20050830Answer to UWI's petition to reconsider.pdf

WELDON B. STUTZMAN
DONOY AN E. WALKER
DEPUTY ATTORNEYS GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone] AND [phone]
IDAHO BAR NOS. 3283 AND 5921
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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
UTH 0 RITY TO IN CREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN
THE ST ATE OF IDAHO COMMISSION STAFF'
ANSWER TO UNITED WATER
IDAHO'S PETITION FOR
RECONSIDERATION
CASE NO. UWI-O4-
The Commission Staff, pursuant to IPUC Rule of Procedure 331.05, files this
Answer to United Water Idaho s Petition for Reconsideration. United Water filed its Petition for
Reconsideration on August 23 , 2005, asking the Commission to reconsider parts of its final
Order No. 29838 issued August 3 , 2005. The Commission Staff files this Answer in part to
address inaccuracies contained in United Water s Petition regarding the Commission s rate base
methodology.
The Commission Should Not Grant Reconsideration on its Rate Base Methodology
United Water first asks the Commission to reconsider its decision to utilize a
thirteen-month average rate base to establish the Company s test year rate base. The Company
argues the average rate base methodology should not be used in this case for three reasons: (1)
the Company maintains that the thirteen month average rate base methodology will
, "
as a matter
of mathematical certainty," be insufficient to allow the Company an opportunity to earn its
allowed return; (2) United Water argues the rate base methodology violates the Company
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
entitlement to have included in rate base investments that are known and measurable; (3) United
Water contends the capital intensive characteristics of the Company justify use of a year-end test
year. United Water also now argues the Company s adjustment to test year revenue and
expenses, which was supported by Staff and approved by the Commission, was appropriate only
if used in conjunction with a year-end test year methodology.
In support of its first argument, that the average base rate methodology will not allow
the Company an opportunity to earn its authorized return, the Company implies the Commission
excluded from the test year rate base all capital investment made after December 31 , 2004.
United Water states: "the Commission s rate base calculation treats all post-test year additions in
service as of December 2004 as though they were placed in service in July, the end of the
historical year.United Water Petition for Reconsideration, p. 3 (italics added). Clearly, the
Commission included in rate base post-test year additions after December 31 , 2004. The
Commission stated that
, "
rather than limit post-test year additions to those capital expenditures
incurred by December 31 , 2004 as proposed by Staff, we find it reasonable in this case to allow
into rate base the post-test year capital expenditures incurred by March 2005 as detailed in
Company witness Rhead's Revised Rebuttal Exhibit No. 16, Schedule 8." Order No. 29838, p. 6
(italics added). It is erroneous to imply the Commission excluded from rate base all post-test
year investment incurred after December 31 , 2004. In particular, the Commission allowed all
Columbia Water Treatment Plant (CWTP) costs in rate base, even though it was not substantially
completed until March 2005.
United Water then argues that "by allowing only a fraction of the total costs of
construction projects actually in service at the end of the historical year, and by excluding post-
test year investment, the revenue produced by allowed rates will produce a return of at least 80
basis points below the allowed return." The Company cites the transcript at pages 1038 through
1040 and its Exhibit 17 in support of this statement. Again, it is inaccurate to imply the
Commission excluded all post-test year investment; in fact, the Commission specifically allowed
post-test year investment that was made as of March 31 , 2005 , even though the Company
selected test year ended July 31 , 2004. Second, the record at pages 1038 through 1040 does not
support the conclusion argued by the Company. The citation to the transcript is to the testimony
of the Company s witness on rebuttal. The witness testified that the rate base calculated by Staff,
using a thirteen-month average rate base, would cause United Water to "suffer rate of return
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
attrition.Tr. p. 1038. The witness s entire discussion is focused on Staffs proposal. For
example, the witness testified that Staff'proposal ensures an overall rate of return shortfall of
88 basis points, the difference between the proposed 8.10% overall rate of return and the 7.220/0
rate of return that results solely from not including the ending rate base investment." Tr. p. 1039.
Of course, the Commission rejected Staffs rate base calculation and determined to include in
rate base additional post-test year plant made by the Company. The Company s testimony in the
record does not support its argument that the Commission rate base calculation will
, "
as a
matter of mathematical certainty, be insufficient to allow the Company an opportunity to earn its
allowed return.United Water Petition, p. 3. There simply is no evidence in the record to
support United Water s argument, and the Company does not propose to present additional
evidence to provide an estimated rate of return calculation based on the Commission
determination of an appropriate rate base.
Finally, and most importantly on this point, the assumptions and resulting
calculations made by the Company s witness to support his testimony about a rate of return
shortfall are significantly flawed. In his calculation, the witness compared adjusted test year
revenue to the total rate base investments expected to be made by the Company. The total rate
base investment, of course, includes significant plant added well after the test year. To reach his
conclusion of under-earning, the witness did not make any revenue and expense adjustments for
the late added plant. It is unreasonable to assume new plant will not have an impact on
Company revenues or expenses. In fact, the Company s witness himself testified in an earlier
case before the Commission that "utilities generally do not make additional investments or
increase their expenses unless they can generate additional revenues and profits, either
serving additional customers, or by cutting costs or increasing margins." Exhibit 137, p. 925. It
is the mismatch problem long recognized by the Commission when late plant additions are
included in the test year. The Commission has addressed the issue in part by using the average
rate base methodology.
In support of its second argument regarding the thirteen-month average rate base
methodology, the Company contends it is unlawfully prevented from including in rate base
investments that are known and measurable. The Company states "the Idaho Supreme Court has
made clear that the utility is entitled to a return on post-test year investments that are known and
measurable." In support of its statement, the Company references and quotes from Utah Power
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
and Light v. Idaho Public Utilities Commission 102 Idaho 282, 629 P.2d 678 (1981), where the
Court said "the commission should include in the rate base all items which are proven with
reasonable certainty to be justifiably used by the utility in providing services to its customers.
United Water Petition, p. 4.
Again, it is important to point out that the Commission allowed a majority of United
Water s post-test year investment in the test year rate base. It is true the average rate base
methodology reduces the impact of post-test year plant addition, but that necessarily results from
selections made by the Company for its test year and the timing of its rate case filing. Second
the broad statement in the 1981 Utah Power case cited by United Water was repeated by the
Supreme Court in a later Utah Power case, and then was set aside by the state legislature when it
enacted Idaho Code 9 61-502A in 1984. At issue in the 1981 case was a post-test year plant
addition called the Huntington Plant. Utah Power argued the plant costs were known and
measurable and thus should have been included in rate base , and the Supreme Court agreed, with
the statement quoted by United Water. Utah Power Light v. IPUC 102 Idaho 282 , 284. The
identical issue was raised in a 1983 Utah Power case. In fact the Supreme Court referenced its
earlier decision where "we held that the value of the Huntington plant under construction was
required to be included in the rate base, since it was not a conjectural or speculative adjustment."
Utah Power Light v. IPUC 105 Idaho 822, 825, 673 P.2d 422, citing Utah Power Light
IPUC 102 Idaho at 284, 629 P.2d at 680. Noting the similarity between the two cases, the Court
stated "(w)e see no reason that the same rule should not apply in the instant (1983) case.Id.
The Idaho Legislature enacted Idaho Code 9 61-502A in response to the Court'
ruling in the 1983 Utah Power case. Section 61-502A precludes post-test year plant from rate
base unless it is short-term work in progress; i.e., it will be completed within twelve months. In
a statement of legislative intent unusual for its specificity, the Legislature declared its intent "that
this act should overrule that portion of the decision of the Supreme Court of Idaho entitled Utah
Power and Light Company v. Idaho Public Utilities Commission, issued December 14, 1983
which authorized or required construction work in progress or property held for future use to be
included in a utility s rate base or otherwise authorized or required the commission to grant a
return on such property, and that the commission be prohibited from following the precedent of
that case in any order issued after the effective date of this act." 1984 S., Ch. 21 , Section 2
, p.
24-25. Staff is not implying the Commission violated Section 61-502A by including in rate base
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
capital investments that were made outside the test year, recognizing the section allows for (but
does not require) a return on short-term construction work in progress. Nonetheless, the broad
proposition for which United Water cites the 1981 Utah Power case was overruled, clearly
demonstrating a legislative intent that out-of-test year investment should be carefully scrutinized
or limited if it is going to be included in a test year rate base. The Commission s use of a
thirteen-month rate base methodology addresses this legislative concern.
The third argument United Water makes to justify use of a year-end test year is the
capital intensive cost characteristics of the Company. The Company s evidence on this point
was clearly refuted in the record and was rejected by the Commission in its final Order.
Finally, United Water argues that a revenue mismatch occurs if the Company
adjustment to test year revenues is adopted along with a thirteen-month average rate base
methodology. The Company states in conjunction with its proposal to use a year-end test year
the Company proposed to increase test year revenues annualized at existing rates from July 31
2004 through May 31 , 2005.United Water Petition, p. 5 (italics added). The Company thus
implies it made an adjustment to test year revenues because it proposed use of a year-end test
year. United Water in its Petition quotes its rebuttal testimony criticizing Staff for accepting the
Company s test year revenue adjustment and also using an average rate base methodology. On
that evidence, the Company states the Commission incorrectly concluded "the evidence on the
adjustments as a means to correct the mismatch is uncontroverted." United Water Petition, p. 5.
It is convenient, but inaccurate, for the Company to now characterize its test year
revenue adjustment as a means to correct a mismatch that occurs by using a year-end rate base
methodology.It is clear in the record, and Order No. 29838, that United Water made
adjustments to test year revenue and expenses to correct a mismatch that occurs by including all
Columbia Water Treatment Plant (CWTP) costs in rate base, even though it was not completed
until eight months after the test year. The Company in its direct testimony "acknowledged the
Commission s concern about a mismatch between plant investment and revenue and expenses
when post-test year plant is included in the test year as if in place during the entire year " and so
the Company proposed an adjustment to revenue and expenses associated with including the
CWTP.Order No. 29838 , p. 4 (italics added). The Commission s Order quotes several relevant
portions of Company testimony, including that it "used its best efforts in proposing adjustments
that both increase revenues and decrease expenses as a result of the addition of the CWTP.
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
Order No. 29838, p. 4 (italics added). The specific revenue adjustment attributable to the
CWTP made by United Water was to increase test year revenue 'by $462 480 to account for
additional customers, annualized at existing rates, from July 31 , 2004, the end of the test year
through May 31 , 2005. ", Order No. 29838 , p. 4, quoting from Tr. p. 18 (italics added). The
Company also adjusted expenses by reducing power and chemical expenses "to reflect changes
in system operation caused by use of the CWTP.Id. The Commission noted that Staff
, "
(t)o
address the mismatch created by including the CWTP in the test year rate base, . . . proposed to
accept the CWTP related expense and revenue adjustments made by United Water." Order No.
29838, p. 4-5 (italics added).
There can be no doubt that United Water, in response to Commission concerns about
a mismatch created when post test-year plant is included in the test year, made adjustments to
test year revenue and expenses because it proposed including all CWTP costs in rate base. The
Commission noted that "(b )oth Staff and the Company included the CWTP in the test year as if it
were completed for the entire year." Order No. 29838 , p. 6. Including this major post-test year
plant in the test year creates a revenue mismatch, and so "United Water addressed the
Commission s concern of a mismatch created by including the CWTP in rate base by making
adjustments to its test year revenue and expenses.Id. Staff and the Company agreed on the
revenue and expense adjustments made to accommodate the CWTP in rate base, and no other
party objected to the test year adjustments. The Commission thus concluded, because "Staff
testified in support of the corresponding revenue and expense adjustments
, . .
. the evidence on
the adjustments as a means to correct the mismatch . is uncontroverted.Id. It was
accordingly, entirely accurate for the Commission to state that the evidence on the adjustments
as a means to correct the mismatch created by including the CWTP in rate base was
uncontroverted.
Finally, the Idaho Supreme Court has already affirmed use of an average rate base
methodology as within the discretion of the Commission. Utah Power argued in the 1983 case
that a year-end test year rather than an average test year should have been used.The
Commission used an average test year because it "better matched the company s revenues to
expenses, since the commission determined that Utah Power s data submitted on the basis of a
year end rate base contained certain mismatches between costs and revenues.Utah Power
Light v. IPUC, 105 Idaho at 825, 673 P.2d at -' The Court affirmed the Commission
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
average rate base methodology, stating: "We hold that the use of the average year rate base was
and is permissible and within the discretion of the commission. That discretion of the
commission will not be disturbed.Id. See also Citizens Util. Co. v. Idaho Public Utilities
Commission 99 Idaho 164, 579 P.2d 110 (1978) (approving Commission s use of average year
rate base formula).
CONCLUSION
United Water does not provide in its Petition for Reconsideration a valid reason to
grant reconsideration on the Commission s use of a thirteen-month average rate base
methodology. The Commission should deny reconsideration of that issue.
Respectfully submitted this 3 (7ft..- day of August 2005.
" ,:::---,--,
Weldon B. Stutzman
Deputy Attorney General
bls!N:UWIWO404 ws Staff Answer
COMMISSION STAFF'
ANSWER TO UNITED WATER IDAHO'
PETITION FOR RECONSIDERATION
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 30th DAY OF AUGUST 2005,
SERVED THE FOREGOING COMMISSION STAFF'S ANSWER TO UNITED WATER
IDAHO'S PETITION FOR RECONSIDERATION, IN CASE NO. UWI- W -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
BOISE ID 83701
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
2019 N 17TH STREET
BOISE ID 83702
SHARON ULLMAN
9627 W. DESERT AVE
BOISE ID 83709
SCOTT L. CAMPBELL
101 S CAPITOL BLVD., 10TH FLOOR
PO BOX 829
BOISE ID 83701
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SECRETARY
CERTIFICATE OF SERVICE