20230215Terry Direct with Exhibits.pdf

BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )OF VEOLIA WATER IDAHO,INC.FOR A )CASE NO.VEO-W-22-02
GENERALRATECASE )
DIRECT TESTIMONY OF JOSEPH TERRY
IDAHO PUBLIC UTILITIES COMMISSION
FEBRUARY 15,2023
1 Q.Please state your name and business address for
2 the record.
3 A.My name is Joseph Terry.My business address
4 is 11331 W.Chinden Blvd.,BLOG 8,STE 201-A,Boise,
5 Idaho 83714.
6 Q.By whom are you employed and in what capacity?
7 A.I am employed by the Idaho Public Utilities
8 Commission ("Commission")as an Auditor 3.
9 Q.What is your educational and professional
10 background?
11 A.I have included my educational and professional
12 background as Exhibit No.118
13 Q.What is the purpose of your testimony?
14 A.The purpose of my testimony is to present my
15 adjustments to Veolia Water Idaho's ("Company"or
16 "Veolia"):(1)Return on Equity ("ROE"),recommending a
17 9.0%ROE;(2)The Company's power cost deferral recovery;
18 (3)The Company's rate case expense recovery;(4)the
19 Company's rate base for the removal of deferred
20 convenience fees;and (5)the Company's tank panting
21 deferral.
22 Q.Are you sponsoring any exhibits with your
23 testimony?
24 A.Yes,I am sponsoring Exhibit Nos.118,119,
25 120,and 121.
CASE NO.VEO-W-22-02 TERRY J.(Di)102/15/23 STAFF
1 Rate of Return
2 Q.Please explain the basis for the Rate of Return
3 for the Company.
4 A.In capital intensive industries like water
5 utilities,companies must have access to the capital
6 markets in order to meet its capital requirements.The
7 Company must have enough money in the revenue requirement
8 to pay all its bills,including servicing its capital
9 obligations.Rate of Return is a significant part of a
10 utility's revenue requirement.
11 Q.What sources of capital does the Company have?
12 A.The Company has two forms of capital financing,
13 debt and equity.
14 Q.Please explain the calculation of the cost of
15 debt financing?
16 A.All debt has a contract that dictates the
17 interest rate for that debt.Therefore,the weighted
18 average of the interest rates of all the debt the Company
19 has is the weighted average cost of debt.
20 Q.Please explain the calculation of the cost of
21 equity financing?
22 A.Because there is no contract explicitly stating
23 what investors require,various different methods are
24 used to determine the appropriate return to attract
25 investors.
CASE NO.VEO-W-22-02 TERRY J.(Di)202/15/23 STAFF
1 Q.What legal standards have been established for
2 determining a fair and reasonable rate of return?
3 A.The legal test of a fair rate of return for a
4 utility company was established in the Bluefield Water
5 Works decision of the United States Supreme Court and
6 repeated specifically in Hope Natural Gas.
7 In Bluefield Water Work and Improvement Co.V.
8 West Virginia Public Service Commission,262 U.S.679,
9 692,43 S.Ct 675,67 L.Ed.1176 (1923),the Supreme Court
10 Stated:
11 A public utility is entitled to such rates aswillpermitittoearnareturnonthevalue of12thepropertywhichitemploysfortheconvenienceofthepublicequaltothatgenerallybeingmade13atthesametimeandinthesamegeneralpartofthecountryoninvestmentsinotherbusiness14undertakingswhichareattendedbycorrespondingrisksanduncertainties;but it has no15constitutionalrighttoprofitssuchas arerealizedoranticipatedinhighlyprofitable16enterprisesorspeculativeventures.The returnshouldbereasonablysufficienttoassure17confidenceinthefinancialsoundnessoftheutilityandshouldbeadequate,under efficient18andeconomicalmanagement,to maintain andsupportitscreditandenableittoraise the19moneynecessaryfortheproperdischargeofitspublicduties.A rate of return may be reasonable20atonetimeandbecometoohighortoolowbychangesaffectingopportunitiesforinvestment,21 the money market and business conditionsgenerally.22
23 In FPC v.Hope Natural Gas Company,320 U.S.591,603,64
24 S.Ct 281,88 L.Ed.333 (1944),the Court stated:
25
CASE NO.VEO-W-22-02 TERRY J.(Di)302/15/23 STAFF
1 From the investor or company point of view it isimportantthattherebeenoughrevenuenotonly
2 for operating expenses but also for the capitalcostsforthebusiness.These include service on
3 the debt and dividends on the stock.(Citationomitted)
4 By that standard the return to the equity ownershouldbecommensuratewithreturnson
5 investments in other enterprises havingcorrespondingrisks.That return,moreover,
6 should be sufficient to assure confidence in thefinancialintegrityoftheenterprise,so as to
7 maintain its credit and to attract capital.
8
9 The Supreme Court decisions in Bluefield Water Works
10 and Hope Natural Gas have been affirmed in Re Permian
11 Basin Area Rate Case,390 U.S.747,88 S.Ct 1344,20
12 L.Ed 2d 315 (1968),and Duquesne Light Co.v.Barasch,
13 288 U.C.299 109 S.Ct.609 L.Ed.2d.646 (1989).The
14 Idaho Supreme Court has also adopted the principles
15 established in Bluefield Water Works and Hope Natural
16 Gas.See In Re Mountain States Tel.&Tel.Co.76 Idaho
17 474,284 P.2d 681 (1955);General Telephone Co.v.IPUC,
18 109 Idaho 942,712 P.2d 643 (1986);Hayden Pines Water
19 Company v.IPUC,122 Idaho 356,834 P.2d 873 (1992).
20 As a result of these United States and Idaho
21 Supreme Court decisions,three standards have evolved for
22 determining a fair and reasonable rate of return:(1)The
23 Financial Integrity or Credit Maintenance Standard;(2)
24 The Capital Attraction Standard;and (3)The Comparable
25 Earnings Standard.
CASE NO.VEO-W-22-02 TERRY J.(Di)402/15/23 STAFF
1 In addition,these Supreme Court decisions have
2 established that the return on equity can change with
3 market conditions,and that the reasonableness of the end
4 result is more important than how you got there.
5 Q.What methods are used to establish an ROE?
6 A.Models are used to estimate what ROE is
7 required for the Company to maintain the standards
8 mentioned previously.I have picked three different
9 models that I believe are useful to create a range of the
10 cost of equity,and from that range I establish a
11 recommendation.The models I selected are the Comparable
12 Earnings Model,Discounted Cash Flows ("DCF"),and the
13 Capital Asset Pricing Method ("CAPM").
14 Q.Are there any outside factors to consider
15 before discussing your specific analysis?
16 A.Yes.I would like to discuss issues dealing
17 with the state of the economy,the Company being a
18 wholly-owned subsidiary,the Hamada Formula,and the
19 proxy group I use for my analysis.
20 Q.What are the issues with the state of the
21 economy.
22 A.The economy is in a period of significant
23 inflation.The Federal Reserve has been increasing
24 interest rates in attempts to curb this inflation.
25 Rising interest rates can have other effects than trying
CASE NO.VEO-W-22-02 TERRY J.(Di)502/15/23 STAFF
1 to curb inflation,and this can affect my analysis
2 determining an appropriate ROE.
3 Q.What is the first of those effect?
4 A.Many methods to estimate a proper ROE use
5 interest rates as a base line.As these rates increase
6 it will also increase the ROE range recommended.
7 Q.What is the second effect?
8 A.When the Federal Reserve uses interest rates to
9 curb inflation,it can have the unintended consequence of
10 causing a recession.
11 Q.Has the Federal Reserve effectively avoided
12 this unintended consequence in the past?
13 A.Not exactly.Since 1961 the Federal Reserve
14 has increased interest rates to curb inflation nine
15 times.Eight of those times the country has gone into a
16 recession afterwards.I
17 Q.Is there evidence that this cycle may be
18 beginning?
19 A.Yes.Many large corporations are announcing
20 layoffs.One example is that Google has announced the
21 largest layoffs in its existence.2 In addition,since
22 August 2022,the treasury yield curve has been inverted.3
23
24 1 https://www.politico.com/news/2022/03/29/federal-
reserve-recession-inflation-rates-00021119252https://gizmodo.com/google-layoffs-12000-workers-largest-cuts-history-1850010658
3 https://home.treasury.gov/
CASE NO.VEO-W-22-02 TERRY J.(Di)602/15/23 STAFF
1 Q.What is an inverted yield curve and what does
2 it mean?
3 A.An inverted yield curve is when short term
4 treasury rates (in this case 1 year treasury rates)are
5 higher than the long-term treasury rates (in this case I
6 am using the 10-year treasury rates).Every recession
7 since the 1960's has been preceded by an inverted yield
8 curve.
9 Q.How does this effect investor viewpoints.
10 A.In troubled economic times investors tend to
11 move their money to safer investment vehicles.This
12 would be things like treasuries,dividend producing
13 stocks like utilities,Exchange Traded Funds,and the
14 like.
15 Q.How does this impact ROE?
16 A.While this will not have a direct impact on the
17 quantification of ROE,with more demand for these types
18 of investments it will tend to support lower ROE
19 recommendations.Some of these effects are already being
20 seen.Some of the comparable utilities used in the
21 analysis are at or near their 52-week high.While the
22 Dow Jones and S&P 500 are not.*
23 Q.What are the effects of the Company being a
24 wholly-owned subsidiary of Veolia North America ("VNA")?
25
4 Yahoo Finance pulled on January 30,2023
CASE NO.VEO-W-22-02 TERRY J.(Di)702/15/23 STAFF
1 A.The Company does not have publicly traded stock
2 as a wholly-owned subsidiary.Therefore,only the parent
3 company and comparable utilities should be used when
4 evaluating the required cost of equity.Also,the
5 Company's debt acquisition is all handled by VNA.Due to
6 size and better geographic diversity,VNA would have
7 better ratings than the Company would have on its own.
8 This provides an overall benefit to the Company and
9 ratepayers.
10 Q.What benefits do customers receive by the
11 Company being a subsidiary of VNA?
12 A.The first is lower debt rates.This has
13 already been incorporated in the Company's debt rate
14 calculation for the overall rate of return.The second
15 benefit is that the Company may be able gain economies of
16 scale with purchasing inventory needed for capital
17 projects and maintenance.These have already been
18 captured in the maintenance expense and plant in service.
19 The last benefit is the greater ability to attract equity
20 investors.Witness Walker's analysis on page 20 of his
21 testimony states that the Company's risk is higher than
22 the comparable group's because of its size.However,if
23 you included the totality of the VNA's footprint,the
24 size and diversity issue becomes moot.And if you look
25 at the next level up,Veolia Environnement S.A.,where
CASE NO.VEO-W-22-02 TERRY J.(Di)802/15/23 STAFF
1 all the stock is purchased and sold,the size and
2 diversity risk is eliminated.To include any adjustment
3 or bias due to the small size of the Company denies these
4 benefits of the larger entity to the ratepayers.
5 Q.Your next factor is the Hamada formula.Please
6 explain.
7 A.Mr.Walker proposed to include an adder based
8 on the Hamada Formula that would increase the Company's
9 ROE by 110 basis points or 1.1%.
10 Q.What is the Hamada Formula?
11 A.The Hamada Formula is a method used to de-lever
12 the beta or adjust the ROE to compensate for a less than
13 ideal or unequal capital structure.
14 Q.Do you agree with Mr.Walker's use of the
15 Hamada Formula?
16 A.No.
17 Q.Please explain your disagreement with the
18 Hamada Formula.
19 A.The Hamada formula is used to de-lever the beta
20 in order to calculate an ROE for an ideal capital
21 structure.This formula has a number of conditions
22 attached to it that do not make it applicable to this
23 situation.The first is that the Hamada formula is not
24 designed for a company that follows a constant leverage
25 policy.
CASE NO.VEO-W-22-02 TERRY J.(Di)902/15/23 STAFF
1 Q.What is a constant leverage policy?
2 A.A constant leverage policy is when a company
3 rebalances its structure so that debt to equity ratios
4 remain fairly constant.
5 Q.Has VNA used a constant leverage policy?
6 A.It appears so.In the last five rate cases the
7 Company has proposed near 50%debt to 50%equity capital
8 structure.The farthest away from the 50%/50%capital
9 structure VNA has been,is in this rate case where the
10 Company proposed a 44%debt to 56%equity capital
11 structure.Whether or not VNA has an official constant
12 leverage policy or not does not matter as the effect is
13 still the same.
14 Q.Are there any other critiques of the Hamada
15 formula?
16 A.Yes.The Hamada formula is usually recommended
17 for a company that has a high level of debt.A level
18 that is far above optimal.Optimal is generally assumed
19 to be anything below a 2:1 debt to equity ratio.In the
20 last five rate cases the Company was only over a 1:1 debt
21 to equity ratio once.In Case No.UWI-W-06-02,the
22 Company proposed a 51.46%debt and 48.54%equity.In
23 this Application,the Company's capital structure has
24 more equity than debt.This is not a highly leveraged
25 company,and therefore the Hamada formula is
CASE NO.VEO-W-22-02 TERRY J.(Di)1002/15/23 STAFF
1 inappropriate.
2 Q.Do you have any other reasons to oppose the
3 Hamada formula?
4 A.Yes,there is one last issue with using the
5 Hamada formula for the Company.The Hamada formula does
6 not take into account default risk.This is the risk
7 that a company may default on its loans.Even with the
8 unsettled financial markets recently,VNA has maintained
9 its Baal credit rating.This shows that the default risk
10 is quite low for VNA and by extension the Company.
11 Q.Has the Commission ever accepted the Hamada
12 Formula?
13 A.I could not find a case where the Hamada
14 Formula has been accepted by this Commission.
15 Q.What is the effect on the Company's
16 recommendation without the Hamada Formula?
17 A.Witness Walker's Hamada adjustment was a 110
18 basis points or 1.1%increase to the recommended ROE.If
19 you removed this adjustment from Witness Walker's
20 recommendation,the resulting ROE would be 9.7%.
21 Q.Your last point has to do with the proxy group
22 you used.Please explain.
23 A.For the most part I agree with the proxy group
24 Witness Walker used for his analysis.However,I feel it
25 is always appropriate to include Veolia Water Idaho's
CASE NO.VEO-W-22-02 TERRY J.(Di)1102/15/23 STAFF
1 parent company in the proxy group,should the data be
2 available and be somewhat comparable to the proxy group.
3 Q.Was the data available?
4 A.It was.However,because it is traded in
5 France and not the U.S.,there may be some differences
6 from the rest of the proxy group.
7 Q.Is it somewhat comparable to the proxy group?
8 A.Yes.Veolia Environnement S.A.is a
9 water/wastewater company and falls in line with the other
10 companies in the proxy group.However,because of the
11 foreign stock exchange,I do not believe it should hold
12 any more influence than any other company in the proxy
13 group.
14 Q.Let's move on to the Comparable Earnings
15 Method.What is the theoretical basis for this method of
16 analysis?
17 A.The Comparable Earnings Method is directly from
18 the comparable earnings requirement in the Hope and
19 Bluefield cases,which is the third standard mentioned
20 above.The earnings of the proxy group are compared to
21 establish an appropriate level of earnings for the
22 Company.
23 Assuming that the proxy group is made of
24 companies that maintain their financial integrity and
25 attract capital,the Comparable Earnings Standard will
CASE NO.VEO-W-22-02 TERRY J.(Di)1202/15/23 STAFF
1 also fulfill the first and second standard as well.The
2 proxy group consists of established companies that are
3 financially sound and able to attract capital.Thus,
4 this method complies most cleanly with all three
5 principles established by the court decisions mentioned
6 above.(The Financial Integrity or Credit Maintenance
7 Standard,The Capital Attraction Standard,and The
8 Comparable Earnings Standard.)
9 Q.How does this method work?
10 A.The ROE from each company in the proxy group is
11 used to create a range.For my analysis,I used the last
12 three years ROE as a comparison.The 2021 results ranged
13 from 3.51%to 17.31%ROE with an average of 9.78%.The
14 2020 results ranged from 1.23%to 13.42%ROE with an
15 average of 8.94%.The 2019 results ranged from 2.63%to
16 13.99%ROE with an average of 9.02%.The average of all
17 the results together is a ROE of 9.25%with a median of
18 10.26%.That analysis is found in Exhibit No.119,
19 Schedule 1.
20 Q.Let's turn our attention to the discounted cash
21 flow methodology.Please explain the basis for the DCF
22 method.
23 A.The DCF method is based upon the theory that
24 (1)stocks are bought for the income they provide (i.e.,
25 both dividends and gains from the sale of the stock),and
CASE NO.VEO-W-22-02 TERRY J.(Di)1302/15/23 STAFF
1 (2)the market price of stocks equals the discounted
2 value of all future incomes.The discount rate,or cost
3 of equity,equates the present value of the stream of
4 income to the current market price of the stock.
5 Q.How does this method comply with the standards
6 presented above?
7 A.This relates to the Capital Attraction
8 Standard,as this method attempts to establish what ROE
9 investors could be looking for in the proxy group of
10 stocks.However,all these standards are very
11 interrelated.Therefore,for the Company to be able to
12 attract capital it must also be able to maintain its
13 financial integrity,and it must be able have comparable
14 earnings to other similar investments.
15 Q.What were the results of the DCF model?
16 A.As is shown in Exhibit No.119,Schedule 2,the
17 results ranged from 3.50%to 11.39%with an average of
18 7.91%and median of 9.04%.
19 Q.How was it calculated?
20 A.The formula for this method is:
21 pROE=--+g
22 3Where:
23 Do =Currently announced dividends
24 Po =Current stock price
25 g =Growth rate
CASE NO.VEO-W-22-02 TERRY J.(Di)1402/15/23 STAFF
1 Q.What did you use for the currently announced
2 dividends?
3 A.I used the dividend declared for 2022 as the
4 current dividends.
5 Q.What did you use for the current stock price?
6 A.I used the January 30,2023,stock price.
7 Q.What did you use for the growth rate?
8 A.I used the five-year expected future growth
9 rate and the five-year historical growth rate as pulled
10 from Yahoo Finance on January 30,2023.However,I
11 removed three companies from the proxy group.
12 Q.Which companies did you remove?
13 A.California Water Services Group,SJW Corp and
14 Veolia Environnement S.A.
15 Q.Why did you remove those three companies?
16 A.Both California Water Service Group and SJW
17 Corp had a historical growth rate that was negative.
18 Veolia Environnement S.A.had extremely high growth rates
19 (11.7%going forward and 15.07%historical).All of
20 these were extreme outliers from the rest of the proxy
21 group and therefore,I do not believe it would be proper
22 to skew the results due to these outliers.
23 Q.Let's turn our attention to the Capital Asset
24 Pricing Model("CAPM").Please explain the basis for the
25 CAPM method.
CASE NO.VEO-W-22-02 TERRY J.(Di)1502/15/23 STAFF
1 A.The CAPM is based on the theory that investors
2 hold diversified portfolios and require more return from
3 more risky assets in their portfolio than less risky
4 assets in their portfolio.A company with a higher risk
5 profile will require higher returns to attract capital
6 and maintain financial integrity,while a company with a
7 lower risk profile will require less return.
8 Q.How does this method comply with the standards
9 presented above?
10 A.This relates to the Capital Attraction
11 Standard,as this method attempts to establish what ROE
12 investors could be looking for in the proxy group of
13 stocks based on the riskiness of each proxy company.
14 This method attempts to estimate what ROE investors are
15 expecting from the proxy group.However,all of these
16 standards are very interrelated.Therefore,for the
17 Company to be able to attract capital it must also be
18 able to maintain its financial integrity and,therefore,
19 it must be able have comparable earnings to other similar
20 investments.
21 Q.How does the model calculate risk?
22 A.This model uses beta,which is a measure that
23 shows the Company's returns in relation to the market.A
24 beta of one means the company moves with the market on a
25 one for one basis.A beta below one means that when the
CASE NO.VEO-W-22-02 TERRY J.(Di)1602/15/23 STAFF
1 market drops the company's stock price does not drop as
2 much and is therefore less of a risk to invest in.A
3 beta above one means that the company's stock price drops
4 faster than the market and is therefore more of a risk.
5 As a whole,utilities tend to be relatively safe
6 investments when compared with the market.
7 Q.What are your results from the CAPM?
8 ..A.My results from the CAPM range from 6.32%to
9 13.11%with an average of 9.33%and a median of 8.98%,as
10 shown in Exhibit No.119,Schedule 3.
11 Q.How does this analysis work?
12 A.The formula is:
13 ROE =R,+ß(Ry -R,)
14 Where:
15 Rr =Risk Free Rate
16 ß =Beta
17 Rm =Market return
18 Q.What did you use for the Risk-Free Rate?
19 A.I used both the 1-month and 30-year treasury
20 rates as a risk-free rate.In addition,I used the
21 average rates from January 1,2022,to January 27,2023,
22 as well as the January 27,2023,treasury rates alone.
23 The 1-month treasury rates are generally accepted as the
24 least risky assets an investor could own,while the 30-
25 year rate tends to have the future expectation of
CASE NO.VEO-W-22-02 TERRY J.(Di)1702/15/23 STAFF
1 inflation included.Because we have been in a time of
2 quickly rising interest rates,I included the average of
3 the previous year as well as the latest rates.This
4 compounds the amount of data to parse but provides better
5 overall results to draw a conclusion from.
6 Q.What did you use for the Market Return?
7 A.I used the average returns of the S&P 500
8 including dividends since 1922.This gives a long-term
9 perspective on what the market returns are for companies.
10 Q.What did you use for Beta?
11 A.I used each individual companies'5 year
12 rolling beta as provided in Yahoo Finance on January 30,
13 2023.
14 Q.What is your overall recommendation?
15 A.Using the average and the median of all these
16 factors I get a range from 7.70%to 10.26%as shown in my
17 Exhibit No.119,Schedule 4.I recommend a 9.0%ROE,
18 which is the middle of the range.With the economic
19 factors mentioned above,it provides the Company a
20 sufficient return to accomplish all three standards.
21 Q.How does this impact the overall rate of return
22 you are proposing?
23 A.This lowers the overall rate of return from
24 7.77%to 6.77%as shown in Exhibit No.119,Schedule 5.
25 Q.How is that calculated?
CASE NO.VEO-W-22-02 TERRY J.(Di)1802/15/23 STAFF
1 A.The overall rate of return is the weighted
2 average cost of capital.I accept the Company's proposal
3 for the capital structure and the debt rate.Therefore,
4 the only change is the ROE.This lowers the weighted
5 average of equity from 6%to 5%and therefore,the
6 overall weighted average cost of capital or rate of
7 return to 6.77%
8 POWER COST DEFERRAL AND AMORTIZATION
9 Q.Do you have any adjustments with the Company's
10 power cost deferral recovery?
11 A.Yes.
12 Q.Please describe the Power Cost Deferral
13 Mechanism.
14 A.The mechanism was initially approved by the
15 Commission in Order No.28800,Case No.UWI-W-01-02,
16 which allowed the Company to defer the impacts of Idaho
17 Power's Power Cost Adjustment ("PCA")on the Company and
18 for recovery in future rate case proceedings.It was
19 later adapted to include Idaho Power's Fixed Cost
20 Adjustment ("FCA")mechanism.
21 Q.Did the Company propose a deferral amount?
22 A.Yes.The Company proposed to defer $1,069,555,
23 consisting of $411,425 of unamortized costs from Case No.
24 SUZ-W-20-02 and $658,130 in new power costs.
25 Q.Do you agree with that amount?
CASE NO.VEO-W-22-02 TERRY J.(Di)1902/15/23 STAFF
1 A.No.The Company included estimated pro forma
2 power expenses from January 2023 to March 2023,along
3 with accrued interest for that time period.
4 Q.Why do you disagree with this?
5 A.This deferral is not to be used for expenses
6 the Company has not yet experienced.
7 Q.What do you recommend instead?
8 A.I recommend using the actual expenses the
9 Company has incurred through the year ended December 31,
10 2022,along with interest at the customer deposit rate.
11 This is consistent with Staff's position on the Company's
12 test year and cut-off date as described in Staff witness
13 English's testimony.The actual 2022 power cost deferral
14 with accrued interest is $644,867,and when combined with
15 the remaining unamortized amount of $411,425,is $13,264
16 less than the Company's request.Exhibit No.120.
17 Q.What amortization period is the Company
18 recommending to recover its power cost deferral?
19 A.The Company proposes a two-year amortization of
20 its power cost deferral.
21 Q.Do you agree with that amortization period?
22 A.No.The average time frame between rate cases
23 since 2011 has been 3.667 years,or approximately 4
24 years.Therefore,I recommend a four-year amortization.
25 This is consistent with the settlement in the Company's
CASE NO.VEO-W-22-02 TERRY J.(Di)2002/15/23 STAFF
1 last rate case.
2 Q.What is the effect of lengthening the
3 amortization period?
4 A.This will reduce amortization expense by
5 $270,705 which is a revenue requirement impact of
6 $288,746.
7 Q.Are there any other concerns with the power
8 deferral?
9 A.Yes.The Company proposed to include the power
10 cost deferral in rate base to earn an additional return.
11 This is a relatively short-term regulatory asset,and
12 historically,the Commission has stated that the
13 opportunity to recover expenses is sufficient that
14 including this in rate base is unnecessary.In addition,
15 the Company has already accrued interest at the customer
16 deposit rate.It is not appropriate for the Company to
17 accrue interest on a deferral and then include the amount
18 in rate base to earn an additional return.
19 Q.What is the impact of the rate base adjustment?
20 A.In isolation,this adjustment would reduce rate
21 base by $990,780.However,this amount was removed in
22 Staff witness English's calculation of the Company's 2022
23 average rate base.
24 RATE CASE EXPENSE ADJUSTMENT
25 Q.Please explain the Company's Rate Case
CASE NO.VEO-W-22-02 TERRY J.(Di)2102/15/23 STAFF
1 deferral?
2 A.The Company included the unamortized amount of
3 $62,225 from the previous rate case,Case No.SUZ-W-20-
4 02,and the current estimated expenses of $343,620 for a
5 total of $405,845.
6 Q.Please explain your adjustment to the Company's
7 rate case expenses.
8 A.My adjustment is a three-part adjustment:(1)
9 remove the current case intervenor funding;(2)change
10 the amortization timeframe from two years to four years;
11 and (3)remove the Company's deferred rate case expenses
12 from rate base.The details of these adjustment are
13 included in my Exhibit No.121.
14 Q.Please explain the costs you wish to remove
15 from the rate base deferral?
16 A.The Company included $40,000 in estimated
17 intervenor funding for this rate case.
18 Q.Is that inappropriate?
19 A.Not normally.Idaho Code §61-617A allows for
20 the Commission to order a utility with intrastate annual
21 revenues exceeding $3.5 million up to $40,000 in
22 intervenor funding to offset the costs for intervenors to
23 participate in the case.
24 Q.Why are you proposing to remove the intervenor
25 funding for this case?
CASE NO.VEO-W-22-02 TERRY J.(Di)2202/15/23 STAFF
1 A.This case has four intervenors:Ada County,
2 City of Boise,Micron,and Sharon Ullman.I believe it
3 is premature to estimate intervenor funding,if any,that
4 may be ordered.
5 Q.Why do you think that intervenor funding may
6 not be ordered?
7 A.These intervenors are unlikely to qualify on
8 the consideration that the costs of intervention need to
9 be a significant financial hardship for the intervenor.
10 Q.What is the impact of this adjustment?
11 A.This will reduce the rate case expenses by
12 $40,000.It will also reduce the rate case amortization
13 by $20,000 before my adjustment to extend the
14 amortization period that is discussed later.
15 Q.Why do you propose a four-year amortization for
16 the rate case expense deferral?
17 A.Similar to the Power Cost Deferral amortization
18 above,the average time frame between rate cases since
19 2011 has been approximately four years.Therefore,I
20 recommend a four-year amortization.Again,this is
21 consistent with the settlement in the Company's last rate
22 case.
23 Q.What is the effect of this adjustment?
24 A.The four-year amortization reduces amortization
25 expense by $96,461,which when combined with the removal
CASE NO.VEO-W-22-02 TERRY J.(Di)2302/15/23 STAFF
1 of the intervenor funding is a reduction of $111,461 to
2 amortization expense.The total revenue requirement
3 reduction of these two adjustments is $102,269.
4 Q.Are there any other concerns with the deferred
5 rate case expenses?
6 A.Yes.The Company proposed including the
7 deferred rate case expenses in rate base to earn a
8 return.The Commission has never authorized the Company
9 to earn a return on deferred rate case expenses.
10 Historically,the Commission has stated that the
11 opportunity to recover expenses is sufficient and that a
12 return is unnecessary.Order No.33304
13 Q.What is the impact of removing deferred rate
14 case expense from rate base?
15 A.This adjustment would reduce rate base by
16 $405,841;however,it has already been incorporated in
17 Staff witness English's calculation of the 2022 average
18 rate base.
19 CONVENIENCE FEES
20 Q.Please explain the Convenience Fees Deferral.
21 A.The Company was authorized in Order No.34405,
22 Case No.SUZ-W-19-01,to defer three years of costs
23 incurred to process payment transactions (Convenience
24 Fees).There was no amortization period provided in that
25 order,nor was authority granted for a carrying charge or
CASE NO.VEO-W-22-02 TERRY J.(Di)2402/15/23 STAFF
1 for the Company to include the convenience fees in rate
2 base to earn a return.
3 Q.Do you agree with including this deferral in
4 rate base?
5 A.No.This is a relatively short-term regulatory
6 asset,and historically,the Commission has stated that
7 the opportunity to recover expenses is sufficient that a
8 return is unnecessary.Order No.33304
9 Q.What is the impact of the rate base adjustment?
10 A.This adjustment would reduce rate base by
11 $81,138,however it has already been incorporated in
12 Staff witness English's calculation of the 2022 average
13 rate base.
14 Q.Please explain the Tank Painting deferral and
15 amortization.
16 A.In past cases (Case Nos.UWI-W-04-04,UWI-W-06-
17 02,UWI-W-09-01,UWI-W-11-02,UWI-W-15-01,and SUZ-W-20-
18 02)the Company has included tank painting as a deferred
19 asset to be amortized over 20 years and included it in
20 rate base.This has been accepted by Staff and the
21 Commission in the past (Case No.UWI-W-04-04).
22 Q.Do you have any adjustments to the Company's
23 tank Painting Deferral and amortization?
24 A.Yes.The Hidden Hollow tank will be painted in
25 March of 2023.As stated in Staff witness English's
CASE NO.VEO-W-22-02 TERRY J.(Di)2502/15/23 STAFF
1 testimony,Staff is proposing a cut-off date on December
2 31,2022.Because this tank painting will happen after
3 the cut off,I propose removing the deferral and
4 resulting amortization.
5 Q.What are the effects of this adjustment?
6 A.This would affect both the amortization expense
7 and rate base.
8 Q.What is the effect on amortization expense?
9 A.This adjustment reduces the Company's
10 amortization expense by $22,500,and reduces the revenue
11 requirement by $22,679
12 Q.What is the impact of the rate base adjustment?
13 A.This adjustment would reduce rate base by
14 $450,000,however it has already been incorporated in
15 Staff witness English's calculation of the 2022 average
16 rate base.
17 Q.Does that conclude your testimony in this
18 proceeding?
19 A.Yes,it does.
20
21
22
23
24
25
CASE NO.VEO-W-22-02 TERRY J.(Di)2602/15/23 STAFF
Veolia Water Idaho
VEO-W-22-02
Relevant Experience and Education
Education
B.B.A.Accounting August 2007 Boise State Utiiversity
Certified Rate of Return Analyst (CRRA)April 2018
Society of Utility and Regulatory Financial Analysts (SURFA)
New Orleans,LA April 2018,2019
Richmond,VA April 2022
NARUC Rate School
Albuquerque,NM May 2012
San Diego,CA May 2014
NARUC Accounting and Finance Meetings
Portland,OR Sept 2013
Pittsburg,PA Oct 2019
Cleveland,OH Oct 2022
NARUC WCPSC Annual Education Conference
Honolulu,HI June 2022
NAWC Staff Water Policy Forum
Scottsdale,AZ December 2014
Relevant Experience
Public Utilities Commission May 2011 to present Auditor 3
General Rate Cases
Electric Cases
AVU-E-12-08 Avista
AVU-E-19-04 Avista
AVU-E-21-01 Avista
PAC-E-11-12 PacifiCorp
PAC-E-21-07 PacifiCorp
Natural Gas Cases
AVU-G-17-01 Avista
AVU-G-21-01 Avista
INT-G-16-02 Intermountain Gas
Water Cases
DIA-W-15-01 Diamond Bar Water
MNV-W-16-01 MorningviewWater
MNV-W-19-01 MorningviewWater
SUZ-W-20-02 Suez
TRH-W-13-01 Troy Hoffman
UWI-W-11-02 United Water Idaho
UWI-W-15-01 United Water Idaho
SPL-W-13-01 Spirit Lake East
Exhibit No.118
Case No.VEO-W-22-02
J.Terry,Staff
02/15/23
Veolia Water Idaho
Case No.VEO-W-22-02
Comparable Earnings Method
2021 2020 2019
Company Dividend Yield ROE ROE ROE
American States Water Co 1.67%13.70%13.42%13.99%
American Water Works Co Inc 1.71%17.31%10.99%10.15%
California Water ServiceGp 1.68%8.55%10.51%8.09%
Essential Utilities,Inc.2.44%8.33%6.08%5.79%
Middlesex Water Co 1.45%9.85%11.02%10.38%
SJW Corp 1.97%5.85%6.71%2.63%
York Water Co 1.81%11.13%11.59%10.73%
Veolia Environnement 3.37%3.51%1.23%10.44%
Average 9.78%8.94%9.02%
Max 17.31%13.42%13.99%
Min 3.51%1.23%2.63%
Source Yahoo Finance Median 9.20%10.75%10.26%
1/30/2023
Exhibit No.119
Case No.VEO-W-22-02
J.Terry,Staff
02/15/23 Schedule l
Veolia Water Idaho
Case No.VEO-W-22-02
Discounted Cash Flows
Company Dividend Dividend Yield Growth Est Last 5 yrs DCF Est DCF Hist
American States Water Co $1.59 1.67%4.40%8.07%6.07%9.74%
American Water Works Co Inc $2.62 1.71%8.28%7.79%9.99%9.50%
California Water ServiceGp $1.04 1.68%11.70%-9.52%
Essential Utilities,Inc.$1.15 2.44%6.60%1.06%9.04%3.50%
Middlesex Water Co $1.25 1.45%2.70%9.94%4.15%11.39%
SJW Corp $1.52 1.97%9.80%-5.65%
York Water Co $0.81 1.81%4.90%7.23%6.71%9.04%
Veolia Envronnement $1.06 3.37%11.70%17.69%
Average 7.19%8.63%
Max 9.99%11.39%
Min 4.15%3.50%
Source Yahoo Finance Median 6.71%9.50%
1/30/2023
Overall
Removedto avoid skewing data Average 7.91%
Max 11.39%
Min 3.50%
Median 9.04%
Exhibit No.119
Case No.VEO-W-22-02
J.Terry,Staff
02/15/23 Schedule 2
Veolia Water Idaho
Case No.VEO-W-22-02
Capital Asset Pricing Method
Return
S&P Since 1922 12.47%
1 Mo 30 Yr
Avg Risk Free Rate 1.86%3.15%
1/27/2023 Risk Free Rate 4.61%3.64%
Average Risk Free Rate Jan 27 Risk Free Rate
Company Beta 1 Mo 30 Yr 1 Mo 30 Yr
American States Water Co 0.42 6.32%7.06%7.91%7.35%
American Water Works Co Inc 0.55 7.70%8.28%8.93%8.50%
California Water ServiceGp .0.49 7.06%7.72%.8.46%7.97%
Essential Utilities,Inc.0.8 10.35%10.61%10.90%10.70%
Middlesex Water Co 0.74 9.71%10.05%10.43%10.17%
SJW Corp 0.63 8.55%9.02%9.56%9.20%
York Water Co 0.57 7.91%8.46%9.09%8.67%
Veolia Envronnement 1.06 13.11%13.03%12.94%13.00%
Min Max Mean Median
6.32%13.11%9.33%8.98%
Exhibit No.l19
Case No.VEO-W-22-02
J.Terry,Staff
02/15/23 Schedule 3
Veolia Water Idaho
Case No.VEO-W-22-02
ROE Results Summary
Summary
Comparative Earnings
Average 9.25%
Median 10.26%
DCF
Average 7.91%
Median 9.04%
CAPM
Average 9.33%
Median 8.98%
Exhibit No.119
Case No.VEO-W-22-02
J.Terry,Staff
02/15/23 Schedule 4
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|
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I HEREBY CERTIFY THAT I HAVE THIS 157"DAY OF FEBRUARY 2023,
SERVED THE FOREGOING DIRECT TESTIMONY OF JOSEPH TERRY,IN CASE
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