20110803Healy Di, Exhibit.pdf

Dea J. Miler (lSB #1968)
McDEVITT & MILLER LLP
420 West Banock Street
P.O. Box 2564-83701
Boise, ID 83702
Tel: [phone]
Fax: [phone]
joe(imcdevitt -miler. com
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Attorneys for Applicant
BEFORE THE IDAHO PUBLIC UTILITIES COMMSSION
IN THE MATTER OF THE APPLICATION
OF UNTED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES Case No. UW-W-LL-02
AND CHAGES FOR WATER SERVICE IN
THE STATE OF IDAHO
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
DIRCT TESTIMONY OF JEREMI 1. HEALY
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Please state your name and business address?
Jeremiah J. Healy, 8248 West Victory Road, Boise, Idao 83709.
By whom are you employed and in what capacity?
I am employed by United Water Idaho Inc. ("United Water" or "the Company") in
the capacity of Manager Finance and Rates.
How long have you been employed by United Water Idaho?
I have been employed by United Water Idaho or United Water Management and
Services Company since Febru 1980.
Briefly describe your responsibilties durng your tenure.
As a Staff Accountant with the Central Region Offce in Harrsburg, Pennsylvania
until April 1982, I performed general accounting, prepared federal and state ta
returs and public utility commssion anual reports among other duties. In May
1982 I transferred to the Philadelphia area as Internal Auditor responsible for
conducting financial and special audits on regulated and non-regulated
subsidiaries of General Waterworks. From September 1985 until December 1989 I
was Accounting Supervisor for United Water Idaho in Boise. In this capacity, I
was responsible for accounting and planing fuctions. In Janua 1990 I became
Financial Coordinator for the Western Region of General Waterworks responsible
for accounting, budgeting and strategic planing for five water and/or wastewater
utilties. From August 1993 until October 1994 I was Director of Rates at United
Water Management and Services Company in King of Prussia, Pennsylvania. In
this capacity I prepared rate filings for various utilty subsidiares. In November
1994 I assumed my curent position.
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United Water Idaho Inc.
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What is your educational background?
I was granted a Bachelor of Science degree with a major in accounting from the
University of South Carolina in May 1977.
Before what regulatory commissions have you appeared and presented expert
testimony?
I have testified in VarOUS proceedings before the Idao Public Utilities
Commission ("IPUC") and I have submitted wrtten testimony before regulatory
bodies in Ilinois and Arkansas as well.
Have you attended rate makng seminars over the course of your career?
In addition to ongoing extensive research of general rate cases and other matters
before the IPUC and other jurisdictions, I have attended the NARUC Ratemaking
Seminar in Fort Lauderdale, Florida and most recently I attended the thee day
seminar "Utility Finance & Accounting for Financial Professionals", presented by
the Financial Accounting Institute in Las Vegas. This seminar is for financial
professionals in utility finance & accounting to enhance their understanding of
techncal accounting issues and cutting edge ratemaking methodologies.
What is the test year United Water is utilizing in this proceeding?
The Company is using the twelve-month historical period staing May 1, 2010
and ending April 30, 2011 as the test period. Normalizing and anualizing
adjustments have been made to the test period as appropriate. Also, known and
measurable adjustments have been made for varous operating expenses.
In connection with the Company's present application for an increase in rates and
charges, what is the scope of your paricipation and testimony?
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United Water Idaho Inc.
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My paricipation and testimony covers test-year operating expenses and
adjustments thereto. I have delegated responsibility to Witness Jarila Car,
Accounting Manager for United Water Idao, for the account analysis and
adjustment prepartion for the areas of payroll to Operations & Maintenance,
associated statutory payroll taxes, employee benefits and all deferred account
amortizations, under my direction and supervision Ms. Car has prepared the
necessar workpapers and exhibits, as well as pre-filed direct testimony, to
support the adjustments she is sponsoring. Ms. Car and I will be referencing the
same sumar Exhibit 11, and that Exhibit wil identify the sponsor of each
adjustment. The adjustment to depreciation expense has been prepared by Witness
Kevin Dohert, Regulatory Business Director for United Water Management and
Services Company. I have analyzed the Company's books and records and
prepared the necessar accounting exhibits to support adjustments to operating
expenses that are my responsibility. I wil in my workpapers include the list of
accounts that were not adjusted from the test year leveL. These accounts comprise
over 10% of total test year operations and maintenance expense. I am certain that
pro forma adjustments could be made to some of these accounts, but for the sake
of materiality, and recognition of the magnitude of increase requested in this case,
no adjustments were made.
Please generally describe the approach you have taken in preparng the exhibits
for operation & maintenance expenses.
For operation and maintenance expenses, I have relied on information and data
produced within the Company, and my own investigation thereof, as the basis for
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my adjustments. In certin instances, adjustments were made for expenses, such
as power and propert tax, expenses that will experience significant known and
measurable changes (the outcome of Idaho Power Company's Case No. IPCO-E-
11-08 or the known Ada County composite levy rate for United Water propert
allocated to varous County taing distrcts) as appropriate during the prosecution
of the instat case and clarfying information will become available that will be
incorporated, in a timely maner, into the respective O&M adjustments.
Additionally, I have carefuly reviewed Commission Orders in United Water
Idaho Inc.'s 2004, 2006 and 2009 general rate cases, as well as recent vintage
Commission Orders in other utilities company matters subject to Idaho Public
Utilties Commission jursdiction to ensure that all adjustments included in
Operating Expenses are within reason and do not contradict the Commissions
general preferences. I am not proposing any adjustments I consider to be
controversial in natue.
Please introduce us to Exhibit No. 11, Sumar, Page 1 of 1.
Exhbit No.11, Sumar, page 1 of 1 contains in Colum 1 a complete
accounting of test year operation and maintenance expenses per books totaling
$24,909,443. Exclusive of depreciation expense and UPAA amortization, this
total is $17,458,292. Witness Car and I are increasing test year expense by a total
of$1,139,174 or 6.52%. Major upward adjustments include, in order of moneta
magnitude: pension expense, $375,128; ad valorem taxes, $307,837; employee
group health, $256,654; payroll to O&M expense, $122,950; purchased power,
$114,959; and deferred rate case expense amortization, $87,986. Major downward
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expense adjustments include fringe benefits transferred, ($247,817), post
retirement health care expense ($91,103); deferred power amortization ($67,380).
Also, expenses not deemed appropriate for rate making puroses in prior cases
have been eliminated ($21,775). Colum 2 of Exhibit No.11, Sumar, page 1 of
1 indicates the net adjustment made to each account and colum 3 of the same
Exhibit indicates the pro-forma level of the expense.
The detailed support for the operation and maintenance expense
adjustments are shown on the thee Schedules following the Exhibit 11,
Sumar, page 1 of 1. Schedule 1, pages 1 to 30, provides the detail for
adjustments made to operation and maitenance expense. Schedule 2, page 1
provides the detail for adjustments to depreciation expense. Schedule 3, pages 1 to
4, provides the detail for adjustments to payroll ta expense and propert tax
expense.
Wil you be addressing any other topics in you testimony?
Yes. I will be introducing the concept of an anual adjustment mechansm related
to significant, volatile and largely uncontrollable costs incured by United Water.
This portion of my testimony will introduce an anual adjustment mechansm to
allow United Water to more effciently recover expense increases, or rebate
expense decreases by way of an anual surcharge device adjusting purchased
power expense, propert ta expense, and cash pension contrbution from levels
set in the most recent general rate case. The mechansm is intended to assist
United Water in its opportunty to ear and maintain its IPUC authorized overall
rate of retur as well as its authorized retu on equity.
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Please describe the varous normalizing and anualizing adjustments, as well as
known and measurable adjustments, made to operation and maintenance expense
that were prepared and sponsored by you.
Witness Car discusses adjustments No's 1 through 17, so I will begin with
Adjustment No. 18, increasing purchased water expense by $12,915 (Schedule 1,
Page 18). This adjustment reflects an incremental increase in the anua expense
of purchased water largely due to the leasing of an additional 500 acre feet of
water by United Water from the Boise Valley Irrgation Distrct, at an anual cost
of $10,500, to meet water supply needs. Company Witness Scott Rhead provides
an explanation of the Company's leased water strategy in his testimony.
Adjustment No. 19 increases the pro forma cost of purchased power by
$114,959(Schedule 1, Page 19). Purchased power is overwhelmingly comprised
of Idaho Power bilings to energize source of supply, water treatment & water
distrbution facilities. Purchased Power also includes a small amount for diesel
fuel to power generators exercised to assure immediate readiness, as well as
utilized in power outage situations that occur in the system. Purchased Power also
includes the proceeds derived from United Waters' paricipation in an Idaho
Power demand response program administered by EnerNOC. The Company
designated certain facilities that United Water personnel have the option of
curailing, when requested by EnerNoc, in the event of unusually large power
loads frequently associated with summer air conditioning demand, or other
reasons that ta the power grid. In the test year, United Water reduced its
purchased power costs by $36,941 due to cash payments received from EnerNOC.
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The anticipated proceeds from the 2011 sumer season are incorporated into this
adjustment.
What are drvers of higher energy costs?
A significant driver of United Water's electricity costs consist of the fact that
water systems that serve a diverse topogrphic area (such as United Water), are
energy intensive. United Water utilzed 31,883,608 kWh in the test year. United
Water is extremely dependent on Idaho Power to supply its power needs. Idaho
Power Company, in order to maintain its credit rating, fud infrastrcture
improvements & upgrades, and recover costs increases, files frequent general rate
cases, limited scope cases and also uses several anual cost adjustment
mechansms, most notably the anua PCA, to maintain the financial viability of
the Company. According to Idaho Power's 2010 Form 1O-K, filed with the United
States Securties & Exchange Commission, Idaho Power Company has put into
effect seven material base rate increases since March 1, 2008 (five "permanent"
base rate increases and two temporar increases). If 2011's activity is taen into
account, one more anual adjustment mechanism (Pension Expense Recovery)
took effect June 1,2011. Also, on June 1,2011, Idaho Power fied for a 9.9% base
rate increase to be effective no later than Januar 1, 2012. If just the nominal
percentage increase in these rate increases is added together (ignoring the
compounding effect), and assuming Idaho Power receives 65% of its requested
award in the current general rate case, Idaho Powers' base rates wil have
increased over 31 % in the last 46 months. For an ilustration of the impact on one
customer, United Water had purchased power expense for the year 2008 of
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$1,432,453 compared to a pro forma expense of $1,884,824 in this case. That is
an increase of $452,371 or 31.58%. United Water pumped 15.45 billon gallons in
2008, versus 13.5 bilion gallons in the test year.
What is United Water doing to ensure efficiency in the usage of energy?
Mr. Wyatt discusses several initiatives the Company has employed to optimize
power usage in his testimony. United Water has utilized Idaho Power's rebate
programs, as well as developing internal programs to monitor and optimize energy
usage.
Briefly, how was pro forma power expense calculated?
I accumulated twelve months of biling determinants from every facility used in
the test year from Idaho Power invoices including every kWh, demand unit, base
load capacity unit, service charge, facility charge, etc. All of these unts were
priced out at rates in effect on June 1, 2011 for schedules 7, 9 S&P and 19 P.
Capacity charges (schedule 46) that were paid for a portion of the test year, but are
not going to be incured in the rate year, were eliminated. This arthetic exercise
totals $1,809,921. An assumption was made that Idaho Power wil receive 65% of
their June 1,2011 general rate request of9.9%. Because the rate increase vares by
customer class, United Water would theoretically receive a weighted average
5.32% increase, or $96,288. Added to this electricity expense was the test year
level of generator fuel offset by the proceeds from EnerNOC, a negative $21,385.
Adjustment No. 20 is for chemicals used in the water treatment process to
disinfect or otherwse make water safe to consume or improve water aesthetically.
The pro forma increase is $10,280 (Schedule, Page 20). Again, test year quantities
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United Water Idaho Inc.
1 for each chemical agent were assembled and priced out at the most recent actul
2 invoice price includig sales ta, totaing $267,486. The Company then used
3 information from suppliers to anticipate price increases on the horizon. During the
4 period between the fiing of this rate case and the hearings, United Water will
5 confrm price changes and substitute them into the pro forma worksheet as they
6 become known thoughout ths proceeding.
7 Adjustment No. 21 increases tranportation expense by $65,202 from the test year
8 level of$532,101, to a pro forma amount of $597,304 (Schedule 1, Page 21). The
9 Company operates and maintains a fleet of 58 vehicles. The fleet includes heavy
1 0 equipment such as four back hoes and three dump trcks, as well as a forklift.
11 Twenty-five full size pick-up trcks ranging from Ford F 150's to Ford 650's
12 comprise the bulk of the fleet, and are augmented with 18 Ford Ragers for meter
13 reading, customer service work and other uses that can be efficiently performed
14 with a lighter duty vehicle. Control System technicians utilize four Ford vans that
15 have adequate storage space for all the parts and materials that are required to
16 efficiently perform their jobs. The fleet is rounded out by one Ford Windstar,
17 Escape & Explorer. Each year United Water employees drive about 600,000 miles
18 and put 1,200 hours of usage on the back hoes and forklift. The primar reason for
19 the increase in pro-forma cost is fuel: test year fuel totaled approximately
20 $169,000 while the Company expects pro forma year fuel expenditues of almost
21 $218,000, an increase of $58,000. Test year per gallon average prices for gasoline
22 and diesel were $3.06 per gallon and $3.48 per gallon, respectively. The Company
23 is using pro forma fuel prices at approximately the curent price levels for
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gasoline, $3.75 per gallon, and a diesel price of $4.25 per gallon. Automobile
insurance is expected to rise over $15,000 from the test year, and the new
Assistat Manager will receive an automobile allowance of $4,800 anually.
What steps has the Company taken since 2008 to control fuel consumption and
overall transporttion costs?
United Water has GPS units installed in most vehicles. Deparent heads are now
able to track vehicle idle times and make drvers aware of them. Employees are
challenged to make changes in their driving habits and tur off vehicles whenever
possible to reduce fuel consumption. In the twelve month period ended June 2011,
United Water used 2,733 fewer gallons of fuel than for the corresponding period
one year earlier. That represents about $10,000 in fuel costs avoided. Another
advantage of GPS benefiting vehicle use effciency is that it enables the Company
to dispatch the nearest available vehicle/worker to a facility or customer location
in response to an emergency or a request for service. In addition to GPS, tire
service agreements and pars purchase contracts are re-bid anually to ensure
optimum pricing.
Please proceed with the next OPEX adjustment.
Adjustment No. 22 decreases test year expense by $4,274 (Schedule 1, Page 22)
for General Corporate Insurance, including General Liability & many other
necessar coverage's, as well as Propert Insurance expense. Test Year expense is
a combined $626,274 while pro forma costs are expected to decrease by
approximately 0.70%. General liability insurance costs are comprised of two
components: insurance premiums and uninsured losses. These costs are pooled
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together and allocated to the varous business unts. Premiums are expected to rise
in 2012, but it is prematue to estimate the amount ofthe increase.
Adjustment No. 23 increases test year expense Customer Biling Expense by
$47,101 from the test year level of$881,554 to the pro forma amount of$928,655
(Schedule 1, Page 23).
This adjustment consolidates a number of different services and products integral
to the billng of customers. Please explain these services and products.
Customer meter reading data begins the entire cycle of generating a customers'
bil on paper or digitally, e-mailing the bil or packaging it for transmittal though
the US Mail, collecting and processing payments whether made locally or mailed
to the lock box in Pittsburgh, using paper, electronic or telephonic services to
gently remind customers to pay, utilzing a collection agency to recover bad debts,
maintaining all computer hardware & softare and other necessar services.
United Water is "in-sourcing" the operation of the biling system with a new asset
that replaces the existing customer information system and relationship with an
outside biling contractor. Witness Hawthorne in his testimony explains the
Company's need for and decision to invest in a new customer information system.
Witness Rhead includes the capital expenditue in his pro forma exhibit, Witness
Dohert speak of the Company's presentation and treatment of ths investment in
rate base and the associated depreciation expense, and I will explain the OPEX
associated with the in-sourcing of the customer information system, as well as the
many processes that will not be substantially changed under the new arangement.
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United Water Idaho Inc.
1 During the test period the Company utilized an outside contractor, Utility Business
2 Servces, to produce and transmit customer bils and notices; Treasur
3 Management Services in Boise to process local cash payments; CDI, a local
4 collection agency, to collect bad debts; Itron to maintain meter reading device
5 hardware & softare; Loomis to transport payments from the operations center to
6 the local ban; Ban of NY-Mellon to operate a consolidated lock box and
7 payment processing service for mailed payments for United Water Idaho and its
8 sister Companies; E-Commerce Group to support e-biling and payment
9 operations, Autosort, a local postage Company, to efficiently handle the
1 0 transmission & postage of AR-1' s and AR -2' s (customer notices), customer
11 backfow device testing notices and all other outgoing mail; Televox, an
12 automated outbound calling service that contacts customers regarding various
13 reminders; and Draper & Company to handle the production and mailng of
14 anual EPA required Consumer Confidence reports. The test year level of expense
15 for all these services totaled $881,554. The pro forma increase of $47,101, or
16 5.3 %, is due to several factors: (l) the number of bils produced - though
17 customer growth has slowed durng the economic downtu, the Company
18 continues to add customers, 562 in 2008, 225 in 2009, 582 in 2010 and 388 year
19 to date though June, 2011. The average number of total customers for the test
20 year is 84,584, suggesting 507,504 bi-monthly bils. The number of bils
21 anualized in the pro forma test year revenue, as adjusted, is 509,580, an increase
22 of 2,076 bils at $1.74 per bil or an approximate increase of $3,600. Also, for the
23 vendor E-Commerce group mentioned earlier, the test year included only five bils
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1 averaing $1,600 per. The anuaization of this vendor's service adds another
2 $11,200 to pro forma costs. The in-sourcing of the customer information system
3 and the change in the cost strctue does not allow the old cost strctUre and the
4 new cost strctue to be effciently analyzed.
5 Adjustment No. 24 increases test year bad debt expense by $140 from the test year
6 level of$199,606 to a pro forma number of $ 199,746(Schedule I, Page 24) based
7 on test year adjusted revenue developed by Witness Paul Herbert and used in this
8 case. The last thee twelve month periods ending May of 2009, 2010 & 2011
9 experienced net bad-debt rates of 0.5082%, 0.5258% and 0.5299%, respectively.
1 0 This is an increase in the net bad debt rate from the 2009 rate case of 25%.
11 Witness Loy recommended a rate of 0.4200% in case UWI-W-09-01 and
12 undoubtedly reflects the difficult local economy. Company Witness Wyatt
13 discusses enhancements to the UW Cares program to respond to the
14 diffcult economic situation in the Boise area.
15 Adjustment No. 25 increases test year water quality testing expense by $23,648
16 from the test year level of $64,952 to a pro forma level of $88,600 (Schedule 1,
17 Page 25). United Waters Water Quality Specialist analyzed the test year level of
18 $64,952, and the calendar year level for 2010 of $62,175, both historically low
19 anual amounts (compared to $113,634 in 2009, $102,981 in 2008, $95,555 in
20 2007 and $72,761 in 2006 and $84,472 in 2005). Because the sampling cycle is
21 different from year to year, and more frequent sampling can occur if there is a
22 "detect" at a certain facilty, and new test are or programs are designed from time
23 to time, this operating expense lends itself to a multi-year average. The average
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anual expenditue, ignoring infation, over the period from 2005 to 2010 is
$531,578/6 = $88,597, or rounded to $88,600 anually. Though higher than the
test year level of expense, the Company believes this average is a fair and
equitable way to smooth out an otherwse irreguar anual expense.
Adjustment No. 26 increases test year IPUC Anual Assessment expense by
$14,153 from the test year expense per books of$71,726 to the pro forma level of
$85,897. The pro forma amount is based on the Commissions Invoice # 3435
(Schedule 1, Page 26) dated April 22, 2011 instrcting United Water to make
equal semi-anual payments in May and November 2011 of $42,939.37 (Schedule
1, Page 26).
Adjustment No. 27 leaves the test year expense level intact at $192,662 for United
Water contributions to the R&I Allance of $192,662. Witness Wyatt discusses
the purose and benefit of the R&I Allance in his testimony.
Adjustment No. 28 reduces overall test year expense by $21,775 by eliminating
certain expenditures that the Commission does not consider appropriate for rate
making puroses (Schedule 1, Page 28). From the test year, the Company has
eliminated the following expenses: $5,594 in dues to Hilcrest Countr Club from
account 90500, $3,300 of National Association of Water Companies dues
considered lobbying expense, as well as $740 of lobbying dues paid to the Idao
Association of Commerce and Industr, from account 90500; also $12,141 of
expenditues spent for the anua Chrstmas par.
Are there no chartable contrbutions to also be eliminated from test year
operating expenses?
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United Water Idaho Inc.
1 A.No. A Company policy was adopted that requires all chartable contrbutions to be
2 recorded "below the line" and are therefore excluded from the ratemakng process.
3 They are recorded in account 71254 and for the test period amounted to $25,692.
4 No adjustment is necessar.
5 Adjustment No. 29 reduces test year operating expenses (power & chemicals) by
6 $9,725 (Adjustment 29, Page 29) to coincide with the revenue reduction
7 adjustment made by Witness Paul Herbert based on his review & analysis of the
8 downward consumption trend of United Water customers over the last decade.
9 The ratio of varable operating expenses (power, $1,769,865 and chemicals,
10 $268,931) totaling $2,038,796 to varable consumptive revenue ($26,966,685) is
11 7.561 %. Mr. Herbert makes revenue adjustments to include the anualization of
12 test year growt, as well as post test year growth included in ths case, as well as a
13 negative revenue adjustment to consumptive revenue based on his analysis. The
14 net revenue adjustment is negative $128,814. Since this consumptive revenue
15 decline will logically impact power and chemical expense, they will decrease by
16 7.55% of($128,814) or negative $9,725.
17 Q.Please explain your next adjustment.
18 A.Adjustment No. 30 reduces test year operating expenses by $7,416 by eliminating
19 account 90852, non-regulated Management & Service Fees. The Company is not
20 adjusting the other M&S Fee accounts, 90850 & 90851.
21 Q.Do you also have an adjustment to discuss in Taxes Other - account 70200, real
22 estate taxes?
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Yes I do. Exhibit No 11, Schedule No 3, Adjustment No 1, Page 1 of 4 indicates
the test-year level of Ada County Propert Tax is $1,530,163, the test year
adjustment is $307,837, providing a pro forma expense of$1,838,000, an increase
of 20%.
Why do you anticipate an increase? United Water has experienced an unexpected
increase in propert taxes over the last several, normally due to unexpectedly large
increases in the composite levy rate. The assessment process can lead to large ta
fluctuations by the nature of the process. The estimated net valuation of United
Water propert was $111.0 millon in 2009, fell to $91.6 milion in 2010, a
decrease of $19.4 millon dollar or 17.5% and for the curent year, the Company
received verification dated July 13,2011 that the net assessed value for the curent
year is $101.1 milion, a bounce-back increase of $9.5 milion or 10.4%.
Please provide a brief explanation of the volatility of the net assessed value.
The Company is "centrally assessed" by the Idaho State Tax Commission (ISTC),
even though all the Company's propert is located in Ada County. Central
Assessment is used with all "Operating Propert", essentially utilties, pipeline
companes, railroads, etc. The net assessed value is determined by merging two
measures of value, namely the "Cost Approach" and the "Income Approach".
Briefly, the Cost Approach is much like a rate base calculation, while the Income
Approach capitalizes the net operating income of United Water at an industr
specific "cap rate" to project tota value. In the curent years' appraisal, the Cost
Indicator is $168.4 millon and the Income Indicator is $105.6 milion. Just for
comparison, the prior years' appraisal indicated Cost at $161.8 milion and
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Income at $92.7 milion. These two indicators are not weighted equaly. The State
Tax Commission has, in the last several year, applied a weighting of 30% cost
approach and 70% income approach, to arve at the overall gross assessed value
for 2011, or the "System Correlation" value of $124.5 millon. From this
correlated amount, the STC removes statutory exemptions to arve at the
"Estimated Idaho Valuation", $10 1.1 millon for 201 1. In the last several years,
United Waters fallng usage per customer has lowered operating revenues and
thus net operating income, which, when combined with the 70% weighting of the
Income Approach, has a signficant impact on assessed value.
Doesn't ths "low" assessed value tend to keep United Water Idaho's propert
taes under control?
Not necessarly. The other key components of the propert tax process is the
determination of budgets by the varous taxing districts in the County, and, the
determination of the levy rate that, when applied to assessed propert values
withn the bounds of any paricular taing distrct, theoretically generates the
allotted tax revenue. The critical percentage is the composite levy rate to be
applied to the Company's assessed value. From 2007 though 2010, United
Water' composite levy has increased as follows: 2008 1.7%, 2009 10.7% and
2010 14.9%. Compounded, this produces a 31.6% levy increase over 3 years.
These levy increases have caused the Company's taxes to rise dramatically.
What is your forecast of the composite levy rate for 2011 ?
I am forecasting a 10% increase to the composite levy rate (lower than the
increase in the two prior years), resulting in a new composite levy rate of 1.697%,
Healy, Di 17
United Water Idaho Inc.
1
2
3 Q.
4 A.
5
6
7
8
9
10
11
12 Q.
13 A.
14 Q.
15 A.
16
17
18
19
20
21
22
23
which I expect will create a $1,715,500 tax bil to be paid half in November 2011
and half in June 2012.
Is ths your pro forma propert ta expense in ths case?
No. Since the composite levy rate will be know and measurable by November
2011 at the latest, and the 2011 tax bil will be precisely known and measurable, I
am forecasting propert tax expense to closely coincide with the year that new
rates will actually be in effect, early March, 2012. Even though I do not anticipate
much change in the net assessed value of United Water in 2012, I do feel that,
especially when the 2011 composite levy is known, it will justify a conservative
composite levy rate increase of 7% resulting in an Ada County ta bil of
$1,838,000.
Does this conclude your testimony regarding OPEX adjustments?
Yes, it does.
Do you have another issue you would like to introduce?
Yes, as previously mentioned, I would like to discuss proposed cost adjustment
mechansm for purchased power, propert tax and pension fuding costs. United
Water has suffered rather poor ROE's the last several years primarily because
customer usage has declined significantly from relative to historical usage. Even
with rate increases granted in 2006 ($3.6 milion) and 2010/2011($4.3 milion),
the Company has not been able to sustain earngs in line with its authorized
levels.
Witness Herbert, in his testimony, is proposing customer consumption levels that
reflect this downward trend. Similarly, though less spectacularly, volatile
Healy, Di 18
United Water Idaho Inc.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20 Q.
21 A.
22
23
operating expenses also eat away at a utilty's retu, damaging the utilties ability
to ear its authorized retu and ultimately the Company's ability to meet the
needs of its customers in an effcient maner. It is not uncommon for utility
companies that serve homes and businesses in Idaho to utilize certn rate
mechansms, outside of a genera rate filing, to mitigate the erosion of earings,
reduce the number of general rate cases fied and reduce the expense of filing a
general rate case. Just as shrng usage leads to insufcient revenue, operating
expenses that are volatile and subject to substatial increases also make it diffcult
for a utility to sustain reasonable earings. United Water has thee operating
expenses in paricular that would be easily and equitably amenable to an anually
adjustable rate-makg mechasm. The thee anual expenses I am referring to
are cash pension contrbutions, purchased power expense and propert ta
expense. In the present case, these thee items, cash pension contributions that
have already been paid ($1,388,921), power ($1,884,824) and propert taes
($1,838,000) represent a total expenditue of over $5,111 ,000, about 11 % of the
Company's tota revenue requirement. To have the opportty to stay relatively
whole on these thee expenses will serve to help the Company in its efforts to
achieve its authorized ROE. The anual mechanism wil also allow the Company
to accelerate the speed of recovery of expense increases and improve cash flow.
Why do these expenses meet the criteria of being material and volatile?
In recent history and recent projected years, the cash pension contribution has
varied from the amount of $460,962 requested in Case UWI-W-09-01 to an
estimated contribution of $1,922,000 in FY 2013. Ths is a potential spread of
Healy, Di 19
United Water Idaho Inc.
1 over $1.4 milion dollars. For a relatively small utilty such as United Water, and
2 its customers, the equity of recovery or rebate of such a large swing in a revenue
3 requirement item is very important to maintain the fiscal health of the utilty while
4 also treating customers fairly. It is also possible that in some anual periods, the
5 Company will not be required to make any cash pension contributions. With an
6 adjustment mechansm in place, customers would not reimburse United Water for
7 cost not incured. The ratemakg challenge of dealing with erratic pension
8 contrbutions amounts is thus effciently solved.
9 Purchased power expense is volatile as welL. Power expense was
10 $1,432,453 in 2008 and $1,769,865 in the test year ended April 2011 (an increase
11 of over $337,000 or almost 24%). Pro forma power expense in this case is
12 estimated to increase another $114,959 or 6.5%, Also, United Water requests that
13 the accounting treatment method of deferrng anual PCA related changes
14 approved by the Commission (see UWI-W-01-2, Order No. 28800 granting
15 United Water permission to defer; subsequent Orders allowed recovery through an
16 amortization allowance) during the western power crisis of the early 2000's be
17 abandoned should the Commission approve the proposed mechansm. United
18 Water would then record the full cost of electrc service on its income statement
19 (the ful cost of power, including the PCA, will be expensed). The deferral
20 mechanism was helpful to United Water by allowing the recovery of deferred
21 power expense upon the fiing of a general rate case, but it entailed a relatively
22 long period of time between the payment for service and the recovery of the
Healy, Di 20
United Water Idaho Inc.
1
2
3
4
5
6
7
8
9 Q.
10
11 A.
12
13
14
15
16
17
18
19 Q.
20 A.
21
22
23
expense. From a cash flow point of view this mechasm was not suffciently
effective.
A thd expense category for which the Company is seekig an anua adjustment
is propert ta expense. In 2007, the Company recorded propert ta expense of
just under $993,000. The 2011 bil is likely to be over $1.7 millon. That
represents an increase of over $700,000, or 71 %, in five years. On the other side
of the coin, due to a legislative change, from 2005 to 2006, United Waters
propert tax expense decreased $479,000, or 34%.
What are the specifics of the anual adjustment process the Company is proposing
to mitigate the impact of these volatile expenses.
There are a varety of methods that can be utilzed to accomplish such an anual
adjustment process. The method outlined below is straightforward and is
relatively easy for customers to understand and for the Company and the
Commission to administer. Whle the Company understads that the proposed
methodology may be modified before it is approved, the Companes' goal is to
achieve conceptual agreement that such a mechanism is equitable and appropriate
for the both United Water and for customers and to utilize the proposed
methodology as the general basis for such a mechanism.
Please describe the straightforward method.
In the course of this rate case, the Commission will decide the appropriate level of
cash pension contrbutions, purchased power expense and propert tax expense to
include in the revenue requirement. For the sake of discussion, I will ilustrate the
adjustment concept using amounts that are par of the Companes direct case. In
Healy, Di 21
United Water Idaho Inc.
1 its direct case, the Company has included cash pension contrbutions of
2 $1,388,921, purchased power of $1,884,824 and propert taes of $1,838,000,
3 totaling $5,111,745. This amount of operating expense represents 11.09% of the
4 $46,076,627 in proposed revenues. At the end of the one year from the time new
5 rates are put into effect, information will be available to determine the level of
6 cash pension contrbutions the Company made in the year ending April 2012 and
7 the actu amount of purchased power expense and propert ta expense that were
8 actually incured as well as the actual revenue for the year. We will conjectue that
9 these known amounts were, respectively, $1,500,000, $1,700,000, and $1,725,000
10 totaling $ 4,925,000 and, actual revenues for the year were $45,900,000.
11
12 Using ths methodology, the Company has collected in its rates$5,090,31O
13 ($45,900,000 x 11.09%) and therefore over-collected ($5,090,310 - $4,925,000)
14 $165,310. The mechansm attbutes an equal recovery of the costs comprising
15 each dollar of revenue requirement in the case to the actual revenue received from
16 customers in the same proportion as that determined in the rate fiing. Pro forma
17 water revenue (no customer service fees or other fees included in revenue
18 considered) was determined to be $45,950,000. To compensate for the over
19 collection, the Company will request that a ($165,310 / $45,950,000) 0.359%
20 surcredit be approved on the subject taff that will effectively reduce customer
21 rates by the amount of the over-collection and would be applied as a percentage
22 reduction to customer's bils. If the actual expenses were higher than those
23 authorized, the Company would request a surcharge. The decision in ths case
Healy, Di 22
United Water Idaho Inc.
1
2
3
4
5
6
7
8
9 Q.
10 A.
11
12
13
14
15
16
17
18
19
20
21
would be the basis of the process until the next general rate case is fied.
However, because the cash pension contrbution will be known and measurable
and very likely different than the level of cash contrbution approved in ths case,
the revenue requirement will be adjusted to reflect the more curent level of cash
pension contrbutions so that, in theory, customers are reimbursing United Water
only for the actua level of contrbutions. Purchased power and propert taes
could remain as determined in the Order in this case, or they could be adjusted for
customer growt and compensated for with an adjusted revenue requirement.
Does ths conclude your testimony?
Yes.
Healy, Di 23
United Water Idaho Inc.
Dean J. Miller (lSB No. 1968)
Chas. F. McDevitt (ISB No. 835)
McDEVITT & MILLER LLP
420 West Banock Street
P.O. Box 2564-83701
Boise, ID 83702
Tel: [phone]
Fax: [phone]
joe(imcdevitt -miller. com
Rr-r:r-i.ii ..,.' h_ t f)
2arl.~UG-3 Pf1 '=52
Attorneys for Applicant
BEFORE TH IDAHO PUBLIC UTILITIES COMMSSION
IN THE MATTER OF TH APPLICATION
OF UNTED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES Case No. UW- W-LL-02
AND CHAGES FOR WATER SERVICE IN
THE STATE OF IDAHO
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
EXHIBIT TO ACCOMPANY THE DIRECT TESTIMONY OF JERRY HEALY
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