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IDAHO PUBLIC UTILITIES COMMISSION UnL ;i f!:" J6tJRifsION
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 RANDY lOBB
IDAHO PUBLIC UTiliTIES COMMISSION
APRil 6, 2005
Please state your name and business address for
the record.
My name is Randy Lobb and my business address
472 West Washington Street, Boise, Idaho.
By whom are you employed?
I am employed by the Idaho Public Utilities
Commission as Utilities Division Administrator.
What is your educational and professional
background?
I received a Bachelor of Science Degree in
Agricul tural Engineering from the Uni versi ty of Idaho in
1980 and worked for the Idaho Department of Water Resources
from June of 1980 to November of 1987.I received my Idaho
license as a registered professional Civil Engineer in 1985
and began work at the Idaho Public Utilities Commission in
December of 1987.My duties at the Commission currently
include case management and oversight of all technical
staff assigned to Commission filings.I have conducted
analysis of utility rate applications, rate design , tariff
analysis and customer petitions.I have testified in
numerous proceedings before the Commission including cases
dealing with rate structure, cost of service, power supply,
line extensions, regulatory policy and facility
acquisitions.
What is the purpose of your testimony in this
CASE NO. UWI -W- 04-04/06/05 LOBB , R
STAFF
(Di) 1
case?
The purpose of my testimony in this case is to
describe the policy position taken by the Staff with regard
to the Company s proposed calculation of test year rate
base and annualizing plant adjustments and explain the
rationale supporting the position.
Please summarize your testimony.
Staff proposes to establish the revenue
requirement for Uni ted Water Idaho (UWI Company)uslng
rate base levels based on a test year average of the
monthly averages us lng July 2003 through July 2004 for the
Company s proposed historic test year.Staff further
proposes to include known and measurable plant additions
through December 31 , 2004 in the July 31 , 2004 rate base
total for calculation of the 13 -month average.The
additional five-month period proposed by Staff for making
known and measurable plant adjustments allows the Company
to update its historic test year to more current levels
while reducing revenue/expense mismatches for adjustments
out of the test year.It also allows Staff sufficient time
to effectively evaluate and incorporate actual booked costs
its case.The December 2004 deadl ine for adjusting
historic test year values coincides with the close
calendar year 2004 and generally consistent wi th the
true-up to actual period allowed in the most recent Idaho
CASE NO. UWI -W- 04-
04/06/05
LOBB , R.
STAFF
(Di) 2
Power general rate case.
In a further effort to provide a revenue
requirement more reflective of expected costs , Staff
proposes to allow one notable exception to the December 31
2004 test year plant adjustment deadline and average rate
base calculation.That exception is to include investment
associated with the Columbia Water Treatment Plant (CWTP)
as if it were in service for the entire test year.Staff
also proposes that the Commission allow reasonable revenue
producing and expense reducing test year adjustments as
proposed by the Company to fully recognize the economic
impacts the treatment plant is expected to have on the
Company s annual revenue requirement.Given the size of
the proj ect and its impact on test year rate base, expenses
and revenues, Staff believes adj ustments for the plant
should be allowed even though actual expenses/revenues are
not known and measurable.Annualizing or adding major
plant addi tions such as this as if it were in service for
the entire test year is consistent wi th treatment of maj or
plant additions in the recently completed Idaho Power and
Avista rate cases.
Why did Staff find it necessary to set a deadline
and propose a methodology for calculating test year rate
base and incorporating post-test year plant investment?
The Staff makes its proposal for three primary
CASE NO. UWI -W- 04-
04/06/05
LOBB, R.
STAFF
(Di) 3
reasons.The first reason is to establish some certainty
and consistency in the process a utility uses when
selecting a historic test year, making proforma adj ustments
and determining annual revenue requirement.
establishing guidelines, utilities will consistently
calculate test year rate base and properly incorporate rate
base adjustments.The second reason l s that it wi II reduce
the expense/revenue mismatch identified by the Commission
to occur when the costs of plant adj ustments are added as
if they were in service for a whole year without adjusting
for any benefits.The third reason is that it will allow
Staff to focus on the Company s filing with the expectation
that adj ustments will be known and measurable and that
revisions to originally filed information will be provided
In time for Staff to complete a proper analysis.
What historic test year is used by UWI in this
case and what adjustments does it propose?
The Company has used a historic test year that
runs from August 1 , 2003 to July 31 , 2004.The rate case
was actually filed with the Commission on October 7, 2004.
The Company has proposed many adj ustments to the test year
data.Some of the traditional adjustments are for such
items as weather normalization , partial billing periods and
other known and measurable changes.Other adjustments are
for estimated impacts of the Columbia Water Treatment Plant
CASE NO. UWI -W- 04-04/06/05
LOBB , R
STAFF
(Di) 4
( CWTP) .However, many of the adj ustments are for budgeted
anticipated or estimated investments that the Company plans
to make through May 31 , 2005.In fact the Company proposes
90 post-test year plant additions to rate base based on
cost estimates of anticipated proj ects.The Company then
uses a year-end rate base that incorporates all of the
post-test year additions as if they were in service for the
entire test year.
How does UWI' s post-test year adjustments compare
to those proposed by other companies in recent rate cases?
Idaho Power Company in Case No. IPC-E- 03 -13 filed
a 2003 test year with 6 months of actual expenses, revenues
and investments and 6 months estimated.The Company made
it's filing on October 16, 2003 and provided updated actual
test year balances to the Commission prior to the Staff
prefile for hearings in late March and early April 2004.
Various normalizing, annualizing and known and measurable
adjustments were made to test year revenues and expenses.
In addi tion, the average of the monthly average rate base
was used to recognize that some plant was in service for
only part of the test year.Finally, only three maJ or
plant addi tions were added beyond the end of the test year.
These three maJ or proj ects were included in the rate base
calculation as if they were in service for the entire test
year.
CASE NO. UWI-04-
04/06/05
LOBB , R.
STAFF
(Di) 5
In Case No. AVU-04-, Avista used a historic
test year from January 1 , 2002 to December 31 , 2002.The
Company then included various normalizing, annualizing and
known and measurable adj ustments to test year revenues and
expenses.It too used an average of the monthly averages
to establish rate base levels.The Company also included
only four major plant additions beyond the test yeari two
generation proj ects and two transmission proj ects.These
four major proj ects were included in the rate base
calculation as if they were in service for the entire test
year.
Did the Commission approve the test year with
post-test year plant additions as proposed by the companies
In these two cases?
However , in both cases the CommissionYes.
expressed specific concern regarding annualizing plant
adjustments to include plant investment added late in the
test year or after the test year as if it were in place for
a full year.In Order No. 29505, in Case No. IPC-03-13,
the Commission stated:
We generally believe that including
investment in the calculation of average
year rate base as if it were in service
the entire year when it was not... creates
a mismatch between test year revenue andexpenses.
In Order No. 29602 , in Case No. AVU-04-1, the
CASE NO. UWI -W- 04-04/06/05
LOBB , R.
STAFF
(Di) 6
Commission stated:
Ra ther than deny the Company
annualizing plant rate base outright or
require the Company to wai t for its next
rate case to include the plant in rates,
we accept staff's proxy proposal for
calculating imputed revenues and expense
reduct ions.
The Commission went on to say:
Henceforth , if the Company seeks full
recovery of plant investment as if the
plant had been in operation a full year
it must present a corresponding
adj ustment to revenues and expenses.
Did the Commission allow a year-end rate base in
these cases?
, the Commission required that rate base be set
at the average of the 13 monthly average for the test year.
The Commission also allowed these companies to include
limited major plant additions completed after the test year
as if they had been in service for the entire year provided
revenue producing or expense reducing benef i ts from these
proj ects were also included.
Is the UWI filing consistent with these
Commission orders?
No, not with respect to determination of test
year rate base levels or including test year ratepayer
benefits that result from plant investment completed after
the end of the test year.While the Company did add test
year adjustments to reflect the revenue producing and
CASE NO. UWI-04-
04/06/05
LOBB , R.
STAFF
(Di) 7
expense reducing effects of the single large CWTP post-test
year addi tion , it used an adj usted test year , year-end rate
base total that resul ts in a revenue requirement for plant
additions as if the other post-test year plant additions
had been in service for the entire test year.This
treatment added nearly $10 million in post-test year plant
additions to rate base for the entire test year without any
revenue producing or expense reducing adj ustments.
How does UWI' s proposed test year adjustments in
this case compare to previous general rate filings made by
the Company?
In Case No. UWI-97-6, the Company used a test
year of July 1, 1996 to June 30, 1997.In addition to the
standard normalizing, annualizing and known and measurable
expense adjustments, the Company included over 100 post-
test year plant additions through February of 1998 totaling
approximately $5.2 million.In Case No. UWI -W- 00 -, the
Company used a test year of October 1 , 1998 to September
30, 1999 with 70 post-test year plant adjustments through
April of 2000 totaling $4.8 million.In both of these
cases the Company based its investment amounts on budgeted
estimates and then trued-up to actual cost after its filing
wi th the Commission.The Company also used a year-end rate
base as if these plant additions had been in service for
the entire test year.No revenue produc ing or expense-
CASE NO. UWI -W- 04-04/06/05
LOBB , R.
STAFF
(Di) 8
reducing adjustments were made to the test year for this
plant.
If the Commission allowed multiple expected plant
additions beyond the test year in each of these prevlous
UWI cases wi thout corresponding revenue/ expense
adjustments , why should the Commission not allow similar
treatment in this case?
Because the Commission has Slnce recognized an
inequity in including the cost of plant additions in test
year revenue requirement without incorporating the revenue
producing/expense reducing effects of such proj ects.The
Commission has established boundaries that limit this
mismatch by requiring the use of average rather than year-
end rate base and limiting post-test year plant additions
to large projects with associated benefits incorporated in
the test year.Also in the prior cases, the plant
proj ections were better justified as known and measurable
wi th a longer time period for Staff to verify the actual
plant numbers.I discuss this further later in my
testimony.
What type of additional problems do you foresee
if the Commission allows the continued use of year-end test
year rate base and unrestricted post-test year plant
adjustments?
Beyond the mismatch created by adding plant
CASE NO. UWI W- 04-04/06/05
LOBB , R.
STAFF
(Di) 9
investment costs without corresponding test year benefits,
allowing utilities to proj ect post-test year investment
based on anticipated budgets is contrary to the principal
that test year adjustments should be known and measurable.
Further revenue/expense adjustments based on estimates
designed to eliminate the cost/benefit test year mismatch
for an ever increasing number of post-test year rate base
addi tions ul timately resul ts in a forecasted rather than a
historic test year.I do not believe it is the intent of
the Commission to move to forecasted test years.
Moreover , UWI has continued to expand its time
period for including estimated post-test year plant
additions in its rate case filings.In the 97 - 6 case, the
Company included 100 expected projects for 8 months after
the end of the test year.In the 00-1 case, the Company
included 70 expected proj ects up to 7 months after the end
of the test year.In this case the Company has added
anticipated proj ects for ten months after the end of the
test year.While the Company hopes to satisfy the known
and measurable principal by providing actual costs for each
proj ect prior to or at the hearing, it provides no time for
the Staff to verify or evaluate , through audi t, the actual
costs submitted.
Finally, if the Commission allows UWI to continue
including unlimited post-test year plant adjustments using
CASE NO. UWI -W- 04-04/06/05 LOBB , R
STAFF
(Di) 10
a year-end rate base without offsetting revenue/expense
adjustments, then every Idaho utility can be expected to do
the same.The statutory time frame for processing the
company s rate case application is intended to reduce
regulatory lag while allowing sufficient time for
Commission revlew.The time period for processing a rate
case in Idaho is already shorter than that for surrounding
states.However , if cost information is continuously
updated to the time of hearing, Staff and ultimately the
Commission do not have sufficient time for adequate review.
This is particularly true if Staff must also evaluate
estimated revenue producing/ expense reducing impacts of
such plant additions when they are added to test year rate
base on a year-end basis.
Are there any other differences in what Staff
proposes in this case and what the Commission approved in
the most recent Idaho Power and Avista general rate cases
with respect to test year rate base calculations?
There is one significant difference.Yes.
both the Idaho Power and Avista cases, no plant addi tions
completed beyond the test year were included in the
calculation of test year rate base other than the limited
large plant additions previously described.In this case
Staff proposes that UWI be allowed to include plant
additions proposed by UWI at the actual amount booked for
CASE NO. UWI -W- 04-
04/06/05
LOBB , R.
STAFF
(Di) 11
non-CWTP plant investment through December 31 , 2004 as if
the investment were made by July 31 , 2004, the end of the
test year.The proposal allows the post-test year plant
investment to be included for one month in the calculation
of average rate base wi thout requiring associated revenue
producing or expense reducing test year adj ustments This
treatment is consistent with the Commission s Idaho Power
ruling that allowed six months of estimated investment to
be trued up to actual investment and included in the test
year calcu+ation of average rate base.
Staff views this treatment as a compromlse that
allows estimated investment to be trued up to actual
investment during the processing of the case and included
in the average rate base calculation.In the Idaho Power
case the number of months investment was allowed in the
rate base calculation was dependent upon when the test
year investment was made.In the UWI case,all plant
additions completed following the test year were added
after the end of the test year and are therefore, only
included in the rate base average for one month.Allowing
plant to be included in rate base on this limited. basis
greatly reduces the potential for revenue/expense mismatch
which reduces the need for further test year adjustment.
What is the revenue impact of the Staff'
proposal?
CASE NO. UWI -W- 04-04/06/05 (Di) 12LOBB , R
STAFF
Staff witness Harms has determined that Staff'
rate base proposal will reduce the Company s proposed
annual revenue requirement by $2 .13 million.Addi tional
details regarding the revenue requirement impact are
provided in Ms. Harms testimony in this case.
Would you please summarize your recommendation?
Staff proposes to use an average of the Yes.
monthly average rate base to establish test year rate base
for ratemaking purposes.The July 2004 monthly average
would include plant additions proposed by UWI at the actual
booked dollar amount through December 31, 2004.Act ual and
projected plant investment in the CWTP through May 31 , 2005
would be included in the rate base total as if it were in
servlce for the entire test year.The Company proposed
revenue producing and expense reducing adjustment
associated with the CWTP would be included in the revenue
requirement calculation.Revenue producing and/ or expense
reducing adjustments to test year revenue requirement would
not be required for non-CWTP post-test year plant additions
included in the test year rate base average.
Does this conclude your testimony in this
proceeding?
Yes, it does.
CASE NO. UWI -W- 04-04/06/05
LOBB , R
STAFF
(Di) 13
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 6Th DAY OF APRIL 2005
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB IN CASE
NO. UWI-04-, BY MAILING A COpy THEREOF POSTAGE PREPAID, TO THE
FOLLOWING:
MARK GENNARI
UNITED WATER
200 OLD HOOK RD
HARRINGTON PARK NJ 07640
DEAN J MILLER ESQ
McD EVITT & MILLER LLP
PO BOX 2564
BOISE ill 83701
DOUGLAS K STRICKLING
BOISE CITY ATTORNEY'S OFFICE
150 N CAPITOL BLVD.
PO BOX 500
BOISE ill 83701
CHUCK MICKELSON
CITY OF BOISE
150 N CAPITOL BLVD.
PO BOX 500
BOISE ill 83701
WILLIAM M. EDDIE
ADVOCATES FOR THE WEST
PO BOX 1612
BOISE ill 83701
BILL SEDIVY
IDAHO RIVERS UNITED
PO BOX 633
BOISE ID 83701
BRAD M. PURDY
ATTORNEY AT LAW
2019 N 17TH STREET
BOISE ID 83702
SHARON ULLMAN
9627 W. DESERT AVE
BOISE ID 83709
SCOTT L. CAMPBELL
101 S CAPITOL BLVD., 10TH FLOOR
PO BOX 829
BOISE ID 83701
Jo f
SECRET AR
CERTIFICATE OF SERVICE