20100128Lobb Direct in Support.pdf

BEFORE THE
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IDAHO PUBLIC UTILITIES COMnn'I'~i~~~)
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IN THE MATTER OF THE APPLICATION )
OF UNITED WATER IDAHO INC. FOR ) CASE NO. UWI-W-09-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES IN THE STATE OF )IDAHO. )
DIRECT TESTIMONY OF RANDY LOBB
IN SUPPORT OF STIPULATION
IDAHO PUBLIC UTILITIES COMMISSION
JANUARY 28, 2010
1 Q.Please state your name and business address for
2 the record.
3 A.My name is Randy Lobb and my business address is
4 472 West Washington Street, Boise, Idaho.
5 Q.By whom are you employed?
6 A.I am employed by the Idaho Public utilities
7 Commission as Utilities Division Administrator.
8 Q.What is your educational and professional
9 background?
10 A.I received a Bachelor of Science Degree in
11 Agricultural Engineering from the University of Idaho in
12 1980 and worked for the Idaho Department of Water Resources
13 from June of 1980 to November of 1987. I received my Idaho
14 license as a registered professional Civil Engineer in 1985
15 and began work at the Idaho Public Utili ties Commission in
16 December of 1987. My duties at the Commission currently
17 include case management and oversight of all technical
18 Staff assigned to Commission filings. I have conducted
19 analysis of utility rate applications, rate design, tariff
20 analysis and customer petitions. I have testified in
21 numerous proceedings before the Commission including cases
22 dealing with rate structure, cost of service, power supply,
23 line extensions, regulatory policy and facility
24 acquisi tions.
25 Q.What is the purpose of your testimony in this
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 1
STAFF
1 case?
2 A.The purpose of my testimony is to describe the
3 terms of the filed Stipulation (the Proposed Settlement)
4 signed by all three parties in this case and to explain the
5 rationale for Staff's support.
6 Q.Please summarize your testimony.
7 A.Based on Staff's review of United Water Idaho's
8 (United Water; Company) rate case filing, a comprehensive
9 audit of Company test year results of operations and
10 consideration of outstanding rate case issues, Staff
11 believes that the proposed Settlement agreed to by Staff,
12 the Community Action Partnership Association of Idaho
13 (CAPAI) and the Company is in the public interest and
14 should be approved by the Commission. The Company
15 originally proposed an annual revenue increase of $5.63
16 million for an overall increase of 15.21%. With updated
17 numbers, the revenue request became $6.14 million, or
18 16.6%. The proposed Settlement specifies an annual revenue
19 requirement increase of $3.66 million or 9.9% on March 1 of
20 this year and an additional increase of $640,000 or 1.73%
21 effective February 1, 2011. The Stipulation also prohibits
22 another general rate filing before June 1, 2011.
23 The primary consideration of the Commission Staff
24 in negotiating the Stipulation was to obtain the best deal
25 possible for United Water customers under current
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 2
STAFF
1 circumstances. Staff's evaluation of the Company's filing
2 revealed that its increased revenue request was driven
3 primarily by needed replacement of aging infrastructure and
4 increased power costs. This limited the potential for
5 reasonable adjustments at hearing, increased the risk that
6 adj ustments would not be accepted by the Commission and
7 made the outcome highly uncertain. Gi ven the depressed
8 state of the local economy and the unlikelihood of
9 achieving a better result through hearing, Staff negotiated
10 a comprehensive agreement that included spreading the
11 increase over time, providing rate stability through a rate
12 moratorium and most importantly providing significant
13 reduction in the revenue increase as compared to that
14 requested by the Company.
15 The Stipulation
16 Q.What are the key components of the proposed
18
17 Settlement Stipulation?
A.The key components include: 1) recommending an
19 overall annual revenue requirement increase of $4.3 million
20 or 11.63% over a two-year period with $3.66 million or a
21 9.9% increase becoming effective on March 1, 2010 and
22 another $640,000 or 1.73% increase effective on February 1,
23 2011; 2) no change in rate design and a uniform percentage
24 increase in all customer charges and volumetric rate
25 components; 3) a rate case moratorium whereby United Water
CASE NO. UWI-W-09-0101/28/10 LOBB, R . (D i) 3
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1 agrees not to file a general rate case prior to June 1,
2 2011; and 4) continued deferral of Idaho Power PCA costs
3 through March 1, 2010 with amortization over a three-year
4 period and continued deferral of PCA costs with carrying
5 charges for future amortization.
6 Q.What other provisions are specified in the
7 Stipulation?
8 A.The Stipulation also specifies amortization of
9 several additional deferred expenses including Rate Case
10 Expense, Tank Painting, the Company's Water Conservation
11 and Implementation expense, and continuation of existing
12 amortizations. Other provisions include establishing a
13 budget Bill Plan that provides for voluntary equal billing
14 and payments on a monthly basis, modification of United
15 Water Rules to clarify the definition of Private Fire
16 Service Line connections and convening an informal workshop
17 to discuss the UW Cares and other issues affecting low
18 income customers.
19 Revenue Requirement
20 Q.Would you please describe the process used by
21 Staff to review the Company's filing?
22 A.Yes. Staff began its review of the Company's
23 filing by identifying the expense and investment drivers
24 behind the Company's requested revenue increase. Staff
25 conducted an account by account trend analysis from the
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 4
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1 last rate case in 2006 to date and submitted 247 production
2 requests for Company response. Staff audited Company books
3 to verify investment and expenditures, evaluated test year
4 proforma adj ustments for reasonableness and assessed
5 investment and expenditure decisions for prudency.
6
7
Q.What did Staff find as a result of its review?
A.Staff determined that 71% of the requested
8 increase was due to routine plant investment and increased
9 power costs. The remainder was for increases in wages and
10 operation and maintenance (O&M) expense. The routine
11 investment over the period consisted primarily of
12 replacement of aging infrastructure. The trend analysis
13
14
15
16
17
18
showed that total booked O&M expense changed by about 6.5%
from December 31, 2006 through May 31, 2009, or about 2.6%
per year.
Staff also noted that 40% of the $5.63 million
requested increase was due to the gross-up for income taxes
on the revenue requirement associated with actual
19 investment and expense increases. Finally, with the true-
20 up of the Company's estimated test year costs to actual
21 costs incurred, Staff determined that revenue requirement
22 could increase in this case from the 15.21% increase
24
23 originally requested to 16.6%.
Q.What areas did Staff identify for possible
25 adjustments that reduced Company revenue requirement?
CASE NO. UWI-W-09-0101/28/10 LOBB , R . (D i ) 5
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1 A.Staff identified over twenty individual areas for
2 potential adjustment. The main areas can be categorized
3 as: 1) Power Supply, which includes weather normalization,
4 purchased water and customer levels; 2) Salaries and
5 Incentives, which include proposed 2010 increases, 2009
6 actual increases and 2009 bonuses and incentives; 3)
7 Affiliate costs such as R&I Alliance, Management and
8 Services contracts and Leakguard; 4) Miscellaneous expenses
9 such as recognition expenses, vehicle allowance and manager
10 expenses; and 5) Cost Controls which includes rate case
11 cost sharing and capping the increase in annual expenses.
12 The Company's requested Return on Equity (ROE) of 10.4% was
13 not contested by Staff and was not adjusted.
14 Q.Would you characterize Staff's review in this
15 case as typical of those conducted by Staff in past United
16 Water rate cases?
17 A.Staff's review in this case was typical with
18 respect to the comprehensive audit and evaluation of
19 Company investment and expenditures. However, the
20 magnitude of the requested increase (15.21%) coupled with
21 harsh local economic conditions of high unemployment (9.1%
22 Boise Metro) and declining wages (-2.6% Idaho) made Staff's
23 review somewhat atypical with respect to the type, and
24 magnitude of revenue requirement adjustments identified.
25 Q.What do you mean by atypical with respect to type
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 6
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1 and magnitude of adjustments?
2 A.With local economic conditions in mind, Staff's
3 review of potential adj ustments was more aggressive and
4 creative than usual. However, Staff also had to consider
5 service quality requirements and adequate recovery by the
6 Company of reasonable operating costs. For example,
7 Company investment associated with water quality and system
8 reliability was identified by Staff as a high priority and
9 subjected to little adjustment. The same is true for
10 recovery of power supply cost actually incurred by the
11 Company to operate its system. The remaining cost
12 categories associated with salary and O&M expenses were
13 broadly targeted for review and adj ustment at levels that
14 Staff has not previously considered in a United Water
15 general rate case.
16 Q.Could you provide some examples?
17 A.Yes. In past cases, Staff has identified
18 proposed salary increases beyond the test year and
19 recommended removal of the entire amount from revenue
20 requirement. In this case Staff not only targeted proposed
21 salary increases, it also targeted all actual test year
22 salary increases and incentive pay. The 2009 salary
23 adjustment totaled over $500,000.
24 Staff also targeted all previously unadjusted
25 expense accounts and applied a 3% growth limit from 2008
CASE NO. UWI-W- 09-01
01/28/10
LOBB, R . (D i) 7
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1 through 2009. This adjustment totaled over $300,000.
2 Finally, Staff targeted for removal all
3 affiliated R&I Alliance research fees regardless of the
4 nature of the research or Company cited benefit. In
5 addition, Staff applied a 10% across the board reduction in
6 affiliated Management and Services contracts. These
7 adjustments totaled over $400,000.
8 Q.How did Staff determine that a negotiated
9 settlement in this case could be more beneficial than
10 proceeding to hearing?
11 A.Staff reviewed each of the 22 identified
12 adjustments to assess the likelihood that they would be
13 accepted by the Commission at hearing. Some adjustments
14 were determined to have a high probability of being
15 accepted by the Commission based on past Commission orders.
16 Other adjustments would clearly be opposed by the Company
17 through rebuttal testimony and cross examination and were
18 more likely to be rejected by the Commission. For example,
19 the portion of Staff's salary adjustments that removed
20 negotiated contract labor salary increases may not have
21 been accepted by the Commission. Based on Staff's review
22 and the identified risk of obtaining adjustments at
23 hearing, Staff determined that negotiated settlement could
24 provide a more beneficial outcome.
25 Q.What level of adjustment did Staff believe had a
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1 high likelihood of approval by the Commission at hearing?
2 A.Before the likely Staff adjustments were
3 subtracted from the Company requested revenue increase,
4 Staff believed the estimated test year expenses such as
5 property taxes would be trued up to actual. After the
6 true-up, the starting point of the revenue requirement
7 increase would be $6.14 million or 16.6% rather than the
8 $5.63 million or 15.21% originally requested by the
9 Company.
10 Staff identified approximately $1.45 million in
11 adj ustments that the Commission has considered at hearing
12 in the past and has accepted at least in part. There is no
13 guarantee that all of these proposed adjustments would be
14 accepted by the Commission in this case. In fact, it was
15 likely that at least a portion would be rejected. If all
16 of the adjustments would have been accepted, the resulting
17 increase would still have been 12.66%.
18 Q.What is the level of revenue requirement
19 adjustment and the ultimate overall increase proposed in
20 the Stipulation?
21 A.The Stipulation specifies an overall revenue
22 increase of $4.3 million (11.63%) over two years with the
23 first $3.66 million (9.9%) effective on March 1, 2010, and
24 an additional $640,000 (1.73%) effective on February 1,
25 2011. The overall proposed revenue reduction from the
CASE NO. UWI-W-09-0101/28/10 LOBB , R . (D i ) 9
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1 total request expected at hearing is $1.84 million. The
2 first year increase is $2.48 million less than the expected
3 request.
4 The first year revenue increase of $3.66 million
5 represents about 60% of the increase request expected at
6 hearing. The first year adjustment also represents
7 approximately 96% of the total adjustments Staff considered
8 in this case. Consequently, Staff believes the stipulated
9 increase constitutes a significantly better outcome for
10 customers than what would have been achieved at hearing.
11 This is particularly true when the rate case filing
12 moratorium through June 1, 2011, as specified in the
13 Stipulation is included, effectively shielding customers
15
14 from further rate increases until at least January of 2012.
Q.Did the parties agree to any account specific
17
16 revenue requirement reductions?
A.Other than the specific expenses subject to
18 deferral and identified in the Stipulation, the reduction
19 in revenue requirement represents a black box agreement.
20 In other words, the parties did not agree to specific
21 reductions in individual expense accounts or to any
23
22 particular rationale justifying the adjustment.
Q.What is the implied return on equity (ROE)
24 incorporated in the revenue requirement proposed in the
25 Stipulation?
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 10
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1 A.Staff and the Company agreed to an ROE of 10.4%
2 prior to the Company's rate case filing. The agreement
3 between the Company and Staff was documented in a letter
4 dated July 31, 2009, and attached to the testimony of
5 Company wi tness Doherty as Exhibit No.6. The agreement on
6 ROE was made between the Company and Staff before the
7 Company case was filed to eliminate ROE as a contested
8 issue in the case, to eliminate the need for an equity
9 return Company witness and to reduce rate case expense.
10 Q.Why does Staff believe a 10.4% return on equity
11 is reasonable?
12 A.Staff believes a 10.4% ROE for United Water is
13 reasonable based on ROE previously allowed by this
14 Commission, ongoing capital requirements and current market
15 conditions. The previously authorized ROE for United Water
16 is 10.6% in 2000, Order No. 28505; 10.3% in 2005, Order No.
17 29838; and 10.3% in 2006, Order No. 30104. Idaho Power
18 Company was authorized a 10.5% ROE on January 30, 2009,
19 Order No. 30722, and PacifiCorp was authorized a 10.25% ROE
20 on April 16, 2009, Order No. 20783. The Commission cited
21 deteriorated economic and financial markets when it
22 approved an increased ROE of 10.5% from 10.25% for Idaho
23 Power Company. Order No. 30722. The increased ROE was
24 found necessary to assure confidence in the financial
25 soundness of the utility, to support credit ratings and
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 11
STAFF
1 enable the utility to raise necessary funds. These same
2 goals are reasonable for United Water and support a 10.4%
3 ROE (an increase from 10.3%) .
4 Q. i What does the Stipulation specify with respect to
5 power cost recovery?
6 A.The Stipulation specifies that United Water's
7 revenue requirement will continue to include annual power
8 expense based on Idaho Power's current base electric rates
9 and the Power Cost Adj ustment (PCA) rate that was in place
10 the last time United Water rates were set. PCA power costs
11 incurred above that rate will continue to be deferred
12 through March 1, 2010, and amortized over a three-year
13 period. After that date, all PCA costs will be deferred
14 with a carrying charge (customer deposit rate) for later
15 amortization.
16 Q.Why did Staff agree to treat power costs in this
17 manner?
18 A.The Company originally proposed to include the
19 current Idaho Power PCA rate in revenue requirement even
20 though the PCA is scheduled to change on June 1, 2010.
21 Both Staff and Idaho Power Company anticipate a significant
22 decrease in the PCA on that date. Staff did not believe it
23 was appropriate to include a temporarily high PCA rate in
24 the United Water base revenue requirement. In addition,
25 Staff believed it was reasonable given the magnitude of the
CASE NO. UWI-W-09- 0101/28/10 LOBB, R. (Di) 12
STAFF
1 United Water rate request and the difficult economic
2 conditions currently experienced by Company customers to
3 continue deferral of extraordinary power expenses for later
4 amortization and recovery. Deferral of these power costs
5 for future amortization removed approximately $500,000 from
6 United Water's revenue requirement request. While Staff
7 supports deferral of PCA costs rather than including them
8 in United Water base rates at this time, Staff continues to
9 believe that these costs are legitimate operating expenses
10 and fully subject to recovery through amortization.
11 Q.What other costs were specified for deferral in
12 the Stipulation?
13 A.The Stipulation also allows the Company to defer
14 the costs of: 1) Rate Case Expenses; 2) Tank Painting; and
15 3) Conservation Plan and Implementation Expense. These
16 costs will be deferred and amortized for ratemaking
17 purposes beginning March 1, 2010. The amortization periods
18 will be: 1) three years for rate case expenses; 2) twenty
19 years for tank painting and rehabilitation of the Ustick,
20 Crestline and Steelhead water storage reservoirs; and 3)
21 three years for the Conservation and Implementation
22 expense. Staff also acknowledged that existing deferrals
23 and amortizations will continue as previously authorized.
24 While Staff generally agrees that expenditures for these
25 items are appropriate, Staff reserves the right to more
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 13
STAFF
1 fully evaluate the actual costs in the future to determine
2 that all deferred costs and amortizations are reasonable
3 and reported properly.
4 Q.What does the Stipulation specify in terms of
5 rate spread and rate design?
6 A.The Stipulation specifies no change in rate
7 design and an across the board increase in all existing
8 rate components. For example, if the Commission approves
9 the Stipulation, the bimonthly customer charge for a
10 customer with a % inch meter will increase from $16.21 to
11 $17.82 on March 1, 2010, or approximately 81 cents per
12 month. The winter and summer first block commodity rate
13 will increase from $1.2112 per 100 cubic feet (CCF) to
14 $1.5141 per CCF. The summer second block commodity rate
15 will increase from $1.3317 per CCF to $1.6648 per CCF. On
16 February 1, 2011, these customer charges and winter
17 (including first block summer) and summer (second block
18 only) commodity rates will increase to approximately $18.13
19 bimonthly, $1.54 and $1.69 per CCF, respectively.
20 Q.Why did Staff agree to maintain the existing rate
21 structure and support a uniform increase in all rate
22 components including customer charges?
23 A.Staff agreed to maintain the existing rate design
24 based on Commission Order No. 30865 which waived the
25 requirement for the Company to submit a cost of service
CASE NO. UWi-W- 09-0101/28/10 LOBB, R. (Di) 14
STAFF
1 study with its rate case application. Staff did not
2 believe it was appropriate to change rate design without a
3 study supporting such a change. Likewise, Staff agreed to
4 a uniform rate spread in this case in part due to a lack of
5 a current cost of service study. Other factors supporting
6 an increase in the customer charge in this case were the
7 increasing cost of fixed charges associated with customer
8 services and as a concession to further reduce revenue
10
9 requirement specified in the comprehensive settlement.
Q.Why has Staff agreed to the Budget Bill Plan
12
11 proposed by the Company?
A.Staff has long supported a customer payment plan
13 to allow customers to pay equal monthly payments throughout
14 the year. Other utilities have similar voluntary plans
15 that assist customers in managing high seasonal billings
16 without sacrificing price signals. This is particularly
17 helpful for United Water customers who face high seasonal
18 bimonthly bills. Any additional cost of the program at
19 this time will be borne by the Company within the
20 stipulated revenue requirement. Finally, the Company has
21 agreed to promote use of its E-billing program in
22 conjunction with its budget bill program to further reduce
23 overall billing costs.
24 Q.Could you please comment on the two remaining
25 provision of the stipulation - Private Fire Line service
CASE NO. UWI-W-09-0101/28/10 LOBB, R . (D i) 15
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2
1 and the Informal Workshops?
A.Yes. Staff supports the change to United Water's
3 rules and regulations regarding the Company's
4 responsibili ty for Private Fire Line Service. The language
5 modification proposed by the Company is consistent with
6 rules for other service line connections and will eliminate
7 confusion and costs for the Company and its customers.
8 Finally, Staff fully supports and plans to
9 participate in informal workshops scheduled by United Water
10 to discuss low income issues such as UW Cares. The
11 workshops will also cover how to improve participation in
12 Company demand side management programs. Staff believes
13 programs that help customers manage their water bills are
14 particularly important at this time and need to be
15 addressed.
16 Q.Does this conclude your testimony in this
18
1 7 proceeding?
19
20
21
22
23
24
25
A.Yes, it does.
CASE NO. UWI-W-09-0101/28/10 LOBB, R. (Di) 16
STAFF
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 28TH DAY OF JANUARY 2010,
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB IN
SUPPORT OF STIPULATION, IN CASE NO. UWI-W-09-1 BY MAILING A COPY
THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
KEVIN H. DOHERTY
UNITED WATER IDAHO INC
200 OLD HOOK ROAD
HARRINGTON PARK, NJ 07640
E-MAIL: Kevin.doherty(funitedwater.com
DEAN J MILLER
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701
E-MAIL: joe(fmcdevitt-miler.com
BRAD M. PURDY
ATTORNEY AT LAW
2019 N 17TH STREET
BOISE ID 83702
E-MAIL: bmpurdy(fhotmail.com
,b~SECRETA -
CERTIFICATE OF SERVICE