenues.
In contrast, Staff s case fails to properly match its proposed thirteen-month and rate base
estimates with corresponding revenues. As demonstrated by Staff Exhibit 126, Staff used the
same level of annualized revenues, those for the period ending May 31 , 2005 , that are contained
in the Company s filing. To be consistent with 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. (Peseau Reb.
Tr.l031). Thus, Staff mismatches rate base on a thirteen-month average basis, with a higher
level of revenues calculated on a forward annualized period ending May 31 , 2005. This flawed
application of the thirteen-month method compels rejection of the Staff proposal.
4. The cost characteristics of United Water Idaho justify use of a year-end test year.
As noted above, the Commission has consistently chosen test year methodologies based
on the characteristics of the individual utility and has not blindly adhered to a single approach.
In 1993 , when the Commission changed from a thirteen-month to year-end method for
United, 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. Order No. 25640.
The same considerations apply just as strongly today. United Water is highly capital intensive
and its growth in rate base cost per customer is at a rate much greater than its customer or usage
growth. This is conclusively shown by the following chart, contained in the rebuttal testimony
of Dr. Peseau:
United Water Idaho
Change in Rate Base per Billing Unit
Test Year Pro Forma
Ending July Year Ending
2004 May 31 Percent
Item Adjusted 20005 Change
Rate Base( 1)$113 575 180 $140 652 083 23.84%
Commodity Use (CCF) (2)407 679 671 823 29%
Rate Base per CCF $5.$6.21.75%
Bills Rendered (3)440 686 450 336 2.19%
Rate Base Per Bill Rendered $257.$311.02 20.68%
(Tr. 1037).
As shown, rate base cost per customer has grown recently by over 20%, while customer or usage
growth has been approximately 2% or less. The circumstance is compounded by the fact that the
Company is adding customers whose revenues or bills are below system average, due largely to a
high percentage of customers taking service in areas where alternative sources of irrigation water
are available.
These conditions-rapid growth in rate base per customer compared to usage growth
coupled with declining incremental revenue per customer-lead clearly to the conclusion that
under the Commission s own decision criteria, the year-end method is more appropriate for
United Water.
5. Staffs proposal to include post test year investment at 1 /13 of its actual amount
is arbitrary
Under Staffs proposal, except for the Columbia Water Treatment Plant projects, post-test
year plant additions through December 31 , 2004 are treated as if they occurred in the last month
of the test year or as of July 31 , 2005. As a result, those investments are included in rate base at
1/13 of their actual amount. (See Harms Di. Tr.575). It is undisputed that the water plant
investments made through December 31 , 2004 are currently in service and providing benefits to
customers. Yet, 92% of that investment is, according to Staff s proposal, disallowed in rates.
The Idaho Supreme Court has recognized that the utility is entitled to have included in
rates post-test year plant additions that meet the "known and measurable" test, which the
investments in this case undisputedly do. In Utah Power Idaho Public Utilities Commission
102 Idaho 282, 629 P .2d 678 (1981) the court said:
Test year data should be adjusted for known and measurable changes where the
changes are shown to be reliable and certain. E.
g.,
Citizens Utility Co. v. Idaho
Public Utilities Comm n, 99 Idaho 164, 579 P.2d 110 (1978); Agricultural
Products v. Utah Power Light Co., 98 Idaho 23 , 557 P.2d 617 (1976). The
Commission should include in the rate base all items which are proven with
reasonable certainty to be justifiably used by the utility in providing services to its
customers. Citizens Utility Co. v. Idaho Public Utilities Comm , supra. 102
Idaho at 284.
Staff does not advance any cogent rationale for departing from or creating an exception to
the Utah Power rule that "all items which are proven with reasonable certainty" should be
included in rate base. To the extent the proposal is aimed at solving a perceived problem of mis-
matched revenue and expense, 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.
The end result of the Staff proposal is completely 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. 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, Pages 16-17). This resulted in
approximately 12% of post test year investment being excluded as opposed to almost 92%
proposed by Staff in this case.
6. Staffs proposal to cut-off allowed investment five months after the test year is
arbitrary and contrary to prior ratemaking practice
In each of United's past four rate cases, the Commission has permitted capital additions
up to the time of hearing, subject to the requirement that the additions be known and measurable
and not merely budget estimates. (See Case No. BOI-93-, Order No. 25062; Case No. BOI-
93-, Order No. 25640; UWI-97-, Order No. 27617 and Case No. UWI-OO-, Order
No. 28585). In this case Staffproposes a new, arbitrary, cut-off date of five months after the test
year end. The effect of the Staff proposal is to produce a rate base that does not accurately
reflect the Company s actual investments.
The Idaho Supreme Court has explained the reason for the rule requiring inclusion of all
investments which meet the known and measurable test. In Citizens Utilities v. Idaho Public
Utilities Commission 99 Idaho 165, 579 P.2d 110 (1978), the court reversed the Commission
refusal to allow in rate base the cost of a billing machine placed in service after the test year.
The court explained:
This Court has stated before that test year data should be adjusted for anticipated and
known changes where the changes are shown to be reliable and certain. Agricultural
Prod. v. Utah Power and Light Co., 98 Idaho 23 , 557 P.2d 617 (1976). There was no
reason to exclude the cost of the billing machine from the rate base. Citizens introduced
sufficient evidence to establish that the 1975 test year data which did not include the cost
of the billing machine did not accurately reflect Citizens' capital investments. Citizens
also introduced sufficient evidence to establish the cost of the billing machine. The
Commission should include in the rate base all items which are proven with reasonable
certainty to be justifiably used in providing services. There are two good reasons for
including these items in the rate base; first, to avoid a rate base which does not
adequately demonstrate real revenue needs and second, to reduce the necessity of a future
application to adjust the rate base to represent additional investments. The decision of the
Commission on this particular item is error. The cost of the billing machine should have
been included in the rate base.
While Staff audit review of post test year investments is appropriate, an arbitrary cut-off date
after which investments that are known and measurable will not be considered deprives the
utility of its legal entitlement to have those items included in rate base.
7. The rates proposed by Staff are unreasonable. unjust and confiscatory and their
enforcement would deprive United of its property in violation of the Constitutions
of the United States and the State of Idaho.
The Company and Staff have stipulated that a reasonable rate of return on invested
capital is 8.357%. (See Staff Exhibit No. 131). Yet, it is a mathematical certainty that the rates
resulting from the thirteen-month average rate base methodology will be insufficient to allow the
Company the opportunity to earn that allowed return. This is demonstrated by Company Exhibit
No. 17 which shows clearly that the net operating income resulting from rates proposed by Staff
will only produce a return of 7.22% on capital actually invested at the start of the new rate
period, a rate of return shortfall of 116 basis points.
In Idaho Power Co. v. Idaho Public Utilities Commission 99 Idaho 374, 582 P.2d 720
(1978), the court held that rates which will not produce the rate of return found to be reasonable
are illegal. There, the Commission found a fair rate of return to be 8.23%. The Commission
however, made an incorrect adjustment to the company s interstate sales for resale that had the
effect of producing an actual return of 8.09%. The court vacated the Commission s Order saying:
To deduct these sales for resale twice produces a rate of return of only 8.
percent and is less than the rate of return found by the IPUC to be fair, just and
reasonable. Orders based on findings by the IPUC that are not supported by the
evidence must be set aside on appeal. We recognize that the Public Utilities
Commission is fact finding and administrative body, exercising great
discretionary powers, and that this court's review of its orders is limited. Const.
Art. 5 , ~ 9; ~ 61-629, I.C.State ex rel. Taylor v. Union Pac. R. Co., 60 Idaho 185
89 P.2d 1005; In re Mountain States Tel. Tel. Co., 76 Idaho 474, 284 P.2d 681.
However, embraced within that review and within the determination of the
question as to whether it has regularly pursued its authority, the findings of the
commission must be based upon substantial evidence; its findings not thus
supported, or which are contrary to the evidence, cannot be accepted by the court
as a basis for upholding the conclusions of the commission. Const. Art. 2, ~ 1;
Idaho Power Light Co. v. Blomquist 26 Idaho 222, 141 P. 1083; Nez Perce
Roller Mills of Lewiston v. Public Utilities Comm.54 Idaho 696, 34 P.2d 972;
Mountain View Rural Tel. Co. v. Interstate Tel. Co.55 Idaho 514, 46 P.2d 723;
State ex rei. Taylor v. Union Pac. R. Co., 60 Idaho 185 89 P.2d 1005; Application
of Nichols, 68 Idaho 490, 199 P.2d 255; Application of Lewiston Grain Growers
69 Idaho 374, 207 P.2d 1028; Application of Pacific Tel. Tel. Co., 71 Idaho
476 233 P.2d 1024. 99 Idaho at 381.
Moreover, rates which will not produce a reasonable return on invested capital are confiscatory
in the constitutional sense. The Idaho Supreme Court recognized this in Intermountain Gas
Idaho Public Utilities Commission 97 Idaho 113, 540 P.2d 775 (1975), where quoting from the
Bluefield case, it said:
1 The values in Exhibit 17 would be slightly, but not materially, different based on Staffs final positions at hearing.
Rates which are not sufficient to yield a reasonable return on the value of the
property used at the time it is being used to render the service are unjust
unreasonable and confiscatory, and their enforcement deprives the public utility
company of its property in violation of the Fourteenth Amendment. This is so
well settled by numerous decisions of this court that citation of the cases is
scarcely necessary: . . ." 262 U.S. at 690, 43 S.Ct. at 678.
In this case, not only is the actual return of 7.22% far below the stipulated reasonable return, it is
below the 7.75% which Staff identified as the lower boundary of a reasonable range of cost of
capital for United Water. (See Carlock Di. Tr. 840).
Acceptance of Staff s thirteen-month proposal would lead the Commission into clear
legal error.
UNITED WATER'S INVESTMENT IN ITS FINANCIAL ACCOUNTING
AND ASSET MANAGEMENT SYSTEM SHOULD BE ALLOWED IN RATES.
In October 2004 United Water upgraded its accounting system since the version in use by
the Company was outdated and no longer supported by the vendor. The new asset is in service
and has been providing service since October 2004 as acknowledged by Staff (Harms Di. Tr.
582) Harms stated that the allocation of the cost to United Water Idaho was explained, the
system was in service, the Capital Expenditure Authorization for the project was reviewed and
the amount was included in the capital addition Exhibit No.8 of Company Witness Rhead and
made no disallowance in its filed case. Witness Harms made a correction during the evidentiary
hearing changing Staff s position and disallowing the investment merely because Staff wasn
able to precisely substantiate the allocation method used by the Company to determine the
amount of the investment included in the Company s rate base. (Harms Cross Tr. 585)
Staff s complete disallowance of this investment is extreme
The traditional grounds for disallowance of rate base investment are that the plant is not
used and useful in providing service (See Idaho Code ~ 61-502A - Restriction on Rates
Authorizing Return on Property not Providing Utility Service) or that utility management was
imprudent in selecting between least costly resource acquisition options. Staff s disallowance is
not based on either of these traditional rationales. Rather, Staff appears to be proposing
disallowance as punishment for a failure to provide information relating to the allocation of cost
in a timely manner. The type of missing information surrounding the allocation of the cost of the
system to United Water Idaho from its parent has been the subject of a detailed Staff audit in the
Company s previous rate case (UWI-OO-l). In that proceeding Staff reviewed all
Management & Service Company allocation methods, all of the allocation factors, the basis of
the allocations and each component of all allocated charges from the parent and concluded that
" . . . 00 reviewed numerous transactions and found no evidence of any inappropriate charges being
flowed through to United Water Idaho." (Smith Di, Tr. p. 671) Further, Mr. Smith described the
audit as "more in detail than ever before." (Smith Cross p. 692). Since that time there has been
no change to any of the methods or the basis of allocation reviewed in Staffs last audit, and in
particular as related to the allocation of the new IT system from the parent to United Water
Idaho, and therefore the Staff s argument for the disallowance on that stated basis is unsupported
and provides no reason to believe that further investigation would likely lead to any different
result. In addition, the appropriate allocation information was provided by the Company as
Exhibit No. 15, Schedule 12 at hearings.
UNITED WATER SHOULD BE ALLOWED TO RECOVER ITS PENSION
EXPENSE DEVELOPED USING GENERALLY ACCEPTED ACCOUNTING
PRIN CIPLES.
As with a number of issues in this case, Staff has proposed a significant change from past
ratemaking practice for United Water and in this instance the proposal is contrary to Generally
Accepted Accounting Principles (GAAP) as well. Staff recommends that the long standing and
universally accepted method of developing a company s pension liability be abandoned due to
the size of United Water s current rate request and because no cash contribution is required by
the Company in the current year.
Financial Accounting Standard 87, (F AS 87) is a stable accounting measure which has
been in effect for over 20 years in the U.S. and has served to provide a consistent method of
computing an annual expense amount. The annual expense amount was defined to reflect
accrual accounting for pension plans, making sure that the cost of pension benefits are expensed
during the time earned - supporting a matching principle under GAAP as well as this
Commission s expressed preference for the guiding principle of matching revenue with
expenses. F AS 87 establishes accurate accrual accounting which produces equitable results for
generations of customers and employees, and also offers a consistent stable methodology with
little discretion from a company on how it is determined. This long standing and accepted
method prescribes that while an employee is actively working and delivering services to the
company and customers, any deferred compensation must be recognized against company books
during active employment. Waiting to recognize benefits promised - and earned - until
retirement is a clear mismatch of expense and revenue.
Since 1989 the Company has adopted Financial Accounting Standards Board No. 87
(F AS-87) for the recording of its pension costs. At least since the merger of General
Waterworks and United Water Resources, this Commission has accepted this method of
accounting for ratemaking since United Water s 1996 rate case and has authorized rate recovery
of the associated expense in all rate proceedings since then. Without this matching, the
Company is not properly recording the future liability it must pay to its retirees in the future.
the Company were to have an underfunded pension asset and was unable to pay future benefits
the then current customers would be funding the shortage for those employees that provided
service in a prior period.
Staff s recommendation is inconsistent with its treatment of post employment
benefits other than pension (OPEB)
Similar to F AS 87, there is a matching standard for the accounting for OPEB costs
promulgated by the Financial Accounting Standards Board as F AS 106. This standard mirrors
the accounting treatment and requirements of F AS 87 and employs the same matching principle
of identifying and accruing the current expense with the service provided and revenue
recognition. In this case the Staff has not recommended that the Commission depart from past
ratemaking practice as it relates to OPEB rate recovery as it has with pension. There is no
explanation expressed by Staff for this inconsistency in treating similar accounting and
ratemaking issues, other than the magnitude of the rate increase.
Staff s Recommendation Is Contrary to the Express Purpose of F AS 87 and of
this Commission to Avoid Expense Volatility
Staffs recommended approach would have United Water contribute to its pension plan
only when ERISA mandates a contribution, with expense recovery only when that contribution is
required. ERISA Minimum Funding contributions are expected to dramatically increase given
the funded status of United Water s Plan. When plans fail to retain a satisfactory funded
position, the ERISA Minimum contribution adds a Deficit Reduction Contribution which
accelerates contributions and requires an employer to make cash contributions to payoff the
unfunded obligations. (Degann, Re Tr. 761) The estimated contribution that will have to be
made by United Water Idaho in the coming year is expected to be approximately $1.8 million.
(Degann, Cross Tr. 733) This method is volatile, inconsistent, and contrary to GAAP accounting
and past Commission practice.
Staff s Recommendation does not Allow United Water the Opportunity to
Achieve its Authorized Rate of Return.
In accordance with Generally Accepted Accounting Principles (GAAP) the Company
must record the pension liability on its books and records as developed by its actuary. Without
matching rate recognition there is a mismatch of revenues and expenses leaving the Company
with lower than authorized earnings. This underperformance impacts the view of the Company
from bondholders and bond rating agencies and may result in a poor credit rating that ultimately
leads to higher debt costs that will be paid by customers through higher rates.
STAFF'S RECOMMENDATION TO DENY RECOVERY OF CERTAIN
KNOWN AND MEASURABLE EXPENSE IS NOT BASED ON FACT
Staff has recommended that United Water s expense associated with its information
technology initiatives as they relate to the Finance and Accounting system be disallowed on their
belief that the expenses are nonrecurring and not supported by contracts. The contracts
supporting the costs clearly provide the basis of the costs and demonstrate that the amounts are
indeed recurring expense amounts and not one time charges. Staff wrongly assumes that since
the upgrade of the Accounting and Finance system is not something that occurs every year, then
it follows that the associated expenses are nonrecurring as well. This misinformed judgment
denies United Water recovery of known and measurable expenses that it will incur annually and
to which it is contractually bound. While the contracts were provided to Staff during the hearing,
the explanation of what the charges represented were provided during discovery where Staff had
sufficient time for analysis and follow up if necessary. (Response to Production Req. No. 175)
The provision or lack of provision of the contracts does not support the incorrect assumption by
Staff that the costs are nonrecurring.
BUSINESS INSURANCE COSTS SHOUD BE ALLOWED
In this case, Staff recommends disallowance of on-going business insurance costs on the
basis that the costs are not supported by policies and the assumption that the costs are only
estimates and therefore not known and measurable. This assumption is based on an uninformed
judgment with no acknowledgement of previously supplied insurance policy support provided to
the Staff during their audit in response to Staff Audit Request 50. A summary of this
information was provided during the hearing (Healy, Re. Tr. 895) where Staff was critical of not
having an opportunity to review. However, the Staff had more than ample time to review the
supporting detail when provided during the audit. The submission of this material in summary
form as a reminder that the information was clearly known and measurable should not be
grounds for disallowance of these known and measurable costs that will be incurred by United
Water.
FULL RECOVERY OF ELECTRIC POWER COSTS DEFERRED
PURSUANT TO ORDER NO. 28800 SHOULD BE ALLOWED.
In Case No. UWI-01-2 the Commission entered Order No. 28800, which authorized
the Company to establish a deferral account for purchased power costs associated with Idaho
Power Company s purchased power adjustment clause (PCA). In reliance on Order No. 28800
the Company has deferred $1 469 292 (through June 2005) and now seeks to amortize that
amount over a three-year period. Staff recommends that the deferral be reduced to $1 034, 098
an amount Staff claims represents "market crisis" costs, leaving un-recovered $435 194, which
Staff characterizes as "poor water conditions" costs.
Staffs theory for disallowance is that the "
...
deferral was intended only to provide
temporary relief from the extremely high power costs resulting from the short-term Western
energy crisis." (Sterling Di. Tr. 641).
There is, however, nothing in the plain language of the Order that supports the limitation
suggested by Staff. The Order recites that the Company requested a deferral of PCA costs
ordered by the Commission in Cases IPC- E-O 1- 7 and IPC- E-O 1-11 and any subsequent related
surcharge that may be authorized prior to the Company s next general rate case." The ordering
language provides
, "
oo.the Commission does hereby approve establishment of a deferral account
for incremental costs related to recent and future PCA related increases..." (Emphasis added).
The plain meaning of prior orders cannot be ignored or changed by subsequent orders. In
the recent case of Idaho Power Company v. Idaho Public Utilities Commission Idaho
04.8 ISCR 270 (2004) the Commission entered an order providing that IPCo direct costs and lost
revenue impacts "may" be treated as a purchased power expense in the PCA. Later, the
Commission entered a subsequent Order denying recovery of lost revenue impacts. On appeal
the court held that the plain and reasonable meaning of the word "may" connoted permissibility
and the Commission could not re-interpret its first Order to deny what it had already granted.
The same should hold true here. Staff is attempting to re-interpret Order No. 28800 by
inserting a hidden condition that is not apparent from the plain and reasonable meaning of the
Order.
Staffs proposal is also unfair. It is undisputed that the amounts recorded in the deferral
account are correctly computed from an accounting point of view and it is undisputed that United
actually incurred the costs reflected thereby in providing service to its customers. In good faith
reliance on the plain language of Order No. 28800 the Company deferred correctly calculated
amounts with the legitimate expectation that amortization would be permitted. (Healy Reb. Tr.
884).
The Company and Staff also disagree regarding the length of the amortization period.
The Company proposes a three year recovery; Staff recommends a four year amortization.
While selection of a reasonable amortization period is, admittedly, a matter of judgment for the
Commission, a balancing of the relevant considerations weighs in favor of a three year recovery.
A three year recovery more closely matches the average interval between rate cases-United has
filed five cases in the last twelve years or an average of 2.4 years between cases. Further, a three
year recovery would not materially burden ratepayers while permitting retirement of the deferred
balance from the Company s books within a reasonable length of time.
Finally, fairness to the Company requires that during the amortization period-at
whatever length the Commission selects-the unamortized balance should be included in rate
base.
THE COMMISSION SHOULD CONTINUE TO ALLOW FOR THE TAX
IMPLICATIONS ASSOCIATED WITH THE ALLOWANCE FOR FUNDS
USED DURING CONSTRUCTION (AFUDC)
Staff claims the Company s calculation of its AFUDC rate applied to construction work
in progress is incorrect because the equity portion of the rate includes a gross-up factor for
federal income taxes and Staff recommends that the Commission disregard the GAAP, NARUC
and F ASB accepted practice of adding a tax gross-up to the AFUDC component of construction
projects. Staff logic is flawed since Staff recognizes the need and requirement outlined in F AS-
109 but then disregards the recognition and determines that the gross-up overstates the asset
value and ultimately rate base. (Stockton, Di. Tr. 537)
Clear authority and guidance exists for this application and resides in the National
Association of Regulatory Utility Commissioners (NARUC) chart of accounts and in the
Financial Accounting Standards Board Statements (F AS) 71 (Accounting for Certain Types of
Regulation) and 109 (Accounting for Income Taxes). Specifically, FAS-109 requires:
recognition of a deferred tax liability for the tax benefits that flow through to customers when
temporary differences originate and for the equity component of the allowance for funds used
during construction
This Commission has recognized the correct application of the gross-up in a
Washington Water Power case, U-1008-209 where the parties disputed the proper amount of
AFUDC to be allowed. When the Commission resolved the dispute it recognized that the amount
needed to be grossed up for taxes. (Healy Reb. Tr. 906). The Company s practice is no different
here and in accordance with all applicable accounting and regulatory practices.
In the Company s rebuttal testimony of Witness Healy, the Company presented Exhibit
, Schedule 10, which demonstrated that utilizing the Staffs recommendation, the Company
would be denied an opportunity to earn its authorized return. Additionally, this exhibit
demonstrated that by including the gross-up not only was the Company able to achieve its
authorized return, but also it did not produce any benefit to the Company at the cost of the
customer. In fact, there is no adverse impact on the customer.
RATE RECOGNITION OF INCENTIVE PAY SHOULD BE ALLOWED TO
CONTINUE
The Company included in its direct case $133 462 of "incentive pay" or "pay at risk"
(See Healy, Di., Exhibit No., Schedule 1 , Page 1 of34, lines 10-12) . The $133,462 is, as
named on the Exhibit, composed of three different incentive pay programs: the Management
Incentive Payor STIP (Short Term Incentive Plan), $74 775 , the Non-Union Incentive Pay,
$44 287 and the Union Incentive Pay, $14 400. Every employee in the Company is eligible for
incentive pay under one of these programs.
Notwithstanding the fact that similar expenses have been recognized in all recent United
Water rate cases, Staff now recommends disallowance. Staff has asserted that incentive pay is
variable and therefore not known and measurable. Additionally, Staff opines that the goals are
aligned with the financial performance of the parent company and finally that the incentive
compensates the employee for doing their job. (English Di. Tr. 442). In fact, only 30 % of each
participant's goals are concerned with financial performance of United Water Idaho (Healy Re.
Tr.873) Furthermore, a goal associated with achieving a level of financial success cannot be
dismissed as unrelated to customer benefit. Goals that achieve financial targets benefit
customers through enabling the Company to earn its return, which in itself yields multiple
benefits, including the Company s ability to contribute toward strong bond ratings thus providing
a lower cost of debt; a decreased frequency of rate increases and; more opportunity to manage
earnings and have a greater availability of capital.
The purpose of the Company s incentive pay programs is to put a portion of pay at risk
to challenge employees to achieve stretch goals, which go beyond their defined job. Since the
incentive pay is excluded from the employee s base pay, there is a savings to customers through
reduced benefit cost that is typically tied to base pay. The prevalence in compensation is to shift
to a "total cash compensation policy , with less emphasis on base pay and more emphasis on
variable pay. United Water has shifted its compensation philosophy from paying at the 75th
percentile of the market place for base pay in year 2000 to paying at the market median.
According to Investor Owned Water Utility Survey of2004, an average of 81.3% of the
positions surveyed which represent like positions to United Water participate in Short Term
Incentive Programs. The level of incentive pay in question in this case is less than 3% of United
Water Idaho s $4.5 million payroll expense.
Staff also asserts that one of the reasons for disallowing recovery of this expense is that
the amount is not known and measurable. When rates are set in any rate proceeding all best
efforts are made to identify any clearly known and measurable amounts and to fairly represent
other items that while reasonably known and measurable may consist of absolute known
occurrences with a potential for variation. In the latter, a normalized amount is developed to
represent this circumstance. In this case as in all prior cases, United Water Idaho has normalized
this incentive pay amount and should be allowed to recover these costs that it will actually incur.
Lack of rate recognition of the Company s actual expenses will not permit the Company the
opportunity to earn its allowed rate of return.
The issue of United's incentive pay program is not new to the Commission. In the
Company s 1996 rate case the Staff challenged payments made under a nearly identical program.
In Order No. 26671 , the Commission rejected Staffs position:
We find that the Company should be permitted to recover its Management Incentive Plan
payments. We find it reasonable that a portion of an employee s base pay be linked to
performance. We further find that other changes in the employee expense were allowed
in this case and these amounts do not appear unreasonable in light of the total salaries
paid. Employee compensation is a matter for Company management to determine. The
fact that a portion of some employees' salaries were put at risk based on job performance
is a legitimate management tool. These amounts would never have been questioned if
total salaries had merely been included without reference to the MIP. (Order No. 26671
page 8).
THE CURRENTLY APPROVED CUSTOMER CHARGE IS
UNREASONABLY LOW AND SHOULD BE MOVED CLOSER TO ITS
ESTIMATED COST.
As required by IPUCRP 121 , the Company s Application in this case was accompanied
by a cost of service study (COSS) that was prepared by Utility Resources Inc. In contrast to
previous cases Staff was not critical of the study and apparently accepts its results as reasonable
recognizing that any cost of service study contains elements of informed judgment. (See
generally, Sterling Di.
The cost of service study estimates that customer charges would need to be increased by
51 % to achieve full cost of service, but the Company does not recommend such a dramatic
move. Rather, based on its initial filing, the Company s consultant, Dr. Peseau recommended a
36% increase, representing an amount half-way between the overall recommended increase
(approximately 22%) and full cost of service. (Peseau Di. Tr. 265).
While cost of service is not the sole measure of a fair rate
, "
It is an important criterion
and in a given case may even be largely dispositive...Grindstone Butte v. Idaho Public
Utilities Commission, 102 Idaho 175, 180, 627 P.2d 804 (1981). At a minimum, it is a starting
point after which other factors such as rate continuity, equity and proportionally can be taken
into account. (See Order No. 29505, Page 45, Case No. IPC-03-13).
A rate structure in which the fixed, non-variable costs of meters and services are
recovered through the variable, volumetric rate creates at least two problems. The first is the risk
to the utility of under-recovery of fixed costs and revenue instability. For United Water this
problem is real. Dr. Peseau calculated that 65% of the cost of meters and services is currently
recovered in the volumetric charge (Peseau Di. Tr. 1046). And, the cost of meters and
services-approximately $6 million-is a large proportion of the Company s total fixed costs of
approximately $11 million. (See Exhibit No. 14, Sch. 1 page 1). Attempting to recover such a
large portion of fixed costs in the variable rate creates a very real risk of under-recovery and the
need for more frequent rate cases. As Dr. Peseau explained:
Placing these direct and individual customer costs on the commodity rate in
the name of conservation only ensures that these 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. (Tr. 1043-1044)
Staff did not contend otherwise:
Q. (Mr. Miller) Well, if the volumetric rate is essentially subsidizing the
costs of meters and services, there s a possibility that revenue recovery in
the volumetric rate will be insufficient to cover the cost of meters and
services, obviously?
A. (Mr. Sterling) Well, I think that only happens though if new customers
use less water than existing customers, and I think there is some evidence
of that for United Water. So that's why I agree that it could happen and
probably will happen to some extent. (Tr.682-683)
In short, the paradox of the current rate structure is that the more customers conserve on
consumption (or use dual irrigation) the more fixed costs go un-recovered leading to more
pressure for frequent rate increases-the exact result conservation is intended to avoid.
The second problem is, contrary to what some parties asserted, the current relationship
between the customer charge and the volumetric charges sends an inaccurate conservation signal.
As Dr. Peseau explained:
Staff did not disagree:
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.
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. (Tr. 1044-1045)
(Mr. Miller) Right. And to the extent people believe that keeping the
customer charge low has a beneficial conservation effect, isn t it true that
any subsidized rate structure has incorrect price signals from an economic
point of view?
(Mr. Sterling) Yes, that's true.
(Mr. Miller) In a perfect world, if you wanted to send the right
conservation signal, you would adjust the volumetric charge and collect
the fixed charge through a fixed cost because that would be the more
precise conservation price signal, would it not, in a perfect world?
(Mr. Sterling) Yes, probably in a perfect world, yeah. If we -- you know
if we were to set the customer charge at what cost of service would
support, it would probably be even quite a bit higher than what Dr. Peseau
has recommended. (Tr.683)
As acknowledged above, cost is not the sole criteria in rate setting; other factors may
legitimately be considered. But, as the Commission has recognized, rates over time should at
least move in the direction of cost of service. (See Order No. 29505). Because the current
relationship between United's customer charge and volumetric charge is so out of balance from a
cost perspective, now is the appropriate time to take steps in the right direction to increase the
customer charge.
DATED this .3..- day of June, 2005.
Respectfully Submitted
D WATER IDAHO INC.
By:
Dean J. ller
Attorney for Applicant
CERTIFICATE OF SERVICE
I hereby certify that on th y of June, 2005, I caused to be served , a true and correct copy of the foregoing
document, by the method(s) indicated below, upon:
Brad M. Purdy
Attorney for the Community Action Partnership
Association of Idaho
2019 North 17th Street
Boise, Idaho 83702
Fax: [phone]
bm urd hotmai1.com
William M. Eddie
Advocates for the West
O. Box 1612-83701
1320 West Franklin Street
Boise, Idaho 83702
Fax: [phone]
Bill Sedivy
Idaho Rivers United
O. Box 633
Boise, Idaho 83701
Fax: [phone]
iru~ idJ!..h ori vers. org
Sharon Ullman
9627 West Desert Avenue
Boise, Idaho 83709
Fax: [phone]
~haronu~cableone.net
Chuck Mickelson
Boise City Public Works
O. Box 500-83701
150 North Capitol Boulevard
Boise, Idaho 83702
Fax: [phone]
~son~cityotboise.org
Douglas K. Strickling
Boise City Attorney s Office
O. Box 500-83701
150 North Capitol Boulevard
Boise, Idaho 83702
Fax: [phone]
~ing~cityotboise.org
Scott L. Campbell
Moffatt Thomas
101 South Capitol Blvd., 10th Floor
O. Box 829-83701-0829
Boise, Idaho 83702
ax: 20 .385.538
~m -
"/.-.. ; . /
~A. .' s.~
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Hand Delivered
S. Mail
Fax
Fed. Express
Email