20220930Kahn Direct Testimony with Exhibits.PDF

Preston N. Carter (ISB No. 8462)
Morgan D. Goodin (ISB No. 11184)
Givens Pursley LLP
601 W. Bannock St.
Boise, ID 83702
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]
Attorneys for Veolia Water Idaho, Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
VEOLIA WATER IDAHO, INC. FOR
AUTHORITY TO INCREASE ITS RATES AND
CHARGES FOR WATER SERVICE IN THE
STATE OF IDAHO
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Case No. VEO-W-22-02
DIRECT TESTIMONY OF MATTHEW KAHN
FOR VEOLIA WATER IDAHO, INC.
SEPTEMBER 2022
KAHN, DI 2
VEOLIA WATER IDAHO, INC.
Q. Please state your name and business address. 1
A. I am Matthew H. Kahn. My business address is 461 From Road, Paramus, NJ 2
07652. 3
Q. By whom are you employed and in what capacity? 4
A. I am employed by Veolia Water M&S (Paramus) Inc. , and I serve as the Tax 5
Director of the Utility Division of Veolia North America’s Municipal Water 6
business. 7
Q. What are your job responsibilities? 8
A. I am primarily responsible for the management of income taxes for Veolia North 9
America’s Municipal Water regulated utility businesses. 10
Q. Please outline your educational and professional qualifications. 11
A. I received a Bachelor of Accountancy degree from Bentley University in 2004. 12
Subsequently, I received a Masters of Taxation degree from Bentley University in 13
2010. I joined Veolia North America’s Utility Division as Tax Manager in July of 14
2019 and was subsequently promoted to Director of Tax in early 2022. Previous to 15
that, I was employed by Con Edison, an electric, natural gas and steam utility 16
operating in the northeast, as Tax Manager, overseeing income taxes and 17
depreciation. 18
Q. Have you previously testified before the Idaho Public Utilities Commission 19
(“Commission” or “IPUC”)? 20
A. Yes. I testified in the Company’s last general rate case, which was filed in 2020. 21
In addition, I have testified before other state commissions on various regulatory 22
issues, including those in New York and New Jersey. 23
KAHN, DI 3
VEOLIA WATER IDAHO, INC.
Q. What is the purpose of your testimony in this proceeding? 1
A. The purpose of my testimony is to present ratemaking considerations in regard to 2
various tax topics including the reversal of protected excess deferred income taxes 3
that resulted from the 2017 Tax Cuts and Jobs Acts (“TCJA”), Idaho’s state income 4
tax rate changes that have occurred since the Company’s last rate filing, along with 5
the refund of Employee Retention Credits that the Company derived from the 6
Federal government during the COVID-19 pandemic. Additionally, my testimony 7
will discuss an update in the income tax accounting for Allowance for Funds Used 8
During Construction (“AFUDC”). 9
Q. Have you prepared or had prepared under your direction any exhibits to your 10
testimony? 11
A. Yes, I am sponsoring Exhibit No. 12, which provides support for the balance of the 12
Company’s TCJA regulatory liability and the related deferred income taxes at the 13
historic test year ended June 30, 2022 (“Historic Test Year”) and projected through 14
March 31, 2023 (“Test Year”). The recommended annual amortization amount of 15
the TCJA regulatory liability, to maintain compliance with the Internal Revenue 16
Service’s normalization rules, is included on Exhibit No. 10, Adjustments to 17
Operating and Maintenance Expenses at Present Rates. 18
Q.Please describe the TCJA and its effects on the Company’s books and records. 19
A. In the Company’s 2020 general rate case, the Commission reviewed and approved 20
the regulatory liability for the refund of excess deferred income taxes that resulted 21
from the federal income tax (“FIT”) rate reduction. This regulatory liability amount 22
is also commonly referred to as excess accumulated deferred income taxes 23
KAHN, DI 4
VEOLIA WATER IDAHO, INC.
(“EADIT”) and was addressed by the Commission in Order No. 34074, Case No. 1
GNR-U-18-01. 2
Q. Has the IPUC addressed the treatment of the EADIT regulatory liability? 3
A. Yes. The Commission, in Order No. 34074, reduced the Company’s rates to reflect 4
the reduction in the FIT rate and ordered the Company to file an update to its 5
deferred income tax records and to work with Staff on determining the amount and 6
manner in which to return to customers the remaining benefits from the TCJA. The 7
Company’s base rates were changed effective June 1, 2018, as ordered. 8
Q. What are the current annual amortization and remaining balances of the 9
EADIT regulatory liability? 10
A. The remaining balance of $4.2 million represents the balance of protected EADIT 11
credit to be refunded to customers over the remaining lives of the Company’s 12
investment in plant assets. The annual amortization of the balance, as required in 13
the previous rate filing, is $227,000 and reflected on Exhibit No. 12. 14
Q. Please describe the Company’s understanding of “protected” and 15
“unprotected” EADIT. 16
A. Per the normalization rules in the Internal Revenue Code, Section 168(i)(9), the 17
amortization period for regulatory liability, which arose from temporary differences 18
between book and tax methods used for plant-related “protected” amounts, may not 19
be shorter than the period in which ADIT would have otherwise reversed over the 20
remaining book lives of its’ assets. The Average Rate Assumption Method 21
(“ARAM”) of amortization must be utilized for as much of the regulatory liability 22
as possible, if the requisite data is available to the utility. ARAM calculates a 23
KAHN, DI 5
VEOLIA WATER IDAHO, INC.
specific amount by year, rather than a period, of amortization and, if amortized 1
faster, could result in a normalization violation which would prohibit the Company 2
from utilizing accelerated depreciation for income tax purposes. The updated 3
projected results of the Company’s ARAM calculations for tax years 2022 through 4
2025 are as follows: 5
ARAM
221,000
228,000
218,000
204,000
The amortization period for the amount of the regulatory liability which arose from 6
amounts not considered normalized are “unprotected” and may be amortized by the 7
utility over a period different from the protected amount. The unprotected EADIT 8
have been fully refunded to customers as of April, 2022 and no longer require 9
consideration in the Company’s rates. 10
Q. What amount is the Company utilizing for the ARAM amortization in this 11
case? 12
A. As shown above, the amount of ARAM reversals can vary year to year. The current 13
approved annual amortization is $227,000. It can be noted that for 2022 the current 14
projected calculation indicates that the actual ARAM reversals will be less than the 15
annual amortization. 16
Q. Does the Company have a proposal to change the amount of amortization of 17
the EADIT regulatory liability balance? 18
KAHN, DI 6
VEOLIA WATER IDAHO, INC.
A. Yes. As previously described, the Company is required to use the ARAM for 1
returning the remaining protected portion of the EADIT balance. As a result, the 2
Company continues to track and monitor the amount of EADIT reversing over 3
ARAM in comparison to the approved amortization amounts provided in its rate 4
agreements. As a result of the projected ARAM calculation results and because the 5
ARAM amount is updated annually and could change either up or down because of 6
the retirement of fixed assets, an amortization amount of $200,000 for this case is 7
prudent in order to allow for potential changes in the ARAM amount for 2022 and 8
following once the recalculation is performed. As this case will likely set rates for 9
more than one year, if the amount of the amortization of the protected portion of 10
the EADIT set in this case is greater than the ARAM amount in a future period, the 11
Company would need to file for a change in tariff rates to reduce the amortization 12
to the amount allowed in that future period. The ARAM amount is a maximum 13
amount or “speed limit” if you will. Therefore, an amortization amount of $200,000 14
for the protected EADIT is included on Exhibit No. 10, Schedule 1, line 26. 15
Q. Does the Company have additional tax benefits that it is proposing to refund 16
to customers in this rate proceeding? 17
A. Yes. In addition to the benefits being amortized to customers for the remaining 18
EADIT, the Company has deferred certain tax benefits that it has derived for the 19
benefit of its customers from its Federal and State jurisdictions since the last rate 20
filing. These benefits are the result of Idaho’s state income tax rate reduction, as 21
well as the Federal Employee Retention Credit. 22
KAHN, DI 7
VEOLIA WATER IDAHO, INC.
Q. Please provide the amounts of benefits to be refunded as a result of these 1
changes? 2
A. As a result of the reduction to Idaho’s state income tax, the Company has deferred 3
approximately $35,000 in state income taxes, and the Federal Employee Retention 4
Credit resulted in an additional deferral of approximately $12,000. The Company 5
proposes to refund these amounts as a reduction to the amortization of rate case 6
expenses as shown on Exhibit No. 10, Schedule 1, Adjustment No. 23. 7
Q. Has the Company made any changes to its method of accounting for AFUDC? 8
A. No. The Company continues to account for the timing difference between financial 9
accounting and its accounting for income tax purposes and record deferred income 10
tax purposes as required under GAAP and specified under ASC 780. However, in 11
its annual review of the Company’s cumulative timing differences as part of the 12
Tax Basis Balance Sheet (“TBBS”) Study, the Company’s Tax Department 13
determined that a true-up adjustment was required to the regulatory balance 14
attributable to the cumulative flow through timing difference associated with the 15
equity component of its AFUDC timing difference. 16
Q. What are TBBS adjustments and why are they necessary? 17
A. TBBS adjustments reflect a review of overall timing differences which support the 18
accumulated deferred income tax balances for any specific item giving rise to 19
differences between financial accounting and the accounting for income tax 20
purposes. As those timing differences reverse, the accumulated deferred tax 21
obligations will reverse and become currently payable to the Company. 22
KAHN, DI 8
VEOLIA WATER IDAHO, INC.
A timing difference that is flowed through in the calculation of income tax 1
expenses results in a change to the per book effective rate that will either increase 2
or decrease total tax expense. Any increase to income tax expense that is caused by 3
a flow through timing difference will result in a regulatory asset balance for 4
consideration of recovery in future rates. Conversely, any reduction to income tax 5
expense that is caused by a flow through timing difference will result in a regulatory 6
liability balance for similar consideration to be refunded to customers in future 7
rates. 8
Q. When accumulating the regulatory balance in the future, will such 9
considerations be made in the accounting for the balances? 10
A. Yes, the Company performs the TBBS study annually to support the tax return 11
filing and incorporates any flow through impacts to the regulatory balances. The 12
regulatory balances are trued-up in conjunction with the deferred tax balances. 13
Q. How will this change the calculation of the amounts for the AFUDC Equity 14
Gross-up going forward? 15
A. The AFUDC Equity Gross-Up calculation is based on the AFUDC Equity balance. 16
The actual calculation of the Gross-Up does not change. 17
Q. Did the adjustment result in a change in rate base? 18
A. There is no change to rate base, as the deferred tax balances agree with the 19
remaining timing difference in support of the cumulative timing difference and the 20
adjusted regulatory balance for future recovery. As a result, there is no adjustment 21
required to the deferred taxes that reduce rate base. 22
KAHN, DI 9
VEOLIA WATER IDAHO, INC.
Q. What adjustments were required to the regulatory balances associated with 1
the timing difference for AFUDC? 2
A. The Company’s TBBS study resulted in a reduction to the regulatory asset balance 3
as of 12/31/2020. As a result, the per book balance of approximately $1.3 million 4
was reduced to about $800,000, in order to reflect the remaining timing difference. 5
Q. What impact does the reduction have on the current amortization of AFUDC 6
in rates? 7
A. The amortization of the regulatory balances attributable to AFUDC will not change. 8
The current amortization provides a 30-year amortization of the balance, such that 9
the benefits associated with AFUDC are provided to customers over the lives of the 10
underlying investment from which they were derived. The reduction to the 11
regulatory balance will be reflected in the ongoing amortization as an overall 12
reduction to the balance being recovered over the 30-year amortization schedule. 13
By doing so, the Company is reducing the regulatory asset balance by 14
approximately $500,000, which will reduce the overall amortization amount. 15
Q. Does this conclude your testimony at this time? 16
A. Yes. 17

Preston N. Carter (ISB No. 8462)
Morgan D. Goodin (ISB No. 11184)
Givens Pursley LLP
601 W. Bannock St.
Boise, ID 83702
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]

Attorneys for Veolia Water Idaho, Inc.

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF
VEOLIA WATER IDAHO, INC. FOR
AUTHORITY TO INCREASE ITS RATES AND
CHARGES FOR WATER SERVICE IN THE
STATE OF IDAHO

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Case No. VEO-W-22-02

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

EXHIBIT 12 TO ACCOMPANY THE

DIRECT TESTIMONY OF MATTHEW KAHN

Veolia Water Idaho, Inc.
Accumulated Deferred Income Tax and Excess Deferred Income Tax Regulatory Liability Balances
As of June 30, 2022
ADIT Adjusted Rate Base
Line Balance at Balance at Related
No.Account Description 6/30/2022 Adjustments [3]6/30/2022 ADIT
(a)(b)[c][d]
1 19010 Def. Federal Inc Taxes- Other ($113,058)$661 (112,397)
2 19017 Def Fed NOL Tax Benefit (3,866) 0 (3,866)
3 28203 Def. FIT-MACRS 2,799,649 2,950,719 5,750,368 5,750,368
4 28203 Def. FIT-MACRS - Unprotected (2,930,986) (2,930,986) (2,930,986)
5 28207 Def FIT Pens Reg Asset FAS158 1,805,433 (9,162) 1,796,271
6 28208 Def FIT PBOP Reg Asset FAS158 (556,392) 1,325 (555,067)
7 28221 Def FIT - COR 239,336 0 239,336
8 28300 Def. FIT-Other 238,570 3,823 242,393
9 28301 Def. FIT-Tank Painting 462,817 0 462,818 462,818
10 28302 Def. FIT-Rate Expenses 18,700 (0) 18,700
11 28303 Def. FIT-Deferred Charges 159,859 1 159,860
12 28304 Def. FIT-Relocation Expense (0) 0 0
13 28306 Def. FIT-Pensions (929,096) 9,161 (919,935)
14 28307 Def. FIT-PEBOP (80,317) 29,373 (50,944)
15 28308 Def. FIT-Cost of Removal 848,354 (0) 848,353 848,353
16 28311 Def. FIT-Injuries and Damages (217,038) 0 (217,038)
17 28312 Def. FIT - AFUDC Equity 486,719 0 486,719 486,719
18 28313 Def. FIT - AFUDC Equity GU [1]160,762 (3,820) 156,942
19
20 Total Deferred Tax [2]5,320,432 51,097 5,371,529 4,617,273 0 0
21
22 25316 Regulatory Liab-Tax New Federal Rate $4,246,184 $4,246,184 Unprotected amortization completed 4/30/2022; Protected balance amortization of $227,004 per year
23 25317 Reg Liab-NewFedRate2018portion ($2,570)($2,570)Amortization ended 4/30/2022
[1] Change in balance is offset by the change in balance of the associated regulatory asset.
[2] Sum of Lines 1 through 19.
[3] Adjustments include Tax Return to Provision, TBBS adjustments, and reclassification of unprotected MACRS deferred taxes.
Case No: VEO-W-22-02
Exhibit No. 12
M. Kahn
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