20250130Direct M. Rowell_Exhibits.pdf

RECEIVED
Thursday, January 30, 2025
IDAHO PUBLIC
UTILITIES COMMISSION
Preston N. Carter, ISB No. 8462
GIVENS PURSLEY LLP
601 West Bannock Street
P.O. Box 2720
Boise, Idaho 83701-2720
Office: [phone]
Fax: [phone]
[e-mail]
18690098.5[13988-221
Attorneys for Falls Water Co., Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION Case No. FLS-W-24-02
OF FALLS WATER CO., INC. FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE
IN THE STATE OF IDAHO
DIRECT TESTIMONY OF MATT ROWELL
FOR FALLS WATER CO.,INC.
JANUARY 30,2025

INTRODUCTION
1 Q. Please state your name and business address.
2 A. My name is Matthew Rowell. My business address is 250 SW Taylor St., Portland, Oregon
3 97204.
4 Q. By whom are you employed and what is your position?
5 A. I am employed by Northwest Natural Gas Company dba NW Natural ("NW Natural") as
6 its Manager of Water Rates and Regulatory Affairs.
7 Q. On whose behalf are you providing this Direct Testimony?
8 A. I am providing this testimony on behalf of Falls Water Co., Inc. ("Falls Water" or the
9 "Company"), a wholly-owned subsidiary of NW Natural Water Company, LLC ("NW
10 Natural Water"), a wholly-owned subsidiary of Northwest Natural Holding Company.
11 Q. Please describe your background and qualifications.
12 A. I have over twenty years of experience in utility rate regulation. I spent ten years as a
13 member of the Arizona Corporation Commission's Utilities Division's Staff(starting in
14 1996). For approximately half of that time I served as the Utilities Division's Chief
15 Economist. I worked directly on or oversaw some of the most complex and difficult cases
16 of that era including several rate cases, an evaluation of water/wastewater policy, cases
17 dealing with the restructuring of the telecommunications industry, and the reevaluation of
18 Arizona's electric competition rules. I also served as the advisor to Commissioner and
19 Chairman Doug Little from 2015 to 2017. As a consultant, I have provided testimony in
20 multiple water/wastewater utility rate cases ranging from large Class A utilities to small
21 Class D utilities. I hold a master's degree and ABD (all but dissertation) in economics
22 from Arizona State University and I hold the designation of Certified Rate of Return
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I Analyst(awarded by the Society of Utility and Regulatory Financial Analysts). My
2 curriculum vitae ("CV") is attached as Exhibit 8.
3 Q. What topics will your testimony address?
4 A. I will cover the following topics:
5 Adjustment To revenue
6 Computation of the revenue requirement
7 Shared services
8 Rate design and rate consolidation
9 Cost of capital, including cost of debt, capital structure, and cost of equity
10 Q. Are you sponsoring any exhibits to support your testimony?
11 A. Yes, I am sponsoring the following exhibits:
12 0 Exhibit 211, Shared Services
13 0 Exhibit 3, Capital Structure
14 0 Exhibit 4, Revenue Requirement
15 0 Exhibit 5, Rate Design
16 0 Exhibit 6, Bill Impact
17 0 Exhibit 7, Capital Structure and Cost of Capital
18 0 Exhibit 8, CV
SUMMARY OF CASE
19 Q. Please describe Falls Water.
20 A. Falls Water currently serves approximately 6,800 connections in Bonneville County near
21 the cities of Ammon and Idaho Falls. Falls Water consists of three water systems served
22 under two rate tariffs. The Falls Water and Taylor Mountain systems were consolidated
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I into one rate tariff in the Company's previous rate case. The Morningview system is
2 currently on a separate rate tariff.
3 Fall Water's customer base is spread across the current tariffs as follows:
Meters
Falls Water and Taylor 6,695
Mountain
Morningview 138
4 Q. Why is this rate case necessary?
5 A. Since Fall Water's previous rate case,the Company has invested over $6 million in plant
6 necessary to provide safe and reliable service to its customers. Additionally, inflation has
7 continued to increase Falls Water's operating costs and has necessitated increases in
8 employee wages to keep up with the cost of living.
REVENUE ADJUSTMENT
9 Q. Why was the $152,073 adjustment to revenue shown on Exhibit 2 necessary?
10 A. The test year in this case (October 1, 2023 through September 30, 2024) spans the rate
11 effective date (December 15, 2023) from Falls Water's last rate case. So, the first few
12 months of the test year include usage billed at rates lower than current rates. The revenue
13 adjustment applies Falls Water's current rates to the early months of the test year so that
14 the adjusted test year revenue reflects Falls Water's current rates applied over 12 months.
REVENUE REQUIREMENT
15 Q. Please discuss the revenue requirement calculation.
16 A. The revenue requirement was developed using the standard rate base rate of return method.
17 The required return on rate base was calculated as discussed below, where the required
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1 return is applied to the value of the rate base to obtain a required operating income. The
2 required operating income is compared to actual operating income and the difference
3 (grossed up for income taxes, property taxes, and bad debt) is the necessary revenue
4 increase. The calculation of the revenue increase and revenue requirements are
5 summarized here:
1 Rate Base 15,924,086 Exhibit 1 to
Company
Witness Bruce's
testimon
2 Required Rate of Return 7.96% Exhibit 3
3 Net Operating Income Requirement 1,267,398 Line 1 X Line 2
4 Net Operating Income Realized 608,531 Exhibit 2 to
Company
Witness Bruce's
testimony
5 Net Operating Income Deficiency 658,867 Line 3 —Line 4
6
7 Gross up Factor 1.365 Exhibit 4
8 Total Incremental Revenue Line 7 X Line 5
Requirement 899,493
9
10 Revenues at existing rates 3,593,153 Exhibit 2
11 Total Revenue Requirement 4,495,646 Line 10+Line 8
12
13 Percent Increase Required 25.02% Line 8/Line 10
6
7 SHARED SERVICES
8 Q. Please explain, generally, the approach used to allocate costs to Falls Water.
9 A. Generally, Falls Water's parent companies, which includes NW Natural Water, attempt to
10 directly assign costs to Falls Water and other subsidiaries for which the services are being
11 performed. Costs that cannot be directly assigned are allocated to the subsidiaries using the
12 NW Natural Cost Allocation Manual.
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I As shown in Exhibit 2H, Column(V), Shared Services Cost, Falls Water is
2 allocated shared services from NW Natural and NW Natural Water. This reflects the fact
3 that, currently, some shared services—such as corporate communications, legal,
4 purchasing, and tax—are provided by NW Natural employees, while others —such as
5 accounting, insurance, and third-party legal—are provided by NW Natural Water. We
6 anticipate that, as NW Natural Water acquires additional companies, more shared services
7 will be provided by NW Natural Water.
8 This is the same allocation methodology that is used with NW Natural Water's
9 subsidiaries in Washington, Oregon, Texas, and Arizona; in addition to the Idaho Public
10 Utilities Commission (the "Commission") the methodology has been approved by the
11 Washington Utilities and Transportation Commission, the Public Utility Commission of
12 Oregon and the Arizona Corporation Commission in prior proceedings to allocate shared
13 services costs.
14 Q. Is Falls Water seeking to recover more or less in shared services costs than it actually
15 incurred in 2024?
16 A. Falls Water is seeking to recover more in shared services costs than it actually incurred in
17 2024, with a 3% increase included over the 2024 charges (see columns U through X of
18 Exhibit 2H for full comparison). Overall corporate costs are increasing by 30%, but this is
19 offset by the fact that Falls Water represents a smaller portion of the whole as the company
20 grows. One of the key drivers is that NW Natural Water has hired its first full-time
21 President of NW Natural Water. NW Natural Water has grown to over 76 thousand owned
22 connections and roughly 22 thousand service connections, and it has reached a size
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I requiring dedicated full-time leadership. Falls Water believes that the modest 3% increase
2 is reasonable given the increased level of service to be delivered.
3 Q. Has the Company provided information regarding the shared services allocated to
4 Falls Water?
5 A. Yes. Exhibit 2H provides additional information related to shared services. This exhibit
6 demonstrates the components of the shared services that are being allocated to Falls Water,
7 including the entity whose shared services are being allocated, a description and amount of
8 the cost, and the allocation percentage used.
9 Q. Do allocated shared services costs benefit Falls Water customers?
10 A. Yes. The services that are allocated to Falls Water include services such as accounting,
1 1 safety, human resources, regulatory support, and legal services. These are back-office
12 functions that every company must provide to continue to serve customers. If Falls Water's
13 parent companies did not perform these functions, then Falls Water would have to perform
14 them directly at higher costs. In addition,by participating in shared services, Falls Water is
15 able to leverage the economies of scale experienced by its parent companies. Exhibited by
16 the fact that overall corporate expenses have grown by 30%,which includes a new full-
17 time President and increased safety/security and accounting resources. Falls Water's
18 portion of these costs only grow by 3%versus the prior year as it is offset by the continued
19 growth of the company requiring less to be carried by Falls Water's customers.
20 CONSOLIDATION AND RATE DESIGN
21 Q. What is the Company proposing regarding rate consolidation?
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I A. The Company proposes to consolidate its tariffs into a single rate design for all customers.
2 Currently, the vast majority of customers are served under a single tariff with a much
3 smaller number(the Morningview customers) served under a different tariff.
4 Q. Please discuss the benefits of consolidation.
5 A. The benefits of consolidation include reducing the administrative burden by reducing the
6 number of rate schedules, enhancing customer service and ease of doing business, and
7 mitigating the rate impact of large investments.
8 The consolidated rates provide an operational benefit by reducing system level
9 tracking of time and materials and accounting for the allocation of costs to each system.
10 Consolidated rates allow for improved customer service and responsiveness by
11 reducing the complexity of the tariff structure. Reducing the number of tariffs and rates
12 improves understanding of tariffs and rates for customers, Company personnel, and
13 Commission regulatory staff.
14 The larger customer base attained through rate consolidation also mitigates rate
15 volatility for the respective, smaller systems. Water utilities are highly capital intensive,
16 and a relatively large capital investment can significantly impact rate base and the
17 associated revenue requirement. Under consolidation, this effect is spread out over a larger
18 base of customers mitigating its impact on individual customers. In the long term,
19 consolidating rates will help spread the costs of system-wide improvements among a larger
20 body of customers more equitably. Under a consolidated rate structure, in the short run one
21 system may have higher rates due to investments in another system, however, eventually
22 each system will need investments and eventually will benefit from consolidation.
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I Allowing for rate consolidation is essential to encouraging the purchase of troubled
2 utilities. It is only through rate consolidation that the costs of necessary improvements can
3 be spread over enough customers to be manageable.
4 The Commission recognized benefits to consolidation in Order No. 36027:
5 We support the move towards increased consolidation of rates for
6 the falls Water,Morning View,and Taylor Mountain water systems.
7 This is a move towards ensuring customers are treated more
8 equitably in rates and that customers are receiving appropriate price
9 signals. We encourage the Company to continue working towards
10 consolidation of the three water systems.
11 Q. Besides the general benefits of rate consolidation discussed above,why is
12 consolidation especially appropriate for Falls Water?
13 A. The Morningview customers are served under a unique tariff where their base charges are
14 based on the size of their lot (i.e., 1/4 acre, 1/2 acre or 1 acre)rather than meter size. The
15 current base charges based on lot size are substantially higher than the base charges for
16 Falls Water's other customers at the same meter sizes even though the Morningview
17 customers do not impose any additional cost of service. In fact, the Morningview
18 customers have lower average usage than Falls Water's other customers on the same meter
19 sizes. So, it is unfair to charge the Morningview customers more than Falls Water's other
20 customers. Additionally, because there are so few Morningview customers, the revenue
21 transferred to Falls Water's other customers as a result of consolidation is minimal.
22 CAPITAL STRUCTURE AND COST OF CAPITAL
23 Q. Please summarize the Company's cost of capital proposal.
24 A. The Company is proposing a capital structure consisting of 55% equity and 45% debt, a
25 cost of debt of 5.22%, and a cost of equity of 10.2%. These values produce a total required
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1 return or Weighted Average Cost of Capital ("WACC") of 7.96% as shown in Exhibit 3
2 and Schedule 1 of Exhibit 7 to my testimony.
3 The cost of equity is supported by an analysis of the returns on equity currently
4 being earned by a sample of water utilities using a Comparable Earnings analysis,
5 Discounted Cash Flow model ("DCF"), and the Capital Asset Pricing model ("CAPM").
6 The cost of debt is based on the actual interest rate for debt held by Falls Water's parent
7 company. The capital structure is a reasonable hypothetical capital structure discussed
8 further below and shown in Exhibit 3 and Schedule 1 of Exhibit 7 to my testimony.
9 Q. Are you recommending a uniform rate of return for the systems involved in this rate
10 case?
11 A. Yes.
12 Q. Your analysis indicates that Falls Water faces a total cost of capital of 7.96%. What
13 total return on capital is Falls Water actually earning?
14 A. Based on pro-forma test year data, Falls Water earned a return of 3.82% in the test year,
15 well below its total cost of capital.
16 Q. Please explain the concept of"cost of capital."
17 A. The cost of capital is the expected return on an investment necessary to attract investors to
18 an enterprise (this cost exists for all companies, whether regulated like utilities, or in a
19 competitive marketplace). The opportunity cost associated with choosing one investment
20 over others is the forgone expected return of the other potential investments an investor
21 could select. A company seeking to attract investors must provide a return at least equal to
22 the return being provided by similar(in terms of risk) other enterprises. That return
23 necessary to attract investment (both through debt financing and equity investment) is the
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I company's "cost of capital." A utility that earns a return on its rate base at least equal to its
2 cost of capital (and that is efficiently managed)will be able to attract necessary capital and
3 maintain its financial integrity. That is what utility regulation must provide under the
4 Hope and Bluefield decisions of the U.S. Supreme Court.
5 The overall cost of capital, or weighted average cost of capital (WACC), is the
6 weighted average of the cost of debt and the cost of equity. A utility's cost of debt is
7 readily observable (it is the interest rate on its bonds and other debt)but the cost of equity
8 is not directly observable and must be estimated.
9 Q. What is the difference between a utility's cost of equity, the authorized return on
10 equity and the realized return on equity?
1 1 A. The cost of equity is the forward-looking opportunity cost of an equity investment. It is
12 also the expected return required to attract equity capital. The authorized return on equity
13 is the estimate of the cost of equity that the regulatory commission uses to determine the
14 utility's revenue requirement. The realized(or actual)return on equity is a backward-
15 looking accounting measurement that shows the return on equity that was actually realized
16 over a given year. The realized return on equity is calculated by dividing the utility's net
17 income by its total equity balance during that given year.
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I Q. Please discuss the challenges facing small and aging water utilities with respect to the
2 cost of equity.
3 A. Like all firms, water utilities face business risks, operational risks, and financial risks.
4 Business risk refers to the risk that a company will be unable to raise enough revenue to
5 cover its operating expenses and its cost of capital. Operational risk refers to the risk that
6 the company's operations will be negatively impacted(by acts of God, natural occurrences,
7 extreme weather, or equipment malfunctions). Financial risk refers to the risk that a
8 company's cash flow will be such that it cannot make interest and principal payments on
9 its debt. While all firms face these risks, the characteristics of the water utility industry
10 make the nature of these risks fundamentally different than that for other industries.
11 The capital intensive nature of the water utility industry is its primary non-
12 regulatory source of risk. It is well known that utilities in general and water utilities in
13 particular are highly capital intensive. A recent analysis of 96 different industries found
14 that utilities in general are the 13th most capital intensive business (at $2.26 in capital for
15 every dollar in revenue) and water utilities in particular are the 9th most capital intensive (at
16 $3.44 in capital for every dollar of revenue).'
17 High levels of capital intensity tend to increase business risk because significant
18 fluctuations in an operation's profitability are more likely for highly capital intensive
19 businesses or firms. This is because a business with more fixed assets has a higher relative
20 value of fixed costs and the high value of fixed costs do not vary with sales volume and
'Aswath Damodaran,adamodar(c�r�,stern.nyu.edu,
hLtp://pages.stem.nyLi.edu/—adamodar/New Home Page/datafile/capex.html
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I thus cause higher fluctuations of profits. Higher risk deriving from high capital intensity
2 will lead to a higher cost of capital.
3 Here's another way of explaining the impact of capital intensity on business risk:
4 "Ordinarily, businesses are not allowed to deduct the full costs of capital
5 expenditures in the year the expenses are incurred. Therefore, the
6 substantial outlays of capital required for such purchases must be
7 carefully planned out, usually years in advance. That way, companies can
8 avoid overextending themselves financially and creating cash
9 flow problems. For capital-intensive companies,proper management of
10 capital expenditures is crucial for survival and growth. Effective
11 management requires striking the right balance between the need for
12 resources in the future and the ability to generate profits in the present."
13 [Emphasis added.12
14 The nature of the water utility industry exacerbates the above issues because often
15 capital outlays are necessary to solve or prevent health and safety issues. Such investments
16 cannot be deferred for purely business reasons.
17 Q. Besides high levels of capital intensity, what other factors enhance the risk water
18 utilities face?
19 A. All firms have essentially three sources of capital available for investment: debt, equity,
20 and retained earnings (i.e., free cash flow). The relatively low depreciation rates inherent
21 in the water utility industry make a reliance on retained earnings more difficult than for
22 other industries. Recovery of depreciation expense is a principal source of cash flows for
23 all utilities. The water utility industry's low depreciation rates make raising cash internally
24 more difficult for water utilities than for other types of utilities. This makes securing debt
25 and equity financing more important and tends to drive up the cost of capital.
2 Maveric,J.B., "Which Types of Industries Have the Largest Capital Expenditures?", Investopedia,June 22,2020,
Link:https://www.investopedia.com/ask/answers/020915/which-types-industries-have-lar eg stcapital-
expenditures.asp
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I Low depreciation rates along with a reliance on an original cost rate base makes
2 water utilities more suspectable to inflation risk. Replacing plant that has been in the
3 ground for some time can be problematic, since the replacement plant can be significantly
4 more costly than the original cost of the plant. Replacement programs can thus see
5 significant increases in rate base.
6 Q. What impact does small size have on a water utility?
7 A. Consider the example of a large industrial user of water that decides to conserve and use
8 less water. A large utility with a diverse customer base will be able to absorb that loss
9 much more easily than a smaller utility that is far more dependent on each of its large users
10 for revenue. On the cost side, smaller utilities are much more susceptible to earnings
11 erosion due to equipment failure than are larger utilities. Consider a pump failure for
12 example: to a large utility serving thousands of customers a single pump failure is really a
13 drop in the bucket and will have little impact on overall earnings. For a smaller utility, the
14 same pump failure can have a much greater impact on earnings.
15 Q. Please explain how the above factors are relevant to the issue of setting a forward
16 looking cost of equity.
17 A. The above discussion clearly demonstrates that small unkempt water utilities face a higher
18 than typical level of risk—and under Bluefield a"public utility is entitled to such rates as
19 will permit it to earn a return on the value of the property which it employs for the
20 convenience of the public equal to that generally being made at the same time and in the
21 same general part of the country on investments in other business undertakings which are
22 attended by corresponding, risks and uncertainties." Since the utilities included in the
23 "proxy group"used in cost of equity models do not face the challenges outlined above,
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I those proxy-based models can understate the necessary ROE for a small water utility
2 struggling with aging and failing infrastructure. Thus, ROE estimates that are developed
3 through the use of a sample of publicly traded utilities (whether they are based on a
4 Comparative Earnings analysis, a DCF analysis, a CAPM analysis or some other method)
5 need to be augmented upwards to reflect the Falls Water's circumstances.
6 Q. Why do the risks outlined above imply that Falls Water faces a higher cost of capital
7 than is typical?
8 A. The expected return required to attract capital to an investment depends on that
9 investment's perceived risk. The higher the risk, the higher will be the expected return
10 necessary to attract sufficient capital.3 Equity investors will require relatively higher
11 expected returns to invest in a higher risk endeavor like a small water system in need of
12 significant capital improvements.
13 Q. Aren't water utilities typically considered to be low risk? How can a monopoly
14 service provider be thought of as a high-risk investment?
15 A. That is a legitimate and logical question. The wide-spread perception that water utilities
16 are a low-risk investment is based primarily on utility bonds which are typically highly
17 rated. Utilities may present low risk to bond investors but that does not mean that equity
18 investors face the same risk. Utility bond ratings are generally high because it is widely
19 accepted that regulators will not allow a large utility to default on the obligations of its
20 bonds. However, experience shows that no such protection is afforded equity holders.
s This basic relationship between risk and return is fundamental to finance theory and practice. Markowitz,Harry M.
"Portfolio Selection,"The Journal of Finance,Vol.VII,March 1952,77-91 provides an early exploration of the
implications of the risk-return relationship.
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I Equity investors face the real probability of earning a below normal return which
2 inevitably leads to share price erosion and a loss of capital.
3 Q. There have been significant economic disruptions over the past several years. Please
4 discuss the current economic situation.
5 A. The current macroeconomic situation is unprecedented and characterized by a high degree
6 of uncertainty. While many commenters have been predicting a recession and growth has
7 slowed, the unemployment rate has remained quite low. Fed policy meant to counter
8 inflation was widely expected to result in a recession, but the focus on the Fed's interest
9 rate policy is likely to prove overly simplistic.
10 In the wake of the 2008 financial crisis the Fed undertook an aggressive policy of
11 low rates and"quantitative easing" i.e., debt purchases. This loose monetary policy was
12 seen as necessary to prop up the economy in the wake of a historic real estate-lead
13 collapse. This loose policy was maintained for over a decade and just when it seemed the
14 economy was returning to a more"normal"trajectory, the Coronavirus pandemic
15 significantly disrupted the global economy. A short recession ensued and the Fed again
16 slashed interest rates and embarked on an aggressive policy of debt purchases. And, while
17 in the past the Fed's debt purchases were limited to bonds issued by the Federal
18 Government and mortgage-backed securities, it expanded into purchasing exchange-traded
19 funds (ETFs) of corporate bonds and corporate bonds directly.
20 At the beginning of the COVID pandemic, most observers feared a demand side
21 recession i.e., that consumers would slow their spending as a result of COVID. Demand
22 side factors have dominated macroeconomic policy discussions for forty years so this is
23 not surprising. However, as it turned out, demand was surprisingly resilient and supply
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I chain disruptions had a much bigger impact on the economy. Supply disruptions of this
2 magnitude had not been seen since the oil embargoes of the 1970s.
3 The severe COVID restrictions put in place in China disrupted supply chains for a
4 wide variety of products across the global economy. Those supply chain disruptions were
5 surprisingly persistent and were exacerbated by the Russia-Ukraine war. Prior to the war,
6 Ukraine was one of the top exporters of agricultural goods. Those exports have been
7 significantly curtailed putting upward pressure on global food prices.
8 The increased prevalence of extreme weather events has also put upward pressure
9 on prices. 2022 saw losses from natural catastrophes at levels well above average.4 This
10 put upward pressure on insurance rates and drove up demand for replacement goods while
11 the supply chain was still recovering.
12 In response to surging inflation the Fed undertook a series of rate hikes in an effort
13 to cool the US economy. That is, the Fed attempted to temper demand by tightening
14 monetary policy. Inflation turned out to be surprisingly persistent however and has only
15 recently come down close to the Fed's 2%target.
16 Three reasons appear to account for the persistence of inflation in the face of rising
17 interest rates. First, as noted above, this bout of inflation has been driven by supply side
18 factors while tight monetary policy is mainly a demand side lever. Second, government
19 fiscal policy has been expansionary and thus has worked against the Feds tight money
20 policy. And finally, the Fed's tight money policy may not be as tight as the interest rate
21 rises lead us to believe. As stated above, the Fed made substantial debt purchases at the
'Hurricanes and floods bring$120 billion in insurance losses in 2022
https://www.reuters.com/business/enviromnent/hurricanes-floods-bring-120-billion-insurance-losses-2022-2023-01-
09/
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I onset of the COVID crisis. The Fed has reduced its debt holdings since then,but they are
2 still at historic highs. The Fed has not attempted to sell this debt but has let it"roll off' as it
3 is paid off or refinanced. But refinancing activity has been greatly reduced by higher
4 interest rates so the roll off is slow. The Fed's hoarding of debt essentially removed a
5 significant amount of debt from the market which drives the price of debt up and interest
6 rates down. So, the slow roll off of the Fed's debt purchases moderated the impact of the
7 Fed's interest rate hikes.s
8 Very recently, the Fed cut interest rates in response to some weakening in the labor
9 market and slowing growth. It is yet to be seen what the effect of the Fed's recent
10 loosening will be. It could result in the proverbial "soft landing"where the economy grows
11 at a moderate but decent pace with inflation kept near the 2%target. But this is not
12 guaranteed, inflationary pressures could reappear and/or economic growth could be
13 stymied by consumer spending running out of steam.
14 We are thus left in an uncertain macroeconomic situation. The Fed's recent
15 loosening may very well avoid a recession. But that is far from certain. Businesses,
16 including utilities, are faced with planning capital expenditures at a time when future
17 conditions are as opaque as they have ever been. This is especially significant for utilities
18 that must maintain significant capital reinvestment plans.
5 The Evolving Role of the Fed's Balance Sheet:Effects and Challenges,Chaitri Gulati and A.Lee Smith,Federal
Reserve Bank of Kansas City,
https://www.kansascityfed.org/Economic%20Review/documents/9251/EconomicReviewV 107N4GulatiSmith.pdf
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I Q. What are the implications of the current macroeconomic situation for cost of equity
2 estimation?
3 A. The models used to estimate the cost of equity(discussed in detail below) are considered to
4 be "market based." That is, they incorporate data from the financial markets that indicate
5 investors' views on current and future market conditions. With a high degree of central
6 bank intervention in the markets, we can question whether financial data are in fact
7 "market based." The Fed (and other central banks around the world) is not a market actor.
8 The Fed's actions represent the deliberate intervention of a government(i.e., non-market)
9 actor in the financial markets intended to influence asset prices. The Fed is purposefully
10 putting its thumb on the sale.
11 While the Fed's interest rate increases were slow to bring inflation down in the real
12 economy, they had much more dramatic impacts on equity markets. Stock prices have been
13 highly volatile and deflated considerably in the wake of the Fed's rate hikes only to rise to
14 record levels after the recent rate cut.
15 So, ROE estimation models that rely on market-based information must be used
16 carefully. The current state of the "market" is highly influenced by Fed(i.e., non-market)
17 policy which could change in the near future. Further, the Fed's impact on the
18 macroeconomy is still uncertain. There is still a somewhat widely held belief that a
19 recession is imminent. But it is far from certain that this will be the case. The degree of
20 uncertainty is currently quite high.
21 This state of affairs should be considered when interpreting the results of ROE
22 estimation models and is discussed in detail below for each of the models used.
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I Q. Please discuss your general approach to ROE estimation.
2 A. Since Falls Water's (or any single utility's) cost of equity is not directly observable,
3 models that rely on a proxy group of publicly traded water utilities are used. I present cost
4 of equity estimates based on three different models: Comparable Earnings, DCF, and
5 CAPM. Using different models is a common practice in cost of equity estimation and it
6 allows for checking the reasonableness of any one estimate against those produced by the
7 other models.
8 The models rely on a proxy group of companies for which publicly available data
9 are available. To the extent possible the proxy group should consist of pure-play regulated
10 water utilities. The proxy group I rely on is as follows:
Symbol Company
AWR American States Water Co.
AWK American Water Works
WTRG Essential Utilities, Inc.
ARTNA Artesian Resources Corp.
CWT California Water Service Group
MSEX Middlesex Water
YORW York Water
11 Q. Please describe the Comparable Earnings approach to estimating ROEs.
12 A. The Comparable Earnings approach is more straightforward compared to other commonly
13 used ROE estimation techniques. The Comparable Earnings approach involves selecting a
14 sample of companies and calculating their actual or expected returns on equity. The period
15 of time over which the actual or expected returns on equity are collected varies by the case.
16 The sample returns on equity are averaged and used as a proxy for the required return on
17 equity of the utility in question.
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I Q. Please explain how the use of a Comparable Earnings analysis is consistent both with
2 the legal and economic underpinnings of rate of return regulation.
3 A. From an economic perspective, the cost of capital is an opportunity cost, the foregone
4 opportunities associated with making a particular investment. A Comparable Earnings
5 approach produces the most straightforward calculation of the real opportunity cost faced
6 by a potential investor. The Comparable Earnings approach fits the concept of
7 "corresponding risk" espoused by the seminal Hope and Bluefield US Supreme Court
8 cases. The Hope and Bluefield cases are widely regarded as foundational to modern rate
9 base rate of return regulation. The cases' assessment of cost of capital issues is best
10 summarized in the following quote from Hope:
11 From the investor or company point of view it is important that there be
12 enough revenue not only for operating expenses but also for the capital costs
13 of the business. These include service on the debt and dividends on the stock.
14 By that standard the return to the equity owner should be commensurate with
15 returns on investments in other enterprises having corresponding risks. That
16 return, moreover, should be sufficient to assure confidence in the financial
17 integrity of the enterprise, so as to maintain its credit and to attract capital.6
18 [Emphasis added.]
19 The three cost of capital standards established by Hope and Bluefield are
20 commensurate (i.e., comparable) earnings, financial integrity and capital attraction. A
21 Comparable Earnings analysis of the cost of equity corresponds directly and literally with
22 the commensurate earnings standard. The Comparable Earnings approach also satisfies the
23 financial integrity standard since only companies characterized by a high degree of
24 financial integrity should be included in the proxy group used to develop the cost of equity.
25 Because of the enhanced risk associated with operating a small utility in need of
26 substantial upgrades (discussed above), a Comparable Earnings analysis (or any other type
6 Federal Power Commission et.al.v.Hope Natural Gas Company(320 U.S. 591),Emphasis added.
PAGE 20 OF 31
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I of analysis)based on a sample of companies with more normal risk profiles will have to be
2 augmented upwards in order to satisfy the capital attraction standard.
3 Q. Please discuss the specific Comparable Earnings analysis you performed.
4 A. I have employed a Comparable Earnings method that relies on five years of historical data
5 and five years of forecasted data. The Eve years of historical data are the actual achieved
6 ROEs of the proxy utilities from 2019 to 2023. The five years of forecasted data are
7 forecasted ROES that represent investors' expectations of future ROES. The forecasts are
8 obtained from Value Line, a highly reputable source of financial data. There has been
9 debate about whether historical or forecasted data is most appropriate for this type of
10 analysis; as such, a hybrid approach is sensible because it acknowledges that investors rely
11 on both history and forecasts when evaluating investments.
12 Unfortunately, Value Line no longer provides ROE forecasts for smaller utilities
13 (and there is no other comparable source), so the two smallest members of the proxy group
14 (ARTNA and YORW) are excluded from the comparable earnings analysis.
15 Q. What are the results of your Comparable Earnings analysis?
16 A. The Comparable Earnings analysis produces an average ROE estimate of 10.6% and a
17 range of 8.2%to 13.8%.
18 Q. Please describe the DCF model.
19 A. The DCF, or Discounted Cash Flow model, is based on the idea that the present value of an
20 asset that pays off in the future is the discounted expected value of the future pay off. This
21 means that the price of a stock is:
22 P = D1 + D2 + D3 + D4 +
(1 + r) (1 + r)2 (1 + r)3 (1 + r)4
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I Where P is the stock price, Di is the dividend paid in future year one, D2 is the dividend
2 paid in future year two, D3 is the dividend paid in future year three etc., (1 +r) is the
3 discount rate and r is the rate of return.
4 Assuming that dividends grow at a constant rate of g and that the future stream of
5 dividends is infinite allows the above equation to be rewritten as:
Do
6 P = (r _ g)
7 Where Do is the current dividend being paid.
8 Solving this equation for r gives the standard formulation of the DCF model used in
9 ROE estimation:
10 r = Dp + g
I I The required rate of return equals the current dividend yield plus the expected growth rate.
12 While the mathematics that connect the above steps may not be intuitively obvious,
13 this basic relationship between stock price, dividend yield and the growth rate is regarded
14 as a truism of finance.
15 The dividend yield of a stock is readily attainable from a variety of sources.
16 However, the expected growth rate is not known with certainty and a proxy for it must be
17 selected.
18 Q. How did you calculate the dividend yield for the companies in the sample?
19 A. The dividend yield is the annual per-share dividend paid by a company to its investors
20 divided by the company's share price. For the per-share dividends paid, I use an
21 annualization of a recently available quarterly dividend(second quarter 2024)provided by
22 Value Line. For the share price, I used the average daily closing price from October 27,
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1 2024 thru January 27, 2025 obtained from Yahoo Finance. The calculation of the dividend
2 yield is shown on Schedule 4 of Exhibit 7.
3 Q. How did you calculate the expected dividend growth rate?
4 A. Like most aspects of ROE estimation, there are different views regarding the best method
5 of estimating investors' growth expectations. Actual and forecasted growth rates in
6 earnings per share ("EPS"), dividends per share ("DPS"), and book value per share
7 (`BVPS") have all been suggested as appropriate indicators of investors' expectations
8 regarding dividend growth rates. I take a hybrid approach and use an average of five-year
9 historical growth rates in EPS, DPS, and BVPS to develop an expected dividend growth
10 rate. Schedule 5 of Exhibit 7 shows the calculation of the expected dividend growth rate.
11 Q. Please discuss the assumptions that the DCF model relies on.
12 A. Like all models the DCF is a simplification of reality. In order to make financial models
13 practical for actual use, simplifying assumptions must be made about the behavior and
14 beliefs of investors and company management. The following are assumptions that the
15 DCF relies on. The first four assumptions are necessary for any DCF model while the last
16 four are necessary only for constant growth DCF models.7
17 Assumption 1: Investors value stocks in the classical economic framework, i.e.,
18 they make investment decisions in a rational fashion based on their perception of value.
19 Assumption 2: Investors discount future dividends at the same rate (1 +the cost of
20 equity) in each future period. This implies that investors assume that the yield curve is flat
21 (i.e., that interest rates on short-term, intermediate-term and long-term debt are the same).
7 This discussion of DCF assumptions follows Morin, 2006,251-258.
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1 While this assumption is unrealistic, its practical implications are limited, i.e., it does not
2 really matter to the analysis.
3 Assumption 3: The cost of equity derived from the DCF model corresponds to the
4 specific stream of future cash flows included in the model. In other words, it is dependent
5 on the specific circumstances of the company whose data are being used in the model. If
6 investors expected the same cash flows but with a higher level of risk, the resulting cost of
7 equity would not be the same. This is because the stock price will decline if perceived risk
8 increases (even if expected cash flows do not change). In the context of the DCF model, a
9 lower stock price results in a higher cost of equity. This supports the notion that the DCF
10 cost of equity results should be adjusted upwards to account for the specific risks faced by
11 Falls Water.
12 Assumption 4: The source of value to investors is dividends.
13 Assumption 5: The cost of equity must be greater than the expected growth rate of
14 dividends. This means that the DCF model cannot be used for growth stocks but it is not
15 an issue for most utilities.
16 Assumption 6: The expected dividend growth rate is constant for every future year
17 to infinity. This does not mean that dividends must actually grow at the same rate every
18 year. Rather, investors are assumed to expect the growth rate to be constant. If the actual
19 growth rate varies randomly around an average expected rate, this assumption is not
20 violated.
21 Assumption 7: Investors require the same return on equity in each future year.
22 This implies that the risks faced by the firm are assumed to be constant.
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I Assumption 8: There is no external financing. Dividend growth comes solely
2 from the retention of earnings.
3 Q. Why can the DCF model be problematic?
4 A. One drawback of the DCF model is that it relies on stock market prices that change from
5 day to day. Stock prices tend to fluctuate much more and more frequently than do our
6 estimates for dividends and the dividend growth rate. This means that as the stock market
7 fluctuates, the ROE estimates produced by the DCF approach will also fluctuate. For
8 instance, the annual compounding DCF ROE estimates can vary widely if there is a stock
9 market rally or crash. However, there is absolutely no reason to believe that the risks
10 associated with operating a water utility have changed because of a stock market rally or
11 crash.
12 Q. How can this problem be dealt with?
13 A. To deal with this problem I have used the average stock price for each of the proxy
14 companies over the most recent practicable three-month period.
15 Q. What are the results of your DCF analysis?
16 A. The DCF analysis discussed here produces an average ROE estimate of 10.25%with a
17 range of 7.7%to 13.1%.
18 Q. Please discuss the CAPM or Capital Asset Pricing Model.
19 A. The CAPM is quite different from the DCF model. The DCF model is a multi-period
20 model that explicitly recognizes that investment returns are paid out over time. In stark
21 contrast, the CAPM is a single period model; it is essentially an instantaneous snapshot of
22 a moment in time and thus it eschews the concept of the time value of money and of
23 discount rates. Further, while the DCF model explicitly recognizes that the cost of equity
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I depends upon firm-specific factors such as a firm's dividend yield and expected dividend
2 growth rate, the CAPM assumes that investors ignore all such firm specific factors. Unlike
3 the DCF model which is grounded by the "old school" financial concept that the value of
4 an asset is the discounted sum of future cash flows,$ the CAPM is based on the more recent
5 theory of Efficient Markets and Modern Portfolio Theory.9
6 Q. What is the basic formulation of the CAPM?
7 A. The CAPM specifies the relationship between the cost of equity, the "risk free"rate of
8 return,beta and the market risk premium. This relationship is expressed as:
9 r = RF + /3 * (RM — RF)
10 Where: r= the cost of equity
11 RF = The "risk free"rate of return
12 R = Beta, the expected correlation between a given securities return and
13 the market rate of return
14 RM= the market rate of return
15 RM—RF =the market risk premium
16
17 The risk free rate of return, RF, is the hypothetical return on the hypothetical risk free
18 asset. In reality, no asset is risk free so an appropriate proxy for the risk free rate must be
19 selected by the analyst.
20 Beta measures a given asset's propensity to move with the "market." A Beta of 1
21 indicates that the asset tends to move in perfect correlation with the market. A Beta of 0.5
22 indicates the asset tends to move half as much as the market.10 Historical betas are
23 determined by the use of a statistical model known as regression analysis that determines
'First advanced by Fisher(1907)and expanded on by Williams(1938.)
9 Markowitz(1952), Sharpe(1963)and Lintner(1965)
"I say"tends to"because Betas are determined statistically through a regression model. The statistical model used to
estimate Beta is:
r = RF+ # * (RM—RF) + E where E is a random error term. I.e.,the CAPM does not explain all of the
variability in r.
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I the correlation between a given asset's return and the market return. Historical betas are
2 often used as a proxy for expected betas when formulating the CAPM.
3 The market rate of return, RM, is supposed to represent the return on a hypothetical
4 portfolio consisting of all assets. In theory this portfolio would consist of all conceivable
5 asset classes: stocks, bonds, agricultural commodities, gold and other metals, art,
6 collectables, etc. However, in practice the market portfolio is usually represented by a
7 broad portfolio of stocks. This difference between the theoretical CAPM and how it is
8 used in practice has been cited as one of the CAPM's fundamental drawbacks.11
9 The market risk premium, RM—RF, is the difference between the market return and the
10 risk free rate of return. It represents the additional return required to compensate investors
11 for the risk associated with holding the market portfolio rather than the risk free asset.
12 This factor explains why investors choose the risk inherent in the market rather than risk
13 free investments: they expect to earn more money.
14 Q. What proxy did you use for the risk free rate of return in the CAPM analysis?
15 A. The utilized risk free rate is an average of the interest rate on 20 year treasuries from a
16 recent three months.
17 Q. How did you pick the betas used in your CAPM analysis?
18 A. For each of the proxy companies, Value Line's estimated betas were obtained.
19 Q. How did you develop the market risk premium (RM—RF) used in your CAPM
20 analysis?
21 A. An ROE for the S&P 500 was calculated and compared to the yield on 20-year treasury
22 bonds for each of the past 42 years. These 42 annual risk premiums were then averaged.
'1 Morin,New Regulatory Finance at 176.
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I Q. Please discuss the results of your CAPM analysis.
2 A. The CAPM model discussed here produces an average ROE estimate of 10.83% and a
3 range of 9.8%to 12.29%.
4 Q. How does Falls Water compare to the sample of utilities used in the above analyses?
5 A. Falls Water is considerably smaller than the utilities in the sample and it faces considerably
6 greater risk as a result of its extremely small size and its need for capital investment.
7 Q. Obviously Falls Water is considerably smaller than the proxy companies. But how
8 small is it?
9 A. The proxy companies' annual revenue averages over$1 billion, which is almost 300 times
10 larger than Falls Water. Even the smallest utility in the proxy group is twenty times larger
1 1 than Falls.
12 Q. What are the implications of Falls Water's small size relative to the sample of utilities
13 used to determine the cost of equity?
14 A. Falls Water's small size relative to the sample utilities calls into question whether the use
15 of such a sample conforms to the "corresponding risk" standard derived from the Hope and
16 Bluefield cases. The risk profile of small firms is fundamentally different from that of
17 large firms. Small firms are widely regarded as riskier than large firms. Therefore,
18 reliance on a sample of large firms can dramatically understate the risk(and the necessary
19 cost of equity) for smaller utilities. In order to conform to Hope and Bluefield's
20 "corresponding risk" standard, consideration of Falls Water's small size is necessary.
21 Q. What method do you propose to use to account for the risk factors of a small utility in
22 need of capital investment?
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I A. There is no universally accepted method for determining an appropriate risk-based
2 adjustment. Therefore, I recommend that the Idaho PUC not authorize an ROE in the lower
3 end of the range of ROE estimates presented here.
4 Q. Please summarize your recommendation regarding ROE.
5 A. The results of the various ROE estimation techniques employed for this testimony is
6 summarized here:
7 ROE Results
Model Range Average
Comparable 8.2%to 13.8% 10.57%
Earnings
DCF 7.7%to 13.1% 10.25%
CAPM 9.8%to 12.29% 10.83%
8 This analysis produces a wide range of ROE estimates from as low as 7.7%to as
9 high as 13.8%. Given the risk profile of Falls Water, an ROE estimate of 10.2% is
10 appropriate. The overall average of the ROE estimates presented here is 10.55%. Falls
11 Water's risk profile could justify an ROE estimate above the average be used. An ROE of
12 10.2% is well below the highest ROE estimates presented here and is below the average
13 ROE. While a higher ROE could be justified, a proposed ROE in the higher range of what
14 is presented here would be out of step with ROES approved by the Idaho PUC in recent
15 years. The proposed 10.2%ROE estimate takes into account the Idaho PUC's recent
16 decisions on ROE and is a reasonable proposal that balances the interest of the Company
17 and its customers.
18 Q. What is your recommendation regarding the capital structure and cot of debt for this
19 rate case?
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I A. Falls Water's actual capital structure is 9 1% equity and 9% debt:12
Equity $13,177,586 91%
Debt $1,291,392 9%
Total $14,468,978 100%
Capital
2 The Company is aware that the Idaho PUC is unlikely to approve a capital structure
3 weighted this heavily toward equity, so the Company is not proposing Falls Water's actual
4 capital structure be used for ratemaking purposes.
5 Falls Water's parent,NW Natural Water, currently has a capital structure of 66%
6 equity and 34% debt. This could be used as a proxy for Falls Water's capital structure but,
7 again,being cognizant of the Idaho PUC's recent practice, the Company is proposing a
8 hypothetical capital structure with a lower equity rate. Our proposed 55% equity and 45%
9 debt hypothetical capital structure is a fair proposal that recognizes the equity investment
10 in Falls Water while balancing the interests of Falls Water's customers. It is also consistent
11 with recent Commission decisions, e.g., Order No. 35692 that decided Gem State Water
12 Company, LLC's last rate case.
13 Falls Water is proposing to use NW Natural Water's cost of debt of 5.22%. This is
14 a reasonable proxy for the cost of the hypothetical debt portion of Falls Water's
15 hypothetical capital structure.
16 Q. What is the weighted average cost of capital (WACC)?
17 A. The WACC is a cost of capital for the whole firm that is derived by weighting the cost of
18 capital associated with each source of capital (debt and equity)by its share in the firm's
19 overall capital structure.
12 Source: 2023 Annual Report to Idaho PUC.
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I (Cost of Debt x Debt % of Capital Structure) + (Cost of Equity x Equity% of Capital
2 Structure)
3 (5.22%x 45%) + (10.2% x 55%) = 7.96%
4 Q. Does this conclude your Direct Testimony?
5 A. Yes.
PAGE 31 OF 31
M.ROWELL,DI
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Preston N. Carter, ISB No. 8462
GIVENS PURSLEY LLP
601 West Bannock Street
P.O. Box 2720
Boise, Idaho 83701-2720
Office: [phone]
Fax: [phone]
[e-mail]
18762334.1 [13988-221
Attorneys for Falls Water Co., Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION Case No. FLS-W-24-02
OF FALLS WATER CO., INC. FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE
IN THE STATE OF IDAHO
EXHIBITS TO ACCOMPANY THE
DIRECT TESTIMONY OF MATT ROWELL
JANUARY 30,2025

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 2H — Shared Services

FALLS WATER COMPANY
EXHIBIT 2(H)
Shared Services
Test Year End 9/30/2024
Mass.
Method
Budget'25 6.17%
Labor&Benefits Overhead Cost by Department Gas Water Combined Budget'25
Executives 25,689 541,427 567,116 34,972
Accounting (excludes Fin. Rep&Tech) 153,053 725,782 878,835 54,195
Corporate Communications - - - -
HR, Payroll 64,878 193,892 258,770 15,957
Information Services 2,698 506,144 508,842 31,379
Legal 142,463 - 142,463 8,785
Purchasing and Stores 1,132 - 1,132 70
Rates& Regulatory Affairs 334,648 - 334,648 20,637
Risk and Land 22,132 - 22,132 1,365
Strategic Planning, Business Dev, & Marketing 170,521 - 170,521 10,515
Tax 43,282 - 43,282 2,669
Treasury 29,283 - 29,283 1,806
Safety 117,960 163,912 281,872 17,382
Capitalized Overheads (100,000) (150,000) (250,000) (15,417)
Total Labor&Benefits $1,007,739 $1,981,157 $2,988,896 $ 184,315
Holding Company Shared Costs Allocation: $ 349,447 $ - $ 349,447 21,549
Shared costs such as SEC Filing costs,allocated out $ 40,980 $ - $ 40,980 2,527
External Spending:
Audit - 215,000 215,000 13,258
Contract Labor - 61,920 61,920 3,818
HR - 48,100 48,100 2,966
Safety - 8,000 8,000 493
Regulatory - 10,720 10,720 661
Depreciation - - - -
Insurance - 3,191 3,191 197
Dues&Memberships - 42,389 42,389 2,614
Travel&Food - 83,050 83,050 5,121
Office Supplies, Bank Fees,&Other - 18,859 18,859 1,163
$ - $ 491,229 $ 491,229 $ 30,292
External Spending,direct allocation when possible:
IT - 360,600 360,600 22,237
Legal - - - -
$ - $ 360,600 $ 360,600 $ 22,237
Total Allocated to Falls Water $1,398,166 $23832,986 $43231,152 $ 260,921
Test Year Expense 233,520
Adjustment $ 27,402
Case No.FLS-W-24-02
Exhibit No. 2H
M.Rowell
Pagel of 1

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 3 — Capital Structure

EXHIBIT 3
FALLS STATE WATER COMPANY
EXHIBIT 3
Capital Structure
Test Year End 9/30/2024
(A) (B) (C) (D)
Percent of Total
Line No. Description Amount Capital Cost Component
1 Long Term Debt $0 45.00% 5.22% 2.35%
2 Common Equity 0 55.00% 10.20% 5.61%
3 Total 0 100.00% 7.96%
Case No.FLS-W-24-02
Exhibit No. 3
Page 1 of 1 M.Rowell
Page 1 of 1

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 4 — Revenue Requirement

EXHIBIT 4
FALLS STATE WATER COMPANY
EXHIBIT 4
Revenue Requirement
Test Year End 9/30/2024
1 Rate Base $ 15,924,094
2 Required Rate of Return 7.96%
3 Net Operating Income Requirement $ 1,267,399
4 Net Operating Income Realized $ 608,531
5 Net Operating Income Deficiency $ 658,867
6
10 Net Operating Income Deficiency 658,867
11 Gross up Factor 1.365212
12 Total Incremental Revenue Requirement 899,493
13
15 Revenues at existing rates $ 3,595,153
16 Total Revenue Requirement $ 4,494,646
17
18 Percent Increase Required 25.02%
Falls Water Company, Inc.
Net to Gross Multiplier
Total Gross Revenues 1.000000
Less Uncollectibles ( percentage) 0.005257
Less 2024 Regulatory Fees (percentage) 0.002529
Less Bank Service Charge Fees (percentage) 0.009022
Net Revenue 0.983192
State Income Tax Rate 5.695% 0.055993
Federal Income Tax Base 0.927199
Federal Income Tax Rate 21.000% 0.194712
Net Operating Revenue 0.732487
Net Income to Gross Revenue Multiplier 1.36521
Case No.FLS-W-24-02
Exhibit No.4
Page 1 of 1 M.Rowell
Page 1 of 1

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 5 — Rate Design

EXHIBIT 5
FALLS WATER COMPANY
EXHIBIT 5
Rate Design
Test Year End 9/30/2024
Monthly Minimum Charges
Current Rates Proposed Rates
Monthly Gallons Monthly Gallons
Minimum Included in Minimum Included in
Water System: Meter Size Charge Minimum Charge Minimum
Falls and Taylor Mountain 5/8" NA NA 28.68 5000
Falls and Taylor Mountain 3/4" 22.50 8,000 28.68 5000
Falls and Taylor Mountain 1" 31.68 11,000 40.38 9000
Falls and Taylor Mountain 1.5" 40.86 15,000 52.08 13000
Falls and Taylor Mountain 2" 51.96 19,000 66.23 17000
Falls and Taylor Mountain 3" NA NA 92.27 19000
Falls and Taylor Mountain 4" 92.82 33,000 118.31 21000
Falls and Taylor Mountain 6" NA NA 477.95 25200
Morningview 5/8" NA NA 28.68 5000
Morningview 3/4" NA NA 28.68 5000
Morningview 1" NA NA 40.38 9000
Morningview 1.5" NA NA 52.08 13000
Morningview 2" NA NA 66.23 17000
Morningview 3" NA NA 92.27 19000
Morningview 4" NA NA 118.31 21000
Morningview 6" NA NA 477.95 25200
Current Rates Proposed Rates
Minimum Gallons Minimum Gallons
Lot Size Charge Based Included in Charge Based Included in
(Acres) on Lot Size Minimum on Lot Size Minimum
Morningview 0.250 50.00 11,000 NA NA
Morningview 0.500 60.00 11,000 NA NA
Morningview 1.000 65.50 11,000 NA NA
Case No.FLS-W-24-02
Exhibit No. 5
Page 1 of 3 M.Rowell
Page 1 of 3

EXHIBIT 5
Commodity Rates
Present Rate Proposed Rate Present Rate Proposed
Tier Upper Limit Tier Upper Per 1,000 Rate Per
Meter Size Gallons Limit Gallons Gallons 1,000 Gallons
Falls and Taylor Mountain 5/8" Tier 1 8000 5000 $ - $ -
Tier 2 24000 15000 0.64 0.97
Tier 3 >24000 >15000 1.44 1.46
Falls and Taylor Mountain 3/4" Tier 1 8000 5000 - -
Tier 2 24000 15000 0.64 0.97
Tier 3 >24000 >15000 1.44 1.46
Falls and Taylor Mountain 1" Tier 1 11000 9000 - -
Tier 2 33000 27000 0.64 0.97
Tier 3 >33000 >27000 1.44 1.46
Falls and Taylor Mountain 1.5" Tier 1 15000 13000 - -
Tier 2 45000 39000 0.64 0.97
Tier 3 >45000 >39000 1.44 1.46
Falls and Taylor Mountain 2" Tier 1 19000 17000 - -
Tier 2 57000 51000 0.64 0.97
Tier 3 >57000 >51000 1.44 1.46
Falls and Taylor Mountain 3" Tier 1 NA 19000 NA -
Tier 2 NA 57000 NA 0.97
Tier 3 NA >57000 NA 1.46
Falls and Taylor Mountain 4" Tier 1 33000 21000 - -
Tier 2 99000 63000 0.64 0.97
Tier 3 >99000 >63000 1.44 1.46
Falls and Taylor Mountain 6" Tier 1 NA 21000 NA -
Tier 2 NA 63000 NA 0.97
Tier 3 NA >63000 NA 1.46
Case No.FLS-W-24-02
Exhibit No. 5
Page 2 of 3 M.Rowell
Page 2 of 3

EXHIBIT 5
Present Rate Proposed Rate Present Rate Proposed
Tier Upper Limit Tier Upper Per 1,000 Rate Per
Meter Size Gallons Limit Gallons Gallons 1,000 Gallons
Morningview 5/8" Tier 1 11000 5000 $
Tier 2 33000 15000 0.64 0.97
Tier 3 >33000 >15000 1.44 1.46
Morningview 3/4" Tier 1 11000 5000 - -
Tier 2 33000 15000 0.64 0.97
Tier 3 >33000 >15000 1.44 1.46
Morningview 1" Tier 1 11000 9000 - -
Tier 2 33000 27000 0.64 0.97
Tier 3 >33000 >27000 1.44 1.46
Morningview 1.5" Tier 1 11000 13000 - -
Tier 2 33000 39000 0.64 0.97
Tier 3 >33000 >39000 1.44 1.46
Morningview 2" Tier 1 11000 17000 - -
Tier 2 33000 51000 0.64 0.97
Tier 3 >33000 >51000 1.44 1.46
Morningview 3" Tier 1 11000 19000 NA -
Tier 2 33000 57000 NA 0.97
Tier 3 >33000 >57000 NA 1.46
Morningview 4" Tier 1 11000 21000 - -
Tier 2 33000 63000 0.64 0.97
Tier 3 >33000 >63000 1.44 1.46
Morningview 6" Tier 1 11000 21000 NA -
Tier 2 33000 63000 NA 0.97
Tier 3 >33000 >63000 NA 1.46
Case No.FLS-W-24-02
Exhibit No. 5
Page 3 of 3 M.Rowell
Page 3 of 3

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 6 — Bill Impact

FALLS WATER COMPANY
EXHIBIT 6
Bill Impact
Test Year End 9/30/2024
Customer Median Usage Current Bill at Median Proposed Bill at
Water System: Meter Size Count (1,000 Gallons) Usage IMedian Usage $Increase %Increase
Falls and Taylor Mountain 5/8" 26 6.50 22.50 30.14 7.64 34%
Falls and Taylor Mountain 3/4" 4,365 7.00 22.50 30.62 8.12 36%
Falls and Taylor Mountain V. 2,170 6.00 31.68 40.38 8.70 27%
Falls and Taylor Mountain 1.5" 48 3.00 40.86 52.08 11.22 27%
Falls and Taylor Mountain 2" 80 11.00 51.96 66.23 14.27 27%
Falls and Taylor Mountain 4" 6 67.00 114.58 164.87 50.29 44%
Mourningview(.25 Acre) 3/4" 10 4.00 50.00 28.68 -21.32 -43%
Mourningview(.25 Acre) 1" 21 5.00 50.00 40.38 -9.62 -19%
Mourningview(.5 Acre) 3/4" 13 0.00 60.00 28.68 -31.32 -52%
Mourningview(.5 Acre) 1" 51 0.00 60.00 40.38 -19.62 -33%
Mourningview(1 Acre) 3/4" 14 5.00 65.50 28.68 -36.82 -56%
Mourningview(1 Acre) 1" 29 0.00 65.50 40.38 -25.12 -38%
Case No.FLS-W-24-02
Exhibit No.6
M.Rowell
Page 1 of 1

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 7
Capital Structure and Cost of Capital

Falls Water Company
Cost of Capital Schedule 1
Calcualtion of WACC
Weighted Average Cost of Capital (WACC)
Cost Weight Weighted Cost
Equity 10.20% 55% 5.61%
Debt 5.22% 45% 2.35%
WACC 7.96%
Case No.FLS-W-24-02
Exhibit No. 7
M. Rowell
Pagel of 8

Falls Water Company
Cost of Capital Schedule 2
Calculation of Cost of Equity
Model Range Average
Comparable Earnings 8.2%to 13.8% 10.57%
DCF 7.2%to 13% 10.25%
CAPM 9.8%to 12.29% 10.83%
Average 10.55%
Cost of Equity 10.20%
Case No.FLS-W-24-02
Exhibit No. 7
M. Rowell
Page 2 of 8

Falls Water Company
Cost of Capital Schedule 3
Comparable Earnings Analysis
PROXY GROUP--COMPARABLE EARNINGS ANALYSIS
Line
No 5-Year
1 5-Year 5-Year Combined
2 Historical ROEs Projected ROEs Historical Projected Historical&
3 2027- Average Average* Projected
4 Company 2019 2020 2021 2022 2023 2024 2025 2029 2019-2023 2024-2029 Average
5
6 AWR American State 14.0% 13.5% 13.8% 11.0% 16.1% 13.5% 14.0% 14.0% 13.7% 13.8% 13.8%
7 AWK American Wate 10.1% 11.0% 17.3% 10.7% 9.6% 10.0% 10.0% 11.0% 11.7% 10.3% 11.0%
8 WTRG Essential Utiliti 5.8% 6.1% 8.3% 8.7% 8.5% 8.5% 9.0% 9.5% 7.5% 9.0% 8.2%
9 ARTNA Artesian Resou 9.3% 9.9% 9.5% 9.6% 7.20% NA NA NA
10 CWT California Wat( 8.1% 10.5% 8.6% 7.3% 3.6% 13.0% 10.5% 9.5% 7.6% 11.0% 9.3%
11 MSEX Middlesex Wat 10.4% 11.0% 9.9% 10.5% 7.4% 10.5% 10.5% 12.5% 9.8% 11.2% 10.5%
12 YORW York Water 10.7% 11.6% 11.1% 9.5% 10.7% NA NA NA
13 Average 9.8% 10.5% 11.2% 9.6% 9.0% 11.1% 10.8% 11.3% 10.1% 11.1% 10.6%
14
15 Source: Value Line Investment Survey July,2024 *Projected ROEs are no longer available for ARTNA and YORW from Value Line.
16
Case No.FLS-W-24-02
Exhibit No. 7
M.Rowell
Page 3 of 8

Falls Water Company
Cost of Capital Schedule 4
Discounted Cash Flow:Dividend Yield
PROXY GROUP--DIVIDEND YIELD
Line October 27,2024-January 27,2025
No Proxy Group Companies DPS High Low Average Yield
1 AWR American States Water Co. $1.72 $86.45 $70.84 $80.47 2.14%
2 AWK American Water Works Co.,Inc. $3.06 $138.79 $121.01 $130.19 2.35%
3 WTRG Essential Utilities,Inc. $1.23 $40.35 $33.49 $37.57 3.27%
4 ARTNA Artesian Resources Corp. $1.18 $36.38 $29.68 $32.85 3.60%
5 CWT California Water Service Gp. $1.12 $52.31 $41.88 $47.97 2.33%
6 MSEX Middlesex Water $1.30 $69.70 $48.68 $59.08 2.20%
7 YORW York Water Company $0.84 $41.31 $35.60 $38.71 2.18%
8 Average 2.58%
9
10 References:
11 Column(A)-Value Line Investment Survey(July 2024)
12 (Reflects annualization of most recent quarterly dividend)
13 Columns(B),(C), and(D)-Yahoo Finance
14
Case No.FLS-W-24-02
Exhibit No. 7
M.Rowell
Page 4 of 8

Falls Water Company
Cost of Capital Schedule 5
Discounted Cash Flow: Growth Rates
PROXY GROUP -- PER SHARE GROWTH RATES
5-Year Compound Average Annual
Line Historical Growth
No Proxv Group Companies EPS DPS BVPS Average
1 AWR American States Water Co. 9.0% 9.0% 6.5% 8.2%
2 AWK American Water Works Co. 15.0% 9.5% 7.5% 10.7%
3 WTRG Essential Utilities,Inc. 7.0% 7.0% 14.0% 9.3%
4 ARTNA Artesian Resources Corp. 3.5% 3.5% 5.0% 4.0%
5 CWT California Water Service Gp. 4.0% 6.5% 10.0% 6.8%
6 MSEX Middlesex Water 5.5% 6.5% 9.5% 7.2%
7 YORW York Water Company 8.0% 4.0% 8.5% 6.8%
8 Average 7.57%
9
10 Reference:
11 Value Line Investment Survey(July 2024)
Case No.FLS-W-24-02
Exhibit No. 7
M.Rowell
Page 5 of 8

Falls Water Company
Cost of Capital Schedule 6
DCF Results
PROXY GROUP--DCF ANALYSIS
Current
Dividend Historical Dividend
Line Yield Per Share Yield DCF
No Proxy Group Companies (Dn/Pp) Growth Rates (D,/Pp) Rates
1 AWR American States Water Co. 2.14% 8.2% 2.2% 10.4%
2 AWK American Water Works Co.,Inc 2.35% 10.7% 2.5% 13.1%
3 WTRG Essential Utilities,Inc. 3.27% 9.3% 3.4% 12.8%
4 ARTNA Artesian Resources 3.60% 4.0% 3.7% 7.7%
5 CWT California Water Service Group 2.33% 6.8% 2.4% 9.2%
6 MSEX Middlesex Water 2.20% 7.2% 2.3% 9.4%
7 YORW York Water Company 2.18% 6.8% 2.3% 9.1%
8 Mean 2.58% 7.57% 2.68% 10.25%
9
Case No.FLS-W-24-02
Exhibit No. 7
M.Rowell
Page 6 of 8

Falls Water Company
Cost of Capital Schedule 7
CAPM Risk Premium
STANDARD&POOR'S 500 COMPOSITE
20-YEAR U.S.TREASURY BOND YIELDS
RISK PREMIUMS
[A] [B] [C] [D] [E]
Line 20-YEAR RISK
No. Year EPS BVPS ROE T-BOND PREMIUM
1 1977 $79.07
2 1978 $12.33 $85.35 15.00% 7.90% 7.10%
3 1979 $14.86 $94.27 16.55% 8.86% 7.69%
4 1980 $14.82 $102.48 15.06% 9.97% 5.09%
5 1981 $15.36 $109.43 14.50% 11.55% 2.95%
6 1982 $12.64 $112.46 11.39% 13.50% -2.11%
7 1983 $14.03 $116.93 12.23% 10.38% 1.85%
8 1984 $16.64 $122.47 13.90% 11.74% 2.16%
9 1985 $14.61 $125.20 11.80% 11.25% 0.55%
10 1986 $14.48 $126.82 11.49% 8.98% 2.51%
11 1987 $17.50 $134.07 13.42% 7.92% 5.50%
12 1988 $23.75 $141.32 17.25% 8.97% 8.28%
13 1989 $22.87 $147.26 15.85% 8.81% 7.04%
14 1990 $21.73 $153.01 14.47% 8.19% 6.28%
15 1991 $16.29 $158.85 10.45% 8.22% 2.23%
16 1992 $18.86 $149.74 12.22% 7.26% 4.96%
17 1993 $21.89 $180.88 13.24% 7.17% 6.07%
18 1994 $30.60 $193.06 16.37% 6.59% 9.78%
19 1995 $33.96 $216.51 16.58% 7.60% 8.98%
20 1996 $38.73 $237.08 17.08% 6.18% 10.90%
21 1997 $39.72 $249.52 16.33% 6.64% 9.69%
22 1998 $37.71 $266.40 14.62% 5.83% 8.79%
23 1999 $48.17 $290.68 17.29% 5.57% 11.72%
24 2000 $50.00 $325.80 16.22% 6.50% 9.72%
25 2001 $24.70 $338.37 7.44% 5.53% 1.91%
26 2002 $27.59 $321.72 8.36% 5.59% 2.77%
27 2003 $48.73 $367.17 14.15% 4.80% 9.35%
28 2004 $58.55 $414.75 14.98% 5.02% 9.96%
29 2005 $69.93 $453.06 16.12% 4.69% 11.43%
30 2006 $81.51 $504.39 17.03% 4.68% 12.35%
31 2007 $66.18 $529.59 12.80% 4.86% 7.94%
32 2008 $14.88 $451.37 3.03% 4.45% -1.42%
33 2009 $50.97 $513.58 10.56% 3.47% 7.09%
34 2010 $77.35 $579.14 14.16% 4.25% 9.91%
35 2011 $86.95 $613.14 14.59% 3.82% 10.77%
36 2012 $86.51 $666.97 13.52% 2.46% 11.06%
37 2013 $100.20 $715.84 14.49% 2.88% 11.61%
38 2014 $102.31 $726.96 14.18% 3.41% 10.77%
39 2015 $86.53 $740.29 11.79% 2.55% 9.24%
40 2016 $94.55 $768.98 12.53% 2.30% 10.23%
41 2017 $109.88 $826.52 13.77% 2.65% 11.12%
42 2018 $132.39 $851.62 15.78% 3.11% 12.67%
43 2019 $139.47 $914.49 15.79% 2.40% 13.39%
44 2020 $94.13 $927.52 10.22% 1.35% 8.87%
45 2021 $197.84 $1,008.02 20.44% 1.98% 18.46%
45 2022 $172.75 $1,024.56 17.00% 3.30% 13.70%
46 2023 $192.43 $1,106.21 18.06% 4.26% 13.80%
Average 13.90% 5.88% 8.02%
[A]:Diluted earnings per share on the S&P 500 Composite Index.
[B]:Book value per share on the S&P 500 Composite Index.
[C]:Average of current-and prior year[B]/current year[A].
[D]:Annual income returns on 20-year U.S.Treasury bonds.
[E]: [C]-[D]
Sources for[A]and[B]:
Standard&Poor's 500 Earnings and Book Value Per Share:
https://vcharts.com/indicators/reports/sp 500 earnings Quarterly data is annualized
bSVs://ycharts.com/indicators/sandp 500 book value per share
Source for[D]: U.S.Department of the Treasury
bSVs://www.treasury og v/Pages/default.aspx
Case No.FLS-W-24-02
Exhibit No. 7
M.Rowell
Page 7 of 8

Falls Water Company
Cost of Capital Schedule 8
CAPM Results
CAPITAL ASSET PRICING MODEL--PROXY COMPANY COST RATES
Line Risk Free Risk Beta X CAPM
No Proxy Group Companies Rate BETA Premium Risk Premium Rates
1 AWR American States Water Co. 4.27% 0.70 X 8.02% = 5.61% 9.89%
2 AWK American Water Works Co.,Inc. 4.27% 0.95 X 8.02% = 7.62% 11.89%
3 WTRG Essential Utilities,Inc. 4.27% 1.00 X 8.02% = 8.02% 12.29%
4 ARTNA Artesian Resources Corp. 4.27% 0.75 X 8.02% = 6.01% 10.29%
5 CWT California Water Service Gp. 4.27% 0.75 X 8.02% = 6.01% 10.29%
6 MSEX Middlesex Water 4.27% 0.75 X 8.02% = 6.01% 10.29%
7 YORW York Water Company 4.27% 0.82 X 8.02% = 6.59% 10.86%
8 Average 10.83%
9
10 Risk Free Rate:20 year Treasury Bonds
11 18-Sep-24 4.08%
12 19-Aug-24 4.23%
13 18-Jul-24 4.51%
14 Average 4.27%
15 20 Year T Bonds Source
16 https://home.treasury.gov/resource-center/data-chart-center/interest-rates/-FextView?type=daily treasury long term rate&field tdr date value=2024
17 Beta:Value Line Reports July 2024
Case No.FLS-W-24-02
Exhibit No. 7
M.Rowell
Page 8 of 8

FALLS WATER CO., INC.
CASE No. FLS-W-24-02
Exhibit 8
Matt Rowell CV

Matthew Rowell
Professional History
• Northwest Natural Water April 2024 to Present
Water Rates and Regulatory Manager
Prepare and manage water rate cases and other regulatory filings across five states.
• Global Water Resources,Inc.April 2021 to April 2024
Manager of Rates and Regulatory Affairs
Provide expert testimony and strategic input in support of the company's rate cases and other
regulatory issues. Analyze the financial and regulatory aspects of potential acquisitions.
• Principal, Insight Utility Consulting,LLC February 2017 to April 2021
Assist clients with all regulatory issues before the Arizona Corporation Commission. Clients
include three of the largest water utilities in Arizona.
• Arizona Corporation Commission January 2015 to February 2017
Policy Advisor to Commissioner/Chairman Doug Little
Advised the Commissioner/Chairman on multiple and varied regulatory issues. Assisted in
preparing documents such as Policy Papers and Amendments to Recommended/Proposed
Orders. Assisted in setting Open Meeting agendas and dealing with the administration of
Open Meetings.
• Principal,Desert Mountain Analytical Services,LLC (DMAS) 2007—2015
DMAS was a small consulting firm specializing in utility finance, ratemaking and other
regulatory issues. DMAS' clients ranged in size from large multinational corporations to
small rural utilities.
• Arizona Corporation Commission 1996 to 2007
Chief Economist(July 2001 to February 2007)
Analyzed and produced testimony or staff reports on a wide variety of utility issues.
Supervised a staff of nine professionals with similar responsibilities.
Economist(October 1996 to July 2001)
Analyzed and produced testimony or staff reports on a wide variety of utility issues.
Education
• Master of Science and ABD Economics, 1995, Arizona State University.
Successfully completed all course work and exams necessary for a Ph.D. Course work
included an emphasis in industrial organization and extensive experience with statistical
analysis, public sector economics, and financial economics.
• Bachelor of Science Economics, 1992, Florida State University.
Minors: Philosophy, Statistics.