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BEFORE THE
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 RICK STERLING
IDAHO PUBLIC UTiliTIES COMMISSION
APRil 6 , 2005
Please state your name and business address for
the record.
My name is Rick Sterling.My business address
is 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 as a Staff engineer.
What is your educational and professional
background?
I received a Bachelor of Science degree in Civil
Engineering from the University of Idaho in 1981 and a
Master of Science degree in Civil Engineering from the
University of Idaho in 1983.I worked for the Idaho
Department of Water Resources from 1983 to 1994.In 1988,
I became licensed in Idaho as a registered professional
Civil Engineer.I began working at the Idaho Public
Utilities Commission in 1994.My duties at the Commission
include analysis of utility applications and customer
petitions.
What is the purpose of your testimony in this
proceeding?
There are several purposes to my testimony.
First, I will discuss United Water s decision to build the
Columbia Water Treatment Plant and the process the Company
used to get it constructed.Next, I wi 11 make several
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recommendations concerning adjustments to test year
expenses.Finally, I will make a proposal for new rates
based on Staff's recommended increase in revenue
requirement, and I will discuss rate design al ternati ves,
including the rate design proposed by United Water.
Please summarize your testimony.
My testimony begins with a discussion of the
Columbia Water Treatment Plant, the primary driver in this
rate case.I conclude that the plant is needed by United
Water , and agree that microfiltration is a reasonable
choice of technology.I review the design-build approach
taken by the Company to construct the plant, discuss the
advantages and disadvantages of the approach, and
recommend that the design-build approach not be used in
the future because of the difficulty it presents in
assuring customers that the best value was obtained for
the investment made.
With regard to the Columbia Water Treatment
Plant, I review the request for proposal process employed
by the Company and the criteria used to choose a design-
build firm to construct the plant.I discuss the cost
plus fixed fee contract used by United Water and how a
guaranteed maximum price was established.In addition, I
review the level of competitive bidding used during
construction of the plant and consider whether adequate
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cost control incentives existed for the construction
contractor.I comment on United Water s own cost
comparisons between its plant and other membrane
filtration plants and conclude that the Company s plant
appears to be one of the most expensive plants compared.
I recommend that the early completion incentive offered by
United Water to CDM , the design-build contractor , not be
recoverable from ratepayers, and that a portion of the
treatment plant construction costs be booked as plant held
for future use because they are not yet used and useful.
Finally, I make recommendations regarding the operation
and maintenance expenses estimated for the Columbia Water
Treatment Plant.
Next, I discuss three adj ustments regarding
water rights acquisitions by the Company.I recommend
that investment related to the Integrated Municipal
Application Package and a water right specifically for
aquifer recharge and storage be considered plant held for
future use.In addition, I recommend that only a portion
of the investment made to acquire the Initial Butte water
rights be included in rate base because not all of the
water rights can currently be utilized.
Next, I make recommendations regarding several
adj ustments to test year expenses-purchased water
purchased power , deferred power, chemicals, and weather
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normalization related expenses.Next, I discuss rate
design issues.I recommend that the fixed bi-monthly
customer charge not be increased, that the 25%
summer/winter rate differential be maintained at least for
now , but that the Commission give consideration to
implementing an inclining block rate design in the future.
Finally, I present the rates that resul t using Staff'
recommended revenue requirement.
Columbia Water Treatment Plant
Need for the Plant
One of the primary drivers for this rate case
costs associated with the new Columbia Water Treatment
Plant (CWTP)Do you believe the plant is necessary?
Yes, I do.Construction of a new surface water
treatment plant has been a part of United Water s plans
for several years.In its 1988 Master Plan , the Company
recognized that it would be necessary to develop
additional surface water sources to meet future customer
needs due to the limited availability of groundwater.
Since the 1988 Master Plan, the Treasure Valley Hydrologic
Study, a j oint effort by the Idaho Department of Water
Resources, the Uni versi ty of Idaho and the Idaho Water
Resources Research Institute, has confirmed the limited
availability of groundwater resources for future
development, particularly in southeast Boise.
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Choice of Technology
Do you agree with United Water s decision to use
microf il tration technology rather than tradi tional
granular media filtration technology like is used at the
Marden plant?
I bel ieve ei ther technology could meet Uni ted
Water s requirements in terms of both water quality and
quanti ty.A more important issue, I bel ieve, is whether
one technology could do it less expensively than the
other.Before building the Columbia Water Treatment
Plant, United Water hired consultants to prepare a Basis
of Design Report.The report shows that both technologies
were considered, but that microfiltration was ultimately
chosen.Preliminary cost estimates indicated that the
construction cost of a microfiltration plant were
approximately 10 percent higher , but the report concluded
that both technologies were nearly equal in cost given the
potential inaccuracies of the cost estimates.The report
also estimated that the lower expected operating costs
a microfiltration plant outweighed any possible
disadvantage of higher construction cost.
Because the preliminary cost estimates were
judged equal , but admittedly rough , I believe that United
Water should have considered soliciting proposals for
traditional granular media filtration as well as
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microfil tration.By soliciting proposals for both types
of technology, Uni ted Water would have been able to make a
more definitive determination as to which technology would
resul t in the lowest overall cost.
Design Build Contract
In constructing the CWTP , United Water employed
a design-build approach.Please briefly explain what the
design-build process is and how it differs from the
traditional design-bid-build approach.
Design-build is a construction approach in which
the proj ect owner enters into a single contract wi th a
design-build company that is responsible for both proj ect
design and construction.Design of the proj ect begins and
construction commences once the design has reached beyond
the preliminary stage.Final design work continues as
construction progresses.Design is always a step ahead of
construction.This differs from the traditional approach
in which a complete proj ect design is first prepared, the
proj ect is bid, and then the proj ect is constructed.
What are the purported advantages of the design-
build approach?
Probably the most often ci ted advantage of
design-build is that it is faster than the traditional
design-bid-build approach because design work and
construction work can overlap.Another advantage is that
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the design professionals , because of their close
relationship with the construction team, can benefit by
collaborati vely coming up wi th design ideas that are less
costly, more effective and easier to construct.
addition , there is less likelihood for disputes between
design and construction professionals, and fewer change
orders and claims for errors and omissions.These factors
can potentially lead to lower overall proj ect costs.From
the owner s perspective, design-build requires only a
single point of contact rather than separate contact with
both the designer and the builder as in the tradi tional
design-bid-build approach.Having a sole source of
responsibili ty is generally eaSler for the owner.
What are the disadvantages of the design-build
process?
The biggest disadvantage in my opinion is the
lack of checks and balances compared to more traditional
construction approaches.Unl ike a tradi t ional approach
where the design engineer acts as a representative for the
owner, in design-build, the engineer and the contractor
are part of the same company, or at least working as a
team.The owner has a greater responsibili ty to insure
that his interests are protected and that he receives a
quality product at a fair price.The relationship between
the owner and the design-build firm must be based on a
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great deal of trust.The design-build firm must satisfy
the owner s desires for a high quali ty, low cost product,
while also trying to stay within budget and maximize its
own prof it.This conflict between providing what the
owner wants and providing it for a fixed prlce often
results in the owner questioning whether it is getting the
best quality for the money paid.Likewise, the design-
build firm must trust in the owner not to make
unreasonable demands when the design-build firm is
opera t ing under a fixed budget.(Reference Best
Practices in Design-Build for the Water and Wastewater
Industry,
p.
26, Document No. FOOI03, Design-Build
Education Research Foundation , January, 2003). In an ideal
world, such a relationship may produce a high quality, low
cost result, but in a regulated world, it is extremely
difficult to assure customers of that fact.
Another maj or disadvantage of design-build is
that a final proj ect cost estimate is frequently unknown
at the start of construction.Because design and
construction proceed simul taneously, the final design
not available for estimating the final cost until
construction is well underway.Without knowing the final
cost before the proj ect is started, there is always a risk
that it could exceed the budget or balloon out of control.
Cost overruns are usually the responsibility of the owner
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unless there was an agreed upon fixed prlce from the
start.
Are there ways to overcome some of the
disadvantages of the design-build process?
One way to overcome some of theYes.
uncertainty about knowing the final cost of a proj ect
to hire an engineering firm to develop a preliminary
proj ect design and cost estimate.Thi s approach can al
help the owner to be reassured of a more economical and
successful final product because the engineering
consul tant is now working for the owner instead of the
contractor and therefore has the owner s best interests in
mind.In this case, Uni ted Water hired a team of two
different engineering consultants to develop preliminary
proj ect designs and al ternati ves.Sometimes an owner will
hire a consul tant to act as its agent and oversee the
entire process, from preliminary design, to development of
an RFP, to evaluation of proposals, to proj ect
construction.
Another way to eliminate some uncertainty is to
establish a guaranteed maximum price at some stage in the
process.When construction has progressed beyond the
initial stages, when major materials and equipment have
been procured, and when most of the final design details
are known, a maximum price can be established to force
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some degree of cost control beyond simply trusting that
the proj ect is being built as economically as possible.
Finally, because the design-build process
requlres such a high degree of trust between the owner and
the design-build firm , owners can invite to bid only firms
with good reputations and with which it may have had prlor
experlence.Although difficult to quantify, maintaining a
good reputation by minimizing cost overruns , proj ect
delays and disputes is a real motivating factor for most
design-build firms.
If construction costs are often unknown at the
time a design-build firm is hired for a proj ect, and
therefore if the construction cost portion of design-build
proj ects are not competi ti vely bid up front, are there
ways to lnsure a competi ti ve construction cost?
One way to compensate for the lack of
competi ti ve bidding up front is to require competi ti ve
bidding for each element of the construction.In other
words, the proj ect owner can require that jobs awarded by
the design-build firm to subcontractors be competitively
bid, and that any tasks self-performed by the design-build
firm also be competitively bid.
Was competi ti ve bidding used in choosing
subcontractors for the CWTP?
Yes, competi ti ve bidding was used for nearly all
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of the maJ or construction tasks.In fact, in the early
stages of the proj ect, CDM, the design-build firm, had
intended to sel f -perform some of the maj or construction
tasks, but later decided to hire subcontractors for almost
all of the construction.
Was the competitive bidding as competitive as
could have been?
No, in some cases it was not.For a few of the
major construction tasks, despite attempting to obtain
bids from several contractors, it appears that only one or
two realistic bids were ultimately obtained.
Unfortunately, there is really no way to know whether a
lower price could have been obtained if more bids had been
received.
Is the design-build process common for water
proj ect construction?
Design-build was not common practice for any
type of construction until about the 1990s.Its use was
restricted primarily because of competitive bidding
statutes in many states and in federal government
construction.Since these restrictions have been removed,
design-build has become more common , especially for state
and federal highway construction.Its use for
construction of water and wastewater facilities has been
much more limited however.
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Has United Water had prevlous experlence with
the design-build approach to construction?
No, United Water Idaho has not.The CWTP is the
first project on which United Water Idaho has used the
process.However , United Water , the parent company, has
used this approach once in New York and is currently uslng
it for two proj ects in Pennsylvania.United Water has
also used the approach for non-regulated operations in
three other states.
Do you believe that the design-build approach
chosen by United Water presented any difficulties in the
construction of the CWTP?
Yes, I do.The biggest difficulty, I believe,
was not in the construction itself.The biggest
difficulty is in United Water s inability to provide
assurance to its customers and the Commission that the
plant represents the best value for the money spent.
Do you recommend that United Water use a design-
build process in the future for maj or proj ect
construction?
No, I do not.Unfortunately, one of the prlmary
purported advantages of design-build-faster completion-was
not real i zed in thi s case.It appears that much of the
one -year delay in get t ing the proj ect bui 1 t was due to the
Company receiving proposals that exceeded initial cost
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estimates.I f a more complete design and a more accurate
estimate had been prepared before proposals were sought,
perhaps this delay could have been avoided.United Water
had been planning since at least 1998 to have a new
treatment plant operational by the summer of 2004.
Anticipating its needs that far in advance, the Company
should not have had to scramble to get the plant buil t one
year later than planned, to have to employ a non-
traditional contracting process in an attempt to expedite
construction, or to necessitate making multiple 11 th hour
updates to its filing for the project to be properly
considered in this rate case.
Another of the purported advantages of design-
build, that proj ects can be buil t at a lower cost, cannot
be proven in thi s case.Just as there is no evidence that
a design-build approach produced a higher overall proj ect
cost, there is no evidence that it produced a lower cost.
This uncertainty about whether the proj ect could have been
completed at a lower cost makes it virtually impossible
for the Commission to reassure ratepayers that United
Water obtained the best value for the amount spent.
In response to a Staff Production Request (Staff
Request No. 131) when asked ~What assurance can UWI
provide to its customers and to the Commission that by
uslng a 'Design-Build, Cost Plus Fixed Fee ' contracting
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process that it obtained the best value for customers?"
the Company stated ~Speculation about the outcome or prlce
from a different contracting process or proposer
impossible to precisely measure or even accurately predict
wi thout building the proj ect twice.
Cost Plus Fixed Fee Contract
Do you see any disadvantages to a cost pI
fixed fee approach like that taken by United Water?
Yes, I see a serious disadvantage.Under a lump
sum contract, the owner knows in advance what the total
proj ect cost will be.However , under a cost plus fixed
fee approach, only the fixed fee is known with certainty.
The fixed fee represents only the design-build firm
profit, and does not include any of the actual
construction or engineering costs.
But in thi s case, wasn t the overall proj ect
cost known wi th certainty once a guaranteed maximum price
was developed?
Yes, but the guaranteed maXlmum prlce could not
be developed until the proj ect design had reached
percent completion.The guaranteed maximum price was
established on January 29, 2004-more than 17 months after
the contract was originally signed.
Why does United Water say it used a cost plus
fixed fee approach?
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Uni ted Water claimed that there were several
unknowns before the proj ect was started such as il tration
type, waste handling, building footprint/configuration and
treated water storage.These unknowns, the Company
claims, create risks to the construction entity that
ultimately have to be passed on to the utility
customers.One way to minimize these risks to the Company
while still attracting bidders is to agree up front on
what fees will be paid independent of construction costs.
Because United Water hired two different consultants to
prepare an extensive Basis of Design Report prior to
issuing an RFP for plant construction, I don t believe
there were nearly as many unknowns as the Company claims.
RFP Process
Please briefly describe the process United Water
used in pursuing construction of the CWTP.
United Water began the process by assembling a
team consisting of engineers from its own local and
national staff, along with engineers from Montgomery
Watson Harza and Carollo Engineers, both international
firms with extensive experience in water treatment.This
team collected and analyzed data about Boise River water
quality, performed pilot studies, assessed regulatory
requirements, developed al ternati ves, and made preliminary
cost estimates.The resul t of the team s work was a Basis
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of Design Report that specified the technology to be used
and the processes to be employed in the new treatment
facility.
After the Basis of Design Report was completed
United Water issued a request for proposals inviting four
firms to submit design-build proposals for construction of
the plant.The four firms were Montgomery Watson Harza
Carollo Engineers, Black and Veatch, and CDM (Camp,
Dresser & McKee) .Two of the firms had previously done
work for United Water Idaho, and the other two firms had
completed work for United Water at other locations.All
of the four firms are well known for their experience with
water facilities.
Uni ted Water required in its RFP that the
proposals include qualifications, proj ect approach , and
business terms.The RFP did not require preliminary
design preparation al though each proposal received
included varying levels of design.The RFP al so did not
require fixed design-build prlces, yet it did require that
each proposal be accompanied by two separate cost
estimates.First, proposers were required to submi t a
fixed fee presented as a lump sum amount.The fixed fee
was intended to represent the design-build firm s required
profi t.In addi t ion , proposers were required to submi t in
a separate sealed envelope a Target Cost of Work.The
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Target Cost of Work was intended to be a non-binding
professional opinion of expected costs based on the
design-build firm s proposed approach and understanding of
the proj ect at the time.
What criteria did United Water use to evaluate
the bids?
A group of local and corporate headquarters
level United Water staff evaluated and scored each
proposal using both price and non-price cri teria.The
non-price evaluation criteria included the qualifications
and experience of the proposer , the personnel commi t ted to
the proj ect, and the proposed proj ect approach including
abil i ty to control costs, the technical approach and the
proj ect schedule.
The price evaluation criteria was based on the
proposer s fixed fee balanced with other factors, such as
assumptions and conditions of the proposal, the degree of
risk that the proposer is judged to be assumlng under the
terms of the proposal , and direct cost factors.
Did Uni ted Water choose the highest ranked
proposal?
No, it did not.It chose the second highest
ranked proposal.
Why?
Based on the information I reviewed, it appeared
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that the final decision was made, or at least very
strongly influenced, by United Water corporate level
staff.A confidential memo provided in response to a
Staff production request (Request No. 111) revealed that
the local United Water staff believed that before a
contract was awarded the highest ranked design-build
firm/proposal , rather than the one ul timately chosen
could have delivered the plant faster and at a lower cost.
How were the Target Cost of Work estimates
included in each proposal considered in the evaluation and
ranking?
According to United Water , they were not
considered at all.In fact, the sealed envelopes were not
even opened until after the evaluation and ranking was
complete and a decision made to choose a design-build
contractor.United Water reasoned that selection and
scoring should have nothing to do wi th the non-binding
estimates provided in the proposals.United Water stated
that it simply wanted to get another budget cost from
these experienced teams to compare to the Basis of Design
Report assumptions.(Response to Staff Request No. 106)
Do you believe that the Target Cost of Work
should have been a factor considered in the evaluation?
Yes, I do.Al though the Target Cost of Work
a preliminary estimate based on limited design work,
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nevertheless is an estimate prepared by professionals with
extensive experience in constructing similar plants.
cannot reasonably be considered a binding estimate but
still reflects the general design elements, treatment
processes and equipment suggested by the proposer.The
purpose of requiring that a Target Cost of Work estimate
be provided is to be able to make at least some assessment
of the ~val ue " represented by each proposal.
completely ignoring the Target Cost of Work estimates,
United Water effectively eliminated construction cost as a
cri terion in choosing a proposal.I am uncertain as to
why Uni ted Water required that the Target Cost of Work
estimates be provided if it did not intend to consider
them.
How did the Target Cost of Work estimates
compare to the guaranteed maximum price ultimately
included in the CDM contract?
The Target Cost of Work estimates from two
the proposals were $14 344,000 and $16,112 , 998, and the
Guaranteed Maximum Price in the final construction
contract was $16,844 498.I was unable to review two of
the four Target Cost of Work estimates because United
Water claims to have lost them.
Does it concern you that United Water lost two
of the Target Cost of Work estimates?
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Yes, I find it very troubling.Again , the
estimates represent the professional opinions of very
experienced and highly qualified firms of the expected
construction costs of the plant.I would have expected
that Uni ted Water would be very interested in knowing the
range of Target Cost of Work estimates and whether
differences in each design-build firm s proposals affected
these estimates.
Each proposer was required to submit an original
and six copies of its proposal.United Water also agreed
to keep each proposal conf ident ial Given the number of
copies required and the care that should have been taken
wi th the proposal s , it is surpri sing that Uni ted Water has
been unable to locate two of the Target Cost of Work
estimates.
Why are the Target Cost of Work estimates
important?
They are important because they provide
addi tional benchmarks against which to measure the
reasonableness of the final CWTP cost.Because every
water treatment plant is unlque, direct cost comparisons
are difficul t.Mul tiple estimates for the same plant may
provide a better indication of a reasonable price than
comparisons to the average cost of many unique plants.
Even though the Target Cost of Work estimates are
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preliminary,they still reflect costs specific to a
particular plant,site,process and equipment.United
Water has pointed out in response to product ion requests
(Staff Request No. 202) that the Guaranteed Maximum Price
agreed to by CDM proved to be only 4.34 percent higher
than their Target Cost of Work estimate.This is an
indication, I believe, that the Target Cost of Work
estimates are still quite accurate, despite being
preliminary and based on limited design information.
In addition, I believe that the Target Cost of
Work estimates can serve as a reference point as design
and construction work progresses prior to development of a
Guaranteed Maximum Price.When a contract is executed
wi thout an up front fixed prlce, there should be something
to gauge the final expected cost so that it can t balloon
out of control.
If the contract between United Water and CDM did
not initially include a fixed price amount for
construction of the plant, how was a Guaranteed Maximum
Price eventually established?
Detailed proj ect design commenced upon contract
signing in August 2002.Once the design had reached the
85 percent completion stage, CDM provided United Water
with an initial preliminary guaranteed maximum price.
That price significantly exceeded United Water s project
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and budget and expectations that were based on the
original Basis of Design Report and budget.The proj ect
was put on hold for approximately a year until United
Water and CDM negotiated a new Guaranteed Maximum Price in
January 2004.The Guaranteed Maximum Price fixed United
Water s construction cost obligation except for minor
contingencies and change orders.
Could a Guaranteed Maximum Price have been
established at the time the contract was signed?
Yes, it could have been.United Water could
have required a lump sum contract so that it knew in
advance wi th certainty what the final proj ect cost would
be.With that type of an approach, however, CDM rather
than Uni ted Water would have been at risk for any cost
ove rruns Because of the added risk , it is likely that
CDM would have increased the contract prlce to cover the
added risk.It is not uncommon , especially when a design-
build approach is used , for a fixed price to not be set
until after the design had advanced far enough so that
accurate cost estimates could be made.
Fixed Fee
The Fixed Fee portion of the proposals was a
factor in the evaluation of proposals.How did the Fixed
Fees compare?
The Fixed Fees were qui te variable , ranglng from
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$846,000 to $1 896,089.The proposal wi th the lowest
Fixed Fee was also the proposal that was ranked highest
overall , yet as I discussed previously, it was not the
proposal ul timately chosen by Uni ted Water.Although the
difference in Fixed Fee between the two highest ranked
proposals was relatively low compared to the total proj ect
cost, it was not immaterial.
Do you think any of the design-build firms who
submitted proposals could have successfully completed the
job?
Yes, I believe all of the firms were highly
qualified and capable and that any one of them could have
delivered a plant that met United Water s needs.
Cost Comparisons
Company witness Rhead in his Exhibit No.
compared the cost of the CWTP to other water treatment
plants, both conventional and membrane filtration.What
lS your opinion of these comparisons?
To the extent the comparisons are useful, my
conclusion in reviewing them is that United Water s CWTP
is considerably more expensive than the average of the
group, and could be one of the most expensive.
Despite a Guaranteed Maximum Price of $16.
million and an overall proj ect cost of $18.20 million
(Response to Staff Request No. 108), Uni ted Water used a
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cost of $12.87 million in comparlng its proj ect to the
others.With this proj ect cost and after adjusting for
differences between when each proj ect was buil t, the CWTP
is still more expensive per gallon of treated water than
all but one of the 19 other proj ects examined.The
Company claims it used this lower cost because it believed
some proj ect features of the CWTP such as the raw water
pumping station, the transmission pipeline from the Boise
River to the plant, land, electrical service, Uni ted Water
labor and overheads, and AFUDC should be removed for
comparlson purposes.However, it is not apparent that
United Water removed similar costs from any other project
or that it considered eliminating the costs of features
from other plants that are not part of the CWTP.For
example , the preliminary design for the CWTP called for
the use of dissolved air flotation as a pretreatment
process and the use of ul traviolet disinfection.These
two processes were estimated together to cost $2.
million.Ul timately, both processes were not included in
the final proj ect design.Some of the plants United Water
uses for comparison purposes may include one or both of
these processes.
Using United Water s adjusted figures for
comparison , the CWTP exceeds the average cost of the other
microfiltration/ultrafiltration plants by 32.7 percent,
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and the average cost of the conventional granular media
plants by 5.9 percent.If the guaranteed maximum prlce or
the total proj ect cost was used instead, the CWTP balloons
to 73.5 percent above the average cost of the filtration
plants and to 38.4 percent above the conventional plants.
How does Uni ted Water explain why its CWTP is
more expensive than other plants?
United Water attributes the CWTP's higher cost
to differences between the scopes of the proj ects.The
Company points out that some of the plants listed involve
the addition of membrane filtration to an existing plant
where some treatment facilities already exist.The CWTP
United Water states, is a completely new plant requlrlng
all of the facilities that may pre-exist at some plants.
United Water also attributes the cost differences to other
factors such as the type of membrane used, relative raw
water quality differences, local labor and material costs
and treated water pumping requirements.
Do you accept United Water s explanation?
Admittedly, it is difficult to compare costs
between plants due to differences in design features,
treatment requirements and challenges, equipment
differences, regional labor costs, and many other factors.
However , the fact remains that the comparison still shows
that the CWTP is nearly the most expensive plant listed,
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even after United Water removed a significant portion of
the proj ect costs to make it more comparable.
Cost Control Incentives
What incentives did CDM have to complete the
proj ect at less than the guaranteed maximum price?
The contract between Uni ted Water and CDM has no
provision for monetary incentive to CDM if the proj ect
should be completed at less than the guaranteed maximum
price.One hundred percent of all savings below the
guaranteed maximum price are to the benefit of United
Wa ter With such contract provisions, I see no motivation
for CDM to save costs, and little likelihood that any
savlngs will be passed on to Uni ted Water.CDM's only
motivation seems to be that it must protect its own
reputation for performing wi thin or below budget
expectations.
Is there evidence that United Water and CDM
tried to keep the costs of the proj ect down?
Yes, there is.During the design phase of the
proj ect, before a guaranteed maximum price had been
established, United Water and CDM worked together to
develop al ternati ves to keep the proj ect costs down.
addition , during project construction , CDM and its
subcontractors have done a variety of things to reduce
construction costs.Finally, as I discussed previously,
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most of the construction tasks were competitively bid.
Early Completion Incentive
The construction contract for the CWTP includes
provisions for payment of an early completion incentive.
What is your recommendation with regard to this incentive?
The contract requires payment by Uni ted Water to
CDM of an early completion incentive of $3,500 per day for
each day that the 30-day facility test is started before
June 1.Because the 30-day facility test began on about
March 7 , I estimate that the early completion bonus will
total approximately $297,500.Originally, the contract
provided for an early completion bonus of $2,500 per day,
but United Water later increased the bonus to $3,500 per
day to provide more motivation to CDM to complete the
proj ect sooner.The reason cited by United Water for
increasing the early completion bonus was that beginning
the 30-day facility test on June 1 ~left little time for
system performance checks and start -up adj ustments that
are common wi th proj ect s of thi s magni tude. (Response to
Staff Production Request No. 110)
While beginning the facility testing sooner than
June 1 may be wise, I contend that beginning the testing
in early March is much sooner than necessary.I do not
believe that the plant will need to be operated to meet
customer demands until at least June.I see no reason for
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Uni ted Water to be paying extra just to have the plant
sitting idle approximately three months before it is
needed.United Water s customers derive no benefit from
having the proj ect completed early.Furthermore, if
Uni ted Water desi~ed to have the plant completed earlier
than June 1, it should have included that requirement in
the original contract or begun the proj ect sooner.As I
pointed out earlier in my testimony, the scheduled
completion date of the proj ect was already delayed by a
year by United Water.The proj ect' s scheduled completion
date has always been within United Water s control.
United Water is contractually obligated to make
the bonus payment for early completion.Howeve r ,
recommend that none of any bonus payment ultimately paid
be passed on to ratepayers.
Has United Water provided any other
justification for agreeing to pay an early completion
bonus?
Yes.In response to Staff Production Request
No. 120, United Water states that it estimates a cost of
$5,000 to $6,000 per day for CDM to remain on site.The
net effect of providing an early completion bonus, the
Company states, saves the proj ect and customers $1,500-
500 per day for each day of early completion.
If early completion saves customers $1 500-
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500 per day for each day of early completion, do you
still recommend that United Water not be allowed to
recover from customers the cost of bonus payments?
If United Water can conclusively demonstrate
that the proj ect cost has been reduced by $5,000 to $6,000
per day for each day an early completion bonus has been
earned, then I would not oppose payment of an early
completion bonus.However, nothing in the contract
between United Water and CDM indicates that CDM will
reduce the proj ect costs if the proj ect is completed
early, nor is there anything in the contract that requires
CDM to reduce its proj ect management fee.In fact, as
discussed earlier, I see no incentive in the contract for
CDM to complete the proj ect for less than the contract
amount because all of the savings, if any, will go to
Uni ted Water.To date, the Company has provided no
evidence that the proj ect cost has been reduced because of
early completion or that the proj ect management fee to CDM
has been reduced.Absent convincing evidence, I must
oppose recovery of the early completion bonus payment.
CWTP Over Sizing
Do you believe the CWTP is properly sized based
on the Company s current needs?
Yes, I do.The plant is designed for an initial
capacity of 6 million gallons per day (MGD) , which the
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Company will be able to fully utilize this summer.The
plant capacity can be increased to 10 MGD just by adding
more membrane fil ters to the existing treatment building.
The ultimate capacity of the plant is expected to be
MGD , but full expansion will require some maj or
construction.
There are portions of the current plant however
that are designed for future use and expansion.For
example , approximately 2.8 of the 11.5 acres (24.5%) on
which the plant sits are currently unused and are intended
for an additional future clear well , an additional future
solids handling basin, and a future Aquifer Storage and
Recovery (ASR) proj ect I bel ieve it was prudent for
United Water to acquire all of the land it believed would
eventually be necessary to accommodate the plant
facilities at full build out; however , that portion of the
investment in land that is not currently being used should
be booked as plant held for future use.Staff witness
Harms has made this adjustment in her Exhibit No. 111.
In addition , I believe that approximately 3,200
of 23,160 square feet of floor space in the treatment
building have no apparent current use.A portion of this
vacant space appears reserved for possible future use for
ul traviolet disinfection if it is eventually necessary.
At an estimated cost of $110 per square foot for the
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treatment building, $352,000 (3,200 x $110) of this
investment should be booked as plant held for future use.
Staff witness Harms has made this adjustment in her
Exhibit No. 111.
CWTP Operation and Maintenance Expenses
The CWTP is not operational as of the
preparation date of this testimony; therefore, how can you
know what the operation and maintenance expenses are for
the plant?
Qui te simply, we can United Water has made
estimates of what it thinks operation and maintenance
costs will be, but until the plant has been operational
for a significant period of time, operation and
maintenance costs cannot accurately be known.Throug hou t
the course of this proceeding, United Water has continued
to provide updated information as it becomes available and
it is my understanding that even more updated information
will be provided by the Company in its rebuttal testimony.
However , chasing such a moving target has been extremely
difficult and frustrating for Staff.Even with updated
informat ion unti 1 the time of the hearing in thi s case, we
still will not really know what the actual operation and
maintenance costs of the CWTP will be.
Do you agree with United Water s estimated
operation and maintenance expenses for the CWTP?
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No; therefore, I am proposlng some adj ustments.
As mentioned, accurately estimating operation and
maintenance expenses for the CWTP is difficult because the
plant is brand new and has no existing record of these
expenses.In addition, the CWTP uses a much different
technology than the existing Marden plant, so operation
and maintenance costs of the two plants are not directly
comparable.Power , chemical , and labor costs will likely
be quite different for the two plants.
United Water and its consultants have estimated
operation and maintenance costs for the CWTP.I am
recommending that the power cost estimate for the plant be
reduced because I believe that the electric rate used to
develop the assumption is too high.Instead of the $0.045
per kWh assumed by Uni ted Water , I have used a rate of
$0.0368, which is the current Schedule 9 rate without the
PCA and includes demand, energy, customer, and basic load
charge s Use of this rate reduces United Water s estimate
for operation costs by $43,891 per year.This adj ustment
is incorporated in my adjustment no. 11.I am accept ing
United Water s estimate for chemical costs for the new
treatment plant.
Adjustments to Rate Base
Staff witness Harms made several adjustments to
rate base associated with water rights of United Water,
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and stated that you would discuss each of these
adjustments.Please discuss each of these adj ustments
Each of the three separate adj ustments is
discussed below.
Integrated Municipal Application Package (IMAP)
What is the Integrated Municipal Application
Package (IMAP)?
United Water has filed 99 Applications for
Transfer of Water Rights (Licenses and Statutory Claims)
and 13 Applications for Amendment (Permits) with the Idaho
Department of Water Resources.The 112 applications are
known as the Integrated Municipal Application Package
(IMAP) and are based on existing uses and the Idaho
Municipal Water Rights Act of 1996 (ACT)The Act allows
municipal providers to hold water rights for reasonabl y
anticipated future needs " within a planning period
accommodate growth in municipal service areas.IMAP will
conform Uni ted Water s rights to the Act.
United Water documented a 50-year planning
period for IMAP, including estimates of population growth
and increased water needs.The Company anticipates a
water demand of about 420 cfs within 50 years.Existing
United Water rights describe about 310 cfs, although
current peak demand is about 150 cfs.The difference
between the rate currently described by the rights (about
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310 cfs) and the current peak flow (about 150 cfs) is
about 160 cfs.Uni ted Water requests approval to hold
about 160 cfs for future growth
What adjustment are you proposlng associated
with IMAP?
I am proposlng that $644 700 in investment
related to the Company s IMAP activities be excluded from
rate base.I am not challenging the prudence of IMAP
activities in any waYi in fact, IMAP is something United
Water should be doing.Clearly, however , IMAP is intended
to preserve and protect water rights for future use.As a
resul t, I am recommending that all investment associated
with IMAP be booked as plant held for future use.
Aquifer Storage and Recharge (ASR) Water Permi t
Please discuss your recommended adjustment
related to one of the Company s water rights for Aquifer
Storage and Recovery.
United Water holds permit no. 63-31409, which
lS a right to divert up to 20 cfs of flood flow
specifically for the purpose of ground water recharge.
Uni ted Water intends to use this right for aquifer storage
and recovery (ASR) at the Marden and Columbia water
treatment plants.However, United Water currently has no
capability for ASR at either plant.Consequently, this
right is not currently used and useful and should
CASE NO. UWI -W- 04-04/06/05 STERLING, R.
STAFF
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booked as plant held for future use.The amount to be
removed from plant in service is $29,697.
Initial Butte Water Right Purchase
Please describe the Initial Butte water right.
The Initial Butte water right actually consists
of three separate licenses (02-2341 , 02-2358, 02-2420)
Previously under the water rights, water was diverted from
the Snake River to irrigate 2055 acres of land located
south of Nampa and north of the Snake River.The water
rights allowed a total volume of 9247.5 acre-feet to be
diverted at a maximum diversion rate of 35.21 cfs.Uni ted
Water purchased these water rights for the purpose of
supplying water to its Marden and Columbia water treatment
plants.In order to be able to use this water at the
plants, however , the Company had to execute an ~exchange.
The exchange of water authorizes United Water to divert,
for irrigation purposes within its authorized serVlce
territory, up to 35.21 cfs from the Boise River in
exchange for the same amount under water rights 02 -2341
02-2358, and 02-2420 from the Snake River and subject to
the conditions of approval of the exchange.The amount of
flow made available through non-diversion under the Snake
River water rights will remain in the Snake River to and
below the mouth of the Boise River to fully replace the
exchanged amount diverted from the Boise River.
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What restrictions are associated with the use
these water rights?
United Water s diversions from the Boise River
under the exchange can only be made during times when the
Bureau of Reclamation is providing flow augmentation water
from Boise River reservoirs pursuant to the NOAA Fisheries
flow augmentation program.Uni ted Water cannot divert
under these rights from June through February each year so
as to reduce flows in the Boise River to less than 240
cfs, and cannot reduce flows to less than 1100 cfs from
March through May.These restrictions effectively limit
United Water from being able to fully utilize all of the
water purchased under the Initial Butte purchase.
fact, the practical limit is approximately half of the
amount of the Initial Butte water rights.Depending on
the amount of water available in the Boise River storage
system in a given year , Uni ted Water expects to be able to
secure approximately 3,500 to 4,900 acre-feet of water
under these rights.
Will United Water ever be able to fully use the
Initial Butte water rights?
In order to be able to use the full amount of
the Initial Butte water rights, United Water will have to
find a way to either get water from the Snake River to its
water treatment plants, or more realistically, to get
CASE NO. UWI -W- 04-04/06/05 STERLING, R.
STAFF
(Di) 36
Snake River water into the Boise proj ect irrigation system
and execute another exchange wi th a water user diverting
Boise River water.
How much did United Water pay to acquire the
Initial Butte water rights?
The total cost to Uni ted Water , including
purchase costs, closing costs and legal fees, was
$1,838 560.
What is your recommendation regarding the
Initial Butte water rights purchase?
Based on the average rate base calculation
recommended by Staff, I am recommending that $677,452 of
the investment be excluded from rate base.This amount
represents the proportionate cost for the 5748 acre-feet
(9248-3500=5748) of water that currently cannot physically
be used.I based this adjustment on the lower amount that
the Company indicates it may be able to use because in a
very low water year as this one is expected to be, it
likely that no water will be available from the Initial
Butte water rights.At such time in the future when
United Water develops the physical capability to fully
utilize all of the water authorized under the Initial
Butte water rights, United Water can seek to add the
excluded amount to rate base.
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Adjustments to Test Year Revenue and Expenses
Staff wi tness English states in his testimony
that Staff disagrees with many of the test year expense
adj ustments proposed by Uni ted Water in this case.
Exhibit No. 108, he shows Staff's proposed adjustments,
but stated that you would discuss adjustment nos. 9, 11,
12, 13, and 3 1 .Please proceed to discuss each of these
adj ustments.
I discuss each of the adjustments in order
below.Exhibit Nos. 121-125 show my computations for each
adj ustment.
Adlustment No.9 - Adlustment of Purchased Water Cost
Before discussing the details of this
adj ustment, please discuss how Uni ted Water acquires raw
water (untreated surface water) for use at its treatment
plants.
United Water acqulres raw water uslng a variety
of mechanisms.First, to the extent they are available,
United Water acquires ownership of water rights, like
Initial Butte which I previously discussed, that authorize
water to be diverted from the Boise River.Owned water
rights are considered capital assets, and investments made
to acquire them are capitalized for rate making purposes.
Second, Uni ted Water makes contractual purchases
of water through a variety of mechanisms including lease
CASE NO. UWI -W- 04-04/06/05
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and rental agreements , and ownership and lease of shares
in canal companies.Some of the purchases made using
these mechanisms are annual agreements, while others may
extend for several years.In every case, however , Uni ted
Water is required to make one or more annual payments,
usually in the spring of the year once water availability
is known and prices are established.Water acquired
through these mechanisms is considered ~purchased water
and booked as an expense for ratemaking purposes.
The combination of owned water rights and
contractual purchases make up a portfolio intended to
fully meet the raw water requirements of the Marden and
Columbia treatment plants.The availability of Idaho
water supplies from year to year dictates how much of each
water right can be satisfied, as well as the amounts and
prlces of water available for purchase, lease or rent.
Uni ted Water must decide each spring how much water to
purchase based on its forecast of water needs and
availabil i ty.
Uni ted Water proposed an adj ustment to test year
purchased water costs of $87 528.Please describe how the
Company arrived at its proposed adjustment amount.
The proposed adjustment consists primarily of
new contractual water purchases that the Company assumes
it will make prior to the CWTP becoming fully operational.
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To arrive at its proposed adj ustment amount, Uni ted Water
took the actual purchased water expense in the test year,
added the estimated costs for three purchases it expects
to make in the coming year , and adjusted upwards the cost
of one exi ting contract that is paid based on the quanti
of water taken from Lucky Peak storage.
Do you agree wi th the Company s proposed
adjustment?
I agree that some adjustment is appropriate, but
I disagree with the amount proposed by the Company.
Contracts have yet to be signed for some of the raw water
purchases the Company estimated it would make;
consequently, they are not known and measurable.Onl y one
new contract for $20,400 with the South Boise Water
Company had been signed as of the preparation date of this
testimony.I recommend that the pro forma purchased water
expense consist of the budgeted test year expense of
$97,437 as documented in the Company s supporting
workpapers, plus the $20,400 for the one new signed
contract.Thus, Staff's proposed adjustment is $20,400 as
shown in Exhibi t No. 121.
Why are you proposing to begin wi th the budgeted
test year expense in making your adj ustment rather than
the actual test year expense?
I recognize that the actual purchased water
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- -- -- _- _- -
expense for the test year of $107 788 was greater than the
budgeted test year expense of $97 437.However , the
objective in adjusting purchased water costs is to
determine an amount representative of normal water
conditions, not water conditions that may be expected to
occur this year or as they may have occurred during the
test year.As a resul t, I used the budgeted test year
amount because I believe it better represents the level of
expenses Uni ted Water expects would occur in a normal
year.I believe the actual expense for the test year was
higher than normal because Uni ted Water had to purchase
water to make up for other water that was unavailable due
to poor water conditions in 2004.In fact, I believe
United Water is estimating even higher purchased water
expenses for 2005 because of even worse water conditions
that will preclude it from receiving its full allotment
under its water rights, contracts, leases, and shares in
canal companies.
Why have you excluded many of the water
purchases United Water expects to make to supply water for
the CWTP?
In the workpapers provided by United Water in
support of its proposed adj ustment amount, the Company has
In many instances included estimates of amounts it expects
to spend for specific purchases (Fairview Lateral Di tch,
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- -
Black Canyon Irrigation, Basin 63 rental pool, etc.
However , without signed contracts establishing specific
prices, the Company s estimates are simply not known and
measurable.Unlike the CWTP construction contract where
there is a contract wi th a guaranteed maximum price, there
are no signed contracts for water purchases in many cases.
Staff is aware that United Water intends to sign contracts
for addi tional water purchases prior to the summer, but
without contracts in hand, or when contracts are provided
to Staff at the 11th hour , Staff is unable to review them
in the time frame established for this rate case.
Consequently, Staff recommends they be considered in a
future case.
Has United Water made any attempt to normalize
its purchased water costs to consider the effect of
varYlng raw surface water cost and availabili ty from year
to year?
No, United Water seems to have made no attempt
to normalize its raw water purchase costs.
You discussed earlier that United Water builds a
portfolio consisting of a combination of owned water
rights and purchased water to supply water for its water
treatment plants.Is your proposed adjustment to
purchased water costs related to United Water s investment
to acquire the Initial Butte water rights?
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(Di) 42
Yes , the adj ustment to purchased water expenses
lS interrelated with the Company s Initial Butte water
rights purchase.As I stated earlier , United Water is
only able to currently utilize approximately half of the
Initial Butte water rights due to seasonal minimum stream
flows that must be maintained in the Boise River and
inability to utilize water from the Snake River.Because
only half or less of the Initial Butte water can be
utilized, additional contractual water purchases are
necessary.United Water should not be allowed to recover
both the full investment for the Initial Butte water
rights and the costs of contractual purchases of
additional raw water because once Initial Butte is fully
utilized at some time in the future, additional
contractual water purchases likely will not be necessary.
Thus, I propose that if the Commission decides to allow
only half of the investment in Initial Butte water rights
to be included in rate base, it consider allowing known
and measurable adjustments to purchased water expenses.
However, if the Commission decides to allow all of the
Initial Butte water rights investment in rate base, it not
allow full recovery of all of the raw water purchase
expenses intended to supply the CWTP.
Adlustment No. 11 - Adlustment of Purchased Power Expense
United Water proposed an adjustment to test year
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- -- _---n - _
purchased power expense of $514 265.Do you agree wi
the Company s proposed adjustment?
The purpose of this adjustment is to adjust for
the effect of Idaho Power s PCA on purchased power
expense, and to adj ust for expected power costs at the
Columbia Water Treatment Plant and the associated raw
water pumping station.I agree that an adjustment
appropriate, but disagree wi th the amount proposed by the
Company.I instead recommend an adj ustment amount of
$283,459.My proposed adjustment removes the effects
Idaho Power s PCA from both the test year and from the
current rates being applied to the estimated usage.
addition , my adjustment also utilized more accurate
estimates of energy consumption amounts for the raw water
pumping station as provided by the Company in response
Staff Production Request No. 94.In addition, I adjusted
the cost assumed by the Company for CWTP redundant power
and stand by charges to correspond to more accurate cost
estimates included in the Company s response to Staff
production Request No. 95.Computations in support of my
proposed adj ustment are included as Exhibi t No. 122.
Adl ustment No. 12 - Adl ustment of Deferred Power Expense
Please explain the purpose of this proposed
adj ustment
The purpose of this adjustment is to reflect the
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amortization of deferred power expenses as established in
Order No. 28505 in Case No. UWI-OO-In that order,
the Commission stated,
United Water has requested authorization to
defer on its books beginning May 1, 2001
certain electric power costs. The Commission
finds it reasonable to authorize such adeferral. The Company also proposes to apply a
carrying charge on unamortized deferral balances
at a rate equal to the customer deposi t rate.
The Commission finds it reasonable to reserve
judgment on the recovery of the amount deferred
as well as the appropriateness of any carrying
charge until actual recovery is requested.
United Water in this case is proposing to
recover an amount of $1 550 000.This amount represents
the Company s estimate of the deferral balance as it has
accumulated from May 1 , 2001 through May 31 , 2005.United
Water is also proposing to amortize this amount over three
years.
Do you agree with the adjustment proposed by
United Water?
I agree that United Water should be permitted to
recover some amount of the deferral.However , I do not
believe that the Commission should authorize recovery
the full amount requested by United Water.The purpose of
the deferral was to allow United Water to seek some relief
from the extraordinarily high power prices that resul ted
from the 2000-2001 Western energy crisis.As depicted in
Exhibit No. 123, page 2 of 3, Mid-C prices had subsided by
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mid-summer 2001, and Idaho Power s monthly PCA deferrals
had returned to more normal levels by the beginning of
2002.Idaho Power began recovering the massive PCA
deferrals from customers through PCA rate adjustments in
May of 2001.As shown on Exhibit No. 123, page 3 of
the average PCA charged to customers remained
exceptionally high from May 2001 through May 2003.
Although the PCA has remained fairly high since May 2003,
it has been far below what it was the previous three
years.I believe that the PCA surcharges since May 2003
have been almost exclusively the result of below normal
water conditions, and have not in any way been influenced
by the extreme market prlce crisis of 2000-2001.
If you agree that Idaho Power s current PCA
surcharge is considerably higher than it was historically
prior to 2001, why don t you believe United Water should
be permitted to continue to defer its unusually high power
expenses?
I do not believe the Commission s authorization
in Order No. 28505 for a deferral of power costs was
intended to permit United Water to recover above normal
power costs that were strictly due to poor water
conditions.I believe the deferral was intended only to
provide temporary relief from the extremely high power
costs resulting from the short-term Western energy crlSlS.
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Absent highly unusual circumstances ike occurred in 2000-
2001 , electric prices will deviate both above and below
normal , and Idaho Power will have both PCA surcharges and
credi ts.Consequently, I propose that Uni ted Water only
be allowed to recover a deferral amount accumulated
between May 1, 2001 and May 31 , 2003.Thi s amount, based
on the Company s accounting records, is $1 033,220.
United Water has proposed to amortize deferred
power expenses over a period of three years.Do you agree
with the proposed amortization period?
No, I believe that United Water s proposed
amortization period of three years is too short.In my
opinion there are several things that should be considered
when determining a reasonable amortization period for
deferred expenses.First, I believe that the length of
time between rates cases is a factor.United Water s last
rate case was four years ago in 2000.Second , I believe
the amortization period should stretch over a period
least as long as the time over which the deferral was
accumulated.As discussed previously, I am recommending
that deferred amounts accumulated over a two-year period
from May 2001-May 2003 be approved for recovery.Finally,
I believe that the length of the amortization period
should be long enough to soften the impact on ratepayers,
compared to the impact that would have been fel t if the
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expenses had been simply passed through during the time
while they were being incurred.For these reasons, I
recommend an amortization period of four years.
approvlng deferral of extraordinary power costs, the
Commission gave relief to the Company and its
shareholders.By approving a four-year amortization
period, I believe the Commission would be balancing the
relief provided to the Company with commensurate relief
provided to customers.Using a four-year amortization
period and my recommended deferral amount, the pro forma
annual amortization expense is $259,524.
United Water has applied a carrying charge rate
of one percent to the deferral balance.Do you agree that
this is appropriate?
The carrying charge rate proposed by United
Water is based on the annual customer deposi t interest
rate approved by the Commission for Idaho Power in Case
No. IPC-OI-07, Order No. 28722.Staff believes a
carrYlng charge is not warranted because, absent the
deferred authori ty, these costs would not be recovered at
all.Recovery of the actual expenditures from the
deferral period, Staff believes, is sufficient relief
wi thout also applying a carrying charge.However, since
these expendi tures are associated wi th the Western power
crisis, and are totally outside the control of United
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Water , Staff is willing to accept this carrYlng charge
rate as appropriate for this issue in this case.
Computations in support of Staff's proposed adj ustment are
incl uded as Exhibi t No. 123, page 1 of
Adjustment No. 13 - Adjustment of Chemical Expense
What is your recommendation wi th regard to
adjustments to chemical expenses?
The purpose of this adjustment is to normalize
chemical expense uslng test year usage at current prices,
to adjust for expected chemical usage at the CWTP, and to
normal i ze phosphate usage.I recommend accept ing the
portion of the adjustment intended to normalize test year
chemical expenses at current prices.I al so recommend
accepting the estimated chemical expense associated with
the CWTP.However, I recommend rej ecting that portion of
the adjustment intended to normalize phosphate usage.
Why do you recommend rej ecting the portion
the adjustment associated with phosphate usage?
The Company states that the phosphate expense
has been normalized upward by $15,000 from the test year
level because ~Company operating personnel have learned
through experience th~t certain areas of the system become
unstable ' in the winter season , leading to an increased
level of customer complaints, unless phosphate use
cont inued through the winter season.(Reference Healy,
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Di.,
p.
16, lines 14-18)Without judging the Company
rationale, the fact remains that United Water did not
increase its phosphate usage in the test year by $15,000;
it only speculates that increased usage will be necessary
in the future.The speculation about increased phosphate
usage in the future simply fails the test of being known
and measurable.Computations in support of Staff'
proposed adj ustment are included as Exhibi t No. 124.
Adjustment No. 31 - Adjustment of Expenses Related to
Weather Normal i za t ion
Do you agree wi th the Company s proposed
adjustment of expenses related to weather normalization?
Yes; however, I have made a very minor change to
the Company s proposed adjustment to maintain consistency
with my earlier recommendation to remove the PCA from the
power cost computations.The purpose of this adjustment
is to normalize variable power costs and chemicals due to
the negative weather normalization adjustment made by
Uni ted Water.Removing the PCA effect from the power cost
reduces the Company s total variable costs, thus slightly
reducing United Water s proposed adjustment.Computations
in support of Staff's proposed adjustment are included
Exhibi t No. 125.
Pro Forma Revenue Adjustments
United Water witness Gradilone has made several
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adjustments to test year revenues as shown on his Exhibit
6, Schedule 1 , page 2 of Do you agree with his
proposed adjustments to test year revenues?
I have reviewed his proposed adj ustments and
agree with the adjustments for a) full pricing of South
County water sales , b) weather normalizing adjustments,
annualization of growth during the test year, and
annualization of growth through May 31, 2005.These
adjustments are shown in columns (2)(3) ,( 4), and ( 5 )
respectively of Exhibi 6, Schedule 1, page 2 of
Are you proposing any other adj ustments
revenue?
Yes, I am proposlng two minor adj ustments
revenue at proposed rates.First, Uni ted Water wi tness
Gradilone in Exhibit No.6, Schedule 1 page 2 of 2 on line
7 shows revenue associated wi th bulk hydrant sales.
United Water s practice is to bill for bulk hydrant sales
at the normal commodity rate charged to all other
customers.If the commodity rate for all other customers
lS increased , a corresponding increase should be reflected
in the revenue at the new proposed rates.I have
reflected this increase in Staff's Exhibit No. 126.
I am also proposing an increase in the rate
United Water charges for rent on construction meters
commensurate wi th the overall increase Staff recommends in
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thi s case.I recommend that the rental rate on
construction meters be increased from $20 per month to $25
per month.Even though Uni ted Water has not proposed an
increase in the meter rental rate, I believe it would be
inappropriate to not increase this charge associated
exclusively with new construction, while increasing the
commodity rates for all other customers.The increased
rate will have a very minor effect on the Company
revenues; nevertheless, the effect has been incorporated
in Exhibi t No. 126.
Rate Design
What do you believe should be the objectives of
a good rate design?
There are many objectives , but I believe some of
the most important are fairness, simplicity, effectiveness
in sending a conservation signal, and sensitivity to the
needs of low- income customers.
Customer Charges
Uni ted Water is proposlng to increase the
customer charge by 36.4 percent.Do you agree wi th thi s
proposal?
No, I do not.The Company s proposal is to
lncrease the customer charge by a percentage equal to hal
the difference between the overall requested revenue
increase of 22.46 percent and the 51.1 percentage increase
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it believes can be supported by its cost of serVlce study.
For a typical residential customer wi th a %- inch meter,
the customer charge would lncrease from $14.57 bi-monthly
to $19.86.
In his testimony, Company wi tness Peseau states
the definition of customer costs as defined by the
American Water Works Association as follows:
Costs directly associated wi th serving
customers, irrespective of the amount of wateruse. Such costs generally include meter
reading, billing, accounting, and collecting
expense, and capi tal costs related to meters andassociated services.
On the other hand, he also acknowledges that the
Commission Staff recently, in Case No. IPC-E- 03 -13,
proposed that customer costs for electric utili ties be
defined more narrowly.In that case, the Commission
accepted Staff's position that customer costs should be
based on the direct costs of meter reading and billing and
should not include any fixed plant cost.In Order No.
29505 issued on May 25, 2004 , the Commission stated,
The Commission finds that a monthly service
charge should recover costs that are directly
attributed to the customer paying the charge.
Typically, these charges are related to meter
reading and customer billing. ... The Commission
finds that the appropriate service charge for
residential customers is $3.30 per month. This
is an increase of 31.47%. We find a service
charge of that amount provides a reasonable
balance between recovering specific customer
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service costs in ,a fixed fee while preserving
the ability to provide price signals forconservation purposes. Order at p. 53.
In an even more recent rate case for Avista,
Avista proposed to increase its basic customer or minimum
monthly charge from $4.00 to $5.00 for residential
customers.In rej ecting the proposed increase, the
Commission stated on October 8, 2004,
The Commission is unwilling to dampen the
incentive for customers to conserve energy. For
the residential customer that incentive
generally a price signal and the ability to
control the total bill amount. We find that the
present customer charge for residential
customers is sufficient to provide the Company
with recovery of those costs that are directly
attributed to the customer taking service.
find that those charges are related to meter
reading and customer billing costs, in this caseapproximately $2. 62/residential customer. While
we are not incl ined to increase the charge;
nei ther do we find a compell ing reason todecrease it. Order No. 29602 at
p.
33.
I recommend an approach in thi s case that is
consistent with that accepted in the Idaho Power and
Avista cases.Based on Uni ted Water s cost of service
study, customer related metering and billing costs
represent $3,752 687 of the Company s total normalized pro
forma annual expenses of $38,141,514 (Peseau, Exhibit No.
, Schedule 1, p. 1 of 2)If metering and billing costs
were converted to a bi -monthly customer charge, the rate
would be $7.04 for a typical residential customer with a
%-
inch meter.The current bi-monthly customer charge for
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this customer is $14.57.Because the current charge
already exceeds the charge that could be supported by the
cost of serVlce study for just customer billing and
metering costs, I do not recommend an increase in the
monthly customer charge.Even at the current rate ($14.
bi-monthly = $7.29 monthly), United Water s customer
charge is more than double Idaho Power s and nearly double
Avista ' s.
Are there any other reasons why you oppose any
lncrease in the bi -monthly customer charges?
Yes, another reason I oppose an increase in the
customer charge is because it would have a
disproportionate effect on customers who use small amounts
of water.For these customers, the customer charge
represents a greater proportion of their bill.For
example, if United Water s proposed 36.4 percent increase
in customer charge and 21. 5 percent increase in commodi ty
charge were accepted, a customer with minimal consumption
would face an overall increase closer to 36 percent, while
a customer with a very large volume of consumption would
face an overall increase closer to 21.5 percent.This
tends to place more of the overall lncrease on those
customers who are likely to already be more conservative
in their water use.I do not believe these customers
deserve to be ~penalized" for their conservative
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consumpt ion habi t s
In addi t ion , many low- income customers are more
likely to also be small water users.Staff has an
interest in minimizing the impact of a rate increase on
low- income customers, and maintaining customer charges at
their current level will help to accomplish that
obj ect i ve
Given that United Water s current customer
charges are more than double an amount you estimate
necessary to cover meter reading and billing costs, do you
recommend a decrease in bi -monthly customer charges?
No, I do not.Because the likely outcome of
this case lS an overall lncrease in rates, I think that a
reduction in any single component of rates is a step in
the wrong direction unless there is a very compelling
reason to do so.In addition , a substantial decrease in
the customer charge could create cash flow problems for
United Water because so much more revenue would then have
to be collected through commodity charges in the summer
months when the maj ori ty of the consumption occurs.
Finally, water utilities generally have much higher fixed
costs per customer than electric utili ties; therefore,
do not believe it is unreasonable to collect a little more
than just meter reading and billing costs in the customer
charge.
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United Water s Proposed Rate Design
In its Application , United Water has not
proposed a new rate design but has instead proposed to
retain the current rate design consisting of a fixed bi-
monthly customer charge and a commodi ty rate wi th a
summer/winter rate differential of 25 percent.Do you
believe that the current rate design should be maintained?
Although my preference is a two-block inverted
rate design which I will discuss shortly, the current rate
design has some posi ti ve features.First, the current
rate design has been in place since 1993.Customers have
now generally become accustomed to the summer/winter rate
differential.Most understand its rationale and
objectives, and many are motivated to conserve by the
higher summer rates.Based on the number of comments and
complaints received by the Commission Staff , many
customers dislike the summer/winter rate differential
believing that they are paying an unjustified ~premium
for summer water use rather than viewing it as getting a
discount" for water used the remainder of the year.
While Staff does not necessarily regard the number of
complaints as an indication of a good rate design, the
number of complaints regarding the seasonal rate
differential is at least some indication that higher
summer rates get customers ' attention and motivate some
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people to conserve.
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.
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.
25% Summer/Winter Rate Differential
Do you believe the 25 percent summer/winter rate
differential should be maintained?
Yes, I do.By having a commodity rate that
25 percent higher in the summer than in the winter,
customers are sent a strong conservation signal that helps
to lessen United Water s peak summertime demands.
Furthermore, I agree wi th Uni ted Water wi tness Peseau ' s
conclusion from his cost of service study that there is a
substantial difference in commodity costs of service
between the winter and the summer.
Do you believe that the summer/winter commodity
rate differential should be increased to more than
percent?
No, I do not.I have reviewed United Water
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witness Peseau s cost of serVlce analyses that show that
the seasonal rate spread based on cost of service falls in
the range of 25-70 percent.Al though thi s is a very broad
range and far from a preclse conclusion , I do believe
demonstrates that a seasonal differential of at least 25
percent is warranted.I am not incl ined to propose a
seasonal rate differential greater than 25 percent,
howeve r .The 25 percent rate differential has been in
place for more than 10 years now.Most customers, I
believe, are now very aware of the rate differential.For
many customers, if not most , the 25 percent rate
differential , especially when combined with much higher
summertime usage and bi-monthly bills, is enough to send a
very strong conservation signal.Al though a greater
seasonal rate differential might be supported by cost of
servlce, if the seasonal rate differential were increased
even further , I expect it would be met wi th extreme
resistance from many customers.Thus, I believe the
current 25 percent seasonal rate differential should be
maintained.
Rate Design Al ternati ves
If the Commission wishes to consider alternative
rate designs, what is your recommendation?
Before any consideration is given to changing
the current rate design, I believe that the Commission
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first needs to decide whether the practice of bi-monthly
billing should be continued.Because there is a lengthy
lag under bi-monthly billing between when water is used
and when the cus tomer is bi 11 ed for it, cus tomers have
limited ability to respond to price signals.Since one of
the obj ecti ves of good rate design is to send appropriate
prlce signals, no rate design can be very effective if the
price signal it sends is always two-months too late.
Are there other issues to consider with regard
to bi -monthly billing?
Bi-monthly billing, combined with theYes.
current 25 percent higher summer commodity rate tends to
greatly inflate nearly all customers ' summertime bills.
For some customers , the higher summertime bills are so
much higher that they have difficulty budgeting and paying
them.Monthly billing could relieve at least some of the
burden of extremely high summertime bills for many
customers.
Would movlng to monthly billing dilute the prlce
signal in the summertime?
Because each bill , including those in the
summer , would be half as large under monthly billing,
there is some possibility that the price signal would be
diminished.However, because there would only be a one-
month lag between consumption and billing, and because
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there would be a monthly prlce signal sent, I bel ieve
customers would receive just as strong of a conservation
message as with bi-monthly billing.
Has United Water estimated the cost of
converting to monthly billing?
Yes, the Company estimates the incremental cost
of monthly billing as $1 086,000 per year.That cost
alone would require an increase in the Company s annual
revenue requirement of approximately 3.4 percent.The
Commission would have to weigh this incremental cost
against the benefits of monthly billing.Most likely,
some customers would prefer to retain bi-monthly billing
if it meant no increase in rates, while others would agree
to pay more just to reduce the impact of their summertime
bills.
Is Staff proposing a new rate design in this
case?
No, Staff is not proposlng to change the current
rate design.
Why not?
In Case No. UWI-98-3, I proposed a change from
the current seasonal rates, but the Commission rej ected
proposal.In that case, I proposed a three-tiered
inverted block rate design.I believed that a three-tier
inverted block rate design would be more equi table, but I
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(Di) 61
acknowledge that it would also be more complicated.
Neither United Water nor Staff is proposing any
change to the current rate design in this case; however,
if the Commission wishes to consider a different rate
design , what type of rate design would you prefer?
My preference would be an inverted block rate
design consisting of two blocks that would be in place
year round.I believe an inverted block rate design would
accomplish all of the same obj ecti ves as the current
seasonal differential rate design , but would overcome some
of the problems.
Please generally describe your preferred
inverted block rate design.
Under an inverted block rate design, all
customers-residential, commercial , industrial and public
authori ty-would have a lower priced block and a higher
priced block that would remain in place throughout the
year.The consumption limits for each block would be set
for each meter size in proportion to the quantity of water
typically used by other customers wi th the same meter
Slze.The block limits would be designed so that most
customers ' usage would not fall wi thin the higher priced
block except in the summertime.Customers whose usage
remained fairly constant throughout the year may never
have their usage fall wi thin the higher priced block.
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Why do you prefer such an inclining block rate
design?
There are several reasons why I prefer it.
First, because rates remaln fixed throughout the year, it
sends a conservation signal year round.This would
provide a more consistent price signal to customers and,
unlike the current summer/winter rates, would send a prlce
signal before the summer season begins.Second, an
inverted block rate design does not give the impression
penalizing " those customers whose usage does not increase
significantly in the summertime.Third, by establishing
block limits based on meter size, an inverted rate design
can differentiate between the seasonal consumption
patterns of large customers.Many large customers,
particularly commercial and industrial ones, have a
relatively flat consumption pattern throughout the year
but under the current rate design, pay much more in the
summer for the same amount of water used in other seasons
of the year.In summary, I simply believe that an
inverted block rate design provides greater fairness for
more customers and still accomplishes a conservation
obj ect i ve
Has the Commission adopted inclining block rate
designs for other utilities?
Yes, both Idaho Power and Avista now have
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STAFF
(Di)
inclining block rate designs.
Are you recommending that an inclining block
rate design be implemented in this case?
My recommendation is that if the Commission
wishes to consider an inclining block rate design or other
al ternati ve designs, that further proceedings be ordered
in this case to enable al ternati ve rate designs to be
created, analyzed, and evaluated.
Rates
Given the revenue requirement increase of
$581 069 recommended by Staff witness Harms that includes
your adjustments to pro forma revenue as discussed earlier
In your testimony, how do you propose to adj ust rates to
collect the 1.84 percent increase in revenue?
I recommend that the commodity rates be
increased uniformly by 2.38 percent to collect the
addi tional revenues.
My recommended rates are shown in Exhibit No.
127.Fixed service charges that are based on meter size
remain unchanged from their present levels.Howeve r , the
fixed rates for street sprinkling and flat rate serVlce
have been increased by 1.84 percent, consistent wi th the
overall percentage increase In revenue requirement
recommended by Staff.Fire protection tariffs have also
been increased by the same percentage.My proposed
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STAFF
commodity rates are $1.0058 per ccf in the winter and
$1.2574 per ccf in the summer.
Have you prepared a rate proof to demonstrate
that your proposed rates will generate Staff's proposed
revenue requirement?
My rate proof is included as Exhibit No.Yes.
126.
Does this conclude your direct testimony in this
proceeding?
Yes, it does.
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