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HomeMy WebLinkAbout20060210Wyatt direct.pdf, ' 2: j 9 Dean J. Miller (ISB 1968) McDEVITT & MILLER LLP 420 West Bannock Street O. Box 2564-83701 Boise, ID 83702 Tel: 208.343.7500 Fax: 208.336.6912 i oe(lVJI1cdevitt -miller. com , '" ' ", JTiLi!!:~~_: CD;;;iiSS!.:j:: Attorneys for Applicant 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 Case No. UWI-06- BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION DIRECT TESTIMONY OF GREGORY P. WYATT Please state your name and business address. Gregory P. Wyatt. United Water Idaho 8248 West Victory Road, Boise Idaho. What is your occupation? I am the General Manager of United Water Idaho ("United Water" or Company Please describe your educational background and other qualifications. I am a graduate of Bloomsburg University with a Bachelor of Arts degree in Business Administration Management.I have previously provided testimony before the Indiana Utility Regulatory Commission, the Pennsylvania Public Utility Commission, and the Idaho Public Utilities Commission. Please describe your work experience. I have been employed at United Waterworks properties, formerly General Waterworks, since December 1974. Prior to assuming my current duties as General Manager of United Water Idaho in late 1999, I worked in various capacities in several states including General Manager for United Water Pennsylvania, Area Manager for the United Water Indiana properties, Assistant Manager of United Water Idaho and various accounting positions in New Jersey and Pennsylvania. Please describe your duties as General Manager. My duties are to oversee the daily operation of providing potable water to the customers of United Water Idaho.I supervise the various departments of Engineering, Production, Transmission & Distribution, Customer Service, Billing, Wyatt, l)i United Water Idaho Inc. Information Technology,Planning and Accounting meeting their responsibilities for the delivery of potable water and the related services in dealing with customers. These functions include planning ' for raw water source, construction maintenance and operation of the treatment and pumping facilities, construction maintenance, and operation of the distribution system including mains, services and storage tanks, responding to customer needs regarding initial service or discontinuing service by reading customer meters, processing and delivering bills and responding to customer needs through the Customer Service Representatives. My duties also include supervision of the Company s compliance with all regulations in regard to safety, complying with the Safe Drinking Water Act, and meeting other similar requirements. What is the purpose of your testimony? I will testify regarding the major reasons for the rate increase requested in this present case, the Company s proposals regarding cost of capital and tariff design in this present case, the operations of the Company, and the Company conservation and customer service efforts. I will also be available to answer questions of a general nature. Please identify the other witnesses who will testify on behalf of the Company and the topics on which they will testify. Mr. Frank Gradilone III consulting expert with Pleasant Valley Analytics, Inc. will testify regarding revenue adjustments. Wyatt, l)i United Water Idaho Inc. Mr. Jeremiah J. Healy, Manager Finance and Rates, will testify regarding rate base and expense adjustments. Mr. Scott Rhead, Managing Engineer, will testify regarding capital additions and plant in service. Rate Increase Drivers When was the last time the Company requested rate relief and what was the result of that request? On November 30, 2004, United Water filed an Application with the Commission (UWI-04-04) requesting an approximate 22% increase in its rates and charges for water service using a pro-forma test year methodology ending July 31 , 2004. The Company subsequently reduced its request to approximately 18%. After full hearings and deliberations, the Commission issued Order No. 29838, dated August 2, 2005 authorizing a 7.68% increase in rates ($2.43 million).The Company then filed a Petition for Reconsideration on August 23 2005, in which it argued, along with other issues, that Order No. 29838, which calculated rate base using a 13-month average methodology, produced rates that would insufficient to allow the Company to earn its authorized return. The Commission then issued Order No. 29871 on September 20 2005 granting an additional 0.40% increase ($116 090), but denied the Company s arguments related to the 13-month averaging methodology. The overall increase in rates ITom those proceedings was $2.55 million or 8.08%. The overall outcome in these proceedings was heavily influenced by two major adjustments; rate base due to the 13-month averaging, and pension expense due to the Commission s decision to allow only the cash Wyatt, l)i United Water Idaho Inc. contribution to the pension plan (ERISA method) rather than the accrued expense to the pension account (F AS 87 method). Would you briefly explain why the Company is seeking a rate increase at this time? As mentioned above, the two major adjustments in the last case (UWI-04-04) are the biggest drivers resulting in the Company needing to make this present filing. The change in ratemaking methodology (use of a 13-month average of rate base) effectively left the Company with no return on investment related to approximately $13 million of its utility plant investments in various projects in service to customers. And, as Witness Healy explains in his testimony, the Company s pension expense obligation under ERISA is the largest area of increased operating expense in this case, which is almost $1.7 million dollars higher than the amount allowed by the Commission in the previous case. Additionally, the increase is necessary for the Company to continue to provide quality service to our customers, to improve service by replacing aging inffastructure and to replace inffastructure that is in conflict with other inffastructure renewal (such as highway and street rebuilds). For these reasons United continues to make capital investments in utility plant. As a result of the various inffastructure investments, the Company s rate base of $126 824 685 as allowed in our last rate proceeding, has increased to $141 015 147 in this proceeding or an increase of $14 190,462. In accordance with the Idaho Public Utilities Commission Order No. 29838 in our last general rate proceeding (UWI- 04-04), the Company has applied the 13-month averaging methodology to Wyatt, l)i United Water Idaho Inc. plant in service and associated components in computing the Company s rate base. This does not contradict the position taken by the Company in its appeal (Case No. SUP-05-01) of the last case. In addition, our operating costs before income taxes have increased ffom $20 144 532 to $22 909 062 or an increase of $2 764 530. An increase in rates is necessary in order to provide sufficient capital dollars to maintain and improve quality service to our customers, to provide adequate operating and maintenance coverage, and to maintain a sound financial position. You mentioned that the Company used a 13-month averaging methodology in determining rate base in this proceeding. Please explain the significance of that rate making change on the Company s request for increased rates in this proceeding. In the last case (UWI-04-04), the Company requested a return on plant service and other components of rate base as ofthe end of the test year (July 31 2004), plus known and measurable proforma plant in service additions through May 31 , 2005. This approach was consistent with the Company s approach in its three previous rate filings and with Commission Orders ffom those cases. However, in that case the Commission ordered a 13-month averaging of plant in service and related components in determining the Company s rate base on which it may earn a return. This change in ratemaking methodology effectively left the Company with no return on investment related to approximately $13 million of its utility plant investments in various projects in service to customers. Since that last proceeding the Company has continued to invest in utility plant in service to Wyatt, l)i United Water Idaho Inc. customers in an amount of approximately $4 million. The Company s requested increase in rates in this proceeding is largely driven by the need to receive a financial return on these investments in utility plant in service to customers which were not recognized in rates in the last case and which are now eligible for full inclusion in rates under a 13-month rate base methodology. What kind of plant investments has the Company made that are requested to be included in this current case? The Company has invested over $2 million dollars in wellhead treatment at two locations in the system, (Bali Hai and Maple Hills). The investments at Bali Hai and Maple Hills wells have enabled the Company to improve water quality to customers while also utilizing more of the source well water ffom those sites. Approximately $1.5 million in water storage facilities that provide fire protection and sustainable pressure to customers in the system, most notably in the South County area, which was acquired ffom the South County Water Company in 1999. The Company has made investments totaling about $4.8 million dollars in replacing aging inffastructure. The Company has replaced about 7 miles of water mainline, 700 water services, and 12 000 meters. What are the major areas of operating cost increases that the Company has experienced since the last rate case? The largest area of increased operating expense in this case is the cost to fund the Company s pension plan, which is almost $1.7 million dollars higher than the amount allowed by the Commission in the previous case.As discussed by Witness Healy, pension expense in this case is calculated consistent with the Wyatt, l)i United Water Idaho Inc. methods required by Order No. 29838. Another significant portion of the expense increase comes ITom depreciation expense related to the capital investments the Company has made. Depreciation expense has increased by almost $671 000 dollars. Additionally, costs have increased by almost $300 000 dollars related to payroll and transportation costs, including fuel. There have been cost decreases in purchased power, property taxes and bad debt write-offs. All of the Company operating expense adjustments are discussed more fully in Witness Healy testimony and exhibits. What is the current average annual residential water bill as determined in the test year? The current average annual residential bill, as reflected in this case after adjustments and normalization, is $327., exclusive of IDEQ fees and ITanchise tax. What would be the average annual residential bill under the proposed rates in this filing, and what is the overall increase request? The average annual residential bill under proposed rates would be $385., or an increase of 17.95%. The overall increase request in this present filing is 17.91 %. Rate of Return and Capital Structure What is the Company s proposal in this case with respect to rate of return and capital structure? Consistent with our desire to present a simplified rate case filing and to reduce the time and cost oflitigation, the Company proposes to carry forward ITom Case No. Wyatt, l)i United Water Idaho Inc. UWI-04-04 the methodology for calculating the overall rate of return including the cost of equity, cost of debt methodology and capital structure adopted in Case No. UWI-04-04. Please summarize the treatment of rate of return and capital structure in Case No. UWI - W -04-04. In that case the Company and Commission Staff entered into a written Settlement of the Overall Weighted Cost of Capital (Settlement), which was accepted and approved by the Commission in Order No. 29838. In the Settlement, the cost rate for the equity component of the capital structure was set at 10.3%. The rate for the debt component was established by a compromise between the Staff and Company methods for calculating issuance expense, discounts and premiums. The overall rate of return was based on the consolidated capital structure of United Waterworks Inc., the Company s parent. What is the overall weighted cost of capital that results from carrying forward the Settlement in Case No. UWI-04-04? Based on the capital structure of United Waterworks Inc. as of 12/31105 it is 8.427%, calculated as follows: Long-Term Debt $224 380 000 RATIOS 51.46% COST WEIGHTED RATE COST 66%3.427% 10.30%000% 00%000% 8.427% Equity $211 ,61 0 905 48.54% Minority Interest $00% TOTAL $435.990.905 100.00% Wyatt, l)i United Water Idaho Inc. Is the cost rate for the debt component of the capital structure calculated in the same manner as in the Stipulation? Yes it is. Do you believe that a cost rate for the equity component of 10.3 % is a conservative estimate of the Company s cost of equity? Yes. In Case No. UWI~W-04-04 the Company offered expert testimony establishing a reasonable return on equity within a range of 10.8% and 11.2%. The agreed rate of 10.3% was well below the rate supported by expert testimony. Additionally, as of the time of filing this testimony, only approximately six months have passed since Order No. 29838 established the cost of equity. The Company is not aware of significant changes in capital markets or other relevant factors that would indicate that cost of equity has declined in the interim. Have there been changes in the Company s capital structure since Case No. UWI- 04-04? Yes. There have been two relatively minor changes. First, all the shares of the United Water Idaho s 5% Preferred Stock, which represented only .13% of the previous capital structure, are being redeemed and by March 17, 2006 will no longer be outstanding. Second, United Waterworks Inc. received ITom its parent an infusion of equity capital which increased the equity ratio of the capital structure to 48.37%, up ITom 46.6% in Case No. UWI-04-04. In light of this proposal with respect to rate of return and capital structure, is the Company presenting independent testimony of a cost of capital witness? Wyatt, l)i United Water Idaho Inc. No. For the reasons discussed above, for the purposes of this case, a weighted cost of capital of 8.427% represents a reasonable rate of return. To the extent that the Commission s Rules of Procedure, 121(e), require the presentation of a cost of capital structure analysis, the Company requests that requirement be waived for this case. It is our intent that this approach will serve to eliminate a source of controversy. However, we would reserve the right to present expert witness testimony on rebuttal if substantial issues emerge on the subject. Cost of Service and Tariff Desi2n What is the Company s proposal for adjustments to rates to recover any revenue increase that may be awarded by the Commission? As explained in more detail in the testimony of Frank Gradilone III, the Company is proposing a uniform percentage increase to all rate elements, excluding miscellaneous service charges and fees. The Company is not proposing, in this case, any change to the current tariff design. Is the Company presenting the testimony of an independent cost of service witness in this case? No. Because no changes to current rate design are proposed, a separate cost of service study would be of little value. Additionally, in Case No. UWI-04- issues of cost of service and rate design were extensively reviewed. In that case the Company presented a complete cost of service study, prepared by Dr. Dennis Pesseau. Given the recent and extensive review of these issues, and consistent with the Company s intent to simplify this case, the Company is not proposing changes to the current rate design; rather the Company proposes that the current Wyatt, l)i United Water Idaho Inc. rate elements be increased by a uniform percentage. Thus, to the extent that the Commission s Rules of Procedure, 121(e), require the presentation of a separate cost of service study, the Company requests that requirement be waived for this case. Company Operations Please describe the operations of the company. As of December 31 , 2005, United Water Idaho provided domestic water service and fire protection to approximately 79 000 residential, commercial, industrial private fire protection and public authority customers within the City of Boise and the immediate surrounding area.Over ninety-nine percent (99%) of the customers are located in what is referred to as the core area system, which is a totally interconnected system. Additionally, there are four (4) satellite systems that are not interconnected with each other or to the core area system. These satellite systems are identified as Coventry Place, DanskiniSaddle Ridge, Belmont Heights, and M&M.The Mesa system, formerly a satellite system, was interconnected with the main system in 2005. Currently our source of supply for the core area is comprised of two (2) surface water treatment plants and eighty- four (84) deep wells, which are located throughout a service area of approximately 146 square miles. The projected delivery capacity in the year 2006 of the surface water treatment plants and the eighty-four (84) wells to the customers in the core service area is 103.2 million gallons per day (mgd). Coventry Place is served by one (1) well with a rated capacity of 0.4 mgd; the DanskiniSaddle Ridge area is served by two (2) wells with a combined rated Wyatt, l)i United Water Idaho Inc. capacity of 2.0 mgd; the Belmont Heights system is served by two (2) wells with a rated capacity of 1.1 mgd; and the M&M system is served by one (1) well with a rated capacity of 0.14 mgd. The wells in the satellite areas are all currently capable of meeting the maximum day demands in those areas. At this time, well water treatment essentially consists of the addition of chlorine for disinfection and system residuals as well as polyphosphate for sequestration of iron and manganese. In addition, green sand filtration systems treat water at two well stations in the system, (Bali Hai and Maple Hills). At the Marden Street surface water treatment plant, the treatment ranges ITom direct filtration to full coagulation, settling and filtration depending on the quality of the raw water.At the Columbia surface water treatment plant, treatment accomplished using micro-filtration membranes. During 2005, the maximum day production ITom all sources was 91.5 million gallons; the minimum day production was 17.9 million gallons; while average day production was approximately 40.5 million gallons. The historical maximum day production was 92.2 million gallons in July 2003. The distribution system consists of approximately 1 073 miles of water main, varying in size ITom 2 inches to 30 inches in diameter. The distribution system also is supported by 34.8 million gallons of storage capacity contained in 31 ground-level reservoirs. Due to differences in elevation within the coverage of the service area United Water Idaho has 10 different pressure zones in the core area.Each satellite area also can be considered as a separate pressure zone. These zones are Wyatt, l)i United Water Idaho Inc. necessary to maintain a reasonable range of pressure at the customers' points of use.Connections ITom adjacent pressure zones allow us to transport water between some pressure zones; however, it is not possible to transport water ITom each pressure zone to all 9 of the other pressure zones. Since we have 86 sources (points ITom which water originates) in the core area, the customers within the area of influence of a particular source normally will receive water ITom that source. As the customers near the source begin to use up the water and as distance ITom the source increases, more water will be consumed until the supply ITom a particular source is exhausted and adjacent customers then receive water ITom a different source. You note that the combined delivery capacity in the core area is approximately 103.2 mgd while the maximum day production during 2005 was 91.5 million gallons. Does this mean that you can serve significant numbers of additional customers without adding any additional source? , it does not. That would require a perfectly balanced distribution system and every well would have to produce 100% of capacity at the same time. This perfect balance would have to be between the main sizes, main locations, source locations, pumping capacity, storage size, and storage locations. History ITom 2001 , 2002 and 2003 shows maximum day demand of 93.7 million gallons, 94. million gallons and 94.1 million gallons respectively, all of which are higher than the maximum day production ITom 2005. Additionally, when the need for supply redundancy is considered the apparent surplus is reduced. The Idaho Department of Environmental Quality Wyatt, l)i United Water Idaho Inc. requires water suppliers to provide supply redundancy by allowing for the loss of the largest capacity wells when determining their reliable water supply targets. Two key operational service areas of the water system are Columbia and the West First Bench. The largest wells serving these zones are Pleasant Valley (2.65 mgd) and Bethel (3.55 mgd) respectively. With a combined capacity of 6.2 mgd, these sources, if lost, decrease the difference in overall system supply vs. demand significantly. Customer growth is also not distributed evenly across the system. There are areas of higher growth where new sources of supply will be needed. Most notably the southwest and northwest areas of the system continue to experience growth that will require future source additions. Water Conservation Would you please provide an overview of the Company s water conservation and demand side management efforts and programs? For over II years the Company has developed and implemented various customer information, education and awareness programs and outreach efforts that promote wise water use and water conservation and that assist customers in managing their water demand and consumption. Although some of these efforts have sought to inform customers about water use in the home, the majority of them have targeted customer water use outside on lawns, gardens and landscape areas. This focus is designed to enable customers who use water provided by the Company for irrigation purposes to benefit the most ITom the Company s efforts, since irrigation demand is the driver of overall water system demand in the summer. Wyatt, l)i United Water Idaho Inc. Below is a brief summary of the company s efforts in these areas: Water Efficient Landscaping Classes: In February of each year, United and others conduct seven, two-hour class sessions focused on the fundamentals of water efficient landscaping. In 2005, 700 adult individuals attended the classes. Water Awareness Week In May of each year, United participates in Water Awareness Week, which promotes water education and conservation information for school students in Region 3, which includes the Boise area. Indoor Water Conservation Kit give-a-wav Customers seeking ways to reduce their water consumption are offered a free water conservation kit that includes a low flow showerhead, faucet aerators and toilet dams. Summer water conservation bill insert As customer bills are delivered throughout the spnng and summer, the bill includes an insert that provides information on how customers can reduce their outside water demand during the summer. Water use management messaging through the media The overall media effort is designed to increase customer s awareness of their water use and to provide them with concrete reminders and methods to manage their water consumption. This consists of a coordinated use of newspaper, radio Wyatt, l)i United Water Idaho Inc. and television to communicate wise water use and management throughout the summer. In 2005 it included a first-ever Annual Conservation Guide, which was placed in the Idaho Statesman as an advertising supplement in July. The Guide included eight pages of water supply information and both indoor and outdoor water use conservation information that customers could use to reduce their annual water usage and cost. The supplement was designed for customers to easily save and refer to the information year-round. In addition, daily radio spots were featured during drive times that provided water conservation messages and tips; and a weeknight television partnership with Channel 6 KIVI highlighting United's daily production compared to normal and to history, along with conservation tips and trivia. Educational and Community outreach United has developed various water awareness and conservation presentations that are available to schools and community organizations in the area. These include PowerPoint presentations, topical lectures, school skits and a video library. Conservation Plan Please comment on the Company s efforts to update its existing Conservation Plan. As a result of the last case (UWI-04-04) the Commission, in its September 20 2005 Order No. 29871 , directed the Company to prepare an updated conservation plan and submit it to the Commission for review no later than April 1 , 2006. The Wyatt, l)i United Water Idaho Inc. Company immediately began soliciting proposals ITom qualified consulting firms for preparation of the new plan. Only one firm submitted a responsive bid however, and some ofthe firms indicated the proposed timeITame was too short to complete and file a conservation plan. What did the Company do in response to this? On November 21 , 2005, the Company filed a Petition with the Commission seeking amendment of the Commission s Order No. 29871. The Petition asserted that preparation of a suitable conservation plan by April 1 , 2006 was not feasible and requested that Order 29871 be amended to extend the deadline to December , 2006. How did the Commission rule on the Company s Petition? On December 28, 2005, the Commission issued Order No. 29934 which amended Order No. 29871 to extend the deadline for submittal of the final revised conservation plan to the Commission by December 1 , 2006, provided until February 1 , 2007 for Commission review of the plan, and set June 1 , 2007 as the date by which United Water must begin implementation of the revised plan. What is the current status of the Company s efforts with regard to the production of a revised conservation plan? The Company again solicited proposals ITom qualified consulting firms identifying the revised timeITame for completion of the plan.To date the Company has received valid responses from two firms and it is expected that final consultant selection will occur in February. Wyatt, l)i United Water Idaho Inc. Does the Company now anticipate being able to meet the revised timeframe? Yes it does. Customer Service Please comment on the Company s customer service efforts. United Water uses various measures and metrics to ensure that it maintains a high level of service and responsiveness to its customers. For example, the Company tracks customer complaints it receives relating to water quality. During 2005 water quality complaints that required a field visit to resolve have averaged only 77% of total customers.Complaints relating to high bills and disconnection have averaged only 0.27% and 0.34% respectively as a percentage of bills rendered. Are there other measures used by the Company to track customer servIce performance? Yes. Our Customer Service group maintains various data relating to customer calls, response time, length of call, and number of dropped calls. During 2005 the Customer Service office answered 93 249 calls with an average answer speed of 29 seconds. The average length of calls was 2.25 minutes, and the abandoned or dropped call rate was 4.3% of all calls. Slightly more than 44% of the dropped calls occurred during the first 30 seconds of hold time and this would include those customers who may have reached our office in error (i.e. wrong number) and hung up. Assuming a caller is willing to hold more than 30 seconds, the dropped call rate falls to 2.4%. In addition, due to the fact that virtually all Wyatt, l)i United Water Idaho Inc. customer meters are located in outside pits or vaults, we are able to render bills based on actual meter readings 99.9% of the time. Are there other things you are aware of that speak to the high level and/or quality of service the Company provides to customers? Yes. In early January 2006, the Company received an award ITom the Idaho Department of Environmental Quality (IDEQ) that recognized the Marden Street surface water treatment plant as one of only seven plants in the state of Idaho to have achieved consistently high quality drinking water quality within the EP Region 10, Area-Wide Optimization Program.Also, since early 2005, the Company has worked closely with IDEQ, and the Commission Staff to provide safe drinking water to the residences of the Terra Grande Water System, and most recently has responded to Staffs request that the Company take over that troubled water system.The Company has proposed making significant capital improvements to ensure that the Terra Grande customers have long-term access to quality drinking water and good customer service. Low-Income Customer Assistance Does the Company currently have a low-income customer assistance program in place? Yes. During the last rate preceding the Company, along with Commission Staff and other interested parties, convened a workshop to evaluate the need for, scope and design of such an assistance program for United's' low-income water customers. As a result of the workshop, and in conjunction with Community Wyatt, l)i United Water Idaho Inc. Action Partnership Association of Idaho, the Company initiated UW Cares, which is the first-ever water utility customer assistance program in the state.The program, which is administered through the EI-Ada and Western Idaho Community Action Partnership social service organizations, provides up to $50 annual water bill assistance to qualifying customers. The Company is currently funding the program and will match customer contributions into the fund up to $20 000 annually. Additionally, the Company provides the agencies with indoor and outdoor water conservation kits for distribution and installation for qualified customers in the program. Also during the last rate proceeding, the Company supported and agreed to a proposed change in it's rate tariff whereby the first 3 hundred cubic feet (ccf) of consumption used during the summer rates period (May through September) is priced at the 25% lower winter rate. Does this conclude your testimony? Yes. Wyatt, l)i United Water Idaho Inc.