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HomeMy WebLinkAbout20050406Harms direct.pdf"'"')'=. \ Ir i- Lt' \ 'l -- - ..- (3) BEFORE THE \t_ . t """"', .? . ..utjJ "'. IO'- fiF %"" - G , . -;1)13 p' IDAHO PUBLIC UTiliTIES COMMISSI ~\' ; 1 d cdt.~:~SIOH\. ilL! \ \..- 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-04- DIRECT TESTIMONY OF PATRICIA HARMS IDAHO PUBLIC UTiliTIES COMMISSION APRil 6 , 2005 Please state your name and address for the record. My name is Patricia Harms.My business address 1S 472 West Washington Street, Boise, Idaho. By whom are you employed and in what capaci ty? I am employed by the Idaho Public Utilities Commission (Commission) as a Senior Auditor. Give a brief description of your educational background and exper1ence. I graduated from Boise State Uni versi ty, Boise, Idaho in 1981 with a B.A. degree in Business Administration, emphasis in Accounting.I am a Certified Public Accountant licensed by the State of Idaho.Prior to joining the Commission Staff in 2000, I was employed by the State of Alaska as an In Charge Auditor and performed both financial and performance audits of governmental agencies.I have attended many seminars and classes involving audi ting and accounting.While at the Commission I have audited a number of utilities including water , electric, gas and telephone utilities and provided comments and testimony in a number of cases that deal wi th general rates, hook-up fees, accounting issues, and other regulatory issues.I have al so completed the National Association of Regulatory Utility Commissioners (NARUC) annual regulatory studies program at Michigan CASE NO. UWI-04-04/06/05 HARMS, P. STAFF (Di) State Uni versi ty.I also attend meetings of NARUC' Staff Subcommittee on Accounting and Finance.I am a member of the State/Federal Joint Oversight team for the Qwest 272 Audit. What is the purpose of your testimony? My testimony summarizes Staff adjustments, rate base, revenue requirement and revenue requirement 1ncrease proposed in thi s case. What exhibits are you sponsoring? I am sponsoring Exhibi t Nos. 110 through 116. Exhibit Nos. 110 and 111 outline Staff's proposed revenue requirement, rate base and itemize Staff's adjustments to the United Water Idaho, Inc.(Uni ted Water UWI Company) adj usted test year operating resul ts and the Company recorded rate base. Staff Exhibit Nos. 112, 113, 114, 115 and 116 calculate rate base components based on a 13 -Month average and identifies the resulting adjustments to the Company s recorded amounts. What is the purpose of Staff Exhibit No. 110? This exhibit shows the overall net operating income requirement and revenue requirement deficiency for the Company as calculated by Staff. What revenue requirement does Staff propose? The total net operating income requirement CASE NO. UWI-04-04/06/05 HARMS, P. STAFF (Di) proposed by Staff is $10,086,477 as shown on Exhibit No. 110 , line Staff's Adjusted Net Operating Income for the Company is $9, 747 ,299.This resul ts in an overall rate increase of $570,837 or 1.8%.The Company has requested an overall rate 1ncrease of $6,767 870 or 21.46%. How is this revenue requirement calculated? Staff calculated the revenue requirement using a 13-Month Average Rate Base of $124 524,407 , an 8.10% overall rate of return described in Staff witnesses Hall's and Carlock's testimony, and Staff's adj usted net operating income of $9,747 299. Please describe the reason for a 13 -Month average rate base. As described in Staff Policy witness Lobb's and Staff wi tness Carlock's testimony, using a 13 -Month average rate base reduces the expense/revenue mismatch identified by the Commission that occurs when the costs of plant adjustments are added as if they were in place for a whole year without adding any benefits. Please describe this expense/revenue mismatch. In Order No.2 9505 entered in Case No. IPC-03-13, the Commission stated it "expects all utilities to attempt to identify expense saving and revenue producing effects when proposing rate base CASE NO. UWI -W- 04-04/06/05 HARMS, P. STAFF (Di) adjustments for maJor plant additions.Page 7. In this case, did Uni ted Water add any plant adjustments to rate base as if they were in place for a whole year? Uni ted Water added to Plant in ServiceYes. approximately $30 Million in capital project expenditures estimated through May 31 , 2005 as identified in Witness Rhead's Exhibi t No.8 dated October 21 , 2004.These costs include proj ects related to the Company s Columbia Water Treatment Plant (CWTP) and approximately 90 other proj ects Did Staff add any plant adjustments to rate base as if they were 1n place for a whole year? The Company s CWTP In-Service AdditionsYes. per Witness Rhead's March 22, 2005 updated Exhibit No. were added to rate base as if they were 1n place for a whole year.In addition,Staff accepts this adjustment. Staff also annualized costs associated with CWTP-related proj ects completed (costs closed to Plant in Service) during the test year (August 1, 2003 through July 31 2004) The adj ustment amount to annualize costs for CWTP totals $23,927 985. Do these costs represent the total Company investment in CWTP? There are many CWTP-related proj ects thatNo. CASE NO. UWI -W- 04-04/06/05 (Di)HARMS, P. STAFF were completed (costs closed to Plant in Service) before the beginning of the Company s test year.Therefore, those costs were already included in rate base for the entire year.Staff wi tness Sterling thoroughly discusses CWTP in his testimony. Did the Company identify expense saving and revenue producing effects associated with CWTP? The Company proposed Adjustment No. Yes. that decreased power and chemical expense at wells as a resul t of the operation of CWTP.According to Wi tness Healy, with the operation of CWTP the Company will rely less on ground water resources.The Company al proposed adj ustments increasing expenses as a resul t of operating CWTP for items such as increased power, chemicals, purchased water and staffing costs (Company Adjustment Nos. 1 and 15)In addi tion, the Company proj ected customer growth through May 31, 2005 and increased revenue accordingly.Correspondingly, the Company increased postage expenses, billing costs, and operation and maintenance costs associated with customer growth (Company Adjustment Nos. 18, 19, and 30) Staff witness English's testimony discusses these adj ustments in detail. Does the Company propose any other post-test year addi t ions? CASE NO. UWI -W- 04-04/06/05 HARMS, P. STAFF (Di) The Company proposed a test year ofYes. August 1 , 2004 through July 31 , 2004 and essentially proformed its rate base through May 31 , 2005 on a year- end basis.(Wi tness Healy Exhibi t No.1, Page 1 of 9) Does Staff accept the Company s adj ustments to rate base as proposed in Wi tness Healy Exhibi t No. Page 1 of 9? As discussed earlier, except for CWTP,No. Staff has prepared rate base on a 13 -month average. 13 -Men th Average Rate Base What activity is included in Staff's 13-month ra te base average? Staff's 13 -month average rate base calculated by averaging the monthly balances from July 31, 2003 through July 31, 2004 for Plant in Service, Customer Advances, and Contributions in Aid of Construction.Except for CWTP , post-test year activity through December 31, 2004 (Exhibit No.8) is treated as if it occurred in the last month of the test year or of July 31, 2004.As a resul t, that acti vi ty has a weighting of one-thirteenth (1/13) in the 13 -month average. What other components of this case are affected by the 13 -month average of Plant in Service related accounts? CASE NO. UWI -W- 04-04/06/05 HARMS, P. STAFF (Di) Depreciation Expense, Accumulated Depreciation and Amortizations, and Accumulated Deferred Federal Income Taxes. How does this 13 -month average compare to the amounts contained in the Company s accounting records for July 31 , 2004? The 13-month average 1ncreases July 31, 2004 Utility Plant in Service by $18,038,678 (Exhibit No. 112, Column H) decreases Customer Advances by $195,891 (Exhibi t No. 114 , Column G, Line 17), decreases Contributions in Aid of Construction by $1,467,382 (Exhibit No. 115, Line 13), and increases Accumulated Depreciation and Amortizations by $1 843,624 (Exhibit No. 113, Column G, Line 19) .Staff's proposed Depreciation Expense is $490,539 (Exhibit No. 116, Page 1, Line lower than that proposed by the Company in Wi tness Healy s Adjustment No. 37. How does the revenue requirement on a 13 -Month Average Rate Base compare to the revenue requirement prepared by the Company through May 31 , 2005? The 13 -Month Average Rate Base proposed by Staff (Exhibit No. 111, Column C) is approximately $12 million lower than the May 31 , 2005 Rate Base filed by the Company.Solely due to the difference in rate base and the related Depreciation Expense, Staff's revenue CASE NO. UWI -W- 04-04/06/05 HARMS, P. STAFF (Di) requirement is approximately $2 million lower than the Company Columbia Water Treatment Plant Adjustments What adj ustments are proposed to CWT P ? Exhibit 111,Column D eliminates costs associated with CWTP land and building costs that Staff witness Sterling determined as not used and useful for the current operation of the plant. As discussed in his testimony Staff witness Sterling determined that approximately 25% of the land and approximately 15% of the building associated wi CWTP is for future use and therefore should not earn a return.This adjustment reduces Plant in Service by $533,084 (Exhibit No. 111 , Column D) . Does Staff propose to remove Depreciation Expense and Accumulated Depreciation associated wi th the building Plant Held for Future Use? In Case No. UWI-97-6 the CommissionNo. denied the Company a return on the Boise River Intake (BRI) proj ect that was not used and useful.However , the expense allowance associated with BRI was approved to provide for the recovery of the Company s investment. Order Number 27690. Should the Company earn Allowance for Funds Used During Construction (AFUDC) until the land and CASE NO. UWI -W- 04- 04/06/05 HARMS, P. STAFF (Di) building become used and useful? No, it is not under construction and should not earn a return as if it were used and useful or as if it were under construction.In Case No. UWI -W- 97 - 6 the Company requested that the Commission permit continued accrual of AFUDC on BRI.The Commission in that case did not grant continued accrual of AFUDC.Order No. 27690. The same treatment is appropriate in this case.In the al ternati ve, the full amount could be left in Plant Held for Future Use.When the plant is used and useful would be rate based at that time with the depreciation also starting at the same time.Staff believes its recommended treatment is preferable. What other adjustment is proposed to CWTP? Staff proposes that costs associated with a cancelled purchase order be removed from the Company rate base.In December 2002 the Company was billed and accrued costs for a portion of CWTP's membrane system. In August 2003 the purchase order associated with this transaction was terminated.In February 2004 and October 2004 credi ts were posted to the CWTP proj ect which removed the financial effect of the transaction except the Allowance for Funds Used During Construction (AFUDC) that accrued during the time period before funds were received and/or written off associated with this CASE NO. UWI -W- 04-04/06/05 HARMS, P. STAFF (Di) transaction.Staff adjustment (Exhibit No. 111, Column E) removes $258,772 AFUDC from Plant in Service and the related Depreciation Expense and Accumulated Depreciation of $12 939. Are there any other adjustments related to CWTP's membrane filtration system? Staff proposes that the Commission orderYes. the Company to depreciate the CWTP membrane filters over a 10-year life (10% depreciation rate) The Company in this case has proposed depreciating the membrane fil ters over a 7-year life (14% depreciation rate) When Staf f toured the CWTP facility the CDM representative with extensive membrane filtration experience stated that the membrane fil ters are lasting 10 years in many plants. Given that information , Staff has proposed reducing Depreciation Expense and Related Accumulated Depreciation by $20,000 (Exhibit No. 111, Column F) Water Rights Does Staff propose any adjustments related to water rights? Staff proposes to adjust water rights toYes. remove costs not used and useful.Staff witness Sterling s testimony discusses this in detail.The reductions in rate base are $677 452 for the Initial Butte water right, $644 700 for the Integrated Municipal CASE NO. UWI -W- 04-04/06/05 HARMS, P. STAFF (Di) Application Package and $29,697 for a Ground Water Recharge permi t (Exhibi t No. 111 , Columns G through I) Staff wi tness Stockton proposes remov1ng AFUDC from the costs of water right proj ects because the nature of water rights does not justify accrual of AFUDC. Are there any other adjustments associated with Allowance for Funds Used During Construction? Staff witness Stockton proposes remov1ngYes. a portion of the AFUDC the Company accrues for an equity tax gross up.This adjustment reduces Plant in Service by $684 962, Depreciation Expense by $13,482 and Accumulated Depreciation by $7 067 (Exhibit No. 111, Column J) Taxes Does Staff propose any adjustments related to taxes? Staff witness Stockton calculated theYes. effect of Staff's proposed 13 -Month Average Rate Base to Accumulated Deferred Federal Income Taxes (ADFIT)The adjustment (Exhibit No. 111 , Col. B, Line 7) increases AD FIT by $ 3 , 3 77 , 2 7 9 . Staff wi tness Stockton also proposes an adjustment to include the effect of a production tax credit related to the Jobs Creation Act of 2004.Staff wi tness Stockton discusses in further detail this CASE NO. UWI -W- 04- 04/06/05 HARMS, P. STAFF (Di) adjustment reducing Federal Income Taxes by $87 501 (Exhibit No. 111, Column K) . Staff witness Stockton also increased Federal Income Taxes by $444 429 and decreased State Income Taxes by $96,162 due to the debt interest associated with the rate base adjustments proposed by Staff (Exhibit No. 111 Column 0) Staff witness Stockton s testimony describes the need for these adjustments. Does Staff witness Stockton propose any other adj ustments? Staff wi tness Stockton decreasedYes. Operating Expenses by $20,678 to remove the non-regulated portion of M&S (United Water Management and Services) Fees (Exhibit No. 111 , Column L) . Staff wi tness Stockton also incorporated into this case $5,628 (Exhibit No. 111 , Column M) in revenue resulting from the sale of the Carriage Hill non- contiguous water system (Case No. UWI-04- Operating Expense Adjustments and Deferred Debi Please describe the entries in Exhibit No. 111 Column N. These entries summar1ze adj ustments prepared Staff witness English and Staff witness Sterling and are described in detail in the respective testimony. Are there any other items that Staff needs CASE NO. UWI -W- 04- 04/06/05 HARMS, P. STAFF (Di) further information from the Company? Yes.Staff has requested documentation associated with the accounting software upgrade that started processing financial data of the Company on October 1 , 2004.The Company has included approximately 200,000 in rate base costs associated with this program on its Exhibi t No.These costs are allocated from the Company s Corporate Office.While Staff has received a general overview of how these costs are allocated to UWI and has been provided the Capital Expendi ture Authorizations that were approved by the Company in March 2005, no detailed allocation spreadsheets have been provided.Staff has not proposed an adj ustment in this case related to this cost because the software program is in place and operating.Howeve r , Staff has been unable to verify the allocation of these costs and therefore cannot verify the actual amounts included in rate base until the additional documentation is received. Does this conclude your direct testimony in this proceeding? Yes, it does. CASE NO. UWI -W- 04- 04/06/05 HARMS, P. STAFF (Di)