20060616Lobb direct re stipulation.pdf

BEFORE THE
. ,
IDAHO PUBLIC UTILITIES COMMISSION , J i i, '
; "
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-
DIRECT TESTIMONY OF RANDY LOBB
IDAHO PUBLIC UTILITIES COMMISSION
JUNE 16 2006
Please state your name and business address for
the record.
My name is Randy Lobb and my business address is
472 West Washington Street, Boise, Idaho.
By whom are you employed?
I am employed by the Idaho Public Utilities
Commission as Utili ties Division Administrator.
What is your educational and professional
background?
I received a Bachelor of Science Degree in
Agricul tural Engineering from the Uni versi ty of Idaho in
1980 and worked for the Idaho Department of Water Resources
from June of 1980 to November of 1987.I received my Idaho
license as a registered professional Civil Engineer in 1985
and began work at the Idaho Public Utilities Commission in
December of 1987.My duties at the Commission currently
include case management and oversight of all technical Staff
assigned to Commission filings.I have conducted analysis
of utility rate applications, rate design, tariff analysis
and customer petitions.I have testified in numerous
proceedings before the Commission including cases dealing
wi th rate structure, cost of service, power supply, line
extensions, regulatory policy and facility acquisitions.
What is the purpose of your testimony in this
case?
CASE NO. UWI-06-06/16/06
LOBB , R
STAFF
(Di) 1
The purpose of my testimony is to describe the
process leading to the filed Stipulation (the Proposed
Settlement) signed by the two parties in this case and to
explain the rationale for Staff's support.
Please summarize your testimony.
Based on Staff's review of United Water Idaho
(United Water; Company) rate case filing, a comprehensive
audit of Company test year results of operations and
consideration of outstanding rate case issues, Staff
believes that the proposed Settlement agreed to by Staff and
the Company is in the public interest and should be approved
by the Commission.The Company originally proposed an
annual revenue increase of $5.92 million for an overall
increase of 17.91%.The proposed Settlement specifies an
annual revenue requirement increase of $3.63 million for an
overall increase of 10.98%.
The primary consideration of the Commission Staff
in leading to the Stipulation on revenue requirement was a
belief that settlement would eliminate the risk of higher
revenue requirement and result in a smaller rate increase
than could be achieved through hearing based on the Staff
case.Staff concluded based on its evaluation of the
Company s filing that much of the requested increase was due
to compliance with the prior Commission order issued in the
most recent United Water rate case or associated with
CASE NO. UWI-06-06/16/06
LOBB , R
STAFF
(Di) 2
undisputed known and measurable test year adj ustments.
After additional audit and investigation , Staff also
concl uded that the potential for additional, justifiable
revenue requirement reducing adjustments was limited given
the exhaustive Staff review conducted in the last general
rate case completed less than one year ago.
The Stipulation
What are the key components of the proposed
Settlement Stipulation?
The key components include:1) recommending an
annual revenue requirement increase of $3.63 million or
10.98%; 2) agreement on a uniform percentage increase in all
customer charges and volumetric rate components; and
dismissal of the appeal from Case No UWI-04-4, Supreme
Court Docket No. 32431.
The Stipulation also specifies amortization of
several additional deferred expenses including $79,000 in
power expenses , $150 000 in tank painting expenses and rate
case expenses for this case and the Company s last rate
case.Finally, the parties agreed to continued use of the
Stipulation approved by the Commission in Case No.
UWI-04-4 for the cost of debt methodology and return on
equi ty.
Revenue Requirement
How did Staff identify revenue requirement issues
CASE NO. UWI-06-
06/16/06
LOBB , R
STAFF
(Di) 3
and determine that settlement should be considered in this
case?
Staff identified issues in this case by reviewing
the Company s rate case filing, conducting a comprehensive
audit of Company test year results of operations and
reexamining issues, recommendations and Commission Orders
associated with the Company s last general rate case, Case
No. UWI-04-
Staff determined that nearly 50% of the requested
$5.91 million increase was directly due to Company
compliance with the Commission order in the last United
Water rate case with respect to the calculation of rate base
and pension expenses.In May 2006, the Company updated its
budgeted investments and expenses to reflect those actually
booked in the test year.The Company also reconfigured its
pension plan to further reduce annual expenses.The update
resulted in a new requested increase of $4.9 million or
14.86% .
Compliance with prior Commission orders with
respect to rate base and pensions now represented nearly 60%
of the requested increase.
In addition to authorized increases due to rate
base and pensions, Staff also identified undisputed proforma
adj ustments for items such as salaries, taxes and additional
investment.Finally Staff did not dispute the Company
CASE NO. UWI -W- 06-
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LOBB , R.
STAFF
(Di) 4
proposed continued use of the cost of debt methodology and
return on equity approved by the Commission in the last rate
case.Consequently, the remaining requested increase and
the underlying rate base and expenses , most of which were
reviewed at length by Staff and approved by the Commission
in the rate case completed in July of 2005, left limited
potential for additional revenue requirement adjustment in
this case.
What is meant by authorized increases due to rate
base and pensions?
The authorized increase due to rate base results
from application of the 13 -month average to determine test
year rate base.The Company simply incorporated prior
investment for the entire test year in this case that was
only partially incorporated in the test year used in the
last rate case due to the 13 -month averaging methodology.
The authorized increase due to pensions resulted
from using the ERISA method, approved by the Commission in
the last case , to calculate test year pension expense in
this case.
Please explain the overall rate of return as
agreed to by the parties as part of the stipulated revenue
requirement.
The parties agreed in this case to accept the
overall rate of return methodology included in the
CASE NO. UWI-06-06/16/06 (Di) 5LOBB, R.
STAFF
Stipulation approved in Case No. UWI-04-, Order No.
29838.That Stipulation specified a return on equity of
10.3% and a compromise method of calculating the cost of
debt.These agreements remain reasonable for adoption in
this case.The difference in the overall rate of return
filed by United Water in this case and authorized in Order
No.2 983 8 is the change in capital structure.The equity
ratio increased by 2% to 48% due to an equity infusion from
the parent company, retirement of the minority interest
preferred stock and retained earnings.The 48% equity ratio
is reasonable for this case in current markets.All of
these components may be issues in the Company s next rate
case.
Was the Staff able to identify any additional
adj ustments to the Company s requested increase?
Staff initially identified nearly 20Yes.
potential issues with annual revenue requirement impacts
ranging from $5,500 to $869,000 for each issue.Some of the
issues such as a back cast of plant in service dates,
purchased water expense, power supply costs, leased water
revenue and an early incentive payment paid by United Water
in conjunction with construction of the Columbia water
treatment plant were a continuation of issues raised in the
last rate case.The remaining issues new to this case
included imputation of affiliate revenue, miscellaneous
CASE NO. UWI -W- 06-
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LOBB , R.
STAFF
(Di) 6
expense adjustments and weather normalization.
What approach did Staff take in evaluating
settlement options and identifying a reasonable revenue
requirement?
Staff's overall approach in evaluating the merits
of settlement was to determine which alternative, settlement
or hearing, would most likely result in the best deal for
ratepayers based on Staff's case.Staff began by evaluating
each of the issues identified and placing them in one of
three categories:1) firm revenue requirement reductions,
2) revenue requirement reductions that were less certain
with respect to acceptance in total by the Commission at
hearing and 3) revenue requirement adj ustments that had a
high degree of uncertainty with respect to acceptance by the
Commission at hearing.
Staff determined that the first category of
adjustments reduced revenue requirement by approximately
$527,000 from the adjusted request of $4.92 million to $4.
million.The second category of adjustments could reduce
the request by another $154 000 to approximately $4.
million.Finally, the third category of adj ustments, the
most speculative, could reduce the overall request by an
additional $962,000 to $3.28 million or 9.9%.
How did Staff arrive at the $3.63 million revenue
requirement increase agreed to in the Stipulation?
CASE NO. UWI -W- 06-
06/16/06
LOBB , R
STAFF
(Di) 7
Based on the nature of the expense/rate base
increases driving the Company s request and the potential
adjustments identified by Staff , the best-case outcome
through hearing would be an increase in revenue requirement
of approximately $3.28 million or 9.9%.Staff believed that
the worst-case scenario could be in excess of $4.24 million
or 12.82%.
Through negotiation and compromise, Staff and the
Company agreed to a revenue requirement increase of $3.
million or 10.98%.Staff determined that the negotiated
increase, incorporating nearly 70% of the uncertain revenue
requirement adjustments identified in categories 2 and
was a reasonable outcome.
Staff also believed that the Company s agreement
to dismiss its appeal from Case No. UWI-04-4, Supreme
Court Docket No. 32431 provided additional value to the
Stipulation.The dismissal eliminates costly and time-
consuming litigation and removes the potential for
modification of test year rate base calculations and
associated rate impacts.
Please explain the amortization of additional
deferred power supply, tank painting and rate case expenses
as included in the Stipulation.
The additional deferred power supply expense of
$79,000 subj ect to amortization reflects actual costs
CASE NO. UWI-06-
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LOBB , R
STAFF
(Di) 8
incurred by the Company for higher power supply costs due to
the PCA.Recovery of these deferred costs was approved by
the Commission in the last rate case.
Tank painting costs of $150,000 in this case were
included for amortization over 20 years consistent with the
Commission decision to allow similar treatment of tank
painting expenses in the last rate case.
The additional rate case expense subject to
amortization is a compromise amount that allows costs
incurred by the Company as part of the last rate case and
rate case expenses incurred for this rate case to be
amortized over a four-year period.The addi t ional expenses
from the last rate case were as yet unquantified when the
Commission previously approved recovery of such expenses.
The Company maintained that an additional $199,000 was
incurred and deferred for recovery from the last rate case.
The Staff analysis used $250,000 as the amount included for
recovery (the $199,000 and amortization of approximately
$50,000 in rate case expenses from this case) .
Why did Staff agree to a uniform increase in all
rate components including customer charges?
Staff originally opposed any increase in the
customer charge but agreed to the uniform increase to
further reduce the overall revenue requirement agreed to in
the Stipulation.Staff notes that other than rounding to
CASE NO. UWI-06-
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LOBB , R.
STAFF
(Di) 9
the nearest 10 cents, customer charges have not increased
since the year 2000.
What will rates be if the Commission approves the
Stipulation?
For customers served by a % inch meter , which
includes the majority of United Water customers, the
customer charge will increase from $14.60 bi-monthly to
$16.03 bi-monthly resulting in a monthly increase of
cents.The winter commodity rate and summer commodity rate
for the first 300 ccf (100 cubic feet) bimonthly will
increase from $1.0912 per ccf to $1.1981 per ccf.The
summer commodity rate for all water use above 300 ccf bi-
monthly will increase from $1.3641 per ccf to $1.5139 per
ccf.
Does this conclude your testimony in this
proceeding?
Yes, it does.
CASE NO. UWI-06-06/16/06
LOBB, R.
STAFF
(Di) 10
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 16TH DAY OF JUNE 2006
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB, IN
CASE NO. UWI-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID
TO THE FOLLOWING:
WALTON HILL
UNITED WATER
200 OLD HOOK RD
HARRINGTON PARK NJ 07640
DEAN J MILLER
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701
Jo ~/hA-
SECRETARY
CERTIFICATE OF SERVICE