20050609Post hearing memo.pdf

WELDON B. STUTZMAN
DONOVAN E. WALKER
DEPUTY A TTORNEYS GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone] AND [phone]
IDAHO BAR NO. 3283 AND 5921
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IDAHO PUBLIC
UTiliTIES COtir1fSSrON
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorneys for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF UNITED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN
THE STATE OF IDAHO COMMISSION STAFF
POST -HEARING
MEM 0 RAND UM
CASE NO. UWI-O4-
INTRODUCTION
United Water Idaho , Inc. (UWI) filed an Application on November 30, 2004
requesting authorization to raise its rates and charges for providing water service to its
customers. UWI requested authority to increase its rates in excess of 21 %, alleging in its
Application that it needed additional revenues "to recover increased operating expenses and costs
associated with plant additions, and to produce a fair rate of return, thereby enabling it to
continue to provide adequate and reliable service to its customers.
The Commission Staff reviewed the evidence provided with UWI's Application, as
well as information obtained through an audit and discovery requests. On April 6 , 2005 , the
Staff filed its case recommending a rate increase of approximately 1.80/0 for UWI. Prior to the
hearing, Staff and UWI reached a settlement on an appropriate return on equity and cost of debt
which raised the Staffs recommended rate increase to approximately 4., and reduced UWI's
rate increase request to 17.50/0. Evidence presented at the hearing revealed significant
differences between Staff and UWI on specific accounting entries and precise dollar amounts to
COMMISSION STAFF
POST-HEARING MEMORANDUM
include in the Company s revenue requirement. A more significant issue, however, is the
difference between the Company and the Staff in the calculation of the test year rate base. The
rate base calculation is particularly important in this case because UWI's capital investment
during the test year it selected is significantly less than its investment after close of the test year.
Because the time provided for post-hearing briefs is limited, Staff will focus on the difference in
rate base methodology and will not discuss in this memorandum other issues that separate its
case from UWI's.
The Commission has Provided Clear Instruction
for Rate Base Methodology when Late Plant
Investment is Added to a Test Year
The test year selected for a rate case is intended to be representative of the normal
operations of a utility seeking a rate increase. It is appropriate to make adjustments to the test
year for occasional expenses or investments that are known and measurable. Making post-test
year adjustments for significant plant investment, however, presents real problems of a mismatch
between investments, operating revenues and operating expenses. The Commission in recent
rate case orders for Idaho Power Company and A vista Corporation discussed the mismatch
problem and required an adjustment to address it. For example, the Commission in the Idaho
Power case noted "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
and expenses.Tr. p. 784 quoting Order No. 29505. In both cases the Commission, in the
absence of an adjustment proposed by the companies, accepted a proxy adjustment to revenues
and expenses rather than waiting for future rate cases to include specific new plant investment in
rate base. It is important to note the Commission in both cases in addition to approving an
average rate base methodology, required an adjustment to revenues and expenses when post-test
year plant was included in rate base. The Commission also directed the companies in future
cases to present a corresponding adjustment to revenues and expenses if seeking full recovery of
plant investment as if the plant had been in operation a full test year. Tr. p. 785 quoting Order
No. 29602.
UWI in this case did propose one adjustment to revenues and expenses to account for
adding one significant post-test year investment in the entire test year. The Company s case
fails, however, to adequately address the mismatch problem identified by the Commission. Staff
addressed the problem by proposing use of a 13-month average rate base calculation, the same
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POST-HEARING MEMORANDUM
methodology approved by the Commission in the Idaho Power and A vista rate cases, and by
limiting the time between the test year and the investment.
The Company s Year-End Rate Base Methodology
Fails to Adequately Address the Mismatch Problem
The Company in its Application and prefiled testimony explained that it selected a
test year ending July 31 , 2004. The increase in UWI's rate base during the test year , however
was fairly insignificant, and the Company sought to
..
adjust the test year to include capital
improvements completed through May 31 , 2005, a date beyond even the hearing in the case.
The Company s rate base methodology is counter to recent Commission guidance, and even past
practice for UWI rate cases, in two distinct but related respects. First, the Company proposed a
year-end rather than 13-month average rate base. Second, UWI intended to add significant post-
test year plant at the period end investment amount, which affects the rate base as if the plant had
existed from the first day of the test year. The final costs of the most significant construction
project - the Columbia Water Treatment Plant (CWTP) - will not be known until sometime after
May 31 , 2005.
By using a year-end methodology to add in post-test year investment, UWI proposed
a rate base that increases dramatically after close of its chosen test year. UWI testified that its
rate base increased from $98 862 937, the amount approved in its last rate case, to more than
$140 000 000. Tr. p. 11. Of the $41.1 million increase, however, approximately 64%, or $26.
million, was not in service until after close of the test year on July 31 , 2004. The Company
proposed to continually update its investment figures to the time of or even after close of the
hearing on May 26 2005. The Company s approach to the test year presents significant issues of
fairness and mismatch between investment and revenues, and renders the purpose of a historical
. test year almost meaningless.
UWI recognized that the Commission in the A vista and Idaho Power cases expressed
concern "that when significant plant improvements are completed during the test period proper
or post-test year, there should be an effort made by the Company to identify expense reductions
and/or revenue additions associated with the plant improvements.Tr. p. 17. Accordingly, the
Company proposed an adjustment to revenues and expenses to correspond only to adding the
CWTP in the test year. UWI made one revenue increasing adjustment "attributable to the
CWTP"; that is, UWI increased test year revenue by $462 480 "to account for additional
COMMISSION STAFF
POST-HEARING MEMORANDUM
customers, annualized at existing rates, from July 31 2004, the end of the test year, through May
, 2005.Tr. p. 18. The Company also made one expense reducing adjustment "that is
attributable to the CWTP.Tr. p. 19. The Company s witness testified "an expense adjustment
for power and chemical expense of $139 580 has been made to reflect changes in system
operation caused by use of the CWTP." Tr. p. 20.
The Company s own testimony, however, demonstrates the difficulty in determining
an appropriate adjustment when adding late plant investment to the test year. A UWI witness
testified that, because "the amount of investment associated with a facility such as the CWTP is
known and measurable, the return and depreciation expense are easily calculated. Operations
and maintenance expense can also be estimated with a high degree of accuracy.Tr. p. 18. On
the other side of the equation, however
, "
the revenue producing and expense mitigating effects of
the CWTP are much more difficult to identify because they are not yet known and measurable.
Id. Even the Company s consultant conceded that "adding known and measurable changes to a
test year base case must be used with extreme caution because of the high potential for abuse.
Tr. p. 1057. That is because, according to the Company s expert
, "
in a rate case, utilities have
every incentive to identify changes that increase the revenue requirement, but no incentive at all
to find revenue enhancing changes." Tr. pp. 1057-58; Exh. 137.
Staff's Average Rate Base Methodology
is Fair and Complies with Commission Directives
Staff believes the Company s test year methodology unfairly inflates its rate base for
ratemaking purposes. Consistent with fairly explicit direction provided by the Commission in
the electric utility rate cases, Staff proposed two adjustments. First, Staff proposed use of an
average test year rate base. The purpose of an average rate base is to reduce the unfair impact
that plant added late in the test year or after the test year has on the rate base to be included in
rate recovery. The second adjustment Staff proposed is to restrict rate base to capital
improvements completed by December 31 , 2004 , rather than including everything in rate base up
to or even beyond May 3 1 , 2005, as UWI proposed.
Staff did propose an exception for the CWTP. Staff included the CWTP in rate base
as if it were in place throughout the test year, and so accepted the related revenue and expense
adjustment the Company proposed. That adjustment, however, did not address all of the rate
base issues. First, UWI proposed to include other than CWTP out-of-test year investment as if in
COMMISSION STAFF
POST-HEARING MEMORANDUM
place the full test year, but did not propose any corresponding revenue or expense adjustment.
The non-CWTP, post-test year investment totaled approximately $5 million. Second, UWI
proposed no practical cut-off date on plant to include in the test year, instead proposing to offer
updated figures for late plant it wanted to include up to the time of hearing. Staff recommended
cutting off post-test year investment, other than for CWTP, at December 31 , 2004. Even UWI's
expert witness conceded, when considering what limits to put on post-test year investment
there must be some limit on the time interval between the test year and pro forma adjustments.
Tr. p. 1058.
This case proves the incentive a utility has to find expense enhancing adjustments to
a test year when a year-end calculation is used, as demonstrated by a comparison with the Idaho
Power and A vista cases. In this case, UWI proposed to include 90 post-test year plant additions
it planned to make through May 31 , 2005 , a full 10 months after close of its test year. Tr. p. 783.
In Case No. IPC-03-, Idaho Power filed its application during the test year itself, and
provided actual test year balances prior to the time Staff prefiled its testimony. The Company
proposed to include only three plant additions that were made within five months after close of
the test year. Id. In Case No. A VU-04-, A vista included four plant additions completed
beyond the test year. In both cases, the companies used an average test year calculation. Even
, the Commission was concerned in both cases about a mismatch that occurs when investment
is included in rate base as if it were in service the entire year when it was not. The Commission
accordingly required an adjustment to revenues and expenses.
UWI argued that because the Commission accepted a year-end rate base in the
Company s rate cases since 1993 , it should be permitted the same methodology in this case.
First, in three rate cases prior to the 1993 case (Case No. BOI-93-1), the Commission used an
average rate base methodology for setting the Company s rates. In the 1993 case, the first case
where the Company filed without an average test year, the Commission stated that the 13-month
average test year "should have, at the least, been presented to us as an option in this proceeding.
Noting that another rate case would be filed in approximately one year, the Commission
instructed the Company "to present, as an option, a 13-month average calculation of rate base in
its next general rate case." Order No. 25062, p. 3, Case No. BOI-93-1. Second, it is clear the
Company was allowed use of a year-end rate base in later cases only because no party objected.
The Company complied with the Commission s instruction in the 1993 case and included an
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POST-HEARING MEMORANDUM
average rate base test year in its next filing. No party, however, including Staff, objected to the
Company s proposal to use a year-end calculation rather than the average rate base.
UWI implied in its rebuttal case that an average rate base test year results in
inadequate rates and thus is confiscatory. Dr. Peseau testified "Staffs thirteen-month average
rate base causes actual returns to be below the fair or allowed return. This in my opinion results
in a denial of fair earnings and a confiscation of shareholder property.Tr. p. 1040. Dr. Peseau
also contended that the Staff recommendation to allow in rate base 1/13 of post-test year
investment means "that the Company is denied a return on up to 92% of post test year
investment in plant." Id.
UWI exaggerates its argument by disregarding Staff s actual recommendation. Staff
proposed to include the CWTP as if it were in service during the entire test year, and the
treatment plant is a large majority of the post-test year plant investment. Far from denying up to
92% of post-test year investment in plant, Staffs rate base methodology results in a rate base of
$125 652 848, while the Company s calculation results in a rate base of$140 148 149 if accepted
at year-end balances through May 31 , 2005.
Finally, UWI argued in rebuttal testimony that characteristics of water utility service
distinguish the Company from electric utility companies, thus justifying use of a year-end test
year for UWI while an average test year may be appropriate for Idaho Power and A vista.
Specifically, UWI's expert identified "capital intensity" and "growth in rate base per customer
as "key determinates" of whether the 13-month average or year-end rate base would be most
appropriate, and claimed UWI "definitely qualifies as a capital intensive utility.Tr. pp. 1034-
35.
Even if UWI's theory were correct , the evidence does not support its underlying
premIse. When the Company s attorney asked a Staff expert witness whether "it's true that a
utility like United Water is more capital intensive than a utility like Idaho Power or Avista or
PacifiCorp," the witness responded ", that's not true.... Electric utilities are much more
capital intensive.Tr. p. 814.Under further questioning, the witness provided specific
information comparing UWI with Idaho Power:
Idaho Power has a much larger rate base per customer growth than United
Water does. Idaho Power added $124 million during its test year some
seven percent increase; United Water adds some $3 million during the test
year, which is about just under three percent. The investment per customer
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POST -HEARING MEMORANDUM
for United Water is significantly less, the rate base increase per customer for
United Water significantly less than the rate base increase for Idaho Power
and the Commission ordered at use or accepted and used average rate base in
that case, and they (Commission) made adjustments to any post-test year
made adjustments for post-test year investments.
Tr. pp. 826-27. Staff calculated the increase in rate base for UWI during its test year to be $41
per customer, while Idaho Power s rate base increased $300 per customer during its test year.
Tr. p. 832.
Clearly the theory that a year-end rate base for UWI is appropriate because the
Company is more capital intensive than electric utilities is unsupported in the record. The
Commission used average rate base test years for recent electric utility rate cases, and those
companies have incredibly larger rate bases per customer than does UWI.
CONCLUSION
Use of an average rate base methodology by the Commission is not new and in fact
was used in UWI's rate cases prior to 1993. The Company was able to use a year-end rate base
calculation in cases since 1993 only because no party objected. The Commission has continued
to use the 13-month average methodology in recent electric cases, and in addition has required an
adjustment to revenues and expenses to address the mismatch that occurs when post-test year
plant is added as if in service during the entire test year. This case exemplifies the problem
identified by the Commission, as UWI proposed to include in the test year significantly more
plant investment than as occurred during the year itself. By the Company s methodology,
selection of the test year is almost meaningless, since all plant would be added at amounts
updated to the time of the hearing, some ten months after close of the test year.
Staff proposed to use an average rate base methodology, but to include the CWTP in
the test year as if in service from the beginning of the year and accept the related revenue and
expense adjustment proposed by the Company. Staff s proposal addresses the mismatch
problem identified by the Commission, and results in a fair and reasonable rate base calculation.
If accepted by the Commission, the Staff proposal would provide a fair return on UWI's rate
base and would result in rates that are just, fair and reasonable to ratepayers as well as the
Company.
COMMISSION STAFF
POST-HEARING MEMORANDUM
Respectfully submitted this
bls/N:UWIWO404 Post Hearing Memo
COMMISSION STAFF
POST-HEARING MEMORANDUM
q4J-day of June 2005.
~ .
Weldon B. Stutzman
Deputy Attorney General
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 9TH DAY OF JUNE 2005
SERVED THE FOREGOING COMMISSION STAFF POST -HEARING
MEMORANDUM, 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
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701
DOUGLAS K STRICKLING
BOISE CITY ATTORNEY'S OFFICE
150 N CAPITOL BLVD.
PO BOX 500
BOISE ID 83701
CHUCK MICKELSON
CITY OF BOISE
150 N CAPITOL BLVD.
PO BOX 500
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WILLIAM M. EDDIE
ADVOCATES FOR THE WEST
PO BOX 1612
BOISE ID 83701
BILL SEDIVY
ID AH 0 RIVERS UNITED
PO BOX 633
BOISE ID 83701
BRAD M. PURDY
ATTORNEY AT LAW
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9627 W. DESERT AVE
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SCOTT L. CAMPBELL
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PO BOX 829
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~QJ~
SECRETARY
CERTIFICATE OF SERVICE