20150521Cary Direct.pdf

ORIGINAL
Dean J. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
P.O. Box 2564-8370L
Boise, D 83702
Tel: ?-O8.343.75W
Fax: ?.08.336.6912
i oe@4rcdevift:miller.com
Attorney s for Applicant
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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-W-15-01
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
DIRECT TESTIMONY OF JARMII.A M. CARY
MAY 2015
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Please state your name and business address?
Jarmila M. Cary, 8248 West Victory Road, Boise, ldaho 83709.
By whom are you employed and in what capacity?
I am employed by United Water ldaho lnc. ("United Water" or "the
Company") in the capacity of Manager of Finance.
How long have you been employed by United Water ldaho?
I have been employed by United Water ldaho since June 1997. I
did leave the Company from June 2008 through August 2009 for
personal reasons.
Briefly describe your responsibilities during your tenure.
As Manager of Finance, I am involved in the Company's financial
planning activities, variance analysis, and operational reporting,
including the development and monitoring of business metrics.
During April 2013, accounting functions transitioned to the United
Water Corporate office. From January 2003 until April 2013, I was
in a supervisory role, as Manager of Accounting. I assisted Witness
Healy in formulating rate increase requests and operating expense
adjustments in the 2006, 2009 and 2011 general rate cases. From
1997 until January 2003, I was in a Senior Accountant role,
performing general ledger accounting, planning functions, variance
analysis, etc. I also prepared annual reports to the ldaho Public
Utilities Commission and the ldaho State Tax Commission.
What is your educational background?
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I was granted a Bachelor of Science in Business, with a major in
Accounting, from the University of ldaho in December 1996.
Before what regulatory commissions have you appeared and
presented expert testimony?
I previously provided testimony before the ldaho Public Utilities
Commission in the Company's 2011 general rate case on certain
operating expenses, specifically: payroll, payroll related benefit
expenses and deferred debit amortizations.
ln connection with the Company's present application for an
increase in rates and charges, what is the scope of your
participation and testimony?
My participation and testimony concerns operating expenses of the
Company. I analyzed the Company's books and records,
determined where it was prudent to make adjustments to test year
results, and prepared necessary accounting exhibits to reflect the
adjustments.
Please generally describe the approach you have taken in
preparing the exhibits for operation expenses.
I have relied on information and data produced within the
Company, and my own investigation thereof, as the basis for my
adjustments.
What exhibit number are you using for your adjustments?
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Operating expense adjustments are included in Exhibit 10,
Schedule 1. Property tax, payroll tax and franchise tax adjustments
are included in Exhibit 10 Schedule 3, pages 1 through 5.
Please describe the various normalizing and annualizing
adjustments, as well as known and measurable adjustments,
made to operating expenses.
Adiustment No. 1 Payroll increases payroll to Operations
and Maintenance expense by $t 70,826. Test year Operations &
Maintenance expense is $4,284,203 and the pro forma amount is
$4,455,029. Gross test year payroll is $5,964,622 and pro forma
gross payroll is $6,202,341. ln the pro forma year, the Company
work force is 99 full time employees (54 Bargaining Unit and 45
non-bargaining) as well as three temporary summer workers.
During the test year, the Company had 98 full time authorized
positions. The Company's 2011 rate filing included 99 full time
employees. This adjustment reflects the April 1, 2015 actual pay
increase for Bargaining Unit employees, which is contractually
obligated. For all Bargaining Unit employees, pay rates are applied
to 2,080 hours worked in the pro forma year. For non-bargaining
employees, pay rates effective April 1, 2015 are reflected and
applied to 1,950 hours worked. The pro forma labor to Operations
& Maintenance amount is calculated using the test year ratio of
71.83o/". The pro forma adjustment includes standby pay and shift
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pay at pro forma pay rates for Bargaining Unit employees. Overtime
is included at the test year level of $144,342, in line with the three
year average. lncentive bonuses for exempt and non-exempt
employees are based on the test year award level, adjusted to
current wages. Exempt employees may be eligible to participate in
the Company's Short Term lncentive Plan (STIP) if they meet goal
targets and criteria requirements. A target award, based upon their
job/salary grade, is established as a percentage of base pay.
Broadly, the incentive is based on achievement in tvvo goal
categories: personal goals and Company goals. Non-exempt, non-
bargaining employees are eligible to participate in the Non-Exempt
lncentive Program. This plan is based upon meeting Safety and
Compliance Training goals. Bargaining Unit employees are not
eligible for incentive pay programs.
Please identity the increase in staffing from the Company's
test year level of staffing.
The net increase of one (1) position can be accounted for by the
hiring of an Environmental Health & Safety Manager in April 2015.
Mr. Wyatt addresses the reasoning for this added position in his
testimony.
Please continue describing the remaining normalizing and
annualizing adjustments, as well as known and measurable
adjustments, made to operating expenses.
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A.Adjustment No. 2 Workers Comoensation increases workers
compensation insurance by $18,568 from the test year amount of
$106,996. The pro forma amount is based upon the three year
average of workers compensation percentage as a ratio of gross
payroll. The average for the last three calendar years (2012
through 2014), produces a ratio of 2.O24o/". Applying this ratio to
the pro forma level of gross payroll $6,202,341, results in pro forma
expense of $125,564.
Adiustment No. 3 Pension Expense increases pension
expense by $820,027, ovet the test year expense of $887,494. The
Company is required to apply FAS 87 in determining book expense.
ln Order No. 29838, UWI-W-04-04, the Commission found that it
was not appropriate, for the purposes of determining rate recovery,
to use the FAS 87 pension expense accrual. The Commission
determined that, for rate making purposes, cash contributed to the
pension plan is the appropriate level to be recovered in rates.
Pension cash contributions from plan year 2012 through 2014
average $1,757,521. This three year average replaces the accrual
method in this filing. The Company is proposing raising the deferral
threshold of pension cash contributions to $1,751,521 to reflect the
current level of cash contributions. The current threshold
established in Case No. UWI-W-11-02 is $1,300,769.
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Adjustment No. 4 PBOP increases test year pro forma
expense by $76,220 for PBOP (Post Retirement Benefits Other
Than Pension). The test year amount is $571,340 including the 20
year amortization of the transition obligation of $40,560. The pro
forma level of expense represents the FAS 106 expense of
$607,000 as contained in the Towers Watson actuarial valuation
dated April 10, 2015, plus the transition obligation amortization.
The total pro forma expense is $647,560.
Adjustment No. 5 Emplovee Healthcare & Group Term Life
increases the cost of providing medical, dental and group term life
insurance coverage to employees who choose to be covered by
United Water benefits, by $129,190. Vision insurance is entirely
funded by employees. Test year expense is $1,257,925 and the
pro forma expense is $1,387,115. The test year expense is
adjusted by the average annual increase in healthcare costs for the
period 2012 through 2014, 10.27o/". Employees contribute
approximately 9% toward the cost of health care.
Adjustment No. 6 401k increases test year 401k Company
matching expense by $5,8+9. The test year amount is $146,676
and pro forma amount is $152,525. The test year level of
participation as a percentage of gross payroll is2.460/". This rate is
applied to the pro forma level of gross payroll of $6,202,341.
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Adjustment No. 7 Other Emplovee Benefits decreases test
year expense by ($10,333) for Other Employee Benefits including
long term disability coverage, voluntary employee benefits
administrative (VEBA) costs, tuition assistance, and employee
service awards. The test year expense is $67,494 and pro forma
amount is $57,161. The adjustment eliminates test year medical
waiver benefits which are no longer provided to employees as of
2015.
Adiustment No. 8 Payroll Overheads normalizes fringe
benefit costs chargeable to other than Operations and Maintenance
expense and reduces test year O&M expense by ($79,159). The
test year credit is ($976,619) and the pro forma credit is
($1,055,778). The Company uses a fringe benefit allocation (FBA)
method to ensure employee benefits follow labor charges. A
portion of fringe benefit costs are therefore transferred off the
income statement to the balance sheet, primarily following labor
charged to capital projects. The test year relationship of capital to
gross payroll dollars is 28.14o/o. This same rate is applied to pro
forma benefit costs.
Adiustment No. 9 Purchased Water increases purchased
water expense by $t 1,948 from the test year level of $136,210, to a
pro forma level of $148,194. This adjustment reflects an
incremental increase in the annual expense of purchased water
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due to the contract leasing of 1,500 acre feet of water by United
Water from Boise Valley lrrigation Ditch Co. to meet water supply
needs. Company Witness Greaves provides an explanation of the
Company's leased water program in his testimony.
Adjustment No. 10 Enerqy increases the pro forma cost of
purchased power by $48,082 from the test year amount of
$2,380,750 to the pro forma amount of $2,428,832. The pro forma
expense reflects current ldaho Power Company tariff base rates.
Power expense includes the proceeds realized from United Water's
participation in the ldaho Power demand response program
previously administered by EnerNOC. The Company is reducing
pro forma power expense by $34,832 tor an EnerNOC payment
received in January 2015.
Does the Company defer any portion of Idaho Power Company
billings?
Yes, the Company follows Commission Accounting Order No.
28800 in Case No. UWI-W-01-02 which allowed the Company to
defer ldaho Power Company's PCA charges and present the
accumulated deferral for amortization recovery in subsequent rate
filings.
Briefly, how was pro forma power expense calculated?
I accumulated twelve months of billing determinants from every
facility used in the test year from ldaho Power invoices including
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every kWh unit, demand unit, base load capacity unit, service
charge, facility charge, etc. United Water consumed 35,393,294
kWh in the test year and the same kWh and billing determinants
are projected for the pro forma period. These units were priced out
at base rates in effect on June 1, 2014 for schedules 7, 9S & 9P
and 19P. The Power Cost Adjustment rates reflect the proposed
annual adjustment mechanism rates in ldaho Power Company's
Case No. IPC-E-15-14, tariff Schedule 55. Added to this electricity
expense is the test year level of generator fuel and other utility
costs.
How is power expense normalized to match Witness Herbert's
pro forma revenue adjustments?
ln Adjustment 26, the test year revenue adjustments made by
Witness Herbert (annualized and pro forma growth, weather and
other pro forma usage adjustments) result in a pro forma reduction
to both energy and chemical costs of $67,579, combined.
Please proceed with your next adjustment.
Adiustment No. 11 Chemicals decreases test year chemical
expense of $288,316 by ($S,S09), to a pro forma expense of
$282,807. Treatment chemicals are utilized in the water treatment
process to disinfect or otherwise make water safe to consume or
improve water aesthetically. Test year quantities for each chemical
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agent were totaled and priced out at the most recent actual invoice
price.
Adiustment No. 12 Customer Billinq decreases test year
expense for customer billing related services provided by United
Water M&S Company personnel by ($ZO,Z13) from the test year
level of $444,542, to the pro forma amount of $417,829 based on a
three year average from 2012 through 2014.
Adjustment No. 13 Postaqe increases postage expense by
$9,315 from the test year amount of $258,461 , to a pro forma
amount of $267,776. The pro forma amount is based on the test
year invoice postage costs. Customer service representatives
ensure that new and late-paying customers are aware of lower cost
e-billing and e-pay options, in addition to this information being
provided to customers via the Company website, customer bill
insert, bill messaging, etc.
Adjustment No.14 Bad Debt decreases test year bad debt
expense by ($3Z,Og8) from the test year level of $234,416, to a pro
forma amount of $197,318. This amount is based on a three year
ratio 2012 through 2014, of an adjusted bad debt expense to
revenue. Prior to 2013, leak and similar customer bill adjustments
were reflected as billing cancellations, and a revenue reduction.
Since 2013, due to a company-wide accounting standardization
effort, these adjustments are posted as increases to uncollectible
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expense. For comparability, leak adjustments for years 2013
forward have been reclassified from uncollectible expense to
revenue for purposes of this rate filing. Adjustments to the
allowance for uncollectible reserves are removed from the
uncollectible expense calculation as they occur infrequently. Year
2012 uncollectible expense was adjusted to exclude a $21,896
credit, due to an overpayment of ldaho Department of
Environmental Quality - Water Division's Safe Drinking Water fees.
Adjustment No. 15 Business lnsurance increases test year
expense for business insurance, including liability and property
coverage of $347,390 by $42,457 to the pro forma amount of
$389,847. A three year average 2012 through 2014 was used as a
representative level of expense.
Adjustment No. 16 Transportation increases transportation
expense by $63,107 from the test year level of $429,755, to a pro
forma amount of $492,862. The Company uses a vehicle allocation
process to distribute transportation costs to the applicable income
statement or balance sheet accounts. All components of vehicle
costs such as lease payments, fuel, maintenance materials and
outside contractors, mechanic payroll and benefits, insurance, GPS
and others are coded to a clearing account on the Company's
balance sheet. On a monthly basis, these costs are cleared to
expense or construction costs based upon the time allocation of
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employees assigned to vehicles. Pro forma fuel prices are $3.00
per gallon for gasoline and $3.25 per gallon for diesel. Test year
average prices were $3.42 and $4.13 per gallon, respectively. Fuel
consumption is projected to be 41,550 gallons of gasoline and
8,959 gallons of diesel fuel. Fuel prices account for a decrease in
costs of approximately $57,000 in the pro forma year. Lease costs
are increasing in the pro forma year from $232,768 to $357,519, by
$124,751. The increase is driven by new leases of five heavy pick-
up trucks in the Production Department, and three heavy pick-up
trucks in the Transmission & Distribution Department. Also, a new
dump truck and a new backhoe were also recently leased. These
ten vehicles alone add nearly $135,000 to gross transportation
expense. As lease agreements expire vehicles are ultimately
disposed of, any proceeds flow back into the vehicle allocation
process and reduce gross costs to be allocated. The level of
proceeds varies from year to year. ln this case, the Company has
utilized a three year average of 2013, 2014 & 2015 proceeds. As of
April of 2015, all proceeds for the disposal of vehicles in 2015 have
been realized in the books and records of the Company. The credit
for proceeds in this case is $88,700. The proceeds in the 2011
general rate filing were $6,800.
Adjustment No. 17 IPUC Assessment increases test year
IPUC Annual Assessment expense by $S,0Sg from the test year
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expense per books of $108,435 to the pro forma level of $113,488.
The pro forma amount is based on the Commissions 2015 Utility
Assessment rate of O.2481o/o p$ invoice dated April 22, 2015
instructing United Water to make semi-annual payments in May
and November 2015 of $56,744. This rate is applied to the
Reported Gross 2O14 lnterstate Operating Revenues of
$45,742,657.
Adjustment No., 18 Rate Case Amortization increases test
year expense by $20,008 for deferred rate case expense
amortization. The test year amount of rate case expense
amortization is $64,992, related to the cost of the 2011 rate case.
This amortization expired in January, 2015. The Company seeks
recovery of the current rate case costs, estimated to be $170,000.
The Company seeks a two-year recovery of this expense or
$85,000 annually.
Adjustment No. 19 Conservation Program Amortization
increases test year expense by $t 1,667 for Conservation Program
amortization over a three year period. The Company has pledged
to donate $35,000 to the Boise WaterShed Environmental
Education Center to fund an interpretive trail to be constructed
through their new river campus, located at the West Boise
Wastewater Treatment Plant. The interpretive trail at the Boise
WaterShed Environmental Education Center is in addition to water-
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wise gardens currently located at the Statehouse, ldaho Botanical
Gardens and the Company's offices on Victory road. These sites
serye to promote water conservation and water wise landscaping to
the Company's customers.
Adjustment No. 20 Relocation Amortization increases test
year expense of $1 O,284 by $3,841 , to a pro forma level of $14,125
for amortization of deferred relocation costs. ln the Company's
prior case, UWI-W-11-02, the Company received permission to
amortize relocation costs for the Assistant Manager ln Training
position over a five year period. The balance as of November 2015
will be $11,998. The Company has deferred an additional $58,629
for the Engineer position hired in March 2013. The Company seeks
recovery of the $70,627 total cost, over a similar five-year period.
Adjustment No. 21 Tank Paintinq Amortization increases test
year tank painting expense of $45,366 by $10,402 to a pro forma
amount of $55,768 (Schedule 1, Page 12). Since the 2011 case,
the Company has painted the Gowen tank interior for $208,040 and
is requesting a twenty year amortization period, consistent with
recent rate case and stipulation agreements. Several tank painting
amortizations expired during or shortly after the test period.
Amortization expense has been adjusted to reflect the expirations.
Adjustment No. 22 Pension Amortization increases test year
expense by $621,541 for the amortization of Deferred Pension. ln
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Case UWI-W-11-02, Order No. 32443, the Commission approved
the Settlement Stipulation agreed to by the Company and IPUC
staff. ln the Stipulation, it was agreed that actual 2010 pension
plan year contributions were $1,300,769. This amount was
adopted as the benchmark from which future Plan Year levels of
cash contributions would be compared. Plan Year payments over
or under the $1,300,769 benchmark were authorized to be deferred
for future consideration. Actual cash contributions were $1,763,742
in plan year 2011, $1,328,478 in plan year 2012, $2,258,721 in plan
year 2013, and an estimated $1,685,364 for plan year 2014. The
Company has exceeded the benchmark in plan years 2011 by
$462,973,2012 $27,709, and 2013 $957,952. For plan year 2014,
in which 4 of 5 payments have been incurred as of January, 2015
and the fifth payment will be made in September 2015, the
exceedance is expected to be $384,595. The total deferred cash
payment amount of $t ,833,229, plus accrued interest applied
through November 2015 of $31,394, equals $1,864,623. Amortized
over a three year period, the expense is $621,541.
Adjustment No. 23 Power Amortization increases the test
year by $62,736 for deferred power amortization expense, over the
test year amount of $183,444. The Company seeks recovery of the
deferred PCA (annual adjustment mechanism) approved in Case
UWI-W-O1-02, tor cost incurred since the last rate case through
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April 2015 of $595,475, and accumulated interest of $37,941 . The
pro forma period projects deferred power from May through
November 2015 at an additional $101,128, with $3,996 of interest
for a total pro forma deferred balance of $738,540. The pro forma
PCA deferral for May through November 2015 is based on ldaho
Power Company's April 2015 proposed PCA filing. The total
deferral of $738,540, amortized over three years, results in an
annual expense of $246,1 80.
Adjustment No. 24 AFUDC Equity Gross Uo Amortization
increases amortization of AFUDC Equity Gross Up by $2,310, from
the test year level of $39,973, to a pro forma level of $42,283. The
IPUC authorized the deferral treatment of that portion of AFUDC in
Case No. UWI-W-04-04 Order 29838 (Page 13). Because the
AFUDC Gross Up continues to be calculated and deferred, the
amount will continue to grow. The Company's corporate regulated
business department recommended that deferred AFUDC Equity
Gross Up be amortized at a thirty-five year rate of 2.85710/"
(0.2381o/o monthly) starting in October,2010, to recognize that the
AFUDC Equity Gross Up is related to the underlying assets. The
test year balance ending 2014 is $1,411,783 and is projected to
grow to $1,479,905 for the pro forma period ending November,
2015.
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Adjustment No. 25 Eliminations reduces overall test year
expense by ($23,741) by eliminating certain expenditures that the
Commission does not consider appropriate for rate making
purposes. The Company has eliminated the following test year
expenses: $4,293 in dues to Hillcrest Country Club, $4,282 oI
National Association of Water Companies dues considered
lobbying expense, $7,630 of lobbying dues paid to the ldaho
Association of Commerce and lndustry, as well as $13,503 of
expenditures spent for the annual Christmas party and employee
retirement celebrations.
Adjustment No. 26 Variable Expense Volume
Normalization reduces test year operating expenses for Power &
Chemicals by ($OZ,SZ9) to coincide with the revenue reduction
adjustment made by Witness Paul Herbert based on his review &
analysis of the downward consumption trend of United Water
customers. The ratio of variable operating expenses (Power
$2,380,750, and Chemicals $288,316) totaling $2,669,066 to
variable consumptive revenue ($32,305,049) is 8.228/". Witness
Herbert makes revenue adjustments to include the annualization of
test year growth of $352,321, post test year growth of $237,871, a
weather & usage adjustment to consumptive revenue of
($1,+t 1,558) for a net revenue adjustment of ($821 ,367). Since this
consumptive revenue decline must logically impact power and
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chemical expense, they will decrease by 8.228/" of ($92t,367) or
(67,579).
Please explain Exhibit No. 10, Schedule 3, Pages 1,2,3 and 4.
Exhibit No 10. Schedule No 3. Adjustment No 1 . Paoe 1 of 4
Property Taxes indicates the test-year level of Ada County Property
Tax is $1,810,812, the test year adjustment is an increase of
$109,634, providing a pro forma expense of $1,920,446. The pro
forma adjustment is based on known and measurable information
and a conservative estimate of the levy rate.
Why do you anticipate an increase?
The Company filed its annual Operator Statement for the calendar
year ending December 31, 2014, with the ldaho State Tax
Commission (ISTC) on April 23, 2015. The Operator Statement
contains financial information that allows the ISTC appraiser to
value the Company based on the capitalization of net operating
income (NOl). The NOI will increase in the 2015 appraisal as
compared to the 2014 appraisal, by approximately $7M. The
financial information in the Operator Statement also allows the
appraiser to calculate the cost indicator of value in a process that
mimics the rate base calculation used in this case. The cost
indicator is increasing by approximately $2.5M. The Operator
Statement provides substantiation of property tax exemptions for
which the Company qualifies. The value of the exemptions will
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increase by $1.2M in 2015. The ISTC has a process for
determining the appropriate capitalization rate to apply to the net
operating income. The preliminary notice indicates a slightly higher
capitalization rate in 2015. At the end of the process, the ISTC
certifies the Company's value to Ada County for the actual
calculation of taxes based on approved levy rates. The Company
has taken a conservative approach to the applicable levy rate by
using the test year rate.
Please explain Exhibit No. 10. Schedule 3. Paqes 2. 3 and 4
Pavroll Taxes
Exhibit No. 10, Schedule 3, Pages 2,3 and 4 increases the test
year level of payroll taxes by $et,246 combined. Page 2 indicates
an increase in FICA taxes of $25,644. Page 3 reflects a decrease
of ($SA1 in Federal unemployment taxes. Page 4 shows a
decrease of ($4,360) in ldaho State unemployment taxes. All
payroll taxes have been adjusted based on information received
indicating statutory limits and rates in effect for 2015.
Please explain Exhibit No. 10. Schedule 3. Paoe 5 Franchise
Tax
Exhibit No. 10, Schedule 3, Page 5 decreases the test year level of
franchise tax expense by $60,000. The Company's normal practice
is to bill franchise fees to customers within the City of Boise and the
City of Eagle and pass the proceeds to the respective cities.
Cary, Di 19
United Water ldaho lnc.
o.
5
6
7
8
I
10
A.11
12
13
14
15
16
17
18
19
20
21
22
23
o.
A.
1
2
3
4
5
6
7
8
I
o.
A.
During an internal compliance review of franchise fee
administration, the Company discovered a billing error. The
Company accrued a provision for the underpayment of franchise
fees in the test year. The Company has reimbursed the cities for
the underpayment. The provision is not the responsibility of
customers and elimination of the expense from the test year is
appropriate.
Does this conclude your direct testimony?
Yes.
Cary, Di 20
United Water ldaho lnc.
Dean J. Miller (lSB 1968)
McDEVITT & MILLER LLP
420 West Bannock Street
P.O. Box 256/-83701
Boise, lD 83702
Tel: [phone]
Fax [phone]
ioe@mcdevitt-miller. com
Attorneys for Appl ica nt
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
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
Case No. UWI-W-15-01
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
EXHIBIT TO ACCOMPANY THE
DIRECT TESTIMONY OF JARMILA CARY
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