20050606Vol IV Tech Hearing.pdf

ORIGINAL
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF UNITED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SEVICE IN
THE STATE OF IDAHO.
) CASE NO. UWI-04-
) TECHNI CAL HEARING
HEARING BEFORE
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COMMISSIONER PAUL KJELLANDER (PRESIDING)
COMMISSIONER MARSHA H. SMITH
COMMISSIONER DENNIS S. HANSEN
PLACE:Commission Hearing Room
472 West Washington Street
Boise, Idaho
DATE:May 25, 2005
VOLUME IV -' Pages 558 - 804
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..I L
HEDRICK
COURT REPORTING
cfetW-V tk Mtr.fratfllf dr.fu 1978
POST OFFICE BOX 578
BOISE, IDAHO 83701
208-336-9208
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For the Staff:WELDON STUTZMAN , Esq.
DONOVAN WALKER, Esq.
Deputy At torneys General
472 West Washington
Boise , Idaho 83702
For Uni ted Water:McDEVITT & MILLER LLP
by DEAN J. MILLER , Esq.
420 West Bannock Street
Boise , Idaho 83702
For Ci ty of Boise:DOUGLAS K. STRI CKLING, Esq.
Boise City Attorney's Office
150 North Capitol BoulevardBoise, Idaho 83702
For Idaho Rivers Uni ted:WILLIAM M. EDDIE , Esq.
Advocates for the West
Post Office Box 1612Boise, Idaho 83701
For Community ActionPartnership:BRAD M. PURDY , Esq.
Attorney at Law
2019 North Seventeenth StreetBoise, Idaho 83702
For Scott L. Campbell:SCOTT L. CAMPBELL , E sq.
At torney at Law
101 South Capitol Boulevard,
Tenth FloorBoise, Idaho 83702
HEDRICK COURT REPORTING
P. O. BOX 578 , BOISE , ID
APPEARANCES
83701
WITNESS
I N D E X
EXAMINATION BY PAGE
Kathy Stockton
(Staff)
Patricia Harms
(Staff)
Rick Sterling
(Staff)
Carol J. Cooper
(Staff)
Dave Degann
(United Water - Rebuttal)
Carolee Hall(Staff)
Randy Lobb
(Staff)
Mr. Miller (Cross)Mr. Walker (Redirect)558
565
Mr. Walker (Direct)
Prefiled Direct
Mr. Miller (Cross)
566
569
584
Mr. Stutzman (Direct)
Prefiled DirectMr. Eddie (Cross)Mr. Strickl ing (Cross)
Mr. Campbell (Cross)
Mr. Miller (Cross)
Commissioner Hansen
Commissioner Smith
Commissioner Kj ellanderMr. Stutzman (Redirect)
590
595
662
666
669
672
698
701
707
708
Mr. Stutzman (Direct)
Prefiled Direct
Mr. Miller (Cross)Mr. Eddie (Cross)Mr. Purdy (Cross)
Commissioner Hansen
709
711
721
723
724
727
Mr. Miller (Direct)
Prefiled Rebuttal
Mr. Walker (Cross)
Commissioner Smi
729
735
748
752
Mr. Stutzman (Direct)
Prefiled DirectMr. Stutzman (Direct)
754
757
773
Mr. Stutzman (Direct)
Prefiled Direct
Mr. Purdy (Cross)Mr. Eddie (Cross)
776
779
792
799
HEDRI CK COURT REPORTINGP. O. BOX 578 , BOISE , ID
INDEX
83701
NUMBER PAGE
Premarked
Admi t ted 584
For the Staff:
110.Calculation of Revenue
Requirement
Premar ked
Admitted 584
111.13 -Month Average Rate Base
Premarked
Admi t ted 584
112 .Staff 13 -Month Average Plant
in Service Adj ustment
Premar ked
Admitted 584
113 .Staff Accumulated
Depreciation Amortization
114 .Staff Calculation of 13 -Month PremarkedAverage Advances Admi t ted 584
HEDRICK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
115.13 -Month Contributions in
Aid of Construction
Premarked
Admitted 584
116 .Details of Adjustment to
Depreciation Expense
Premarked
Admitted 584
117.Uni ted Waterworks , Inc. Premarked
Consolidated Capital Structure Admitted 773
118 .Cost of Long Term Debt Premarked
Admitted 773
119.Discounted Cash Flow Model Premarked
Admitted 773
121.Details of Adjustments to
Operation and Maintenance
Premarked
Admitted 662
122.Details of Adjustments to
Opera t ion and Maintenance
Premar ked
Admi t ted 662
123.Details of Adj ustments to
Operation and Maintenance
Premarked
Admitted 662
124 .Details of Adjustments to
Operation and Maintenance
Premarked
Admitted 662
EXHIBITS
125.Details of Adjustments to
Operation and Maintenance
Premarked
Admi t ted 662
126.Normalizing Adjustments to
Opera t ing Revenue
Premarked
Admi t ted 662
127.Existing & Proposed Tariffs Premar ked
Admi t ted 662
128.United Water Idaho
Complaints 2002-2004
Premar ked
Admi t t ed 721
129.Comparison of Large Water
Companies Premar ked
Admitted 721
130.Sheet No.4 4 Premarked
Admi t t ed 721
131.Settlement of the Overall
Weighted Cost of Capi tal Marked
Admi t ted 774
774
HEDRICK COURT REPORTING
P. O. BOX 578 , BOISE , ID 83701
EXHIBITS
i',
BOISE , IDAHO , WEDNESDAY , MAY 25, 2005, 1:20 P.
KATHY STOCKTON
produced as a wi tness at the instance of the Staff , having been
previously duly sworn , resumed the stand and was further
examined and testified as follows:
COMMISSIONER KJELLANDER:Okay, we'll go back on
the record, and before we broke for lunch I believe we were
ready for Mr. Miller to begin his cross-examination of the
wi tness
MR. MI LLER :Thank you, Mr. Cha i rman .
CROSS - EXAMINATION
BY MR. MILLER:
One minute here.
It's my impression that cross-examination on the
equity gross-up on AFUDC would not be particularly riveting, so
I intend to pass over that section.
COMMISSIONER KJELLANDER:Thank you.
BY MR . MILLER:Al though, we wi 11 have some
things to say about that when Mr. Healy testifies in rebuttal.
I would like though to ask some questions,
558
HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701
STOCKTON (X)
Staff
Ms. Stockton , with respect to the American Jobs Creation Act of
2004 .
Okay.
What , in general , do you understand the purpose
of that Federal tax measure to be?
I believe the intent of Congress was to create a
level playing field for American companies as far as foreign
country - - competing wi th foreign countries to stimulate the
economy, things of that nature, satisfy their consti tuents at
home.
Provide an incentive for companies to make
domestic investments?
Yeah.Yes.
Is there a school of thought that because the
purpose of the Act is to incent companies to make investments
of the nature that become qualified investments, is there a
school of thought that it's appropriate for any deduction
benefits to remain with the Company so that the full effect of
the incentive is maximized , recognizing that if all those tax
benef i ts were passed through to customers, the incentive would
be diminished or diluted?
There would certainly be that school of thought.
But I would like to point out that in the rate making process,
it's the customers that pay the taxes , and so any tax benefits
that - - any credi ts that there are, it's my posi tion that those
559
HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701
STOCKTON (X)
Staf f
should also flow through to the customers Slnce they pay the
taxes through their rates.
But the Company would be left with no net benefit
it sel f as a resul t of undertaking the act i vi ties that are
encouraged by the Act under that full flow-through approach?
Well , I know that in this first
- -
the first two
years, it I s three percent, the credi t is three percent.
accelerates all the way up to nine percent.And what Il
proposing in this case is a very conservative amount for the
credi t , so that to the extent that the Company actually did
recel ve a greater credi t and did not come in for a rate case In
the subsequent years , then they would, in fact, have that
potential for investment.
Well , let's turn to the question of the , as you
characterize, conservative treatment.To compute the amount of
the tax benefit , the Company will have to make an allocation
between the production of water and the transmission of water.
Is that not correct?
That's correct.
Because there is a credit for production but not
for transmission.
Would you agree that up until now , there has been
no reason for the Company to attempt to allocate its revenues
between production and transmission for tax purposes because
there has never previously been this distinction?
560
HEDRI CK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
STOCKTON (X)
Staff
I could agree to that.
Is it also correct that until the U. S. Department
of Treasury promulgates regulations or provides guidance , it is
unknown what method the Department will approve for allocation
of revenue between production and transmission?
That I S true , it is not known at this time what
methodology the IRS will eventually settle upon , but that
doesn't mean that a wise business decision wouldn't be made to
begin studying that , and I would imagine that the tax
department, if not here in Boise but certainly back in
New Jersey, is certainly looking at the effects of the entire
American Jobs Creation Act and specifically the production
credi ts.This is a new credit, but it is a credit that they
are entitled to , and there will be an amount that they receive
even though the IRS hasn't specifically come out wi th a
defini ti ve way of calculating it.
In Response to a Production Request along these
lines, did the Company say to the Staff:It is premature to
determine how the domestic production or tax credit will impact
Uni ted Water Idaho because the U. S. Treasury has yet to
promulgate regulations that will give guidance?
Yes , that was a Company Response, and I included
it in my testimony.
And I just read it from your testimony.
Okay.
561
HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701 STOCKTON (X)
Staff
The Staff in Exhibit 1-something-or-other --
102 - - comes up with a proposed method for allocating revenue
between production and transmission.Has the Staf f in any way
asked the Internal Revenue Service to review its proposed
allocation method to know if it's likely to be a method within
a range ikely to be approved by the Internal Revenue
Service?
, the Staf f has not talked to Internal Revenue
Service about this particular way of calculating an estimate
for what the production credi t would be , but the Company has
admi t ted that , yes , that this will apply to Uni ted Water Idaho,
but the Company did not provide some sort of calculation of
their own.
And that's because it's yet to recel ve guidance
from the Internal Revenue Service on how to do it.Isn t that
correct?
If that's the Companyl s reason for not providing
their own calculation , then I would agree with that.
Didn I t the Company say to you in Response to your
Production Request:Guidance will be provided through U. S.
Treasury regulations that have yet to be released?
Yes, they did state that guidance would be
provided, but that still doesn't mean that there isn't going to
be an effect that there won t be a production credi The
Company didn't say:This doesn't apply to us and the dollar
562
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 STOCKTON (X)
Staff
amount will be zero.
But it is true , is it not, that at this time, the
allocation method to be followed as prescribed by the Internal
Revenue Service is not known because the Internal Revenue
Service has not prescribed the method?
Yes, it's true , they have not fully prescribed
the method; however , a wise business company would probably
have been already working on their first quarter results of
operations, and to that extent they would have made some
attempt, I would imagine, to determine what the impact of the
credi t would be for reporting purposes
- -
for recording
purposes - - so that they could approve throughout the year the
amount that they fel t they would be receiving for the
product ion credi t
That is somewhat speculative on your part , isn'
it, to try think what might be occurlng inside the Company when
it has told you that they're wai ting on guidance from the
Treasury?
It could be speculative, I guess.I would
imagine though that most companies have started to look at it
and say, How is this going to affect us, how much should we
accrue , how should we account for this.
But you , of your own knowledge , do not know
anything more than what the Company has told you in Response to
your Production Request?
563
HEDRI CK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
STOCKTON (X)
Staff
That is
That is correct, is it not?
Tha t is correct.
All right.Just to put one final exclamation
point on that, I take it you're not aware specifically of what
any other companies are doing internally to prepare for
implementation of the Act?
I don I t know what other companles are doing
internally.I do know that other companies have made mention
to Staff that they would be willing to accept a calculation for
the production credit.
Would that be other regulated water companies?
Not to my knowledge.
All right.And the allocation of income between
production of water and transmission of water compared, for
example , to the production of electricity and the transmission
of electrici ty may be entirely different things, couldn I
they?
Yes , they may.
MR. MILLER:I think those are my questions for
this wi tness.Thank you , Mr. Cha i rman .
COMMISSIONER KJELLANDER:Thank you , Mr. Miller.
Let I S see if we have any questions from
Mr. Campbell.
MR . CAMPBELL:No questions.Excuse me.
564
HEDRICK COURT REPORTING
P. O. BOX 578, BOISE , ID 83701
STOCKTON (X)
Staf f
questions.Thank you.
MR. STRICKLING:No quest ions.
COMMISSIONER KJELLANDER:Mr. Eddie.
MR. EDDIE:No quest ions.
COMMISSIONER KJELLANDER:Mr. Purdy.
MR . PURDY:I have none, thanks.
COMMISSIONER KJELLANDER:Are there questions
from members of the Commission?
Is there any redirect?
MR. WALKER:Briefly, Mr. Chairman.
REDIRECT EXAMINATION
BY MR. WALKER:
Is it common rate making practice for this
Commission to recognize tax credits for all utilities even when
the intent is to stimulate investment?
It I S my understanding, yes , that's true.
Will the Company be required to calculate the
credit using a reasonable method even if the guidelines are not
prescribed by the time the tax returns are due?
Yes, I would think they would have to.If they
want the credi t, they'd have to figure out a way to calculate
it.
MR.WALKER:Nothing further.
565
HEDRICK COURT REPORTING
BOX 578,BOI SE 83701
STOCKTON (Di)
Staff
COMMISSIONER KJELLANDER:Okay.Thank you
Ms. Stockton.
(The wi tness was excused.
COMMISSIONER KJELLANDER:I believe we're ready
for Staff I s next wi tness.
MR. WALKER:The Staff calls Patricia Harms.
PATRICIA HARMS,
produced as a witness at the instance of the Staff , being first
duly sworn , was examined and testified as follows:
DIRECT EXAMINATION
BY MR. WALKER:
Could you please state your name for the record?
My name is Patricia Harms.
And could you tell us where you're employed and
In what capacity?
m employed at the PUC as a senior audi tor.
And did you prepare and prefile written testimony
for this case?
Yes, I did.
And that testimony consists of 13 pages?
Yes, it does.
And you do have several corrections to your
566
HEDRI CK COURT REPORTING
P. O. BOX 578, BOISE , ID 83701
HARMS (Di)Staff
prefiled testimony?
Yes, I do.
Could you briefly tell us the nature and the
reasoning for those changes?
The revised
- -
revisions to my testimonyYes.
are associated with revisions to Staff witnesses English
Stockton , and Sterling, and incorporate the settlement on the
weighted cost of capi tal.
In addition , I have also made an adjustment
specific to my testimony associated with the Company'
accounting system upgrade.In my original testimony, I was not
proposing an adj ustment in this case because I was aware that
the accounting system was operating and in use, but was
awaiting additional information from the Company as to the
allocation from their affiliate of cost associated with that
The Company has not provided further information onprogram.
that.As a resul t, I'm now recommending that cost in this case
be removed, and those costs are approximately 93,000 in plant
In service and related depreciation and accumulated
depreciation.
And did you also have some exhibits with your
test imony?
Yes, I did.I had Exhibits 110 through 116.
And you prepared the corresponding changes to
your exhibits?
567
HEDRI CK COURT REPORTING
O. BOX 578, BO IS E , I D 83701
HARMS (Di)
Staff
Yes, I did.
MR . WALKER:Mr. Chairman, we would ask if you
prefer us to go through and make each correction through the
testimony; or that testimony, the corrected pages, have been
provided to the court reporter, and I've handed out a list of
changes as well as the revised exhibits, if you would prefer to
waive going through line by line in the testimony.
COMMISSIONER KJELLANDER:I personally would
prefer to waive that, but let's see what the parties think.
it clear enough to you, easy enough to follow?Mr. Purdy.
MR . PURDY:Yeah, that's fine.
COMMI S S IONER KJELLANDER:Anyone obj ect?Then
let I S move forward with that.
BY MR. WALKER:Ms. Harms, if I were to ask you
the questions in your prefiled testimony, would your answers be
the same with the corrections you have made?
Yes.
MR . WALKER:I would move that the testimony of
Patricia Harms be spread on the record as if read, and that the
Exhibi t s 110 through 116 be admi t ted into the record.
COMMISSIONER KJELLANDER:Thank you.So wi thou
objection , we'll spread the testimony across the record as
read, and admit the associated exhibits.
(The following prefiled direct testimony
of Ms. Harms is spread upon the record.
568
HEDRI CK COURT REPORTING
O. BOX 578, BOISE , ID
HARMS (Di)
Staf f83701
Please state your name and address for the
record.
My name is Patricia Harms.My business address
lS 472 West Washington Street, Boise, Idaho.
By whom are you employed and in what capaci ty?
I am employed by the Idaho Public Utilities
Commission (Commission) as a Senior Auditor.
Give a brief description of your educational
background and experlence.
I graduated from Boise State University, Boise,
Idaho in 1981 with a B.A. degree in Business
Administration, emphasis in Accounting.I am a Certified
Public Accountant licensed by the State of Idaho.Prior
to joining the Commission Staff in 2000, I was employed
by the State of Alaska as an In Charge Audi tor and
performed both financial and performance audi ts
governmental agencies.I have attended many seminars and
classes involving audi ting and accounting.While at the
Commission I have audited a number of utilities including
water, electric, gas and telephone utilities and provided
comments and testimony in a number of cases that dealt
wi th general rates, hook-up fees, accounting issues, and
other regulatory issues.I have also completed the
National Association of Regulatory Utility Commissioners
(NARUC) annual regulatory studies program at Michigan
CASE NO. UWI-04-
04/06/05 (Di)HARMS, P.
STAFF
569
State Uni versi ty.I also attend meetings of NARUC'
Staff Subcommittee on Accounting and Finance.I am a
member of the State/Federal Joint Oversight team for the
Qwest 272 Audit.
What is the purpose of your testimony?
My testimony summarizes Staff adj ustments, rate
base, revenue requirement and revenue requirement
lncrease proposed in this case.
What exhibi ts are you sponsoring?
I am sponsoring Revised Exhibit Nos. 110
through 113 and 116.I am also sponsoring Exhibit Nos.
114 and 115.Revised Exhibit Nos. 110 and 111 outline
Staff's proposed revenue requirement, rate base and
itemize Staff's adjustments to the United Water Idaho,
Inc.(Uni ted Water UWI; Company) adj usted test year
operating resul ts and the Company s recorded rate base.
Staff Revised Exhibit Nos. 112, 113, 116 and
Exhibit Nos. 114 and 115 calculate rate base components
based on a 13 -Month average and identifies the resulting
adj ustments to the Company s recorded amounts.
What is the purpose of Staff Revised Exhibit
No. 110?
This exhibit shows the overall net operating
income requir~ment and revenue requirement deficiency for
the Company as calculated by Staff.
CASE NO. UWI-04-
REVISED OS/24/05 570
HARMS , P (Di)
STAFF
What revenue requirement does Staff propose?
The total net operating income requirement
proposed by Staff is $10,500,809 as shown on Revised
Exhibit No. 110, line Staff's Adj usted Net Operating
Income for the Company is $9,665,261.This results in an
overall rate increase of $1,406,227 or 4.5%.The Company
has requested an overall rate increase of $6,767 870 or
21.46%.
How is this revenue requirement calculated?
Staff calculated the revenue requirement using
a 13-Month Average Rate Base of $125,652,848, an 8.357%
overall rate of return described in the Settlement of the
Overall Weighted Cost of Capital filed May 23, 2005, and
Staff's adjusted net operating income of $9,665 261.
Please describe the reason for a 13 -Month
average rate base.
As described in Staff Policy witness Lobb's and
Staff witness Carlock's testimony, using a 13 -Month
average rate base reduces the expense/revenue mismatch
identified by the Commission that occurs when the costs
of plant adjustments are added as if they were in place
for a whole year without adding any benefits.
Please describe this expense/revenue mismatch.
In Order No. 29505 entered in Case No.
IPC-03-13, the Commission stated it "expects all
CASE NO. UWI -W- 04-
REVISED OS/24/05
(Di)HARMS , P.
STAFF
571
19
utilities to attempt to identify expense saving and
revenue producing effects when proposing rate base
CASE NO. UW1-04-
REVISED OS/24/05 572
HARMS, P. (Di)
STAFF
adjustments for maJor plant additions.Page 7.
In this case, did Uni ted Water add any plant
adjustments to rate base as if they were in place for a
whole year?
United Water added to Plant in ServiceYes.
approximately $30 Million in capital project expenditures
estimated through May 31, 2005 as identified in Witness
Rhead's Exhibit No.8 dated October 21, 2004.These
costs include projects related to the Company s Columbia
Water Treatment Plant (CWTP) and approximately 90 other
proj ects.
Did Staff add any plant' adjustments to rate
base as if they were In place for a whole year?
Yes.The Company s CWTP In-Service Additions
per Wi tness Rhead' s March 22 , 2005 updated Exhibi t No.
were added to rate base as if they were In place for a
whole year.Staff accepts this adj ustment In addition
Staff also annualized costs associated wi th CWTP-related
projects completed (costs closed to Plant in Service)
during the test year (August 1, 2003 through July 31,
2004) The adjustment amount to annualize costs for CWTP
totals $23,927 985.
Do these costs represent the total Company
investment in CWTP?
There are many CWTP-related proj ects thatNo.
CASE NO. UWI-04-
04/06/05 (Di)HARMS , P.
STAFF
573
were completed (costs closed to Plant in Service) before
the beginning of the Company s test year.Therefore,
those costs were already included in rate base for the
entire year.Staff witness Sterling thoroughly discusses
CWTP in his testimony.
Did the Company identify expense saving and
revenue producing effects associated with CWTP?
Yes.The Company proposed Adjustment No.
that decreased power and chemical expense at wells as a
resul t of the operation of CWTP.According to wi tness
Healy, wi th the operation of CWTP the Company will rely
less on ground water resources.The Company al so
proposed adj ustments increasing expenses as a resul t of
operating CWTP for items such as increased power,
chemicals, purchased water and staffing costs (Company
Adj ustment Nos. 1 and 15) .In addition, the Company
proj ected customer growth through May 31, 2005 and
increased revenue accordingly.Correspondingly, the
Company increased postage expenses, billing costs, and
operation and maintenance costs associated wi th customer
growth (Company Adj ustment Nos. 18, 19, and 30) .
Staff witness English's testimony discusses
these adj ustments in detail.
Does the Company propose any other post test
year addi t ions?
CASE NO. UWI-W-04-4
04/06/05
(Di)HARMS, P.
STAFF
574
Yes.The Company proposed a test year of
August 1, 2004 through July 31, 2004 and essentially
proformed its rate base through May 31, 2005 on a year-
end basis.(Wi tness Healy Exhibi t No.1, Page 1 of 9)
Does Staff accept the Company s adjustments to
rate base as proposed in wi tness Healy Exhibi t No.
Page 1 of 9?
No.As discussed earlier, except for CWTP,
Staff has prepared rate base on a 13 -month average.
13 -Month Average Rate Base
What activity is included in Staff's 13-month
ra te base average?
Staff's 13 -month average rate base
calculated by averaging the monthly balances from July
31, 2003 through July 31, 2004 for Plant in Service,
Customer Advances, and Contributions in Aid
Construction.Except for CWTP, post-test year activity
through December 31 , 2004 (Exhibit No.8) is treated as
if it occurred in the last month of the test year or as
of July 31, 2004.As a resul t, that acti vi ty has a
weighting of one-thirteenth (1/13) in the 13-month
average.
What other components of this case are affected
by the 13 -month average of Plant in Service related
accounts?
CASE NO. UWI -W- 04-
04/06/05
(Di)HARM S, P.
STAFF575
Depreciation Expense, Accumulated Depreciation
and Amortizations, and Accumulated Deferred Federal
Income Taxes.
How does this 13 -month average compare to the
amounts contained in the Company s accounting records for
July 31 , 2004?
The 13-month average increases July 31, 2004
Utility Plant in Service by $17 945,652 (Revised Exhibit
No. 112 , Column H), decreases Customer Advances by
$195,891 (Exhibit No. 114, Column G, Line 17), decreases
Contributions in Aid of Construction by $1,467 382
(Exhibit No. 115, Line 13), and increases Accumulated
Depreciation and Amortizations by $1 826,956 (Revised
Exhibi t No. 113, Column G, Line 19) .Staff's proposed
Depreciation Expense is $507 207 (Revised Exhibit No.
116, Page 1 , Line 6) lower than that proposed by the
Company in Witness Healy s Adj ustment No.3 7 .
How does the revenue requirement on a 13 -Month
Average Rate Base compare to the revenue requirement
prepared by the Company through May 31 , 2005?
The 13 -Month Average Rate Base proposed by
Staff (Revised Exhibit No. 111, Column C) is
approximately $11 million lower than the May 31 , 2005
Rate Base filed by the Company.Solely due to the
difference in rate base and the related Depreciation
CASE NO. UWI-04-4
REVISED OS/24/05
(Di)
576
HARMS, P.
STAFF
Expense, Staff's revenue requirement is approximately
million lower than the Company
Columbia Water Treatment Plant Adjustments
What adjustments are proposed to CWTP?
Revised Exhibit No. 111, Column D eliminates
costs associated with CWTP land and building costs that
Staff witness Sterling determined as not used and useful
for the current operation the plant.
discussed his testimony Staff witness
Sterling determined that approximately 25%the land
and approximately 15% of the building associated with
CWTP is for future use and therefore should not earn a
return.This adj ustment reduces Plant in Service by
$533,084 (Revised Exhibit No. 111, Column D) .
Does Staff propose to remove Depreciation
Expense and Accumulated Depreciation associated with the
building Plant Held for Future Use?
No.In Case No. UWI-97-6 the Commission
denied the Company a return on the Boise River Intake
(BRI) proj ect that was not used and useful.Howeve r, the
expense allowance associated wi th BRI WdS approved to
provide for the recovery of the Company s investment.
Order Number 27690.
Should the Company earn Allowance for Funds
Used During Construction (AFUDC) until the land and
CASE NO. UWI -W- 04-
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HARM S , P.
STAFF
(Di)
building become used and useful?
No, it is not under construction and should not
earn a return as if it were used and useful or as if
were under construction.In Case No. UWI-97-6 the
Company requested that the Commission permi t continued
accrual of AFUDC on BRI.The Commission in that case did
not grant continued accrual of AFUDC.Order No. 27690.
The same treatment is appropriate in this case.In the
al ternati ve , the full amount could be left in Plant Held
for Future Use.When the plant is used and useful
would be rate based at that time wi th the depreciation
also starting at the same time.Staff believes its
recommended treatment is preferable.
What other adjustment is proposed to CWTP?
Staff proposes that costs associated with a
cancelled purchase order be removed from the Company
ra te base.In December 2002 the Company was billed and
accrued costs for a portion of CWTP's membrane system.
In August 2003 the purchase order associated with this
transaction was terminated.In February 2004 and October
2004 credi ts were posted to the CWTP proj ect which
removed the financial effect of the transaction except
the Allowance for Funds Used During Construction (AFUDC)
that accrued during the time period before funds were
received and/or written off associated with this
CASE NO. UWI-04-
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STAFF
578
transaction.Staff adjustment (Revised Exhibit No. 111,
Column E) removes $258,772 AFUDC from Plant in Service
and the related Depreciation Expense and Accumulated
Depreciation of $12,939.
Are there any other adjustments related to
CWTP's membrane filtration system?
Yes.Staff proposes that the Commission order
the Company to depreciate the CWTP membrane filters over
a 10-year life (10% depreciation rate) The Company in
this case has proposed depreciating the membrane filters
over a 7-year life (14% depreciation rate) When Staff
toured the CWTP facility the CDM representative with
extensive membrane filtration experience stated that the
membrane filters are lasting 10 years in many plants.
Given that information , Staff has proposed reducing
Depreciation Expense and Related Accumulated Depreciation
by $20 000 (Revised Exhibit No. 111, Column F)
Wa ter Rights
Does Staff propose any adjustments related to
water rights?
Yes.Staff proposes to adj ust water rights to
remove costs not used and useful.Staff witness
Sterling s testimony discusses this in detail.The
reductions in rate base are $677,452 for the Initial
Butte water right, $332,748 for the Integrated Municipal
CASE NO. UWI-04-
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STAFF
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579
Application Package and $29,697 for a Ground Water
Recharge Permit (Revised Exhibit No. 111 , Columns G
through I)
Staff witness Stockton proposes removlng AFUDC
from the costs of water right proj ects because the nature
of water rights does not justify accrual of AFUDC.
Are there any other adjustments associated with
Allowance for Funds Used During Construction?
Yes.Staff witness Stockton proposes removing
a portion of the AFUDC the Company accrues for an equity
tax gross up.Staff witness Stockton s adjustment
related to AFUDC reduces Plant in Service by $786,835,
Depreciation Expense by $13,482 and Accumulated
Depreciation by $7 071 (Revised Exhibit No. 111 , Column
J)
Taxes
Does Staff propose any adjustments related to
taxes?
Yes.Staff witness Stockton calculated the
effect of Staff's proposed case including the 13 -Month
Average Rate Base to Accumulated Deferred Federal Income
Taxes (ADFIT)The adjustment (Revised Exhibit No. 111,
Col. B , Line 7) increases ADFIT by $2 382,716.
Staff witness Stockton also proposes an
adjustment to include the effect of a production tax
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STAFF
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580
credi t related to the Jobs Creation Act of 2004.Staff
witness Stockton discusses in further detail this
adjustment reducing Federal Income Taxes by $87 034
(Revised Exhibit No. 111, Column K) .
Staff wi tness Stockton also increased Federal
Income Taxes by $313,020 and increased State Income Taxes
by $117 659 due to the debt interest associated with the
rate base adjustments proposed by Staff (Revised Exhibit
No. 111, Column 0)Staff witness Stockton s testimony
describes the need for these adjustments.
Q. Does Staff witness Stockton propose any other
adjustments?
Staff witness Stockton decreasedYes.
Operating Expenses by $20 678 to remove the non-regulated
portion of M&S (United Water Management and Services)
Fees (Revised Exhibit No. 111, Column L)
Staff wi tness Stockton also incorporated into
this case $5,628 (Revised Exhibit No. 111, Column M) In
revenue resulting from the sale of the Carriage Hill non-
contiguous water system (Case No. UWI-04-
Operating Expense Adjustments and Deferred Debits
Please describe the entries in Revised Exhibit
No. 111, Column
These entries summarlze adjustments prepared by
Staff witness English and Staff witness Sterling and are
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described in detail in the respective testimony.
Are there any other items that Staff needs
further information from the Company?
Yes.Staff has requested documentation
associated with the accounting software upgrade that
started processing financial data of the Company on
October 1, 2004.The Company has included approximately
$1,200,000 in rate base costs associated with this
program on its Exhibi t No.These costs are allocated
from the Company s Corporate Office.While Staff has
received a general overview of how these costs are
allocated to UWI and has been provided the Capital
Expenditure Authorizations that were approved by the
Company in March 2005 , no detailed allocation
spreadsheets have been provided.Staff had not
originally proposed an adj ustment in this case related to
this cost because the software program lS in place and
operating.However, Staff has been unable to verify the
allocation of these costs and therefore cannot verify the
actual amounts included in rate base until the additional
documentation is received.No further information has
been provided by the Company, therefore this cost has
been removed from the 13 -month average rate base in
Column B on Revised Exhibit No. 111.
Does this conclude your direct testimony in
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STAFF
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this proceeding?
Yes, it does.
CASE NO. UWI -W- 04-
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STAFF
13
(The following proceedings were had in
open hearing.
(Staff Exhibit Nos. 110 through 116,
having been premarked for identification , were admitted into
evidence.
MR . WALKER:The witness is available for
cross-examination.
COMMISSIONER KJELLANDER:
start with Mr. Purdy.
MR . PURDY:No quest ions.
Okay, thank you.We'll
COMMISSIONER KJELLANDER:
Mr. Eddie.
MR. EDDIE:No quest ions.
Let I S move
Mr. Strickl ing
MR. STRICKLING:No questions.
HEDRI CK COURT REPORTING
P. O. BOX 578, BOISE , ID 83701
COMMISSIONER KJELLANDER:
COMM IS S lONER KJELLANDER:Mr. Campbell.
MR . CAMPBELL:None, thank you.
COMMISSIONER KJELLANDER:
Mr. Miller.
CROSS - EXAMINATION
BY MR. MI LLER :
And now we'll move to
I guess I have, one area of clarification with
respect to the changes that have just been submitted.
584
I assume
HARMS (X)Staff
the ones that relate to the weighted cost of capi tal should be
relatively easy to identify and follow.I did not follow your
testimony with respect to some adjustment that you previously
considered but held off making pending further information and
now are proposing to make.Could you explain to me or to us
what you're talking about?
Okay.In my original testimony, on page 13, I
had discussed the need for additional information from the
Company to support an allocation from one of the other United
Water companies to the United Water Idaho associated with their
accounting software upgrade, and since I knew it was in service
and was expecting additional information on that, I did not
prepare an adj ustment And since that date I haven't received
any additional information to support that allocation from the
Company s corporate office, and as a result, I've removed that
from rate base.
And in my original testimony, I identified that
the amount the Company included on Scott Rheadl s Exhibit No.
was approximately 1.2 million.Because of the 13 -month average
rate base, that adjustment becomes approximately $93,000 as
this is plant that was placed in service after the end of the
test year.
And where would we see that adj ustment on your
revised exhibits?
It is in revised Exhibit 111 , and it is embedded
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HARMS (X)Staff83701
in Column B, I believe it is.Column B, plant in service,
accumulated depreciation and depreciation expense, was changed
as a result of that adjustment.
line
Which exhibit?I m sorry.
m sorry.That was revi sed Exhibi t No. 111.
Uh-huh.
And , for example, utility plant in service on
Column B , was originally an adjustment of -- of
approximately 18,038,678, and now that amount is the
945,652.
Apologize for the slow pace here.This is taking
a minute to integrate.
Okay, so as I understand it, the lssue with
respect to this software accounting upgrade is not a question
of whether it's used and useful?
Correct.
You actually went to the Company offices,
verified that it's there, saw it working.Is that correct?
Yes , it is.
The unanswered question is
- -
has to do with the
allocation of costs between United Water Idaho and somebody
else.Is that --
Correct.
- -
the essence of it?
Okay.I wanted to ask you someThank you.
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HARMS (X)Staff83701
general questions about the concept of matching of revenues,
rate base, and expenses, which sort of permeates through your
testimony.Do you understand or do I understand correctly that
in an effort to comply with the Commission's directives and the
Idaho Power Company case and the Avista case regarding
matching, that the Company used annualized customer revenue
growth through May 31, 2005, in an effort to capture growth
revenues that might be associated with plant additions?
I'd prefer your questions regarding the matching
of revenues, expenses, and the 13 -month averages to Staff
witnesses Lobb and Carlock.
I won't go far with you on this if this isn'
your area, but is that an , to your understanding, a correct
statement of how the Company attempted to comply with the
Commission I S directive in those cases?
I believe Mr. Wyatt may have mentioned that in
his testimony.
I also wanted to ask some questions about the
wisdom of including post-test year investment at one/thirteenth
of its value or including it in rate base as if it had been in
service for the last month of the test year.Are you capable
of answering questions along those lines or would you like to
defer them to another witness?
I d refer them to our Staff policy witness
Randy Lobb.
587
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HARMS (X)Staff83701
I also wanted to ask some questions about the
wisdom of Staff I s apparent new policy of cutting off
consideration of post-test year benefits at a specific date; in
this case, December 31st.Are you capable of answering
questions about the wisdom of that policy or should those be
deferred to another witness?
I believe Staff witness Lobb discusses that in
his testimony.
I wanted to ask a couple of questions about one
adjustment that you make independently as opposed to your role
of collecting adjustments from other witnesses and
incorporating them into financial statements , and that is on
page 10.You propose changing the depreciation life of the
Columbia water treatment membranes from the Company's proposed
amount of seven years to ten years.Is that correct?
Correct.
And your adjustment is based on what an unnamed
person said to you during a tour of the Columbia water
treatment plant.Is that not correct?
It's based upon
- -
my adj ustment was based upon
that , and to recognize that the membrane filters do not have
are not expected to have the 22 year life that I s normally
associated wi th water treatment equipment.
The reason cited in your testimony is the
conversation with some unnamed person during a tour of the
588
HEDRICK COURT REPORTING
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HARMS ( X )Staff83701
plant?
Correct.
Right.And although the dollar amount here
not large, it just struck me as odd, I guess, that when an
adjustment works against the Company, unsubstantiated hearsay
will do.When the Company proposes adj ustment, the Staff seems
to hold the Company to a higher burden of proof.
And so I guess my question is do you think the
Staff has been consistent throughout this case in its
application of burden of proof principles?
MR . S TUT ZMAN :Mr. Chairman, we'll obj ect to that
quest ion.I think he's asking the wi tness to give a legal
analysis of evidence, and I don't think she I s prepared to do
that.
MR. MILLER:I don t think it I S a legal analysis.
I just think that there are examples in this case where
adjustments that go against the Company are supported by very
minimal evidence, whereas the Staff requires of the Company
very significant evidence for adjustments that go in its favor.
And rather than let
- -
require the witness to answer , I could
just leave the matter with that assertion.
MR. STUTZMAN And I attempted to make a motion
to strike Mr. Miller's testimony, but I guess I won t do that.
COMMISSIONER KJELLANDER:Okay.Well , the
objection is sustained , so let's move forward.
589
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
HARMS (X)Staff
MR. MILLER:Those are all the questions we had
for Ms. Harms.
COMMISSIONER KJELLANDER:Thank you.Are there
any questions from members of the Commission?None.
I guess we are ready for redirect, if any.
MR . WALKER:No redirect, Mr. Chairman.
COMMISSIONER KJELLANDER:Thank you, and thank
you, Ms. Harms.
(The witness was excused.
COMMISSIONER KJELLANDER:I bel ieve we re ready
then for Staff's next wi tness.
MR. STUTZMAN Thank you, Mr. Cha i rman .The
Staff will call Rick Sterling, please.
RICK STERLING,
produced as a witness at the instance of the Staff , being first
duly sworn, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. STUTZMAN
Would you please state your name and spell your
last name for the record?
Rick Sterling, S-
And where are you employed and in what
590
HEDRI CK COURT REPORTING
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STERLING (Di)Staff
capaci ty?
m employed by the Idaho Public Utilities
Commission as a Staff engineer.
And did you prepare and prefile written testimony
in thi s case?
pages?
would also
Yes, I did.
And does that consist of approximately
My original testimony was 65 pages.Yes.
make note though of some revisions to my testimony
that were mailed to the parties of record on May 20th , which
was last Friday.Those revisions were to pages 34 and 35, and
so there was also a page 34a and a page 34b that were included.
Okay.What were the
- -
Slnce you ve brought that
up, why don t you tell us what the nature of those revisions
were and why you've refiled those pages.
Well , there were two
- -
revisions in two areas.
One had to do with a Water Permit No. 63-31409.When I
originally prepared my testimony, I relied on information
available on the Department of Water Resources Web site.
Subsequent to that, United Water had made a Production Request
of the Staff inquiring about that water right, which that
caused me to investigate that right further , and I then
examined the actual paper documents held by the Department of
Water Resources.The actual water rights documents were more
591
HEDRI CK COURT REPORTING
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STERLING (Di)Staff
complete than what was reflected on their Web si te.That
necessi tated a change to my testimony.
The other change was associated with a change in
Staff I S recommendation with regards to IMAP , and that change
described on page 34 of my testimony.
Okay.Besides the changes that you made in your
revised pages, do you have any other changes or corrections to
your direct testimony?
Yes , I do.The first is on page 3 , on line 16,
and these changes are also reflective of the pages that were
revised that I had referred to earlier.But on line 16 after
the word 11 that 11 insert the words 11 a portion of the 11 so that
that ine should begin 11 that a portion of the investment.
Okay.
And on line 17 , the word 11 specificallyll should be
deleted and replaced wi th the word II partially.
COMMISSIONER KJELLANDER:Could you gl ve us that
again?
THE WITNESS:On line 17 , delete the word
specificallyll and replace it with the word "partially.
MR. MILLER:Page 1 7?
THE WITNESS:Page 3, ine 1 7 .
BY MR. STUTZMAN Are there any other changes?
Yes , there are.On page 40 , 1 ine 5, the third
word in that line should be "existing. There is just a typo.
592
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
STERLING (Di)Staff
On page 45, line 2 , that should read "Order No.
28800. "
And on the following page, page 46, line 20, that
should also be "Order No. 28800.
Those are all.
Q .Okay.Thank you.Did you al so have some
exhibits attached to your prefiled testimony?
Yes, I did.
And what numbers of exhibi t s do you have?
I will need to look, so -- 121 through 127.
Okay.Do you have any corrections or changes to
make to your exhibits?
No,don't.
were ask you the questions in your
prefiled testimony today with the corrections that you made,
would your answers be the same?
Yes, they would.
Thank you, Mr. Sterling.
MR. STUTZMAN Mr. Chairman , I I d move that the
testimony of Mr. Sterling be spread upon the record as if read,
and Exhibi t Nos. 121 through 127 be admi t ted in the record.
COMMISSIONER KJELLANDER:And wi thou t obj ect ion
we III spread the testimony of Mr. Sterling across the record as
if read, and admit Exhibits 121 through 127.
MR. STUTZMAN Thank you.
593
HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701
STERLING (Di)Staff
l~'
14
(The following prefiled direct testimony
of Mr. Sterling is spread upon the record.
594
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STERLING (Di)Staff83701
Please state your name and business address for
the record.
My name is Rick Sterling.My business address
lS 472 West Washington Street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission as a Staff engineer.
What is your educational and professional
background?
I received a Bachelor of Science degree in Civil
Engineering from the University of Idaho in 1981 and a
Master of Science degree in Civil Engineering from the
University of Idaho in 1983.I worked for the Idaho
Department of Water Resources from 1983 to 1994.In 1988
I became licensed in Idaho as a registered professional
Civil Engineer.I began working at the Idaho Public
Utilities Commission in 1994.My duties at the Commission
include analysis 6f utility applications and customer
petitions.
What is the purpose of your testimony in this
proceeding?
There are several purposes to my testimony.
First, I will discuss United Water s decision to build the
Columbia Water Treatment Plant and the process the Company
used to get it constructed.Next, I will make several
CASE NO. UWI - W - 04 - 4
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595
recommendations concernlng adj ustments to test year
expenses.Finally, I will make a proposal for new rates
based on Staff's recommended increase in revenue
requirement, and I will discuss rate design al ternati ves,
including the rate design proposed by Uni ted Water.
Please summarize your testimony.
My testimony begins with a discussion of the
Columbia Water Treatment Plant, the primary driver in this
rate case.I conclude that the plant is needed by Uni ted
Water, and agree that microfil tration is a reasonable
choice of technology.I review the design-build approach
taken by the Company to construct the plant, discuss the
advantages and disadvantages of the approach , and
recommend that the design-build approach not be used in
the future because of the difficulty it presents in
assuring customers that the best value was obtained for
the investment made.
With regard to the Columbia Water Treatment
Plant, I review the request for proposal process employed
by the Company and the criteria used to choose a design-
build firm to construct the plant.I discuss the cost
plus fixed fee contract used by United Water and how a
guaranteed maximum price was established.In addition, I
review the level of competitive bidding used during
construction of the plant and consider whether adequate
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596
cost control incentives existed for the construction
contractor.I comment on United Water s own cost
comparisons between its plant and other membrane
filtration plants and conclude that the Company s plant
appears to be one of the most expensive plants compared.
I recommend that the early completion incentive offered by
Uni ted Water to CDM , the design-build contractor , not be
recoverable from ratepayers, and that a portion of the
treatment plant construction costs be booked as plant held
for future use because they are not yet used and useful.
Finally, I make recommendations regarding the operation
and maintenance expenses estimated for the Columbia Water
Treatment Plant.
Next, I discuss three adjustments regarding
water rights acquisitions by the Company.I recommend
that investment related to the Integrated Municipal
Application Package and a water right specifically for
aquifer recharge and storage be considered plant held for
future use.In addition, I recommend that only a portion
of the investment made to acquire the Initial Butte water
rights be included in rate base because not all of the
water rights can currently be utilized.
Next, I make recommendations regarding several
adj ustments to test year expenses-purchased water
purchased power, deferred power, chemicals, and weather
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597
normalization related expenses.Next, I discuss rate
design issues.I recommend that the fixed bi -monthly
customer charge not be increased, that the 25%
summer/winter rate differential be maintained at least for
now , but that the Commission give consideration to
implementing an inclining block rate design in the future.
Finally, I present the rates that resul t using Staff'
recommended revenue requirement.
Columbia Water Treatment Plant
Need for the Plant
One of the primary drivers for this rate case
costs associated with the new Columbia Water Treatment
Plant (CWTP)Do you believe the plant is necessary?
Yes, I do.Construction of a new surface water
treatment plant has been a part of United Water s plans
for several years.In its 1988 Master Plan , the Company
recognized that it would be necessary to develop
additional surface water sources to meet future customer
needs due to the limited availability of groundwater.
Since the 1988 Master Plan, the Treasure Valley Hydrologic
Study, a j oint effort by the Idaho Department of Water
Resources, the Uni versi ty of Idaho and the Idaho Water
Resources Research Institute, has confirmed the limited
availability of groundwater resources for future
development, particularly in southeast Boise.
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598
Choice of Technoloqy
Do you agree with United Water s decision to use
microfiltration technology rather than traditional
granular media filtration technology like is used at the
Marden plant?
I believe either technology could meet United
Water s requirements in terms of both water quality and
quantity.A more important issue, I believe, is whether
one technology could do it less expensively than the
other.Before building the Columbia Water Treatment
Plant, Uni ted Water hired consul tants to prepare a Basis
of Design Report.The report shows that both technologies
were considered, but that microfiltration was ultimately
chosen.Preliminary cost estimates indicated that the
construction cost of a microfiltration plant were
approximately 10 percent higher, but the report concluded
that both technologies were nearly equal in cost given the
potential inaccuracies of the cost estimates.The report
also estimated that the lower expected operating costs of
a microfil tration plant outweighed any possible
disadvantage of higher construction cost.
Because the preliminary cost estimates were
judged equal , but admittedly rough, I believe that United
Water should have considered soliciting proposals for
traditional granular media filtration as well as
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599
microf il tration.By soliciting proposals for both types
of technology, Uni ted Water would have been able to make a
more definitive determination as to which technology would
resul t in the lowest overall cost.
Desiqn Build Contract
In constructing the CWTP, Uni ted Water employed
a design-build approach.Please briefly explain what the
design-build process is and how it differs from the
traditional design-bid-build approach.
Design-build is a construction approach in which
the proj ect owner enters into a single contract wi th a
design-build company that is responsible for both proj ect
design and construction.Design of the proj ect begins and
construction commences once the design has reached beyond
the preliminary stage.Final design work continues as
construction progresses.Design is always a step ahead of
construction.This differs from the tradi tional approach
in which a complete project design is first prepared, the
proj ect is bid, and then the proj ect is constructed.
What are the purported advantages of the design-
build approach?
Probably the most often cited advantage of
design-build is that it is faster than the traditional
design-bid-build approach because design work and
construction work can overlap.Another advantage is that
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600
the design professionals, because of their close
relationship with the construction team , can benefit by
collaboratively coming up with design ideas that are less
costly, more effective and easier to construct.
addition , there is less likelihood for disputes between
design and construction professionals, and fewer change
orders and claims for errors and omissions.These factors
can potentially lead to lower overall proj ect costs.From
the owner s perspective, design-build requires only a
single point of contact rather than separate contact with
both the designer and the builder as in the traditional
design-bid-build approach.Having a sole source
responsibility is generally eaSler for the owner.
What are the disadvantages of the design-build
process?
The biggest disadvantage in my opinion is the
lack of checks and balances compared to more tradi tional
construction approaches.Unl ike a tradi t ional approach
where the design engineer acts as a representative for the
owner , In design-build, the engineer and the contractor
are part of the same company, or at least working as a
team.The owner has a greater responsibility to insure
that his interests are protected and that he receives a
quali ty product at a fair price.The relationship between
the owner and the design-build firm must be based on a
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601
great deal of trust.The design-build firm must satisfy
the owner s desires for a high quality, low cost product,
while also trying to stay within budget and maximize its
own prof it.This conflict between providing what the
owner wants and providing it for a fixed prlce often
results in the owner questioning whether it is getting the
best quality for the money paid.Likewise, the design-
build firm must trust in the owner not to make
unreasonable demands when the design-build firm is
opera t ing under a fixed budget.(Reference Best
Practices in Design-Build for the Water and Wastewater
Industry, p. 26 , Document No. FO0103, Design-Build
Education Research Foundation, January, 2003). In an ideal
world, such a relationship may produce a high quali ty, low
cost resul t, but in a regulated world, it is extremely
difficul t to assure customers of that fact.
Another major disadvantage of design-build is
that a final proj ect cost estimate is frequently unknown
at the start of construction.Because design and
construction proceed simultaneously, the final design is
not available for estimating the final cost until
construction is well underway.Wi thout knowing the final
cost before the proj ect is started , there is always a risk
that it could exceed the budget or balloon out of control.
Cost overruns are usually the responsibili ty of the owner
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STERLING, R.
STAFF
unless there was an agreed upon fixed price from the
start.
Are there ways to overcome some of the
disadvantages of the design-build process?
Yes.One way to overcome some of the
uncertainty about knowing the final cost of a proj ect
to hire an engineering firm to develop a preliminary
proj ect design and cost estimate.Thi s approach can al
help the owner to be reassured of a more economical and
successful final product because the engineering
consul tant is now working for the owner instead of the
contractor and therefore has the owner's best interests in
mi nd .In this case, Uni ted Water hired a team of two
different engineering consultants to develop preliminary
proj ect designs and al ternati ves.Sometimes an owner will
hire a consultant to act as its agent and oversee the
entire process, from preliminary design, to deyelopment of
an RFP, to eval ua t ion of proposal s , to proj ect
construction.
Another way to eliminate some uncertainty is to
establish a guaranteed maximum price at some stage in the
process.When construction has progressed beyond the
initial stages, when major materials and equipment have
been procured, and when most of the final design details
are known, a maximum price can be established to force
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some degree of cost control beyond simply trusting that
the proj ect is being buil t as economically as possible.
Finally, because the design-build process
requlres such a high degree of trust between the owner and
the design-build firm , owners can invite to bid only firms
with good reputations and with which it may have had prlor
experlence.Although difficult to quantify, maintaining a
good reputation by minimizing cost overruns, proj ect
delays and disputes is a real motivating factor for most
design-build firms.
If construction costs are often unknown at the
time a design-build firm is hired for a proj ect, and
therefore if the construction cost portion of design-build
projects are not competitively bid up front, are there
ways to insure a competitive construction cost?
One way to compensate for the lack of
competitive bidding up front is to require competitive
bidding for each element of the construction.In other
words, the proj ect owner can require that jobs awarded by
the design-build firm to subcontractors be competitively
bid, and that any tasks self-performed by the design-build
firm also be competitively bid.
Was competitive bidding used in choosing
subcontractors for the CWTP?
Yes, competi ti ve bidding was used for nearly all
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of the maJ or construction tasks.In fact, In the early
stages of the proj ect, CDM, the design-build firm , had
intended to self -perform some of the maj or construction
tasks, but later decided to hire subcontractors for almost
all of the construction.
Was the competitive bidding as competitive as
could have been?
No, in some cases it was not.For a few of the
maj or construction tasks, despi te at tempting to obtain
bids from several contractors, it appears that only one or
two realistic bids were ultimately obtained.
Unfortunately, there is really no way to know whether a
lower price could have been obtained if more bids had been
received.
Is the design-build process common for water
proj ect construction?
Design-build was not common practice for any
type of construction until about the 1990s.Its use was
restricted primarily because of competitive bidding
statutes in many states and in federal government
construction.Since these restrictions have been removed,
design-build has become more common, especially for state
and federal highway construction.Its use for
construction of water and wastewater facilities has been
much more 1 i mi t ed however.
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Has United Water had prevlous experlence with
the design-build approach to construction?
No, Uni ted Water Idaho has not.The CWTP is the
first proj ect on which Uni ted Water Idaho has used the
process.However, United Water, the parent company, has
used this approach once in New York and is currently uslng
it for two projects in Pennsylvania.Uni ted Water has
also used the approach for non-regulated operations in
three other states.
Do you believe that the design-build approach
chosen by United Water presented any difficulties in the
construct ion of the CWTP?
Yes , I do.The biggest difficulty, I believe,
was not in the construction itself.The biggest
difficulty is in United Water s inability to provide
assurance to its customers and the Commission that the
plant represents the best value for the money spent.
Do you recommend that Uni ted Water use a design-
build process in the future for maj or proj ect
construct ion?
No, I do not.Unfortunately, one of the primary
purported advantages of design-build-faster completion-was
not realized in this case.It appears that much of the
one-year delay in getting the proj ect built was due to the
Company receiving proposals that exceeded ini tial cost
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estimates.If a more complete design and a more accurate
estimate had been prepared before proposals were sought
perhaps this delay could have been avoided.United Water
had been planning since at least 1998 to have a new
treatment plant operational by the summer of 2004.
Anticipating its needs that far in advance, the Company
should not have had to scramble to get the plant buil t one
year later than planned, to have to employ a non-
traditional contracting process in an attempt to expedite
construction , or to necessitate making multiple 11th hour
updates to its filing for the proj ect to be properly
considered in this rate case.
Another of the purported advantages of design-
build, that proj ects can be buil t at a lower cost, cannot
be proven in thi s case.Just as there is no evidence that
a design-build approach produced a higher overall proj ect
cost, there is no evidence that it produced a lower cost.
This uncertainty about whether the proj ect could have been
completed at a lower cost makes it virtually impossible
for the Commission to reassure ratepayers that Uni ted
Water obtained the best value for the amount spent.
In response to a Staff Production Request (Staff
Request No. 131) when asked "What assurance can UWI
provide to its customers and to the Commission that by
uslng a Design-Build, Cost Plus Fixed Fee ' contracting
CASE NO. UWI-04-04/06/05 (Di) 13STERLING, R.
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process that it obtained the best value for customers?"
the Company stated "Speculation about the outcome or prlce
from a different contracting process or proposer
impossible to precisely measure or even accurately predict
wi thout building the proj ect twice.
Cost PI us Fixed Fee Contract
Do you see any disadvantages to a cost plus
fixed fee approach like that taken by United Water?
Yes , I see a serious disadvantage.Unde r a 1 ump
sum contract, the owner knows in advance what the total
proj ect cost will be.However , under a cost pI us fixed
fee approach, only the fixed fee is known with certainty.
The fixed fee represents only the design-build firm
profit, and does not include any of the actual
construction or engineering costs.
But in this case, wasn t the overall proj ect
cost known with certainty once a guaranteed maximum price
was developed?
Yes, but the guaranteed maXlmum prlce could not
be developed until the proj ect design had reached
percent completion.The guaranteed maximum price was
established on January 29, 2004-more than 17 months after
the contract was originally signed.
Why does United Water say it used a cost plus
fixed fee approach?
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United Water claimed that there were several
unknowns before the project was started such as filtration
type, waste handling, building footprint/configuration and
treated water storage.These unknowns, the Company
claims, create risks to the construction enti ty that
ultimately have to be passed on to the utility
customers.One way to minimize these risks to the Company
while still attracting bidders is to agree up front on
what fees will be paid independent of construction costs.
Because United Water hired two different consultants to
prepare an extensive Basis of Design Report prior to
issuing an RFP for plant construction , I don t believe
there were nearly as many unknowns as the Company claims.
RFP Process
Please briefly describe the process United Water
used in pursuing construction of the CWTP.
United Water began the process by assembling a
team consisting of engineers from its own local and
national staff , along with engineers from Montgomery
Watson Harza and Carollo Engineers, both ,international
firms with extensive experience in water treatment.This
team collected and analyzed data about Boise River water
quali ty, performed pilot studies, assessed regulatory
requirements, developed al ternati ves, and made prel iminary
cost estimates.The resul t of the team s work was a Basis
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of Design Report that specified the technology to be used
and the processes to be employed in the new treatment
facili ty.
After the Basis of Design Report was completed,
Uni ted Water issued a request for proposals invi ting four
firms to submit design-build proposals for construction of
the plant.The four firms were Montgomery Watson Harza,
Carollo Engineers, Black and Veatch, and CDM (Camp,
Dresser & McKee) .Two of the firms had previously done
work for United Water Idaho, and the other two firms had
completed work for United Water at other locations.All
of the four firms are well known for their experience with
water facilities.
United Water required in its RFP that the
proposals include qualifications, proj ect approach , and
business terms.The RFP did not require prel iminary
design preparation al though each proposal received
included varying levels of design.The RFP al so did not
require fixed design-build prlces, yet it did require that
each proposal be accompanied by two separate cost
estimates.First, proposers were required to submi t a
fixed fee presented as a lump sum amount.The fixed fee
was intended to represent the design-build firm s required
profit.In addition, proposers were required to submit in
a separate sealed envelope a Target Cost of Work.The
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610
Target Cost of Work was intended to be a non-binding
professional opinion of expected costs based on the
design-build firm's proposed approach and understanding of
the proj ect at the time.
What criteria did United Water use to evaluate
the bids?
A group of local and corporate headquarters
level United Water staff evaluated and scored each
proposal using both price and non-price cri teria.The
non-price evaluation criteria included the qualifications
and experience of the proposer, the personnel commi t ted to
the proj ect, and the proposed proj ect approach including
abili ty to control costs , the technical approach and the
proj ect schedule.
The price evaluation cri teria was based on the
proposer s fixed fee balanced with other factors, such as
assumptions and conditions of the proposal, the degree of
risk that the proposer is judged to be assumlng under the
terms of the proposal, and direct cost factors.
Did United Water choose the highest ranked
proposal?
No, it did not.It chose the second highest
ranked proposal.
Why?
Based on the information I reviewed, it appeared
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611
that the final decision was made, or at least very
strongly influenced, by United Water corporate level
staff.A confidential memo provided in response to a
Staff production request (Request No. 111) revealed that
the local United Water staff believed that before a
contract was awarded the highest ranked design-build
firm/proposal, rather than the one ultimately chosen,
could have delivered the plant faster and at a lower cost.
How were the Target Cost of Work estimates
included in each proposal considered in the evaluation and
ranking?
According to Uni ted Water, they were not
considered at all.In fact, the sealed envelopes were not
even opened until after the evaluation and ranking was
complete and a decision made to choose a design-build
contractor.United Water reasoned that selection and
scoring should have nothing to do wi th the non-binding
estimates provided in the proposals.United Water stated
that it simply wanted to get another budget cost from
these experienced teams to compare to the Basis of Design
Report assumptions.(Response to Staff Request No. 106)
Do you believe that the Target Cost of Work
should have been a factor considered in the evaluation?
Yes, I do.Although the Target Cost of Work
a preliminary estimate based on limited design work,
CASE NO. UWI-O4-04/06/05 (Di) 18STERLING, R.
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612
nevertheless is an estimate prepared by professionals with
extensive experience in constructing similar plants.
cannot reasonably be considered a binding estimate but it
still reflects the general design elements, treatment
processes and equipment suggested by the proposer.The
purpose of requiring that a Target Cost of Work estimate
be provided is to be able to make at least some assessment
of the "value " represented by each proposal.
completely ignoring the Target Cost of Work estimates,
United Water effectively eliminated construction cost as a
cri terion in choosing a proposal.I am uncertain as to
why Uni ted Water required that the Target Cost of Work
estimates be provided if it did not intend to consider
them.
How did the Target Cost of Work estimates
compare to the guaranteed maximum prlce ul timately
incl uded in the CDM contract?
The Target Cost of Work estimates from two
the proposals were $14 344,000 and $16,112 998, and the
Guaranteed Maximum Price in the final construction
contract was $16,844 498.I was unable to review two of
the four Target Cost of Work estimates because United
Water claims to have lost them.
Does it concern you that United Water lost two
of the Target Cost of Work estimates?
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613
Yes, I find it very troubling.Again, the
estimates represent the professional opinions of very
experienced and highly qualified firms of the expected
construction costs of the plant.I would have expected
that United Water would be very interested in knowing the
range of Target Cost of Work estimates and whether
differences in each design-build firm s proposals affected
these estimates.
Each proposer was required to submi t an original
and six copies of its proposal.Uni ted Water al so agreed
to keep each proposal conf idential Given the number of
copies required and the care that should have been taken
wi th the proposals , it is surprising that Uni ted Water has
been unable to locate two of the Target Cost of Work
estimates.
Why are the Target Cost of Work estimates
important?
They are important because they provide
additional benchmarks against which to measure the
reasonableness of the final CWTP cost.Because every
water treatment plant is unique, direct cost comparisons
are difficult.Mul tiple estimates for the same plant may
provide a better indication of a reasonable price than
comparlsons to the average cost of many unique plants.
Even though the Target Cost of Work estimates are
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614
preliminary, they still reflect costs specific to a
particular plant, si te, process and equipment.United
Water has pointed out in response to production requests
(Staff Request No. 202) that the Guaranteed Maximum Price
agreed to by CDM proved to be only 4.34 percent higher
than their Target Cost of Work estimate.This lS an
indication, I believe, that the Target Cost of Work
estimates are still quite accurate, despite being
preliminary and based on limited design information.
In addition , I believe that the Target Cost of
Work estimates can serve as a reference point as design
and construction work progresses prior to development of a
Guaranteed Maximum Price.When a contract is executed
without an up front fixed prlce, there should be something
to gauge the final expected cost so that it can t balloon
out of control.
If the contract between United Water and CDM did
not initially include a fixed price amount for
construction of the plant, how was a Guaranteed Maximum
Price eventually established?
Detailed proj ect design commenced upon contract
signing in August 2002.Once the design had reached the
85 percent completion stage, CDM provided United Water
wi th an ini tial preliminary guaranteed maximum price.
That price significantly exceeded United Water s project
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615
and budget and expectations that were based on the
original Basis of Design Report and budget.The proj ect
was put on hold for approximately a year until United
Water and CDM negotiated a new Guaranteed Maximum Price in
January 2004.The Guaranteed Maximum Price fixed United
Water s construction cost obligation except for minor
contingencies and change orders.
Could a Guaranteed Maximum Price have been
established at the time the contract was signed?
Yes, it could have been.United Water could
have required a lump sum contract so that it knew in
advance with certainty what the final proj ect cost would
be.With that type of an approach, however, CDM rather
than United Water would have been at risk for any cost
overruns.Because of the added risk, it is likely that
CDM would have increased the contract prlce to cover the
added risk.It is not uncommon, especially when a design-
build approach is used , for a fixed price to not be set
until after the design had advanced far enough so that
accurate cost estimates could be made.
Fixed Fee
The Fixed Fee portion of the proposals was a
factor in the evaluation of proposals.How did the Fixed
Fees compare?
The Fixed Fees were qui te variable , ranglng from
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616
$846,000 to $1 896,089.The proposal with the lowest
Fixed Fee was also the proposal that was ranked highest
overall , yet as I discussed previously, it was not the
proposal ul timately chosen by Uni ted Water.Al though the
difference in Fixed Fee between the two highest ranked
proposals was relatively low compared to the total proj ect
cost, it was not immaterial.
Do you think any of the design-build firms who
submi t ted proposals could have successfully completed the
job?
Yes, I believe all of the firms were highly
qualified and capable and that any one of them could have
delivered a plant that met United Water s needs.
Cost Comparisons
Company witness Rhead in his Exhibit No.
compared the cost of the CWTP to other water treatment
plants, both conventional and membrane fil tration.What
lS your opinion of these comparisons?
To the extent the comparisons are 'useful, my
conclusion in reviewing them is that United Water s CWTP
is considerably more expensive than the average of the
group, and could be one of the most expensive.
Despi te a Guaranteed Maximum Price of $16.
million and an overall proj ect cost of $18.20 million
(Response to Staff Request No. 108), United Water used a
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617
cost of $12.87 million in comparing its proj ect to the
others.With this project cost and after adjusting for
differences between when each proj ect was buil t , the CWTP
is still more expensive per gallon of treated water than
all but one of the 19 other proj ects examined.The
Company claims it used this lower cost because it believed
some proj ect features of the CWTP such as the raw water
pumping station, the transmission pipeline from the Boise
River to the plant, land, electrical service, Uni ted Water
labor and overheads, and AFUDC should be removed for
comparison purposes.However, it is not apparent that
Uni ted Water removed similar costs from any other proj ect
or that it considered eliminating the costs of features
from other plants that are not part of the CWTP.For
example, the preliminary design for the CWTP called for
the use of dissolved air flotation as a pretreatment
process and the use of ul traviolet disinfection.These
two processes were estimated together to cost $2. 1
million.Ul timately, both processes were not included in
the final proj ect design.Some of the plants United Water
uses for comparison purposes may include one or both of
these processes.
Using United Water s adjusted figures for
comparison, the CWTP exceeds the average cost of the other
microfiltration/ultrafiltration plants by 32.7 percent,
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618
and the average cost of the conventional granular media
plants by 5.9 percent.If the guaranteed maximum prlce or
the total proj ect cost was used instead , the CWTP balloons
to 73.5 percent above the average cost of the filtration
plants and to 38.4 percent above the conventional plants.
How does Uni ted Water explain why its CWTP
more expensive than other plants?
United Water attributes the CWTP's higher cost
to differences between the scopes of the proj ects.The
Company points out that some of the plants listed involve
the addition of membrane filtration to an existing plant
where some treatment facilities already exist.The CWTP
United Water states, is a completely new plant requiring
all of the facilities that may pre-exist at some plants.
Uni ted Water also attributes the cost differences to other
factors such as the type of membrane used, relative raw
water quality differences , local labor and material costs
and treated water pumping requirements.
Do you accept United Water s explanation?
Admittedly, it is difficult to compare costs
between plants due to differences in design features
treatment requirements and challenges, equipment
differences, regional labor costs, and many other factors.
However, the fact remains that the comparison still shows
that the CWTP is nearly the most expensive plant listed,
CASE NO. UWI-04-04/06/05 (Di) 25STERLING, R.
STAFF619
even after United Water removed a significant portion
the proj ect costs to make it more comparable.
Cost Control Incentives
What incentives did CDM have to complete the
project at less than the guaranteed maximum price?
The contract between Uni ted Water and CDM has no
provision for monetary incentive to CDM if the proj ect
should be completed at less than the guaranteed maximum
prlce.One hundred percent of all savings below the
guaranteed maximum price are to the benef i t of Uni ted
Water.With such contract provisions, I see no motivation
for CDM to save costs, and little likelihood that any
savings will be passed on to Uni ted Water.CDM's only
motivation seems to be that it must protect its own
reputation for performing within or below budget
expectations.
Is there evidence that United Water and CDM
tried to keep the costs of the proj ect down?
Yes , there is.During the design phase of the
proj ect, before a guaranteed maximum price had been
established, United Water and CDM worked together to
develop al ternati ves to keep the proj ect costs down.
addition , during project construction , CDM and its
subcontractors have done a variety of things to reduce
construction costs.Finally, as I discussed previously,
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most of the construction tasks were competi ti vely bid.
Early Completion Incentive
The construction contract for the CWTP includes
provisions for payment of an early completion incentive.
What is your recommendation with regard to this incentive?
The contract requires payment by Uni ted Water to
CDM of an early completion incentive of $3,500 per day for
each day that the 30-day facility test is started before
June 1.Because the 30-day facility test began on about
March 7, I estimate that the early completion bonus will
total approximately $297,500.Originally, the contract
provided for an early completion bonus of $2 500 per day,
but United Water later increased the bonus to $3 500 per
day to provide more motivation to CDM to complete the
proj ect sooner.The reason cited by United Water for
increasing the early completion bonus was that beginning
~he 30-day facility test on June 1 "left little time for
system performance checks and start-up adjustments that
are common wi th proj ects of this magni tude. "(Response to
Staff Production Request No. 110)
While beginning the facility testing sooner than
June 1 may be wise, I contend that beginning the testing
in early March is much sooner than necessary.I do not
believe that the plant will need to be operated to meet
customer demands until at least June.I see no reason for
CASE NO. UWI-04-04/06/05 (Di) 27STERLING, R.
STAFF621
United Water to be paYlng extra just to have the plant
sitting idle approximately three months before it is
needed.United Water s customers derive no benefit from
having the proj ect completed early.Furthermore, if
United Water desi~ed to have the plant completed earlier
than June 1, it should have included that requirement in
the original contract or begun the proj ect sooner.As I
pointed out earlier in my testimony, the scheduled
completion date of the proj ect was already delayed by a
year by United Water.The proj ect' s scheduled completion
date has always been within United Water's control.
United Water is contractually obligated to make
the bonus payment for early completion.However, I
recommend that none of any bonus payment ul timately paid
be passed on to ratepayers.
Has Uni ted Water provided any other
justification for agreeing to pay an early completion
bonus?
Yes.In response to Staff Production Request
No. 120, United Water states that it estimates a cost of
$5,000 to $6,000 per day for CDM to remain on site.The
net effect of providing an early completion bonus , the
Company states, saves the project and customers $1,500-
$2,500 per day for each day of early completion.
If early completion saves customers $1,500-
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'..
$2,500 per day for each day of early completion , do you
still recommend that United Water not be allowed to
recover from customers the cost of bonus payments?
If United Water can conclusively demonstrate
that the proj ect cost has been reduced by $5,000 to $6,000
per day for each day an early completion bonus has been
earned, then I would not oppose payment of an early
completion bonus.However, nothing in the contract
between United Water and CDM indicates that CDM will
reduce the proj ect costs if the proj ect is completed
early, nor is there anything in the contract that requires
CDM to reduce its proj ect management fee.In fact, as
discussed earlier , I see no incentive in the contract for
CDM to complete the proj ect for less than the contract
amount because all of the savings, if any, will go to
United Water.To date , the Company has provided no
evidence that the proj ect cost has been reduced because of
early completion or that the proj ect management fee to CDM
has been reduced.Absent convincing evidence, I must
oppose recovery of the early completion bonus payment.
CWTP Over Sizing
Do you believe the CWTP is properly sized based
on the Company s current needs?
Yes, I do.The plant is designed for an initial
capacity of 6 million gallons per day (MGD) , which the
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623
Company will be able to fully utilize this summer.The
plant capacity can be increased to 10 MGD just by adding
more membrane filters to the existing treatment building.
The ultimate capacity of the plant is expected to be
MGD, but full expansion will require some major
construction.
There are portions of the current plant however
that are designed for future use and expansion.For
example, approximately 2.8 of the 11.5 acres (24.5%) on
which the plant si ts are currently unused and are intended
for an additional future clear well, an additional future
solids handling basin , and a future Aquifer Storage and
Recovery (ASR) proj ect I believe it was prudent for
United Water to acquire all of the land it believed would
eventually be necessary to accommodate the plant
facilities at full build out; however, that portion of the
investment in land that is not currently being used should
be booked as plant held for future use.Staf f wi tness
Harms has made this adjustment in her Exhibit No. 111.
In addition, I believe that approximately 3,200
of 23 160 square feet of floor space in the treatment
building have no apparent current use.A portion of this
vacant space appears reserved for possible future use for
ul traviolet disinfection if it is eventually necessary.
At an estimated cost of $110 per square foot for the
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treatment building, $352 000 (3,200 x $110) of this
investment should be booked as plant held. for future use.
Staff witness Harms has made this adjustment in her
Exhibit No. 111.
CWTP Operation and Maintenance Expenses
The CWTP is not operational as of the
preparation date of this testimony; therefore, how can you
know what the operation and maintenance expenses are for
the plant?
Qui te simply, we can Uni ted Water has made
estimates of what it thinks operation and maintenance
costs will be , but until the plant has been operational
for a significant period of time, operation and
maintenance costs cannot accurately be known.Throughout
the course of this proceeding, Uni ted Water has continued
to provide updated information as it becomes available and
it is my understanding that even more updated information
will be provided by the Company in its rebuttal testimony.
However, chasing such a moving target has been extremely
difficult and frustrating for Staff.Even with updated
information until the time of the hearing in this case, we
still will not really know what the actual operation and
maintenance costs of the CWTP will be.
Do you agree with United Water s estimated
operation and maintenance expenses for the CWTP?
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625
No; therefore, I am proposing some adjustments.
As mentioned, accurately estimating operation and
maintenance expenses for the CWTP is difficult because the
plant is brand new and has no existing record of these
expenses.In addition, the CWTP uses a much different
technology than the existing Marden plant, so operation
and maintenance costs of the two plants are not directly
comparable.Power , chemical, and labor costs will likely
be qui te different for the two plants.
United Water and its consultants have estimated
operation and maintenance costs for the CWTP.I am
recommending that the power cost estimate for the plant be
reduced because I believe that the electric rate used to
develop the assumption is too high.Instead of the $0.045
per kWh assumed by Uni ted Water, I have used a rate of
$0.0368, which is the current Schedule 9 rate without the
PCA and includes demand, energy, customer, and basic load
charge s Use of this rate reduces United Water s estimate
for operation costs by $43,891 per year.This adjustment
is incorporated in my adjustment no. 11.I am accepting
United Water s estimate for chemical costs for the new
treatment plant.
Adjustments to Rate Base
Staff witness Harms made several adjustments to
rate base associated with water rights of United Water,
CASE NO. UWI -W- 04-04/06/05 (Di) 32
626
STERLING, R.
STAFF
and stated that you would discuss each of these
adj ustments.Please discuss each of these adj ustments
Each of the three separate adjustments is
discussed below.
Inteqrated Municipal Application Packaqe (IMAP)
What is the Integrated Municipal Application
Package ( IMAP) ?
United Water has filed 99 Applications for
Transfer of Water Rights (Licenses and Statutory Claims)
and 13 Applications for Amendment (Permits) with the Idaho
Department of Water Resources.The 112 applications are
known as the Integrated Municipal Application Package
(IMAP) and are based on existing uses and the Idaho
Municipal Water Rights Act of 1996 (ACT)The Act allows
municipal providers to hold water rights for reasonably
anticipated future needs " within a planning period
accommodate qrowth in municipal service areas.IMAP will
conform Uni ted Water s rights to the Act.
Uni ted Water documented a 50 -year planning
period for I MAP , including estimates of population growth
and increased water needs.The Company anticipates a
water demand of about 420 cfs within 50 years.Existing
United Water rights describe about 310 cfs, although
current peak demand is about 150 cfs.The difference
between the rate currently described by the rights (about
CASE NO. UWI -W- 04-04/06/05 STERLING, R.
STAFF
(Di) 33
627
310 cfs) and the current peak flow (about 150 cfs) is
about 160 cfs.Uni ted Water requests approval to hold
about 160 cfs for future growth
What adjustment are you proposing associated
with lMAP?
I am proposing that a minimum of $332,748 =
(160/310) (644,700) in investment related to the Company
lMAP activities be excluded from rate base.I am not
challenging the prudence of lMAP activities in any way; in
fact, lMAP is something United Water should be doing.
Clearly, however, one of the primary purposes of lMAP is
to preserve and protect water rights for future use.As a
result, I am recommending that at least a portion of the
investment associated with lMAP be booked as plant held
for future use.
Aquifer Storaqe and Recharqe (ASR) Water Fermi
Please discuss your recommended adj ustment
related to one of the Company s water rights for Aquifer
Storage and Recovery.
United Water holds permit no. 63-31409,. which
a right to divert up to 20 cfs of flood flow for the
purposes of ground water recharge and municipal use.
Because sufficient facilities do not yet exist at Columbia
for ground water recharge, and because no such facilities
are planned at Marden, use of water under the permit for
CASE NO. UWI-04-
REVISED 05/19/05
STERLING, R. (Di) 34
STAFF
628
ground water recharge is not currently possible.Under
the permit, water could currently be used for municipal
use, but its use is subj ect to restrictions to only those
times when the Boise River is on flood release below Lucky
Peak Dam.In addition, diversions under the permit are
restricted during certain periods of the year when certain
minimum stream flows must be maintained for fish
migration.Given the restrictions on use of water under
the permit, Staff believes that use of water for municipal
purposes is extremely limited.Storage and release
records from Lucky Peak, Arrowrock and Anderson Ranch
reservoirs indicate that no water could have been obtained
under the right since 2000 because the reservoir system
did not f ill and no flood flow releases were made.It is
also likely that no water can be obtained in 2005 for the
same reason.In the 20 years of records examined by
Staf f,appears that water would have been available
under the right in only 11 years.Moreover,water would
have been available in only years June,5 of 20
years July,and never August.These are the months
in which United Water is most likely to need the water
right to meet system demand.Because United Water has yet
to obtain any water under this water right, and because of
the limited occasions on which it can obtain water, Staff
continues to recommend that investment associated with
CASE NO. ~~I-O4-05/19/05 (Di) 34aSTERLING, R.
STAFF
629
future use.
obtaining the water right be considered plant held for
service is $29,697.
The amount to be removed from plant in
CASE NO. UWI-04-05/19/05
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630
STERLING, R. (Di) 34b
R'T'AFF
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Initial Butte Water Right Purchase
Please describe the Initial Butte water right.
The Initial Butte water right actually consists
of three separate licenses (02-2341, 02-2358, 02-2420)
Previously under the water rights, water was diverted from
the Snake River to irrigate 2055 acres of land located
south of Nampa and north of the Snake River.The water
rights allowed a total volume of 9247.5 acre-feet to be
diverted at a maximum diversion rate of 35.21 cfs.Uni ted
Water purchased these water rights for the purpose of
supplying water to its Marden and Columbia water treatment
plants.In order to be able to use this water at the
plants, however, the Company had to execute an "exchange.
The exchange of water authorizes United Water to divert,
for irrigation purposes within its authorized servlce
territory, up to 35.21 cfs from the Boise River in
exchange for the same amount under water rights 02-2341,
02-2358, and 02-2420 from the Snake River and subject to
the conditions of approval of the exchange.The amount of
flow made available through non-diversion under the Snake
River water rights will remain in the Snake River to and
below the mouth of the Boise River to fully replace the
exchanged amount diverted from the Boise River.
C~_SE NO. UWI-O4-
REVISED 05/19/05
STERLING, R,
STAFF
(Di) 1S
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631
What restrictions are associated with the use of
these water rights?
United Water s diversions from the Boise River
under the exchange can only be made during times when the
Bureau of Reclamation is providing flow augmentation water
from Boise River reservoirs pursuant to the NOAA Fisheries
flow augmentation program.United Water cannot divert
under these rights from June through February each year so
as to reduce flows in the Boise River to less than 240
cfs , and cannot reduce flows to less than 1100 cfs from
March through May.These restrictions effectively limit
United Water from being able to fully utilize all of the
water purchased under the Initial Butte purchase.
fact, the practical limit is approximately half of the
amount of the Initial Butte water rights.Depending on
the amount of water available in the Boise River storage
system in a given year, Uni ted Water expects to be able to
secure approximately 3,500 to 4 900 acre-feet of water
under these rights.
Will Uni ted Water ever be able to fully use the
Initial Butte water rights?
In order to be able to use the full amount of
the Initial Butte water rights, United Water will have to
find a way to either get water from the Snake River to its
water treatment plants, or more realistically, to get
CASE NO. UWI-04-04/06/05 STERLING, R.
STAFF
(Di) 36
632
Snake River water into the Boise proj ect irrigation system
and execute another exchange wi th a water user diverting
Boi se River water.
How much did United Water pay to acquire the
Initial Butte water rights?
The total cost to Uni ted Water, incl uding
purchase costs , closing costs and legal fees, was
$1,838,560.
What is your recommendation regarding the
Initial Butte water rights purchase?
Based on the average rate base calculation
recommended by Staff, I am recommending that $677 452 of
the investment be excluded from rate base.This amount
represents the proportionate cost for the 5748 acre-feet
(9248-3500=5748) of water that currently cannot physically
be used.I based this adjustment on the lower amount that
the Company indicates it may be able to use because in a
very low water year as this one is expected to be, it is
likely that no water will be available from the Ini tial
Butte water rights.At such time in the future when
United Water develops the physical capability to fully
utilize all of the water authorized under the Initial
But te water rights, Uni ted Water can seek to add the
excluded amount to rate base.
CASE NO. UWI -W- 04-
04/06/05 (Di) 37STERLING, R.
STAFF
633
Adjustments to Test Year Revenue and Expenses
Staff witness English states in his testimony
that Staff disagrees with many of the test year expense
adj ustments proposed by Uni ted Water in this case.
Exhibit No. 108, he shows Staff's proposed adjustments,
but stated that you would discuss adjustment nos. 9, 11,
, 13, and 3 1 .Please proceed to discuss each of these
adj ustments.
I discuss each of the adjustments in order
below.Exhibit Nos. 121-125 show my computations for each
adj ustment.
Adiustment No.9 - Adiustment of Purchased Water Cost
Before discussing the details of this
adj ustment, please discuss how Uni ted Water acquires raw
water (untreated surface water) for use at its treatment
plants.
United Water acquires raw water uslng a variety
of mechani sms First, to the extent they are available,
United Water acquires ownership of water rights, like
Initial Butte which I previously discussed , that authorize
water to be diverted from the Boise River.Owned water
rights are considered capi tal assets, and investments made
to acquire them are capitalized for ratemaking purposes.
Second, Uni ted Water makes contractual purchases
of water through a variety of mechanisms including lease
CASE NO. UWI -W- 04-
04/06/05
(Di) 38
634
STERLING, R.
STAFF
and rental agreements, and ownership and lease of shares
in canal companies.Some of the purchases made using
these mechanisms are annual agreements, while others may
extend for several years.In every case, however, Uni ted
Water is required to make one or more annual payments,
usually in the spring of the year once water availability
is known and prices are established.Wa ter acquired
through these mechanisms is considered "purchased water
and booked as an expense for ratemaking purposes.
The combination of owned water rights and
contractual purchases make up a portfol io intended to
fully meet the raw water requirements of the Marden and
Columbia treatment plants.The availability of Idaho
water supplies from year to year dictates how much of each
water right can be satisfied, as well as the amounts and
prices of water available for purchase, lease or rent.
United Water must decide each spring how much water to
purchase based on its forecast of water needs and
availabili ty.
United Water proposed an adjustment to test year
purchased water costs of $87 528.Please describe how the
Company arrived at its proposed adjustment amount.
The proposed adjustment consists primarily of
new contractual water purchases that the Company assumes
it will make prior to the CWTP becoming fully operational.
CASE NO. UWI-04-04/06/05 STERLING , R.
STAFF
(Di) 39
635
To arrive at its proposed adjustment amount, United Water
took the actual purchased water expense in the test year
added the estimated costs for three purchases it expects
to make in the coming year, and adj usted upwards the cost
of one exi ting contract that is paid based on the quanti
of water taken from Lucky Peak storage.
Do you agree with the Company s proposed
adj ustment?
I ,agree that some adjustment is appropriate, but
I disagree wi th the amount proposed by the Company.
Contracts have yet to be signed for some of the raw water
purchases the Company estimated it would make;
consequently, they are not known and measurable.Only one
new contract for $20,400 with the South Boise Water
Company had been signed as of the preparation date of this
testimony.I recommend that the pro forma purchased water
expense consist of the budgeted test year expense of
$ 97 ,437 as documented in the Company s supporting
workpapers, plus the $20,400 for the one new signed
contract.Thus, Staff's proposed adjustment is $20,400 as
shown in Exhibit No. 121.
Why are you proposlng to begin with the budqeted
test year expense in making your adjustment rather than
the actual test year expense?
I recogni ze that the actual purchased water
CASE NO. UWI -W- 04-
04/06/05 636
STERLING, R.
STAFF
(Di) 40
expense for the test year of $107 788 was greater than the
budgeted test year expense of $97 437.However, the
obj ecti ve in adj usting purchased water costs is to
determine an amount representative of normal water
condi tions, not water condi tions that may be expected to
occur this year or as they may have occurred during the
test year.As a resul t, I used the budgeted test year
amount because I believe it better represents the level of
expenses United Water expects would occur in a normal
year.I believe the actual expense for the test year was
higher than normal because United Water had to purchase
water to make up for other water that was unavailable due
to poor water condi t ions in 2004.In fact , I believe
United Water is estimating even higher purchased water
expenses for 2005 because of even worse water conditions
that will preclude it from receiving its full allotment
under its water rights, contracts, leases, and shares in
canal companles.
Why have you excluded many of the water
purchases Uni ted Water expects to make to supply water for
the CWTP?
In the workpapers provided by Uni ted Water in
support of its proposed adjustment amount, the Company has
In many instances included estimates of amounts it expects
to spend for specific purchases (Fairview Lateral Ditch,
CASE NO. UWI -W- 04-04/06/05 STERLING, R.
STAFF
(Di) 41
637
Black Canyon Irrigation , Basin 63 rental pool , etc.
However, without signed contracts establishing specific
prices, the Company s estimates are simply not known and
measurable.Unlike the CWTP construction contract where
there is a contract wi th a guaranteed maximum price, there
are no signed contracts for water purchases in many cases.
Staff is aware that United Water intends to sign contracts
for additional water purchases prior to the summer , but
without contracts in hand, or when contracts are provided
to Staff at the 11th hour , Staff is unable to review them
In the time frame established for this rate case.
Consequently, Staff recommends they be considered in
future case.
Has United Water made any attempt to normalize
its purchased water costs to consider the effect of
varYlng raw surface water cost and availability from year
to year?
, United Water seems to have made no attempt
to normalize its raw water purchase costs.
. You discussed earlier that United Water builds a
portfolio consisting of a combination of owned water
rights and purchased water to supply water for its water
treatment plants.Is your proposed adjustment to
purchased water costs related to United Water s investment
to acquire the Initial Butte water rights?
CASE NO. UWI -W- 04-
04/06/05 STERLING , R.
STAFF
(Di) 42
638
Yes, the adj ustment to purchased water expenses
lS interrelated with the Company s Initial Butte water
rights purchase.As I stated earlier, Uni ted Water is
only able to currently utilize approximately half of the
Initial Butte water rights due to seasonal minimum stream
flows that must be maintained in the Boise River and
inability to utilize water from the Snake River.Because
only half or less of the Initial Butte water can be
utilized, additional contractual water purchases are
necessary.United Water should not be allowed to recover
both the full investment for the Initial Butte water
rights and the costs of contractual purchases of
additional raw water because once Initial Butte is fully
utilized at some time in the future, additional
contractual water purchases likely will not be necessary.
Thus, I propose that if the Commission decides to allow
only half of the investment in Initial Butte water rights
to be included in rate base, it consider allowing known
and measurable adjustments to purchased water expenses.
However , if the Commission decides to allow all of the
Initial Butte water rights investment in rate base, it not
allow full recovery of all of the raw water purchase
expenses intended to supply the CWTP.
Adlustment No. 11 - Adlustment of Purchased Power Expense
Uni ted Water proposed an adj ustment to test year
CASE NO. UWI-04-04/06/05 (Di) 43STERLING, R.
STAFF
639
purchased power expense of $514,265.Do you agree wi th
the Company s proposed adjustment?
The purpose of this adjustment is to adjust for
the effect of Idaho Power s PCA on purchased power
expense, and to adj ust for expected power costs at the
columbia Water Treatment Plant and the associated raw
water pumping station.I agree that an adjustment
appropriate, but disagree with the amount proposed by the
Company.I instead recommend an adjustment amount of
$283,459.My proposed adjustment removes the effects of
Idaho Power s PCA from both the test year and from the
current rates being applied to the estimated usage.
addition, my adjustment also utilized more accurate
estimates of energy consumption amounts for the raw water
pumping station as provided by the Company in response to
Staff Production Request No. 94.In addition, I adjusted
the cost assumed by the Company for CWTP redundant power
and stand by charges to correspond to more accurate cost
estimates included in the Company s response to Staff
Production Request No. 95.Computations in support of my
proposed adjustment are included as Exhibit No. 122.
Adlustment No. 12 - Adlustment of Deferred Power Expense
Please explain the purpose of this proposed
adj ustment
The purpose of this adj ustment is to reflect the
CAS E NO. UW I - W - 04 - 4
04/06/05 (Di) 44STERLING, R.
STAFF
640
amortization of deferred power expenses as established in
Order No. 28505 in Case No. UWI-00-In that order,
the Commission stated,
United Water has requested authorization to
defer on its books beginning May 1 , 2001
certain electric power costs. The Commission
finds it reasonable to authorize such adeferral. The Company also proposes to apply a
carrying charge on unamortized deferral balances
at a rate equal to the customer deposit rate.
The Commission finds it reasonable to reserve
judgment on the recovery of the amount deferred
as well as the appropriateness of any carrying
charge until actual recovery is requested.
United Water in this case is proposing to
recover an amount of $1 550,000.This amount represents
the Company s estimate of the deferral balance as it has
accumulated from May 1, 2001 through May 31, 2005.Uni t ed
Water is also proposing to amortize this amount over three
years.
Do you agree wi th the adj ustment proposed by
United Water?
I agree that United Water should be permitted to
recover some amount of the deferral.However, I do not
believe that the Commission should authorize recovery of
the full amount requested by United Water.The purpose of
the deferral was to allow Uni ted Water to seek some relief
from the extraordinarily high power prices that resul ted
from the 2000-2001 Western energy crlSlS.As depicted in
Exhibit No. 123 , page 2 of 3, Mid-C prices had subsided by
CASE NO. UWI-04-04/06/05 STERLING, R.
STAFF
(Di) 45
641
mid-summer 2001, and Idaho Power s monthly PCA deferrals
had returned to more normal levels by the beginning of
2002 .Idaho Power began recovering the massive PCA
deferrals from customers through PCA rate adjustments in
May of 2001.As shown on Exhibi t No. 123, page 3 of
the average PCA charged to customers remained
exceptionally high from May 2001 through May 2003.
Although the PCA has remained fairly high since May 2003,
it has been far below what it was the previous three
years.I believe that the PCA surcharges since May 2003
have been almost exclusively the result of below normal
water conditions, and have not in any way been influenced
by the extreme market prlce crisis of 2000-2001.
If you agree that Idaho Power s current PCA
surcharge is considerably higher than it was historically
prior to 2001 , why don t you believe United Water should
be permitted to continue to defer its unusually high power
expenses?
I do not believe the Commission s authorization
in Order No. 28505 for a deferral of power costs was
intended to permi t Uni ted Water to recover above normal
power costs that were strictly due to poor water
condi tions.I bel ieve the deferral was intended only to
provide temporary relief from the extremely high power
costs resulting from the short-term Western energy crisis.
CASE NO. UWI-04-
04/06/05
STERLING, R.
STAFF
(Di) 46
642
Absent highly unusual circumstances like occurred in 2000-
2001, electric prices will deviate both above and below
normal , and Idaho Power will have both PCA surcharges and
credi ts.Consequently, I propose that Uni ted Water only
be allowed to recover a deferral amount accumulated
between May 1 , 2001 and May 31, 2003.This amount, based
on the Company's accounting records, is $1 033,220.
United Water has proposed to amortize deferred
power expenses over a period of three years.Do you agree
with the proposed amortization period?
No, I believe that United Water's proposed
amortization period of three years lS too short.In my
opinion there are several things that should be considered
when determining a reasonable amortization period for
deferred expenses.First ,I believe that the length of
time between rates cases is a factor.United Water s last
rate case was four years ago in 2000.Second, I believe
the amortization period should stretch over a period
least as long as the time over which the deferral was
accumulated.As discussed previously, I am recommending
that deferred amounts accumulated over a two-year period
from May 2001-May 2003 be approved for recovery.Finally,
I believe that the length of the amortization period
should be long enough to soften the impact on ratepayers,
compared to the impact that would have been fel t if the
CAS E NO. UW I - W - 04 - 4
04/06/05 (Di) 47
643
STERLING, R.
STAFF
expenses had been simply passed through during the time
while they were being incurred.For these reasons, I
recommend an amortization period of four years.
approving deferral of extraordinary power costs, the
Commission gave relief to the Company and its
shareholders.By approving a four-year amortization
period, I believe the Commission would be balancing the
relief provided to the Company with commensurate relief
provided to customers.Using a four-year amortization
period and my recommended deferral amount, the pro forma
annual amortization expense is $259,524.
Uni ted Water has applied a carrying charge rate
of one percent to the deferral balance.Do you agree that
thi s is appropriate?
The carrying charge rate proposed by United
Water is based on the annual customer deposit interest
rate approved by the Commission for Idaho Power in Case
No. IPC-E-01-07, Order No. 28722.Staff believes a
carrYlng charge is not warranted because, absent the
deferred authori ty, these costs would not be recovered
all.Recovery of the actual expendi tures from the
deferral period , Staff believes, is sufficient relief
wi thout also applying a carrying charge.However , s lnce
these expendi tures are associated wi th the Western power
crisis, and are totally outside the control of United
CASE NO. UWI -W- 04-
04/06/05
STERLING, R.
STAFF
(Di) 48
644
, 15
Water , Staff is willing to accept this carrYlng charge
rate as appropriate for this issue in this case.
Computations in support of Staff's proposed adj ustment are
included as Exhibi t No. 123, page 1 of
Adiustment No. 13 - Adiustment of Chemical Expense
What is your recommendation with regard to
adjustments to chemical expenses?
The purpose of this adjustment is to normalize
chemical expense using test year usage at current prices,
to adj ust for expected chemical usage at the CWTP, and to
normalize phosphate usage.I recommend accept ing the
portion of the adjustment intended to normalize test year
chemical expenses at current prices.I al so recommend
accepting the estimated chemical expense associated with
the CWTP.However , I recommend rejecting that portion of
the adjustment intended to normalize phosphate usage.
Why do you recommend rej ecting the portion of
the adjustment associated with phosphate usage?
The Company states that the phosphate expense
has been normalized upward by $15,000 from the test year
level because "Company operating personnel have learned
through experience th~t certain areas of the system become
\ unstable ' in the winter season , leading to an increased
level of customer complaints, unless phosphate use
continued through the winter season.(Reference Healy,
CASE NO. UWI-04-
04/06/05
STERLING, R.
STAFF
(Di) 49
645
Di ., p. 16, ines 14 -18) Without judging the Company
rationale, the fact remains that United Water did not
increase its phosphate usage in the test year by $15,000;
it only speculates that increased usage will be necessary
in the future.The speculation about increased phosphate
usage in the future simply fails the test of being known
and measurable.Computations in support of Staff'
proposed adjustment are included as Exhibit No. 124.
Adlustment No. 31 - Adlustment of Expenses Related to
Weather Normalization
Do you agree with the Company s proposed
adjustment of expenses related to weather normalization?
Yes; however, I have made a very minor change to
the Company s proposed adj ustment to maintain consistency
with my earlier recommendation to remove the PCA from the
power cost computations.The purpose of this adjustment
is to normalize variable power costs and chemicals due to
the negative weather normalization adjustment made by
Uni ted Water.Removing the PCA effect from the power cost
reduces the Company s total variable costs, thus slightly
reducing Uni ted Water s proposed adj ustment Computations
in support of Staff's proposed adjustment are included as
Exhibi t No. 125.
Pro Forma Revenue Adlustments
Uni ted Water wi tness Gradilone has made several
CASE NO. UWI -W- 04-
04/06/05
STERLING , R.
STAFF
(Di) 50
646
adjustments to test year revenues as shown on his Exhibit
6, Schedule 1 , page 2 of Do you agree with his
proposed adjustments to test year revenues?
I have reviewed his proposed adjustments and
agree with the adjustments for a) full pricing of South
County water sales, b) weather normalizing adjustments,
annualization of growth during the test year, and
annualization of growth through May 31, 2005.These
adjustments are shown in columns (2)(3) ,( 4), and ( 5 )
respectively of Exhibi 6, Schedule 1, page 2 of
Are you proposing any other adjustments to
revenue?
Yes, I am proposing two minor adjustments to
revenue at proposed rates.First, Uni ted Water wi tness
Gradilone in Exhibi t No.6, Schedule 1 page 2 of 2 on ine
7 shows revenue associated wi th bulk hydrant sales.
United Water s practice is to bill for bulk hydrant sales
at the normal commodity rate charged to all other
customers.If the commodity rate for all other customers
is increased, a corresponding increase should be reflected
in the revenue at the new proposed rates.I have
reflected this increase in Staff's Exhibit No. 126.
I am also proposing an increase in the rate
United Water charges for rent on construction meters
commensurate with the overall increase Staff recommends in
CASE NO. UWI -W- 04-
04/06/05 STERLING, R.
STAFF
(Di) 51
647
this case.I recommend that the rental rate on
construction meters be increased from $20 per month to $25
per month.Even though United Water has not proposed an
increase in the meter rental rate, I believe it would be
inappropriate to not increase this charge associated
exclusively with new construction, while increasing the
commodity rates for all other customers.The increased
rate will have a very minor effect on the Company
revenues; nevertheless, the effect has been incorporated
in Exhibi t No. 126.
Rate Design
What do you believe should be the objectives
a good rate design?
There are many obj ect i ves, but I bel i eve some of
the most important are fairness, simplicity, effectiveness
in sending a conservation signal, and sensitivity to the
needs of low- income customers.
Customer Charqes
Uni ted Water is proposlng to increase the
customer charge by 36.4 percent.Do you agree wi th thi
proposal?
No, I do not.The Company s proposal is to
increase the customer charge by a percentage equal to half
the difference between the overall requested revenue
increase of 22.46 percent and the 51.1 percentage increase
CASE NO. UWI-04-
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(Di) 52STERLING, R.
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648
, 12
it believes can be supported by its cost of serVlce study.
For a typical residential customer with a %-inch meter,
the customer charge would lncrease from $14.57 bi -monthly
to $19.86.
In his testimony, Company wi tness Peseau states
the definition of customer costs as defined by the
American Water Works Association as follows:
Costs directly associated with serving
customers, irrespective of the amount of wateruse. Such costs generally include meter
reading, billing, accounting, and collectingexpense, and capi tal costs related to meters andassociated services.
On the other hand, he also acknowledges that the
Commission Staff recently, in Case No. IPC-E- 03 -13,
proposed that customer costs for electric utilities be
defined more narrowly.In that case, the Commission
accepted Staff's position that customer costs should be
based on the direct costs of meter reading and billing and
should not include any fixed plant cost.In Order No.
29505 issued on May 25, 2004 , the Commission stated,
The Commission finds that a monthly service
charge should recover costs that are directly
attributed to the customer paying the charge.
Typically, these charges are related to meter
reading and customer billing. ... The Commission
finds that the appropriate service charge for
residential customers is $3.30 per month. This
is an increase of 31.47%. We find a service
charge of that amount provides a reasonable
balance between recovering specific customer
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649
service costs in .a fixed fee while preserving
the ability to provide price signals forconservation purposes. Order at
p.
53.
In an even more recent rate case for Avista,
Avista proposed to increase its basic customer or minimum
monthly charge from $4.00 to $5.00 for residential
customers.In rej ect ing the proposed increase, the
Commission stated on October 8 , 2004
The Commission is unwilling to dampen the
incentive for customers to conserve energy. For
the residential customer that incentive
generally a price signal and the ability to
control the total bill amount. We find that the
present customer charge for residential
customers is sufficient to provide the Company
with recovery of those costs that are directly
attributed to the customer taking service.
find that those charges are related to meter
reading and customer billing costs, in this caseapproximately $2. 62/residential customer. While
we are not incl ined to increase the charge;
neither do we find a compelling reason todecrease it. Order No. 29602 at
p.
33.
I recommend an approach in this case that
consistent wi th that accepted in the Idaho Power and
Avista cases.Based on United Water s cost of service
study, customer related metering and billing costs
represent $3,752,687 of the Company s total normalized pro
forma annual expenses of $38 141,514 (Peseau, Exhibit No.
, Schedule 1, p. 1 of 2)If metering and billing costs
were converted to a bi -monthly customer charge, the rate
would be $7.04 for a typical residential customer with a
%-
inch meter.The current bi -monthly customer charge for
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650
this customer is $14.57.Because the current charge
already exceeds the charge that could be supported by the
cost of service study for just customer billing and
metering costs, I do not recommend an increase in the
monthly customer charge.Even at the current rate ($14.
bi-monthly = $7.29 monthly)United Water s customer
charge is more than double Idaho Power s and nearly double
Avista ' s.
Are there any other reasons why you oppose any
increase in the bi -monthly customer charges?
Yes, another reason I oppose an increase in the
customer charge is because it would have a
disproportionate effect on customers who use small amounts
of water.For these customers, the customer charge
represents a greater proportion of their bill.For
example, if United Water s proposed 36.4 percent increase
in customer charge and 21. 5 percent increase in commodi ty
charge were accepted, a customer with minimal consumption
would face an overall increase closer to 36 percent, while
a customer with a very large volume of consumption would
face an overall increase closer to 21.5 percent.This
tends to place more of the overall lncrease on those
customers who are likely to already be more conservative
in their water use.I do not believe these customers
deserve to be "penalized" for their conservative
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651
consumption habits.
In addition, many low- income customers are more
likely to also be small water users.Staff has an
interest in minimizing the impact of a rate increase on
low- income customers, and maintaining customer charges at
their current level will help to accomplish that
obj ecti ve.
Given that United Water s current customer
charges are more than double an amount you estimate
necessary to cover meter reading and billing costs, do you
recommend a decrease in bi-monthly customer charges?
No, I do not.Because the likely outcome of
this case lS an overall increase in rates, I think that a
reduction in any single component of rates is a step in
the wrong direction unless there lS a very compelling
reason to do so.In addition, a substantial decrease in
the customer charge could create cash flow problems for
United Water because so much more revenue would then have
to be collected through commodi ty charges in the summer
months when the maj ori ty of the consumption occurs.
Finally, water utili ties generally have much higher fixed
costs per customer than electric utilities; therefore, I
do not believe it is unreasonable to collect a little more
than just meter reading and billing costs in the customer
charge.
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652
United Water s Proposed Rate Design
In its Application, United Water has not
proposed a new rate design but has instead proposed to
retain the current rate design consisting of a fixed bi-
monthly customer charge and a commodity rate with a
summer/winter rate differential of 25 percent.Do you
believe that the current rate design should be maintained?
Although my preference is a two-block inverted
rate design which I will discuss shortly, the current rate
design has some posi ti ve features.First, the current
rate design has been in place since 1993.Customers have
now generally become accustomed to the summer/winter rate
differential.Most understand its rationale and
obj ecti ves, and many are motivated to conserve by the
higher summer rates.Based on the number of comments and
complaints received by the Commission Staff, many
customers dislike the summer/winter rate differential
believing that they are paying an unjustified "premium
for summer water use rather than viewing it as getting a
discount" for water used the remainder of the year.
While Staff does not necessarily regard the number of
complaints as an indication of ' a good rate design , the
number of complaints regarding the seasonal rate
differential is at least some indication that higher
summer rates get customers ' attention and motivate some
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people to conserve.
Any time a new rate design is implemented,
however , there is a period-sometimes a very lengthy one-
during which customers must learn and become aware of the
new rate design.Moreover, even more time is required for
customers to adjust their usage patterns before the
obj ecti ves of a new rate design can be achieved.
believe the decision of whether to implement a new rate
design should be based on an eval uation of whether the
advantages of a new rate design outweigh the tradeoffs.
25% Summer/Winter Rate Differential
Do you believe the 25 percent summer/winter rate
differential should be maintained?
Yes, I do.By having a commodity rate that
25 percent higher in the summer than in the winter
customers are sent a strong conservation signal that helps
to lessen United Water s peak summertime demands.
Furthermore, I agree wi th Uni ted Water wi tness Peseau ' s
conclusion from his cost of service study that there is a
substantial difference in commodity costs of service
between the winter and the summer.
Do you believe that the summer/winter commodity
rate differential should be increased to more than
percent?
No, I do not.I have reviewed United Water
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wi tness Peseau ' s cost of serVlce analyses that show that
the seasonal rate spread based on cost of service falls in
the range of 25-70 percent.Although this is a very broad
range and far from a precise conclusion, I do believe it
demonstrates that a seasonal differential of at least 25
percent is warranted.I am not incl ined to propose a
seasonal rate differential greater than 25 percent,
howeve r .The 25 percent rate differential has been in
place for more than 10 years now.Most customers, I
believe, are now very aware of the rate differential.For
many customers, if not most, the 25 percent rate
differential, especially when combined with much higher
summertime usage and bi -monthly bills, is enough to send a
very strong conservation signal.Al though a greater
seasonal rate differential might be supported by cost of
serVlce, if the seasonal rate differential were increased
even further, I expect it would be met wi th extreme
resistance from many customers.Thus, I believe the
current 25 percent seasonal rate differential should be
maintained.
Rate Desiqn Alternatives
If the Commission wishes to consider alternative
rate designs, what is your recommendation?
Before any consideration is given to changing
the current rate design, I believe that the Commission
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(Di) 59
first needs to decide whether the practice of bi-monthly
billing should be continued.Because there is a lengthy
lag under bi-monthly billing between when water is used
and when the customer is billed for it, customers have
limited ability to respond to price signals.Since one of
the obj ecti ves of good rate design is to send appropriate
price signals, no rate design can be very effective if the
price signal it sends is always two-months too late.
Are there other issues to consider with regard
to bi -monthly billing?
Bi-monthly billing, combined with theYes.
current 25 percent higher summer commodity rate tends to
greatly inflate nearly all customers ' summertime bills.
For some customers, the higher summertime bills are
much higher that they have difficul ty budgeting and paying
them.Monthly billing could relieve at least some of the
burden of extremely high summertime bills for many
customers.
Would movlng to monthly billing dilute the price
signal in the summertime?
Because each bill, including those in the
summer , would be half as large under monthly billing,
there is some possibili ty that the price signal would be
di mini shed.However , because there would only be a one-
month lag between consumption and billing, and because
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656
there would be a monthly price signal sent, I believe
customers would receive just as strong of a conservation
message as with bi-monthly billing.
Has United Water estimated the cost of
converting to monthly billing?
Yes, the Company estimates the incremental cost
of monthly billing as $1,086,000 per year.Tha t cos t
alone would require an increase in the Company s annual
revenue requirement of approximately 3.4 percent.The
Commission would have to weigh this incremental cost
against the benefits of monthly billing.Most likely,
some customers would prefer to retain bi-monthly billing
if it meant no increase in rates, while others would agree
to pay more just to reduce the impact of their summertime
bills.
Is Staff proposing a new rate design in this
case?
No, Staff is not proposing to change the current
rate design.
Why not?
In Case No. UWI-98-3, I proposed a change from
the current seasonal rates, but the Commission rej ected
proposal.In that case, I proposed a three-tiered
inverted block rate design.I believed that a three-tier
inverted block rate design would be more equitable, but I
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657
acknowledge that it would also be more complicated.
Neither United Water nor Staff is proposing any
change to the current rate design in this case; however,
if the Commission wishes to consider a different rate
design, what type of rate design would you prefer?
My preference would be an inverted block rate
design consisting of two blocks that would be in place
year round.I believe an inverted block rate design would
accomplish all of the same obj ecti ves as the current
seasonal differential rate design, but would overcome some
of the problems.
Please generally describe your preferred
inverted block rate design.
Under an inverted block rate design, all
customers-residential , commercial, industrial and public
authori ty-would have a lower priced block and a higher
priced block that would remain in place throughout the
year.The consumption limi ts for each block would be set
for each meter size in proportion to the quanti ty of water
typically used by other customers with the same meter
S l ze .The block limits would be designed so that most
customers' usage would not fall wi thin the higher priced
block except in the summertime.Customers whose usage
remained fairly constant throughout the year may never
have their usage fall wi thin the higher priced block.
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658
Why do you prefer such an inclining block rate
design?
There are several reasons why I prefer it.
First, because rates remaln fixed throughout the year, it
sends a conservation signal year round.This would
provide a more consistent price signal to customers and,
unlike the current summer/winter rates, would send a prlce
signal be fore the summer season beg ins.Second, an
inverted- block rate design does not give the impression
penalizing" those customers whose usage does not increase
significantly in the summertime.Third, by establishing
block limits based on meter size, an inverted rate design
can differentiate between the seasonal consumption
patterns of large customers.Many large customers,
particularly commercial and industrial ones, have a
relatively flat consumption pattern throughout the year
but under the current rate design, pay much more in the
summer for the same amount of water used in other seasons
of the year.In summary, I simply believe that an
inverted block rate design provides greater fairness for
more customers and still accomplishes a conservation
obj ecti ve.
Has the Commission adopted inclining block rate
designs for other utilities?
Yes , both Idaho Power and Avista now have
CASE NO. UWI -W- 04-
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659
inclining block rate designs.
Are you recommending that an inclining block
rate design be implemented in this case?
My recommendation is that if the Commission
wishes to consider an inclining block rate design or other
al ternati ve designs, that further proceedings be ordered
in this case to enable al ternati ve rate designs to be
created, analyzed, and evaluated.
Raws
Given the revenue requirement increase of
$581 069 recommended by Staff witness Harms that includes
your adjustments to pro forma revenue as discussed earlier
in your testimony, how do you propose to adjust rates to
collect the 1.84 percent increase in revenue?
I recommend that the commodi ty rates be
increased uniformly by 2.38 percent to collect the
additional revenues.
My recommended rates are shown in Exhibit No.
127.Fixed service charges that are based on meter size
remain unchanged from their present levels.However , the
fixed rates for street sprinkling and flat rate service
have been increased by 1.84 percent, consistent wi th the
overall percentage increase in revenue requirement
recommended by Staff.Fire protection tariffs have also
been increased by the same percentage.My proposed
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660
commodi ty rates are $1.0058 per ccf in the winter and
$1.2574 per ccf in the summer.
Have you prepared a rate proof to demonstrate
that your proposed rates will generate Staff's proposed
revenue requirement?
My rate proof is included as Exhibit No.Yes.
126.
Does this conclude your direct testimony in this
proceeding?
Yes, it does.
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661
(The following proceedings were had in
open hearing.
(Staff Exhibit Nos. 121 through 127
having been premarked for identification , were admitted into
evidence.
Mr. Sterling is available forMR. STUTZMAN
cross - examina t ion.
COMMISSIONER KJELLANDER:Thank you.Okay.
Let's start wi th Mr. Purdy.
MR . PURDY:I believe I'll defer to Mr. Lobb for
any questions, thank you.
COMMISSIONER KJELLANDER:Okay.Thank you.
Mr. Eddie.
CROSS - EXAMINATION
BY MR.EDDIE:
do have few
you
- -
first set quest ions are in reference to conservation
questions, and Mr. Sterling,
planning discussion that was reflected in Don Woj cik' s
testimony filed on behalf of Idaho Rivers United and also in
Mr. Wyatt's rebuttal testimony.If you're, more comfortable
deferring the questions to Mr. Lobb that would be okay, but
have you reviewed the Woj cik testimony and Mr. Wyatt'
testimony with regard to the conservation planning issues?
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Yes , I have.
And you I re aware that in Mr. Wyatt I s rebuttal
testimony, he essentially agrees with Mr. Woj cikl s call
request to the Commission for a updated conservation plan to be
submitted?
Yes.
Is there -- does Staff have a position on the
development of a new and updated conservation plan for United
Water?
Yes,think would support or updatereVlSlons
the plan.far remembe r the last conservation plan
was 1993,it I probably quite outdated.
As I see it, the one outstanding issue is the
timing for development of that plan.Were you here when
Company witness Scott Rhead was discussing the difficulty
acquiring water supplies for 2005?
Yes.
And m not golng
mouth,but
to put words in Mr. Rhead'
light of that discussion, do you think it would
be important to have conservation opportunities or an updated
analysis of conservation options in place and ready for
implementation as soon as possible?
Yes.
Perhaps before summer 2006?
I think that's probably feasible, before next
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summer.
I wanted to turn to a fewThank you.'Great.
questions about rate design which was discussed in your
testimony.At pages - - well , page 64 of your testimony,
lines 14 to 25, you discuss here what you describe as your
preferred rate design which is an inverted block rate.Maybe
you should take a minute to review that just so that you I
refreshed?
Okay.
Would it -- would you agree that the typical or
average indoor water use - - indoor water use
- -
by customers in
each class or in each category that you've identified , that
that figure would generally correlate with the "break point that
you ve identified for the block rate?
m not sure I understand the question.
m trying to put a little more detail to your
suggested break point between the blocks of your preferred
al ternati ve and how an analysis might be done to determine that
exact break point, and I'm suggesting that it's average indoor
water use within each category.Would you agree with that
assessment?
Well, United Water I s tariffs bill a customer
according to meter size and there are many different meter
slzes even wi thin residential customers, and so each - - each
meter size would have to have associated with it its own block
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STERLING (X)Staff
limits.And there are lots of different ways that you could
establish those block limits, but average indoor water
consumption would be one and it wouldnl t necessarily be
unreasonable.
Okay.I guess I'm wondering whether Staff
supports a more thorough investigation into setting to
discussing inverted block rates, where break points would
happen and how - - how revenues would be collected under a block
rate design.Would you support a further investigation of
those issues following this rate case?
Well , I think that would be something really for
the Commission to decide how far they want to proceed wi
that, if at all.We certainly would be willing to look at it
if the Commission wanted to go that direction.
I proposed an inverted block rate design in
Uni ted Water I s last rate case and that was rej ected.Whether
or not the Commission wishes to look at that again , I think we
would want to have some indication from them as to whether or
not they would want to address rate design in this proceeding
or In some subsequent proceeding.
Okay.
Nothing further.MR. EDDIE:Thanks.
COMMISSIONER KJELLANDER:Thank you.
Mr. Strickl ing.
MR. STRICKLING:Thank you.
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CROSS - EXAMINATION
BY MR. STRICKLING:
Mr. Sterling, In your testimony, you talk about
the RFP process used by Uni ted Water to choose their
- -
the
contractor ul timately, CDM?
Right.
And there were other proposers for that contract.
Is that correct?
Yes, there were.
And in your testimony, you indicate that United
Water chose the second highest proposal?
Well , there were
- -
there were varlOUS cri teria
that were used in the ranking process , but considering all of
the criteria, some price criteria and some other criteria , the
one that scored second to highest was the one ul timately chosen
by the Company.
Okay.And your discussion wasn't based on target
pricing, but they did ask for target price proposals, did they
not?
Yes, they did.
And there was a difference between the proposers
that you reviewed?
We were only able to review two of theYes.
target prlce figures because that I s all the Company was able to
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Staf f
provide to us.
Okay.And yesterday I believe Mr. Wyatt
indicated there was a difference between CDM and the next
proposer of about 42 000.He indicated about 888,000 between
that and 846,000.Were you hereDo you recall that testimony?
yesterday?
Yes, that was the difference between
- -
there
were two parts to the price part of the proposal.There was a
fixed fee price and that's the part that you just referred to
the difference.There was also the target price which you
referred to earlier , which was a separate piece of each
proposal.
And did that include an engineering difference in
the engineering proposal?
Did which include?
The total price that was estimated there.
Well, there were
- -
the engineering costs were
actually included I believe in the target price, and then there
was a profit piece that was included in the fixed price.
And what was the total difference in the target
prlce between the first proposal and second proposal?
I believe in my testimony
- -
and I can't point
you to the page immediately
- -
but I believe I gave a range
somewhere in my testimony.
Would it have been more than the $42 , OOO?
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Yes , it was.
Could it have been in the $600,000 range?
I think it was probably even more than that.
From your testimony, it indicates that the
decision to go with the second proposal, with CDM , was not made
at the local level?
Well , there were local people involved in the
decision, but I think ultimately the influence to choose the
proposal that they did was
- -
came from the New Jersey office.
And , again , it was other factors besides costs?
I assume there were other factors as well , yes.
From the documents that you viewed, was there any
indication that the highest proposer could not have performed
the work suitably?
No, I bel ieve - - I bel ieve any of the companies
that made proposals could have done the work.In fact , I think
that's why those four firms were chosen or invited to bid
because the Company bel ieved any one of those four could have
done the job.
Okay.
MR. STRICKLING:I have no further questions.
COMMISSIONER KJELLANDER:Thank you.
Mr. Campbell.
MR . CAMPBELL:Thank you.
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CROSS - EXAMINATION
BY MR. CAMPBELL:
Mr. Sterling, turning to your revised testimony
on page 34, can you tell me specifically what the revision
pertained to and wi th regard to the IMAP proceeding?I see
that --
I don't have a copy of my original testimony, but
I believe that the revision was primarily
- -
the revision
associated with IMAP primarily was in line 6 and 7.
The original testimony indicates that you were
proposlng a $644 700 in investment related to the Company I
IMAP be excluded from rate base, and your current testimony
that the minimum be -- $332 748 -- be excluded.Is that
correct?
Yes.
Can you tell me why you made that adjustment to
your test imony?
Because when I did further investigation after my
initial testimony was submitted, I think I concluded that there
are portions of the IMAP process that aren t exclusively
associated with preserving and protecting water for future use;
that some of that work associated with IMAP involves water
rights that are currently being used by the Company and not
being held or protected for future use.
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And what did you base that upon?You said,
"further investigation.Can you tell me specifically what you
relied upon?
It was a combination of documentation that we
reviewed from Department of Water Resources, as well as verbal
conversation with Water Resources staff.
Okay.Did you rely upon the rebuttal testimony
of Mr. Rhead at all?
I donl t believe that I relied on it necessarily,
but I do believe the reason that we investigated it further had
to do with some of the Production Requests that were made by
the Company, which they then followed up with rebuttal
testimony as reflected in Mr. Rhead I s rebuttal.
Okay.And did any of this adjustment result from
your evaluation the utilization the IMAP with respect
the Snake River Bas in Adjudication process?
No,not specifically.
Okay.With regard your testimony concerning
water right -- or , excuse me -- Water Permit No. 63-31409 on
page 34 and 35, has that testimony been changed at all from
your ini t ial ?
Yes , as I explained earlier, there is -- the
response to the question regarding that water right that begins
on 34 has been revised , and now there is a page 34a and a 34b
that have been added to my testimony.
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Okay.Were you present in the hearing room when
Mr. Rhead testified yesterday?
Yes , I was.
Did you hear his testimony that no water has been
diverted under this water permit to date?
Yes, and that was my understanding as well , even
before hearing his testimony.
All right.Turning your attention to page 35 of
your testimony on direct, line 16 through 21 , can you tell me
what you base your statement that the exchange of water
authorizes United Water to divert for irrigation purposes
within its authorized service territory up to 35.21 cfs from
the Boise River?
I believe that was based on information that was
contained in the files from the Department of Water Resources
concerning the exchange.
I see.
Thank you.That's all I have.MR . CAMPBELL:
COMMISSIONER KJELLANDER:Thank you
Mr. Campbell.
Let's move to Mr. Miller.
MR. MILLER:Thank you, Mr. Cha i rman .
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CROSS - EXAMINATION
BY MR. MI LLER :
Maybe if it's all right with you, Mr. Sterling,
I III start essentially at the end of your testimony and then
ei ther work backwards or touch on some other issues.Let me
start wi th a couple of the rate design questions.
Now , would you agree that as the case stands or
the record stands in this case , no party has put forward a
specific proposal for a change in rate design that could be
implemented in this case?
Yes, I would agree.
If the Commission is interested in further
exploration of possible changes to the current summer/winter
differential in favor of inverted blocks or something else,
that could ei ther be done in a follow-up proceeding to this
case or in Uni ted Water's next general rate case, presumably.
Would those be the two options that you would see?
Yes , I would say so.
I presume the potent ial advantage of doing it in
a follow-up proceeding would be getting to it quicker.On the
other hand, that could potentially involve a major change in
rates that customers would have to understand in between rate
cases.Correct?
Yes.
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And if you made a maJor change in rate design
outside of a rate case , it would be more difficult to, In
effect, do a rate proof to be sure that the rates were
collecting the revenues that were allowed by the Commission.
It would be easier to do that , to make those decisions , in the
context of a general rate case, would it not?
Yes , probably so.
In the Company I s rebuttal testimony based on what
the Company saw in testimony from the other parties , the
Company affirmatively is endorsing and encouraging the
Commission to adopt a monthly billing format as opposed to the
current bimonthly billing format.Do you understand that?
Yes.
Is the Staff opposed or neutral or supportive on
the question of moving to monthly billing?
I think at this point the Staff is undecided.
don't think we've established a position.You know , we would
have to take a look at the benefits and the costs and determine
what we thought would be best.We see some advantages to
monthly billing, but we also understand that it comes at a
prlce.
Would one of the advantages be a more timely
prlce signal to consumers?
Yes, that would be one.
Another would be, as Ms. Ottens indicated this
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mornlng, it might make budgeting for some customers more
manageable?
Yes, it could do that.
It might provide a more useful consumption
history since you would have 12 units of consumption as opposed
to six in order to compare year to year?
Yes.
Okay.And is it al so the case that a move to
monthly billing would give the opportunity to the Commission
if it desired to take it, the ability to perhaps make some
upward movement on the customer charge wi thout undue hardship
to consumers?
I t all depends on the consumer.Some people
would recognize that as an increased customer charge no matter
how you framed it , but
- -
whether it was spread over two months
or all put in one month - - but it may appear to be less of a
customer charge to some customers.
Right.The Company has provided an estimate of
the cost to implement monthly billing.Has the Staff
undertaken to analyze or conf irm the reasonableness of that
estimate?
No.We are aware of the estimate.We have
looked at how the number was derived, but we've really not
made - - at least I have not made any attempt, nor am I aware
that any other Staff member has made' any attempt to evaluate
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the reasonableness of any of those estimates.
At least based on your initial review , I infer by
lack of obj ection that you didn t see anything that seemed
crazy?
No, I wouldn t necessarily say that.All I did
was I took the number that was given to us as an estimate from
the Company.I ran it through, I did some calculations to see
how much that would increase the rates, but I made no attempt
to evaluate the reasonableness of the estimate.
I believe the estimate came with some backup that
showed, for example, X number of new customer service
representatives at X wage for total increase to wages , X number
of new pickups at X price per pickup.Do you remember seeing
that?
Yes , I did, but, you know , a lot of those kind of
costs are - - that I s not my area of expertise , so it I S
- -
would be difficult for me to evaluate those things anyway.
would probably be something another Staff person would be more
qualified to do than
But if it's simply a matter of multiplying four
new employees by the existing wage, I mean, there's not much
room for error in that?
No, but I don t know that it would be four
employees could do it or three employees could do it or two
employees, or what the wages for those employees would be.
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Those things are not my area of expertise.
Well , I guess to say it the other way, Staff has
no basis for
- -
at this point
- -
for asserting that the
estimated annual cost is unreasonable?
No, we - - we've taken no posi tion on the
reasonableness of that number , or the unreasonableness of that
number, whichever way you want to present it.
Right.But you're not saying to the Commission
this lS a crazy number , you should probably discredit it?
I think it I S probably in the ballpark.No.
Whether it's too high or too low , I can't say, but I think it'
probably in the range of reasonableness.
Okay.Let me ask you a few questions about the
current level of the customer charge.Staff is proposing in
this case no change to the customer charge, assumlng monthly
, bimonthly continues.Did I understand that correctly?
That I S right.
The current charge, as I understand it, is
14.50 -- $14.57 on a bimonthly basis.Is that your
understanding?
For a three-quarter-inch meter.
Right.
It's different for every meter Slze, but that's a
common residential meter size.
And for the purpose of our discussion , let'
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stick with the three-quarter residential.
Okay.
The Company's proposal is to move that charge to
$19.86, which is halfway between the overall proposed increase
of 22 percent and the 51 percent increase indicated by the
Company I s cost of service studies.Have I
That I S my understanding, yes.
Right.And Staff did in this case review the
cost of service study that was performed by Dr. Peseau and his
firm?
Yes , I did.
And , likewise, you reviewed the cost of serVlce
study that was performed by other consultants in United Water I
previous rate case, you or the Staff did?
Probably the last two rate cases I'm familiar
with.
In reading the Staff testimony in this case,
contrasted to my recollection of Staff testimony in prevlous
cases , the Staff in this case did not have disputes or
criticisms with the methodology and the results of the cost of
service study prepared by Dr. Peseau, in contrast to prevlous
cases where it was there were cri tic isms.Is that a fair
summary?
Well , we didn't have any objection to or any
particular problems wi th his cost of service study, but I would
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also say that except for comlng up wi th a customer charge which
we didn't support, the cost of service study really wasn t used
that much to derive the rates in this case because there
it I S really the same rate design as before , only with a little
higher customer charge.
Now , the cost of service study did seem to
confirm that the current summer/winter differential of
percent is wi thin a cost of service rate.Am I correct on
that?
Yes , and I would accept that.
So the question is the customer charge, and the
maJ or element that's involved there, is it not, is the cost of
meters and services , the question of how you recover the cost
of meters and services?
Well, Staff I s position in this case is that the
customer charges should only be recovering the cost of meter
reading and billing.Very often though other fixed costs such
as meters and services are sometimes a part of the customer
charge, and there is often a debate as to whether or not they
should be recovered through the customer charge or through some
other mechani sm.
In Response to Production Request No.3 7 , did you
acknowledge that the cost of meters does not vary by
consumption?
Yes.
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And in Response to the same Interrogatory or
Production Request , did you acknowledge that the cost
services does not vary by consumption?
Yes , I did.
And in the same Response to Production Requests,
did you acknowledge that there is not a
- -
an economic
rationale for recovering costs of meters and services in
volumetric charge?
Well --
Might be other reasons , but there is not an
economic rationale?
Well , I think Staff I s perception was not based on
economic rationale.
But you agree that from a standpoint of economic
rationale, there is not a basis for recovering the cost of
meters and serVlces in the volumetric charge; you might have
other reasons, but they're not --
I would agree wi th that.
Right.And I bel ieve that one of the reasons
that you
- -
the noneconomic reasons that you indicated was that
you believe it would be consistent with the approach taken by
the Commission in the Avista and Idaho Power Company cases?
Yes.
All right.Do you think it I S a meaningful
comparison to compare rate structures for electric utilities
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and water utilities without taking into account the underlying
cost differences of the Company
- -
of the types of companies
and wi thout taking into account, as you acknowledge, the more
capital-intensive nature of water utilities?
Well , I certainly think you have to consider
those things and it is
- -
I do agree that there are a lot more
fixed costs associated with a water utility, and the question
really becomes how much of those fixed costs should you recover
t hroug h customer charge.And when you have a water utility
wi th lot fixed cost,that means if you intend to recover
all them through customer charge,you have ve high
customer charges compared to electric utilities.
I believe Dr. Peseau calculated that, currently,
approximately 55 percent - - 65 percent of the cost of meters
and services is recovered through the volumetric charge.Woul d
you agree or at least not dispute that percentage?
I can't veri fy whether it's 65 percent or not,
but I wouldn't disagree with it.I m notI would accept that.
surpri sed.
Did you happen to look at Dr. Peseau'
Exhibi t 14 , Schedule I?I don't know if you happen to have hi
testimony with you.
I believe I have it.It will take me a second
to --
Okay, I've got it.
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I thought this was a somewhat interesting exhibit
that might be worth spending just a moment to understand.
Are we on page 1 of that exhibi
Yes, sir.
MR. STUTZMAN I m sorry, I could use the
reference agaln.Wha t is it?
Schedule 1, page MR. MILLER:
MR. STUTZMAN Of exhibi t
Exhibi t 14.MR. MILLER:
BY MR. MILLER:And I could well be wrong, but as
I understand the exhibit, the second portion of it, the summary
of revenues
- -
rates and revenues by component would indicate,
to me, that this is an allocation summary of the cost of
service results which would show winter volumetric costs of
eight million, summer volumetric costs of 18 million , customer
costs of 11 million.
Yes, I would accept that.
And of the $11 million in customer costs, it
would indicate that 6.7 million are meters and services?
Yes.
Is that the way you'd understand it?
And if 65 percent of those nonvariable costs for
which there is not an economic rationale to recover in a
volumetric charge are, in fact, in the volumetric charge, a
very large number in comparison to the total fixed costs is in
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variable volumetric charge , lS it not?
Yes , it is.I would point out too though that,
you know , I think it I S always been the case.This particular
case is not unique.I think for quite some time and maybe it I s
always been the case that Uni ted Water has probably never
recovered all of their fixed costs through the customer charge,
and it I s
- -
furthermore, it's not unique just to Uni ted Water
ei ther.I think there are other utilities, even electric
utilities , where all of the fixed costs are not recovered
through the fixed charge.
There may be some practical judgmental reasons
for not doing it, but it I S worthwhile understanding the
magnitude of the issue we're dealing with?
Absolutely.
Yeah.And it would also be true, would it not
that the more you attempt to recover fixed costs in a
volumetric rate, the more you produce the possibility of
revenue instability and revenue underrecovery for the
Utili ty?
I think there I s some possibility for that to
happen , yeah.
Well, if the volumetric rate is essentially
subsidi zing the costs of meters and services, there's a
possibili ty that revenue recovery In the volumetric rate will
be insufficient to cover the cost of meters and services,
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obviously?
Well , I think that only happens though if new
customers use less water than existing customers, and I think
there is some evidence of that for Uni ted Water.So that I s why
I agree that it could happen and probably will happen to some
extent.
Right.And to the extent people believe that
keeping the customer charge low has a beneficial conservation
effect , isn I t it true that any subsidized rate structure has
incorrect price signals from an economic point of view?
Yes, that I s true.
In a perfect world, if you wanted to send the
right conservation signal, you would adjust the volumetric
charge and collect the fixed charge through a fixed cost
because that would be the more precise conservation price
signal , would it not, in a perfect world?
Yes, probably in a perfect world , yeah.I f we --
you know , if we were to set the customer charge at what cost of
service would support, it would probably be even quite a bit
higher than what Dr. Peseau has recommended.
Right.And the Company has attempted to strike
some balance that takes into account all of those things.The
point I'm trying to discuss with you is the problems of the
current system, that it I S not really a effective conservation
signal , that there are other ways to accomplish that.
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. 18
Well
- -
And I think the last reason that you relied on
f or change to the customer charge is your concern about
impact to low volume users and a seemingly disproportionate
price change to those users by raising the customer charge , and
I guess it occurred to me the question is why is it a penalty
to anybody to pay the - - something approaching a fair share of
the nonvariable costs through the nonvariable rate?
I don't know that I've characterized it as a
penal ty.AllIt's just very unpopular with most customers.
customer charges for every utility, no matter what they are or
how high they are , are very unpopular wi th customers, and it I S
particularly exaggerated for United Water because it's a
bimonthly billing system so you've got, in effect, two monthly
customer charges on the same bill.And for United Water it I
particularly unpopular when customers pay three or $4 to their
electric utility for a customer charge and don't really realize
why it should be any different for Uni ted Water.
Two minor quibbles, I guess.You indicated that
you didn t characterize this as a penalty, but on page 55 of
your testimony, you do characterize an increase in the charge
as penalizing low income or low volume customers.
MR . S TUT ZMAN :What line are you referring to?
MR. MILLER:, I don t know.I believe the
last line, Weldon.
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THE WITNESS:What page and line was that again?
BY MR.MILLER:Page
don'see anything
customer charge.
in that sentence that refers
, line 25, approximately.
Do you see something in it that refers to
penal ty?
Yes, I do.
And isn't it in connection wi th your discussion
of customer charge?
What I'm referring to in that paragraph is if
you - - if you only lncrease
- -
if you increase the customer
charge by a certain percentage
- -
in this case it was proposed
36 percent - - and the commodity charge is proposed to increase
at some different percentage, various water users will
depending on how much water they use, will experience overall
percentage increases that are qui te different , and a customer
who uses a small amount of water will experience a higher
overall increase because of the 36 percent customer charge
increase.
And this is just a quibble, but it I S not really a
penal ty for a person to pay the cost of providing the service
to that person , is it?
No, but again , the point I'm trying to make
that certain customers would be affected differently if United
Water I S rate proposal was accepted.
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others just
their bill.
because customer charges are a bigger portion of
Certainly.
Some would experience a higher increase than
And the Commission, in its judgment, can take
into account disparate impacts and moderate moves towards cost
of service obviously in its judgment?
Certainly.
Then just one mlnor quibble before we leave this
area.You indicated that customer charges are unpopular.
was going to take this point up with Ms. Cooper , but perhaps
can just do it with you.
Ms. Cooper's Exhibi t 128 contains a summary of
complaints and inquiries received by United Water over the last
three years , and you may not have this wi th you.I f you don I
let me just , for example , represent that in 2004 of 52 total
complaints received by the Company, one related to the customer
charge.In 2004 , the total of 18 inquiries received , two
related to the customer charge.And in Ms. Cooper I s testimony
regarding comments received by the Commission in this case, I
believe she indicated that she received
- -
reviewed 102 written
comments and three obj ected to a customer charge.
So if customer charges are a source of such
enduring and dramatic unpopularity, it doesn I t reflect in these
numbers, does it?
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Staf f
No, it doesn't reflect in these numbers , but
would also point out that I think United Water's customer
charge has been at least as high as it is now since probably at
least 1993, and I think there was a period of time when they
were even higher than they are now.So customers have been
paYlng these customer charges for qui te a number of years and
are - - they may be accustomed to them.I don't think they
happy with them , but they're used to them.They accept them,
but grudgingly.
Ready for an increase then?
Didn't say that.
MR. MILLER:Mr. Chairman , I wonder if this would
be an appropriate time to give Mr. Sterling and myself a short
break.
What about the rest of us?MR . CAMPBELL:
MR . MI LLER :You ve got to stay in here.
COMMISSIONER KJELLANDER:Okay, we'll go ahead
and take a 10-minute break, and doing my math we'll be here at
the top of the hour.So we'll go off the record.
(Recess.
COMMISSIONER KJELLANDER:We'll go back on the
record.Mr. Miller was in the midst of cross with witness
Sterl ing.
Mr. Miller, if you I d like to continue.
MR. MILLER:Thank you, Mr. Cha i rman .
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Mr. Sterling, I'd like to nowBY MR. MI LLER :
discuss with you your proposed adjustment regarding the
Company's purchased power expense, and that discussion is on
what page of your testimony again?
I don't know.I need help finding it as much as
you do.
MR . S TUT ZMAN :Thirty-eight , perhaps.
Thirty-eight?THE WITNESS:Is that what someone
said?
A VOICE:Forty- three.
MR . WALKER:You said 43?
Right.MR. MILLER:
Do you have that general area ofBY MR. MILLER:
your testimony in mind?
Yes, I do.
As I understand it, your proposal is to eliminate
costs associated wi th the Idaho Power Company PCA charge, both
as an adjustment generally to purchased power expense and in
connection wi th Columbia water treatment plant power expense.
Is that correct?
Yes.
And as I understand your theory, it is that Idaho
Power I S base rates reflect a normal level of electric power
expense, and by removing the PCA cost, you have, in effect,
normalized the Company's electric power expense.Is that a
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fair statement of your approach?
Yes , it is.
Do I understand you correctly that the Idaho
Power PCA has been in effect, I believe , since 1991?
I would accept that, yes.
And do you happen to know in how many of the
years Slnce 1991 the PCA has been exactly zero?
I don't know for certain , but I would guess it'
probably zero years.
Right.So there has never , s lnce the PCA has
been in effect, been a normal year in the sense that the PCA
has been zero?
I would accept that , yes.
Is it correct that in every case -- in every
United Water case Slnce the PCA has been in effect, the
Commission has accepted a power expense all - - or , allowance
for United Water Company that has included a purchased power
expense component?
m not aware of that.I can't say whether it I s
been the case or not.I m just not aware.
Are you aware that in every case since the PCA
has been in effect , that the Company has included its test year
level of electric power expense and then updated that number
for the most current known level of PCA expense the Company
will incur under the Idaho Power Company tariffs?
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Again , I'm not aware of it.Thi s would be the
first United Water rate case that I have reviewed that
particular expense , and had I reviewed any in prior years, my
recommendation would be similar to this case.
Would you accept , subj ect to check then , that
this proposal is new?
It would have to be subj ect to check , because
have absolutely no indication that that's the way it was done
in the past.
Are you aware of the way the Company has proposed
it in this case; that is, they have their test year level of
expense, then Mr. Healy has taken the most current Idaho Power
Company filing and priced the electric power. at the PCA level
that's expected to go into effect within the next few days to
weeks?
My recollection of what he did was first he
removed the effect of the PCA from the test year purchased
power expense, but for the
- -
in making his adj ustment,
incorporated the existing PCA in his computations, did not
remove it. And it was the PCA that was currently in place , not
the PCA that's now under consideration by the Commission.
And isn I t that exactly the way it's been done in
all previous cases?
Once again , I don't know.
Would you admi t that PCA expenses are real , just
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as are kilowatt hour charges and demand charges that are
charges that are actually billed and incurred and must be
paid?
Certainly.
If the Commission were to follow your
recommendation , wouldn t it be logical that the Company be
entitled to a surcharge to collect the PCA charges it actually
faces and pays?
, I don't believe so.
it I S your recommendation that even though
never been a zero PCA year and even though we know
PCA charges the Company will face least during
there has
the level
the first year of the rate period , the Company shouldn't be
able to recover them?
No.And even if I was willing to do that, it
would only be under the condition that the Company be required
to refund money to customers in years when there's a surcharge.
That would be fair.m not recommending that, but
- -
because
the PCA sometimes is a credi t, sometimes it I S a surcharge.
happens to be a surcharge right now.
And the Company is proposing to include in its
rate case expense the known and measurable level of PCA expense
it will face in the first year of the rate period , is it not?
It's known and measurable, but it I S not normal
and that's the reason that I don't believe it should be
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included.
Even though there has never been a normal year
the way you define it?
There has never been a year when the PCA has been
zero, but as I stated previously, there I s been many years where
the PCA is a credi t and other years when the PCA is a
surcharge.Over a course of time, over a long period of time,
in theory, those credi ts and those surcharges should balance
out, so if United Water is allowed to recover through rates now
when there I s a surcharge, that's not fair to customers unless
they're wi 11 ing to give a re fund when there is a credi t .
But it is the methodology that's been followed,
and if the Commission wanted to implement a system of
surcredi ts and surcharges for electric power expense , certainly
the Company would consider that, but at the present time, this
is the method that's been followed, is it not?
Once again , I don t know that this is the method
that I S been used in the past, and again , if it had been , I
would have opposed it then as well.
But you're willing to accept, subj ect to check
the accuracy of my representation to you?
Which part of your representation?
That it I S consistent wi th the practice that I
been followed routinely.
I would have to check that to convince mysel
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that that, in fact , is the case.m not sure that it is.
Another area relating to power is deferred power.
And just to sort of set the stage here , is it correct that in
Order No. 28800 , the Company -- or , the Commission permitted
the Company to commence a deferral for PCA-related expenses
also in connection with the Idaho Power Company PCA?
Yes, that is true.
I just want to check one thing.
And that Order was entered in 19 - - or , pardon
me - - in the year 2001?
I believe so, yes.
And it has not , to your knowledge , Slnce been
rescinded, modified , or al tered in any way by the Commission?
No.
And is there any dispute that the Company has
calculated a deferral of $1 469 000, plus or minus?
No, we don't dispute the amount.
So the calculation of the deferral as approved by
the Order is correct as far as Staff is concerned?
Well , no, I wouldn't state it that way.We have
no - - Staff has no dispute with regard to the amount that has
been deferred.The amount that should be recovered though , we
do disagree wi th the Company on that.
I understand that.But from a mathematical point
of view , the amount that I s been recorded as a deferral is not
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disputed?
That I S correct.We don
- -
we don't have any
dispute over the calculations of the Company, of the deferral.
And if I could state your theory of the
recommendation, and I don t want to misstate it, but as
understand it is that the Company should be permi t ted to
amortize and recover costs that were associated with the
electricity market crlSlS, so to speak , in the years -- in the
early years of the deferral , but it should not be able to
recover costs associated with variable water conditions that
occurred thereafter?
That's a fair characterization.
Okay.Now , would you agree that regulated
companles and others who have business before the Idaho
Commission rely on Commission Orders as meaning what they say,
and that is , that the Commission Orders don t have hidden
meanlngs that reasonable people cannot fathom?
Yes.
Is there anything in Order 2800 (sic) that limits
the deferral in the manner you have suggested?
No, but as shown in my testimony, I've quoted a
portion of the Order on page It clearly states that the
Commission finds it reasonable to reserve judgment on the
recovery of the amount deferred , as well as the appropriateness
of any carrying charge , until actual recovery is requested , and
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tha ti s now.
And does the Order ordering language:Say it is
hereby ordered that the Commission does hereby approve
establishment of a deferral account for incremental costs
relating to recent and future PCA related increases?
I don't believe I have a copy of the Order in
front of me, so I would have to accept that you re reading
directly from the Order.
And there I s nothing in the Order that advises the
Company or anybody else that the deferral is limited to market
crisis costs as opposed to any other PCA type costs, is
there?
No, but there's - - by the same token , there'
nothing that says the Company shall be allowed to defer these
costs indefini tely for whatever reason they may be higher than
a zero PCA.
At any time during the course of this deferral
did the Staff in any way advise the Company that the Staff
believed the purpose of the deferral had expired and the
Company should stop the deferral?
No.
The first time the Company was aware that there
was any possibility that these amounts deferred might not be
recovered was when we saw your testimony.Isn't that
correct?
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Well , I think the Company should have known and
expected even from the time the Order was issued that there
would be some limitation to how long they would be able to
defer those costs, that they couldn t defer them forever.The
Commission clearly stated in its Order that they would reserve
judgment on the amount of the deferral.And the reason for
that was that I believe at the time that Order was issued , we
were still in the midst of that power crisis and we didn I t know
how long it was going to persist, and until the Commission knew
better of just how long we were going to experience those
extremely high prices , it was really not realistic for the
Commission to establish a deferral amount or a period over
which that deferral could accumulate.
Well , it was recognized and obviously continued
to accrue until the next rate case, and that's when accrual
was --
I think that was the Company's request, but the
Commission certainly didn't accept that in the Order.
It is true, as you acknowledged at the start
that the Company has actually spent this amount for electric
power over the past years for the PCA to serve its customers.
Right?
That's true.
All right.And there I s nothing in the language
of the Order that limits the PCA deferrals to market crlSlS
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costs, is there?
A ., I think the Order is silent wi th regard to
that.
Right.And these electrons that the Company
purchased didn I t come labeled wi th "market crisis electrons II or
"bad water electrons II attached to them , did they?
No, they didn'I think , you know, if the
Commission were to allow that deferral to continue, you know
what would be the rationale for the Commission not to allow the
Company to defer a PCA next year or the following year or the
year after that as long as it I S a positive PCA.The Commi s s ion
has not done that in the past.
Well , obviously, the Company I s Application
requests the PCA in its rates , which you oppose, and the
presumption obviously is that the deferral would end with this
case?
Again , I believe that I s the Company'
presumption.I don t believe that's necessarily anyone else'
presumption.
All right.
MR. MILLER:I think those are all the questions
for this wi tness.
COMMISSIONER KJELLANDER:Thank you , Mr. Miller.
Let's move to members of the Commission.Are
there questions from members of the Commission?
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HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701
STERLING (X)Staff
Commissioner Hansen.
EXAMINATION
BY COMMISSIONER HANSEN:
Well, Mr. Sterling, maybe you're not the right
person to ask these questions , but where you had discussion
wi th Mr. Miller about the customer charge, I've got a couple
questions I'd like to ask you , and one is where I'm not a
customer myself of United Water, I don'-- I'm not really
familiar wi th their billing to the customers.And could you
tell me how that billing is structured, like is it just a
commodity charge and then a customer charge, or is the billing
more unbundled to show meter reading charges and more of a
breakdown , or is it just basically customer charge and
commodi ty charge , do you know?
I can speak to how the charges are determined.
Now , exactly what appears on the bill , you may want to ask
Carol Cooper that, but there are two parts to the bill.
There's a customer charge that's a fixed amount that is
dependent upon your meter si ze; and then there is a commodi
charge which is a rate per ccf or hundred cubic feet that'
based on your meter reading.And those two components are then
added together to come up with your total bill.
The commodi ty charge is 25 percent higher in the
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O. BOX 578, BOISE , ID 83701
STERLING (Com)
Staf f
summer than it is in the winter, but it's the same commodity
rate for all customers regardless of meter size or type of
customer, residential versus commercial , or so forth.
So as I understand in your testimony and I think
it's on page 53 , you talk about the commodity charge of 14.
bimonthly.Now , you just said it I S 25 percent more in the
summer - - the commodity charge
- -
than it is in the winter?
The commodity charge isn I The customer charge
is.
The customer?
The customer charge is the same year-round.It I s
the commodity charge that I s 25 percent higher.
And so we talked earlier about the average
monthly billing being per customer, residential customer , on an
annual basis, would be an average of about $27 a month or $54
bimonthly, and wi th the 14., that
- -
the customer charge then
would be about , in my calculation , would be about 25 percent of
the bill.And if it was raised up to 19.86 bimonthly, as
proposed, that would be more than a third of the bill would be
to customer charge.
And my question is
- -
lS do you know whether a
25 to 35 percent customer charge is an acceptable amount for
water companies to assess to customers?I mean , you know , we
talked about I think , you know , earlier with Mr. English about
what - - what's acceptable to water companies.What - - do you
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HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE, ID 83701
STERLING (Com)Staff
,,'
have an idea of whether this range of 25 to 35 percent would be
acceptable as what an average water company customer charge is?
Well , I certainly have not conducted any kind of
a survey of water companies to see what their customer charges
are and how much those customer charges are in relation to an
average customerl s bill, but I think it's quite common that
customer charges are kept artificially low , if you want to use
that term lower than what cost serVlce might justify,
United Water not unlque that respect.
There are and the numbers that you gave are
average numbers, but if you look at it during certain seasons
of the year , for many customers, for example, in the
wintertime, myself included , my actual charge that's based on
commodi ty is roughly a third of the customer charge.I pay
fi ve or $6 for my water and 14.57 for my customer charge in a
lot of the bi 11 ing periods.In the summer , obviously, you
know , I may pay 14.57 customer charge, but 50 , 60 , $70 in
commodi ty.And that I s pretty typical for a lot of customers.
But the customer charge for water utilities in
general is frequently higher than it is for electric utilities,
because water utilities have so much more fixed cost than an
electric utility does.
Probably Ms. Cooper is the one to ask this
question , but do you think the customer understands what goes
into that customer charge?
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HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701
STERLING (Com)Staff
Most customers don'Most customers , and while
we might not get that many formal complaints anymore , most
customers say, I don I t know what I get for the 14.57 that I pay
every two months.I get a bill and the opportunity to be a
customer , but I have no idea what it covers.
And that's probably common of most customers.
Probably very few really understand what that's intended to
cover , In my opinion.
Thank you.
COMMISSIONER HANSEN:That's all I have.
COMMISSIONER KJELLANDER:Further questions?
Commissioner Smith.
EXAMINATION
BY COMMISSIONER SMITH:
Mr. Sterling, In one of his questions
- -
at least
one of his questions
- -
Mr. Miller characterized United Water'
rate structure as a subsidized rate structure, and you agreed
wi th him.What did you mean by a "subsidized rate
structure"
Well, if I recall the series of questions and the
context of those questions , I think it had to do wi th we were
talking about the customer charge and whether a higher customer
charge could be warranted , and to the extent that you keep a
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HEDRI CK COURT REPORTING
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STERLING (Com)Staff
customer charge below what your cost of serVlce study says
might be justified.
Is cost of serVlce study a science?
Absolutely not.
That yields a correct answer?
Absolutely not.
I guess my question is who's subsidizing who, and
lS that discriminatory under Idaho law?
Well , I can't speak to the legal issue of
discrimination, but the question as to as far as subsidization,
you know --
Could it be in the eyes of the beholder?
Well , it's all a matter of degree.You know
cost of service studies, while they're not an exact science,
they aren I t worthless ei ther.
Depending on who does them?
Well , it may depend on who does them , but the one
that was done in this case I think was very well done, and I do
accept the cost of service study in this case and I think
- -
think conservatively Uni ted Water , based on cost of service
could justify their existing customer charge.But, again,
customer charges very often are not based on cost of service
and for a lot of the reasons that I stated before.They are
very unpopular wi th customers; customers don't understand them.
Has the Commission ever adopted a policy of
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HEDRI CK COURT REPORTING
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STERLING (Com)Staff
recovering all fixed costs in fixed rates?
, not to my knowledge.
Have we even ever suggested that it's a good
idea?
Not to my knowledge.I think where some of that
comes from - - and I think Dr. Peseau quoted some of it
- -
you
know , the American Waterworks Association or other groups might
suggest that that's the way to do your rate design , that you
should recover fixed costs through a customer charge , but
Can reasonable people disagree on what fixed
costs should be included in fixed rates?
Absolutely.
And so the fact that there's disagreement doesn I
make the customer charges wrong or unreasonable, does it?
No.And, in fact, I guess I would just reiterate
that Staff's recommendation to not increase the customer charge
is not based at all on Uni ted Water's cost of service study.
It's primarily based on Commission policy and past practice,
and more specifically for the last two electric rate cases.
tried to take a position that was consistent with the
Commission I S Decision in Idaho Power and Avista I s last rate
cases.
What is your position on minimum charges?
In general , I would support a minimum charge.
Okay.In your Vlew , is the ini tial block
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HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
STERLING (Com)Staff
proposal that was agreed to by the Company and one of the
Intervenors in this case actually a form of inverted rates?
Yes, but the reason that I hesitate a little
that that proposal, that's a very small amount of water that I s
included in that proposal.
I agree.
On page 62 of your testimony, you describe your
preferred inverted block rate design that I understand you
not proposing, having on the previous page noted your previous
rej ection.Have you picked usage levels for your two-block
rate design that you prefer?
No, we have not.And , agaln , to do that, it'
probably not as simple as it may seem , because United Water has
probably at least a dozen different meter sizes for their
customers and you'd have to establish blocks for each meter
So it I S not a meter of establishing only two blocksS l ze .
it's a matter of establishing two times 12 or 14 or however
many meter sizes they have got, so it I S more complicated than
it may sound.
I mean , we focus a lot on the residential
customers because they seem to be the most visible in a lot of
respects.Do you think it's as important for the other meter
sizes, which I assume are larger use customers, to have the
inverted structure?Do you have any idea whether their
seasonal usage varies?
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HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
STERLING (Com)Staff
Well , I think that's one of the primary reasons
you might have an inverted block structure is because one of
the more common complaints that we get is, particularly from
larger customers and there are some larger customers whose
usage stays pretty much constant year-round, and they view a
summer/winter rate differential as they look at the summer part
as a premium but they don't look at the winter part as a
discount.So they say,You know , they don I t balance the two.
Why should I have to pay more in the summertime when my usage
doesn't change at all throughout the year?And for many of
those customers an inverted block rate design would address
that problem, for many but not all.
Assuming that the lower block covered most of
their usage.Is that what you're saying?
Yes.Yes.
So you re a proponent kind of of the large lower
block?
Well, in general.I would establish a lower
block that would accommodate most customers' usage.I f your
usage doesn't vary year-round for your meter size , the lower
block would
- -
you I d stay in the lower block most of the time.
And is there any reason we I d have to do all of
the meter sizes at once if we wanted to try some kind of
two-block structure?
Yeah , I think you probably would have to , because
705
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
STERLING (Com)Staff
if you didn I , I think then you might not
- -
the Company might
not recover its revenue requirement and there could be lot
things that could easily get out whack if you only start
messing with just selected number of meter Sl zes.
Is that because our forecasts of usage are
substantially off , generally?
Yes, that I s a part of it.There's a lot of
approximation that would be involved in that process as well.
So maybe it could be done if you just did a few meter sizes
but my recommendation would be to do them all.And, qui te
frankly, it wouldn't be that much more difficult to do all of
them than it would be to just do a few.
Okay.But in your view , we don't have the
information to do that now?
The Staff certainly doesn'Whether or not
United Water has it all immediately available, I don't know.
They could certainly collect it in some period of time if they
donl t already have it, but it would take a while to do it.
What kind of information would need to be
collected and over what time period?
The types of information that we would need,
things like bill frequency analysis,we I d need to know water
consumption by meter size,we I d need to know numbers
customers in each meter si ze, probably a lot of other things,
but those are some of the ones that immediately come to mind.
706
HEDRI CK COURT REPORTING
O. BOX 578, BOISE , ID 83701
STERLING (Com)Staff
Thank you.
EXAMINATION
BY COMMISSIONER KJELLANDER:
Just one question and it's along the same lines:
Without monthly billing, Mr. Sterling, does
implementing an inverted block rate really send the price
signal that it's intended to send to customers?
Well , I think it can send an effective prlce
signal just like summer/winter rates can.I think where
relates to monthly billing though is my recommendation , for
example , is if you want to look at other rate designs , we
should also look at monthly billing maybe even as a
prerequisi te, because whether it I S an inverted block design or
a summer/winter rate differential , one of the problems we have
in sending a price signal with either rate design is that
just gets sent too late for most customers because of the
bimonthly billing.
Okay.Thank you.
So it's a problem no matter what.The bimonthly
billing could be a problem no matter what rate design was
chosen.
All right.Thank you.
COMMI S S IONER KJELLANDER:I think we're ready for
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HEDRI CK COURT REPORTING
O. BOX 578, BOISE , ID 83701 STERLING (Com)Staff
redirect.
MR. STUTZMAN Thank you , Mr. Cha i rman .Jus t one
question.
REDIRECT EXAMINATION
BY MR. STUTZMAN
Mr. Miller was asking you about the Company'
proposal to implement a monthly billing program.Would it be
sound regulatory policy for the Commission to implement a
program based on whether or not the information provided by the
Company appears to be "crazy"
No.
Thank you.
MR . S TUT ZMAN :That I S all I have.
COMMISSIONER KJELLANDER:Okay.
Thank you , Mr. Sterl ing .
(The wi tness was excused.
COMMISSIONER KJELLANDER:And I believe we I
ready for the next wi tness
MR. STUTZMAN We'll call Carol Cooper.
708
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
STERLING (Di)
Staff
CAROL COOPER,
produced as a wi tness at the instance of the Staff , being first
duly sworn, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. STUTZMAN
Would you please state your name and spell your
name for the record?
Carol J. Cooper , C-
And where are you employed and in what
capaci ty?
The Idaho Public Utilities Commission as a
utilities compliance investigator.
Okay.And in that capaci ty, did you prepare and
prefile written testimony in this case?
I did.
Does that consist of approximately ten pages?
Yes.
Do you have any corrections or changes to your
prefiled testimony?
No.
And are you also sponsorlng exhibits?
Yes.
And what numbers are those?
709
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
COOPER (Di)
Staff
12 8 , 12 9 , and 13 0 .
Okay.If I were to ask you the same questions in
your prefiled testimony today, would your answers be the same
as prepared in that testimony?
Yes.
MR . S TUT ZMAN :Mr. Chairman , I'd ask that the
prefiled direct testimony of Ms. Cooper be spread on the record
as if read , and that Exhibit Nos. 128 through 130 be admitted
into the record.
COMMISSIONER KJELLANDER:Okay.Wi thout
obj ection , we'll spread the direct testimony across the record
as if read, and admit the associated exhibits.
(The following prefiled direct testimony
of Ms. Cooper is spread upon the record.
710
HEDRICK COURT REPORTING
P. O. BOX 578, BOISE , ID 83701
COOPER (Di)
Staf f
Please state your name and business address
for the record.
My name is Carol J. Cooper.My business
address is 472 West Washington Street, Boise, Idaho.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission (IPUC) as a Utili ties Compliance Investigator in
the Consumer Assistance Section.
What is your relevant employment history?
I have been employed with the Public Utilities
Commission since March 1984 and have been with the Consumer
Assistance Section since August 1992.
What is the purpose of your testimony in this
proceeding?
I will address the following consumer issues:
(1) forms, bills and notices;(2) customer relations;
(3) low income assistance program;(4) proposed
miscellaneous service charges;(5) proposed tariff changes;
and (6) summary of customer comments filed in this case.
CUSTOMER FORMS
Have you reviewed customer billings, forms,
notices and letters?
Yes.I reviewed each document and found the
materials to be in compliance with the Utility Customer
Relations Rules (IDAPA 31.21.01000 et seq.) and Utility
CASE NO. UWI -04-
04/06/05
COOPER , C.
STAFF
(Di)
711
Customer Information Rules (IDAPA 31.21.02000 et seq.
) .
CUSTOMER RELATIONS
Please describe how many and what type of
complaints and inquiries the Commission has received
regarding Uni ted Water Idaho (UWI)
Exhibit No. 128 shows a three-year comparison
of the customer contacts with the Commission.Customers
were primarily concerned about billing and disconnection
servlce.High bills were of particular concern to
customers.Wi th respect to disconnection of service, I
found that there are many reasons why customers do not pay
their UWI bills.
Are these customers primarily low- income
customers?
The Consumer Assistance Staff does not requlre
that piece of information , so unless a customer voluntarily
discloses his or her income to Staff, there is no way to
determine if income is a factor in inability to pay the
water bills.
What are some of the other lssues raised by
customers?
Rate design issues such as the summer
differential in rates and the customer charge were topics
of concern.Several customers indicated they would prefer
to have a lower customer charge and a higher consumption
CASE NO. UWI-04-
04/06/05
COOPER , C.
STAFF
(Di)
712
charge.They also questioned why the customer charge for
United Water lS so much higher than for other utility
companl e s .
Do you agree wi th UWI' s proposal to increase
the customer charge by 36.4 percent?
I support Staff witness SterlingNo.
testimony to keep the existing bi-monthly customer charge
for residential customers with a %-inch meter at $14.57.
How does UWI' s performance compare to that of
other water companies?
Exhibit No. 129 shows a three-year comparlson
of customer complaints wi th those regulated companies
having more than 1000 customers.United Water has a
satisfactory ranking among those companles.
Based on my review of customer complaints and
inquiries, I find the Company s customer relations and the
qual i ty of service to be acceptable.
Do you believe Uni ted Water provides adequate
customer assistance for non-English speaking customers?
The Company does not currently provide bills
or notices in any language other than English at this time.
The Company does have one meter reader fluent in Spanish
who assists the customer service representatives when
necessary.
Should UWI be doing more to assist its non-
CASE NO. UWI -W~04-4
04/06/05
COOPER , C.
STAFF
(Di)713
English speaking customers?
In Case No. RUL-04-, the Commission
considering what steps, if any, utilities should be taking
to accommodate customers whose primary language
something other than Engl ish.Therefore, I have no
recommendation to make -at this time.
Is there an area of customer serVlce that you
believe United Water goes above and beyond what is required
by the Commission?
Al though not required by the PublicYes.
Utilities Commission , United Water offers credit
adjustments on high bills due to leakage if the leak is on
the customer s side of the meter and proof of repair
provided.
How would a typical customer find out that UWI
has such a pol icy?
Usually customers recelve a high bill , which
results in a call to the Customer Service staff of United
Water.A field service person lS sent out to determine
whether or not the leak is on the customer s side of the
meter.The customer is informed at that time to provide
documentation of the repalr,such copy the
plumber bi 11 receipts for parts used,let ter
stating how the eak was repaired.final check made
to insure there is no further leakage and an adj ustment
CASE NO. UWI-O4-
04/06/05
COOPER, '
STAFF
(Di)
714
calculated.A comparison from similar time periods from
preVlous years is used to get an average use.The cus tomer
is sent a corrected bill, which is based on average use for
the time period in question plus one-half of the additional
usage attributable to the leak.
Is the process the same if a customer has a
sprinkler system leaking?
Yes, it is.However, if the customer is on a
pressurized irrigation system and the settings are wrong
and causing United Water backfeeds, no adjustment is given.
The Company believes the pressurized irrigation system
wi thin the customer s control, while leakage is usually
not.
LOW INCOME ASSISTANCE PROGRAM
Does UWI disconnect serVlce to residential
customers in the winter months?
Yes, it does.The restrictions on termination
of service to households with children, elderly or infirm
(Utility Customer Relations Rule IDAPA 31.21.01306) apply
only to residential gas and electric service.
According to the statistics received from the
Company, during 2002 and 2003 the highest number of
disconnections took place in the month of January.
2004, the highest number of disconnections occurred in the
month of March.
CASE NO. UWI-04-
04/06/05
COOPER, C.
STAFF
(Di)
715
Why would the largest number of disconnections
take place during the winter months if the bills are
usually much lower?
Termination is allowed when the bill is two
(2) months past due or the bill is $50 or more (IDAPA
31.21.01310) Since UWI bills customers on a bi -monthly
basis, each past due bill is subj ect to collection action
regardless of the amount owed.A customer might have
service disconnected if payment arrangements for high
summer usage were spread over more than one billing cycle
and the customer failed to pay as agreed.Another factor
might be that al though the Company is allowed to disconnect
service during the months of December through February
United Water typically does not disconnect service around
the Thanksgiving, Christmas or New Year s holidays.Once
the holidays are over , disconnections resume.
Have you reviewed the Stipulation filed by
United Water Idaho and Community Action Partnership
Association of Idaho (CAPAI) regarding a proposed low-
income assist~nce program?
Yes, I have.Unfortunately, Staff did not
have an opportunity to thoroughly explore the issues raised
in that filing.Staff would support a program that
encourages conservation and targets low- income customers
who are having difficulty paying their bills.
CASE NO. UWI-04-
04/06/05
COOPER, C.
STAFF
(Di)716
MISCELLANEOUS SERVICE CHARGE
What is your position with respect to the
proposed increases in Miscellaneous Service Charges
outlined in Company wi tness Gradilone ' s Exhibi t No.
Schedule 3, page 19?
The Company is proposlng increases in charges
for reconnection of service, returned checks, and premise
visits to collect payment of bills.The Company has not
provided any rationale or cost support documentation
indicating a need to increase any of these non-recurring
charges.It has also listed a new reconnection fee of $80
for reconnections made from 8:01 p.m. to 7:59 a.The
currently approved reconnection fee of $30 applies to any
reconnection performed outside of normal business hours.
Staff does support the increase from $15 to $20 for
returned checks, since this is the maximum charge allowed
by statute.Other than the returned check charge, however
without cost support documentation, I recommend the
miscellaneous service charges stay at the existing rates.
I also recommend that the $80 after hours reconnection fee
from 8:01 p.m. to 7:59 a.m. be denied.
Why do you oppose implementing a higher fee
for reconnections done in response to customer requests
received from 8:01 p.m. to 7:59 a.
Staff supports higher after-hours reconnection
CASE NO. UWI -W- 04-
04/06/05
COOPER , C. (Di)
STAFF71 7
fees such as those found in UWI' s existing tariff.
However, the Company has provided no cost justification or
reason for charging an $80.00 fee for late night/early
mornlng reconnect ions.If handling late night/early
mornlng reconnection requests pose a problem for United
Water, it is not clear what other policy or procedural
changes may have been explored to address the perceived
problem.Unlike other Idaho utilities that provide service
over large, somet imes diff icul t to reach areas, UWI' s
servlce area is primarily urban , which would tend to
minimize the expense of responding to after-hours calls.
Another factor to be considered is the Company s relatively
short business hours of 8: 00 a. m. to 4: 30 p. m., which
limits customer access and the ability to pay or make
payment arrangements.I recommend that the reconnection
fee stay at $30 for reconnections performed outside of
normal business hours.
REVI SED T ARI
What comments do you have wi th' respect to
UWI's proposed tariff revision?
UWI filed a revised verSlon of its tariff with
the Commission.Although no Company witness sponsored this
document, it includes the Company s proposed changes to its
rate schedules as well as its rules and regulations
governing the rendering of water service and water main
CASE NO. UWI-04-
04/06/05
COOPER , C.
STAFF
(Di)718
extensions.In his testimony, Company wi tness Gradilone
refers to several changes made to the tariff.However,
changes were made to the Residential, Mul tiple Family
Housing, Commercial, Industrial or Municipal Development
Water Main Extension Agreement that are not discussed
his testimony.Staff notes that the Company is proposing
to increase the "Umbrella Excess Liability " coverage
required of an Applicant and an Applicant's Contractor from
$2,000,000 over primary insurance to $5,000,000.The
Company is also proposing to change the provision requlrlng
a sixty-day (60) notice for cancellation or material change
in coverage to thirty (30) days.Staff Exhibi t No. 130
contains the existing approve~ tariff page (page 1) as well
as the proposed tariff page (page 2) .These changes appear
to be substant i ve , but the Company has not provided any
explanation as to why these changes should be made.
Therefore, Staff recommends that these two proposed changes
not be approved by the Commission.
CUSTOMER COMMENTS
Did the Commission recelve any consumer
comments regarding the filing of this case?
Yes.As of April 1 , 2005, the Commission had
received 102 written comments.
Please summarlze some of the comments received
from customers.
CASE NO. UWI -W- 04-
04/06/05
COOPER , C.
STAFF
(Di)719
Many of the comments mC?-de .(21) were regarding
new growth and questioned whether existing customers are
subsidizing new developments.Twenty (20) customers stated
they personally were on a fixed income or could not afford
such a high increase in rates as requested by United Water.
Several others indicated they were concerned about the
elderly and low income in the communi ty being able to
afford these higher rates due to an already tight budget.
There were ten (10) comments against the summer
differential in rates and three (3 )obj ecting to such a
large customer charge.
Does this conclude your direct testimony in
this proceeding?
Yes, it does.
CAS E NO. UW I - W - 04 - 4
04/06/05
COOPER, C.
STAFF
(Di)
720
l~::,
(The following proceedings were had in
open hearing.
(Staff Exhibit Nos. 128 through 130,
having been premarked for identification , were admitted into
evidence.
MR. STUTZMAN Ms. Cooper is available for cross.
COMMISSIONER KJELLANDER:Thank you.Let's move
to Mr. Miller.
MR . MI LLER :Just a couple very quick questions.
CROSS - EXAMINATION
BY MR. MI LLER :
You reviewed Mr. Wyatt's rebuttal testimony in
which he discusses your recommendations that had to do with the
tariff area?
Yes.
And based on his rebuttal testimony, are you
satisfied that there is not a disagreement between the Company
and the Staff on that point?
Yes , I did review the records.I t appears that
it was the Company I s intention to change the policy; however
when they filed the tariffs, the incorrect tariffs were filed.
And so based on that, you don I t have an obj ection
to them now correcting the tariff?
721
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
COOPER (X)Staff
That I S correct.
All right.Very good.I covered wi
Mr. Sterling the resul ts of the customer surveys and customer
comments in this case, so I won t belabor that wi th you.You
do say that on page 3, that based on your review of customer
complaints and inquiries, you find the Company I s customer
relations and quality of service to be acceptable?
Yes.
I guess there is probably not a large point of
quibbl ing over words , but isn I t the Company's customer
relations and quality of service really quite good when
compared with other utilities?
bel ieve is good.
All right.
MR.MILLER:That'all had.
COMMISSIONER KJELLANDER:Thank you , Mr. Miller.
Let's move to Mr. Campbell.
MR. CAMPBELL:No questions.
COMMISSIONER KJELLANDER:Okay.Mr. Strickling.
MR. STRICKLING:No questions.
COMMISSIONER KJELLANDER:Mr. Eddie.
MR. EDDIE:I'll ask one question.
722
HEDRICK COURT REPORTING
O. BOX 578, BOISE , ID 83701
COOPER (X)
Staf f
CROSS - EXAMINATION
BY MR. EDDIE:
Ms. Cooper , in general, In your experlence
dealing with customers, is it true that customers desire to
have more control over the amount of their bills, rather than
less control in terms of changing their behavior and thereby
changing the amount of their bill?
m not sure you
- -
what you mean by control of
their bill.Can you please explain?
If they were to improve their or enhance their
conservation efforts, their bill amount would go down?
Correct.
And that I s an attractive feature for most
customers?
Yes.
Thank you.
MR. EDDIE:Nothing further.
COMMISSIONER KJELLANDER:Thank you.
Mr. Purdy.
MR . PURDY:Yes, just a couple, thank you.
723
HEDRI CK COURT REPORTING
P. O. BOX 578, BOISE , ID 83701
COOPER (X)Staff
CROSS - EXAMINATION
BY MR. PURDY:
Ms. Cooper, I would direct you to page 6 of your
direct testimony, with the question beginning on line 17.
you have that?
Yes.
Okay.You indicate that you have reviewed the
Stipulation entered into between Community Action Partnership
and United Water?
I have.
Is that true?
Okay.You also state that , unfortunately, Staff
did not have an opportunity to thoroughly review that
Stipulation.And I fully accept that statement and this is not
in the form of cri ticism , but do you acknowledge that, in fact,
the Stipulation was attached to the testimony of Teri Ottens,
the direct testimony, prior to the rebuttal deadline?
Yes.
So it wasn't a matter of Staff not having access
to that Stipulation that somehow prevented you from thoroughly
reviewing it.Correct?
Correct.It was a matter of time.
Okay.You do goThat I S fair enough.Thank you.
on to say that Staff would support a program that encourages
724
HEDRICK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
COOPER (X)
Staff
conservation and targets low-income customers.
With the understanding that Staff has not
thoroughly reviewed the Stipulation , can you tell me, in
general terms , what you feel that
Well , let's talk about the Uni ted Water Shares
proposal that I s contained in the Stipulation.Is that the kind
of program
- -
low- income program - - that you have in mind when
you say you would support low-income assistance?
Yes, I believe it is , and Staff witness
Randy Lobb is prepared to answer the questions regarding the
low-income Stipulation.
Okay.I appreciate that.Thank you.Earl ier
that same page, page 6 , line 5 , you talk about United Water'
disconnection of customers for nonpayment of bills?
m sorry, what page?
Page 6 , line
Okay.
And you state that when the arrearage is $50 or
greater , United Water then can disconnect that customer.
Correct?
Correct, or two months past due.
Right.Are you aware that theOkay.Thank you.
United Water Shares program as proposed provides for a benefit
of as much as $50 per customer , with the possibility that that
amount might be increased in the future?
725
HEDRI CK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
COOPER (X)
Staff
Yes.
Wi th that in mind, do you think that this kind of
a program might - - might avoid or reduce the amount of
disconnections by United Water for nonpayment?
I would expect if they had more funds to work
with, it could.
Okay.And along wi th that reduction in
disconnections, you have a reduction in costs for the Company
and bad debt write-off.Isn't that true?
That usually tracks, yes.
Okay.Now , on a somewhat unrelated note, I have
previously asked you about the amount of funding wi th respect
to the Idaho Power proj ect Share fund.Is that right?
Yes.
And I represent that in the IPC-03-13 case,
which is Idaho Power's last general rate case, Staff witness
Marilyn Parker testified that Idaho Power in the year 2002
which I guess is the test year for that case , contributed
$25 , 000 to proj ect Share.Is that your recollection of her
testimony?
Yes, the shareholders did contribute that amount.
And that ratepayers contributed roughly $180 000.
Is that right?
Yes, I believe that's true.
All right.With that, I'll wait for Mr. Lobb for
726
HEDRICK COURT REPORTING
o. BOX 578, BOI SE , ID 83701
COOPER (X)Staff
further questions, and I thank you.
COMMISSIONER KJELLANDER:Thank you.
Are there any questions from members of the
Commission?Commissioner Hansen.
EXAMINATION
BY COMMISSIONER HANSEN:
Ms.Coope r ,
Yes.
- -
when you
customers that are having
that mean that the type program that Staff encourages is to
on page 6, line 23 through 25
say that it targets low-income
12,difficul ty paying their bills, does
relieve some of the burden of their water bill?
I think what we'd encourage is something like a
demand-side management program that would cover like low flow
toilets, that type of thing, yes.
So it wouldn't have anything to do wi th the
commodity usage?
I don't know.I don't know what
- -
what other
opt ions we would have to work wi th.We haven't really
discussed that.
When you say the Staff would support a program
such as this, has the Staff come up wi th any suggestions of how
a program like this would be funded?
727
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
COOPER (Com)
Staff
We haven't di scussed it.
Okay.Thank you.
COMMISSIONER HANSEN:That I S all.
COMMISSIONER KJELLANDER:Ready now for redirect.
MR. STUTZMAN I have no questions on redirect.
COMMISSIONER KJELLANDER:Okay.Thank you.
Thank you, Ms. Cooper.
(The wi tness was excused.
COMMISSIONER KJELLANDER:And we are ready now
for your next wi tness.
MR. STUTZMAN Mr. Chairman , I understand that
Mr. Miller would like to call a witness today out of order
because he is not available tomorrow , and I don't know how much
time that witness will take.We can call another one of our
witnesses or accommodate him.
COMMISSIONER KJELLANDER:If you don't have a
problem wi th it , we'll go ahead and accommodate Mr. Miller I
wi tness, unless there's some obj ection.
MR. MI LLER :The Company's rebuttal witness,
Mr. Dave Degann , has air travel scheduled for tomorrow mornlng,
so if we could call him at this point, it would be of
convenience to him.
COMMISSIONER KJELLANDER:Okay, we I 11 do that.
728
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
COOPER (Com)
Staf f
DAVE DEGANN
produced as a rebuttal witness at the instance of United Water,
being first duly sworn , was examined and testified as follows:
DIRECT EXAMINATION
BY MR. MILLER:
Sir , would you state your name and spell your
last name for the record?
My name is David Degann, D-A double
And did you previously have occasion to submit to
the Commission written prefiled rebuttal testimony consisting
of 13 pages?
I have.
And are there any additions or corrections that
need to be made to your testimony?
I have one minor addi t ion.
Uh-huh.
On page 1 , line 19, I would point out that
served as president of the American Society of Pension
Actuaries, as well as General Chairman of the Education and
Testing Committee.
So it would read:And a member and former
president of the American Academy of Actuaries.
Period, and then:I have served as president of
729
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
DEGANN (Di -Reb)
Uni ted Water
the American Society of Pension Actuaries and as General
Chairman.I would put those words in.
All right.Very good.
Thank you.
Wi th those addi t ions, if I asked you the
questions that are set forth in your written prefiled rebuttal
testimony, would your answers be the same as they are there
written?
They would.
Just by way of an additional question or two
were you in the hearing room this morning during the testimony
of Mr. English?
Yes, I was.
And Mr. English indicated in response to
questions to me that - - from me
- -
that the primary purpose
think he said of FAS 87 is to allow comparison among
- -
allow comparlsons among utilities.Would you agree wi th that
characterization of FAS 87 as a tool?
I would not , and in order to understand why,
I will need to go back into a little bit of history which
unfortunately, I'm old enough to remember.
ERISA was enacted in 1976 following some
disasters in the pension world - - Studebaker comes to mind
and when ERISA was enacted , it required that Company's budget
for and fund their pension plans and allowed seven different
730
HEDRICK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
DEGANN (Di-Reb)
United Water
budgeting methods to pay for those pension plans.Some of
those budgeting methods accelerated funding, meaning that the
cash contributions went in earlier; some of those budgeting
methods deferred funding to a degree , which meant that the cash
went in later.But in any event , it allowed seven different
budget ing methods.The ERISA is still there and it still
allows the same budget ing methods, al though it I S been changed
numerous times over the years.
In 1985 or so, the accounting profession
recogni zed that some of the budget ing methods were not
necessarily accruing for pension costs variably over the
working lifetimes of the plan participant , and enacted
FAS 87 -- and FAS means Financial Accounting Standard; it is an
accounting standard - - in order to provide for a consistent
method of accruing for benefit costs over the working lifetime
of plan participants and in order to not advantage or
disadvantage anyone - - oh , sorry - - any one period of time in
the stakeholder history so that a stakeholder in the earlier
years shouldn't be paying for more than their share and a
stakeholder for later years shouldn I t be getting the benefit of
the fact that a company paid for more in the early years than
in the later years.
MR. STUTZMAN:Mr. Chairman , perhaps Staff I s
willingness to accommodate the Company had some limit on this
and I guess I 1 m going to object to the narrative this witness
731
HEDRICK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
DEGANN (Di-Reb)
United Water
lS sitting there providing without questions, especially in
light of the fact that I'm not sure that the Chair has
authorized ini tial direct examination of this wi tness.
maybe it I S a technical point , but it seems, to me , we're just
listening to a narrative by this witness.
MR. MILLER:Perhaps I could ask a question that
would bring us to a conclusion on this quickly.
COMMISSIONER KJELLANDER:G i ve it a t ry
BY MR. MILLER:Could you come to a quick
conclusion on your point that --
Yes.
- -
FAS 87 is something more than a financial tool
to allow comparison between companies?
Yes.Well , as I said, it was put in place
because ERISA allowed so many methods of budgeting, and
therefore, FAS 87 provided the standard for a consistent method
to accrue pension costs.As it happens, it became a good
comparison and it was a useful method of doing that, but that
wasn I t the primary reason why it was enacted.
Then just one additional question , or let me ask
a couple predicate questions:You are the actual actuary for
Uni ted Water?
I am , yes.
So you do its actuarial calculations?
I do.
732
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
DEGANN (D i - Reb )
United Water
And are aware of its current status?
Yes, I do.Yes, I am.
In your direct testimony, you indicate the
possibility that the -- if calculated on an ERISA basis , the
required funding for United might be significantly higher in
immediate future years?
Yes.
Do you have any other information for the
Commission bearing on that topic?
I do.In the normal course of our work , as we do
for most companies, we do some forecasting and budgeting.
would expect that the cash cost for the current year will
increase to about $630 000 and the cash cost for 2006 will
increase to about $1.8 million from the current amounts shown
in the testimony.
They would increase by that amount?
To those amounts.
All right.From the levels that are shown in
your test imony?
Yes , 160 odd two to 633 to 1.8 million.
So if the Commission did approve a change to an
ERISA method, it could be buying substantial increases in
amounts?
Those are our best guesses of the forecasts based
on current information and data.
733
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
DEGANN (Di-Reb)
Uni ted Water
All right.
MR. MILLER:Thank you, Mr. Cha i rman , Counse 1
With that, Mr. Degann is available for cross-examination.
COMMISSIONER KJELLANDER:Okay.Let's begin with
the attorneys representing Staff.
MR. MILLER:I guess, Mr. Chairman , I'
neglected the formality of asking that his testimony be spread
on the record as if read.
COMMISSIONER KJELLANDER:Yes, you did.So we
will spread the testimony across the record as if read, and
there are no exhibits associated with that testimony, so
wi thout obj ection , that will be done.
(The following prefiled rebuttal testimony
of Mr. Degann is spread upon the record.
734
HEDRICK COURT REPORTING
O. BOX 578 , BOI SE , ID 83701
DEGANN (Di - Reb)
Uni ted Water
Please state your name and business address.
My name is David Degann. My business address is 125 Chubb
Avenue, Lyndhurst, New Jersey 07071.
Please state the purpose of your testimony in this case.
I was requested by United Water Idaho to review and comment on the
testimony of Staff Witness English regarding the appropriate
ratemaking allowance for pension cost.
Please state your qualifications.
I serve as the Enrolled Actuary under ERISA for the United Water
Plans and offer the advantage of almost two decades of experience in
working specifically with these Plans. I have provided expert witness
testimony for regulated entities related to this area of specialty of
pension actuarial issues. I am Cum Laude graduate of the College of
Insurance, with a bachelor of Business Administration. I hold a
Master of Business Administration from Pace University, with a
concentration in Taxation. I am an Enrolled Actuary (#25) and a
Fellow in the American Society of Pension Actuaries and the
Conference of Consulting Actuaries and a member of the American
Academy of Actuaries. I have served as a General Chairman
American Society of Pension Actuaries Education & Examination
Committee, and as a member of the Joint Board for the Enrollment of
Actuaries Advisory Committee on Testing and Education. I am an
Executive Vice President of Aon Consulting Group. My CUlTent
735 Degann, Re
United Water Idaho Inc.
responsibilities are to manage and supervise all actuarial and benefit
consulting in the Northeast Region, and for Aon s Merger &
Acquisition Practice. As the actuary for United Water, my
responsibilities are to accurately measure the liabilities and costs of the
Company s benefit programs, and to advise the Company of
appropriate expense, accrual or funding rates so that such costs and
liabilities are accounted for and so that assets are accumulated by a
rational method.
I bring more than 40 years of actuarial and benefits plan
consulting experience. In my present position, I am responsible for
actuarial and benefit consulting for some of the largest and most
complex corporate organizations in the United States, such as Crown
Cork & Seal Company, Inc., Bethlehem Steel Corporation and Cathay
Pacific Airways, Ltd.
Please state your understanding of Staff Witness English's testimony
and recommendations.
Mr. English recommends that the Company s recoverable pension
expense be determined by reference to its ERISA contribution, rather
than its actuariall y determined pension cost under F AS 87. This
reduces the 2004 recoverable cost from $637 046 as claimed by the
Company to $162,454 as recommended by Staff (Exhibit 108). This
cash methodology has some serious flaws as I will demonstrate in
736 Degann, Re 2
United Water Idaho Inc.
more detail below. As I read his testimony, he bases his
recommendation on several points:
1. The F AS cost is "artificial" and has "no connection to real world
values . (p. 20)
2. The sizable revenue increase requested justifies a reduction in
pension cost. (p. 21)
3. Required plan funding under ERISA will not cause future costs to
rise dramatically. (p. 24)
4. "There is growing concern among accounting professionals
regarding the use of F AS 87 and the potential for manipulation of
financial statements
" (p.
16)
It is my professional opinion that Staff's reliance on these points
inappropriate, and that established accounting and regulatory
principles require the use of F AS 87 to detennine recoverable pension
cost.
Please explain.
Let me address each of the flaws in Mr. English's testimony:
F AS 87 expense results are, in fact, a direct function
of "real-world" plan financials. F AS 87' s entire methodology is
geared to developing a realistic, accurate measure of the costs of a
year s worth of pension accrual. F AS 87 expense is calculated by
recognizing the value of plan assets at market value, reflecting the
current economic conditions in the marketplace and explicitly
recognizing the benefit accruals earned in pensions for participants
each year. One example of how much F AS 87 is tied to actual "real
737 Degann, Re 3
United Water Idaho Inc.
world" conditions relates to the fact that the discount rate selected
must be the rate "at which the pension benefits could be effectively
settled".looking at current prices of annuity contracts... and rates of
return on high-qualify fixed income investments currently available
(F AS 87, paragraph 44- Italics added for emphasis)
Mr. English suggested that the fact that pension
expense increased means that the F AS 87 method should be
abandoned and another (cash funding) be applied. Selecting a cost
method based upon how high or low costs are in a given year is not an
appropriate decision process , particularly for pension costs which rely
upon cost over many years (usually 20 to 30) not a given year.
- If rate recovery were based upon selecting the minimum
cost of the various methods without any regard to the actual
fundamentals of continuing program costs, rate recovery would be
insufficient to maintain the program. The fact that program costs
increased merely reflects what has actually occurred in the real world
with respect to the program liabilities growing and the value of plan
assets in today s market underperforming. Please see the table below.
Contrary to Mr. English's suggestions, the required
ERISA Minimum Funding contributions are expected to dramatically
increase for these particular qualified pension plans, given their funded
history, current asset values and current liability levels. As the plan
actuary, 1 have advised United Water that the cash contribution
738 Degann, Re 4
United Water Idaho Inc.
requirements for its defined benefit plans will increase dramatically to
address the significant unfunded status of these plans. Below we show
the deficit position of both plans as of 1/1/05:
UW Idaho UW Idaho Total
Non-Bargaining Bargaining
Current Liability for ERISA $6,162 000 053 000 $11 215 000
Funding at 1/1/05
Assets at Market Value at 1/1/05 044 000 $3,711 000 755 000
Funded Status $(2 118 000)342 000)(3,460 000)
Funding Ratio 66%73%69%
Because of the pension plan s funded status with plan assets covering
only 690/0 of liabilities, the ERISA Minimum contributions will require
that United Water contribute significantly higher amounts to bolster
the funded position. When plans fail to retain a satisfactory funded
position, the ERISA Minimum contribution adds a Deficit Reduction
Contribution, which accelerates contributions and requires an
employer to make cash contributions that payoff the unfunded
obligations in 3 to 5 years.
Contrary to Mr. English's testimony, FAS 87 is a
stable accounting measure which has now been in effect for over 20
years in the U.S. and is serving as a model in many respects for
international standards. F AS 87 has served to provide plan sponsors a
consistent method of computing an annual expense amount, separate
and distinct from a plan s generall y voluntary and variable funding
deposits to the plan. The annual expense amount was defined to
reflect accrual accounting for pension plans, making sure that the cost
739 Degann, Re 5
United Water Idaho Inc.
of pension benefits are expensed during the time earned - supporting a
matching principle of whatever a company is promising in benefits to
be charged against company revenue at that time.
I believe that Mr. English is referring to the highly
publicized recent debates revolving around the appropriate actuarial
assumptions, rather than any issues related to the fundamentals of F
87 expense. Further, such debates on assumptions impact both
funding and expense. Selecting appropriate actuarial assumptions has
been a focus largely because of turbulent economic times. In general
virtually all plan sponsors, including United Water, have made
adjustments to the expected long-term yield on plan assets to reflect
the lower investment yields. Finally, with reduced inflation levels, the
discount rate used to determine program liabilities has been
dramatically reduced (resulting in increased liabilities).
Why is FAS 87 the proper approach in setting rates?
FAS 87 is.the proper approach for rate recovery. Only FAS 87
provides accurate accrual accounting which produces equitable results
for generations of customers, and also offers a consistent stable
methodology with no discretion from a company on how it is
determined. Below we describe the major advantages that
distinguishes F AS 87 as the proper approach for rate setting:
740 Degann, Re 6
United Water Idaho Inc.
~ A voids volatility in expense from year to year
~ A voids underfunding and ensures as much as possible that plan assets
will be sufficient to meet retiree needs over the long term
Matches costs with benefits under accrual basis,
Provides a stable F AS methodology
Is consistent across companies
Follows generally accepted regulatory practice
Follows the recommended past decisions of the PUC in the last case
when F AS pension income REDUCED expense
Follows the current recommended basis of the PUC related to FAS 106
costs, which mirror the same principles as under F AS 87
I discuss each of the above briefly below:
Avoids volatility in expense from year to year. FAS 87 expense
methods include defined amortizations of actuarial gains/losses
making such method less volatile from year to year.
Avoids underfunding. In the event the Commission were to modify its
past decisions to move to a cash contribution basis, United Water
would be faced with deferred recognition of expense/cost in rates and
in fact may not have proper financial reserves to properly make
contributions to the pension plan. In other words, without accrual
recognition of program costs, when the cash requirements are
demanded, United Water may not have the financial ability to pay such
contributions as ERISA demands. If United Water cannot afford to pay
the contributions, then the programs are ultimately remanded to the
PBGC for insufficient funding. Certainly, I do not recommend that any
situation put such risks on a long-standing program designed to address
fundamental retirement security needs.
741 Degann, Re 7
United Water Idaho Inc.
Matches costs with benefits under accrual basis. Accrual accounting under
F AS 87 aligns program costs with the proper generation of customers in
the rates. By using FAS 87 expense/(income) methods, the costs
associated with active employees working to deliver water services to
customers in each year are recognized during that year - not assigned to
another year.
Accrual accounting has long been recognized as the
prefelTed method of charging back the costs of pensions. "Accrual
accounting goes beyond cash transaction to provide infonnation about
assets , liabilities, and earnings" (FASB 87 Introductory Comments).
The concept is that while an employee is actively working and
delivering services to the company and customers, any defelTed
compensation must be recognized against company books during active
employment. Waiting to recognize benefits promised - and earned -
until retirement or until the company is required to make cash
contributions to the fund results in inequitable and volatile year-by- year
results.
If the PUC were to apply a method that does not follow
accrual accounting, there is a mismatch of revenues and expenses, and
the wrong generation of customers winds up paying for costs of other
customers. Accrual accounting under F AS 87 offers an equitable
method that follows the PUC guiding principles of matching revenue
and expenses.
742 Degann, Re 8
United Water Idaho Inc.
Provides a stable F AS methodology. Unlike cash funding requirements
which have been modified numerous times, the specific requirements
of F AS 87 have been retained virtually unchanged since 1985. That'
20 years of stability and reliability. On the pension cash funding side
we see a much different picture in the past and going forward, with
multiple changes to the methods of computation. In fact, in 2005 , the
Administration has proposed funding legislation (if passed, to be
effective in 2006) which will be the most sweeping fundamental
change since ERISA's passage. The Administration s funding
requirements are intended to force many plan sponsors to contribute
far more than current Minimum funding requirements. On the FASB
side, there are no plans for any changes - merely a continuation of the
20 years of stability we have seen already.
Is consistent across companies. F AS 87 is the consistent US GAAP
methodology for recognizing the annual costs of pension benefits. All
companies in the US follow this method.
Follows generally accepted regulatory practice.
Follows the recommended past decisions of the PUC in the last case
when FAS pension income REDUCED expense.
Follows the current recommended basis of the PUC related to F
106 costs, which mirror the same principles as under F AS 87. We
note that the commission has endorsed F AS 87 in all prior years, and
743 Degann, Re 9
United Water Idaho Inc.
currently continues to apply accrual expense accounting for FAS 106
purposes for rate recovery.
Do you have experience with the regulatory treatment of this cost for
other clients in other jurisdictions?
Based upon Aon Consulting s experience with regulated utility
companies, the general practice adhered to applies annual expense
under F AS 87 for pensions and F AS 106 for retiree medical benefits to
detennine:
Annual expense recognized for purposes of computing an
organization s P&L (Profit & Loss), and also for
consistency;
Annual rating costs recognized for purposes of passing on a
company s pension costs to the consumer.
In this way, complete consistency exists between:
What a company is required to report as annual
expense/(income) for pension benefits; and
What customers pay for in rates.
This one-to-one correlation ensures that as a company records pension
expense or (income), the same amount is reflected in rates. If cash
funding or another approach were employed a company s rating basis
could be dramatically different than what is recorded each year in its
books.
Below are specific cases where the Regulatory Commission
ruled that annual expense under FAS 87 is the required rate basis:
744 Degann, Re 10
United Water Idaho Inc.
Since 1995, the Board of Public Utilities of the State of New
Jersey has based its rating costs on the pro forma pension
expense/(credit) as computed by the pension actuary each year.
Specifically, the Commission applied a "pay-as-you-
expense approach for rate recovery purposes. The amount
accrued as an expense in determining the organization
financial status is the same amount applied in rate recovery.
Since 1992, the Public Service Commission of the State of New
York has also required the application of F AS 87 pension
expense/(income), with only a review of the key assumptions
applied in such computation.
In your opinion, what would be the result if the Commission follows
the Staff recommendation of applying ERISA Minimum Cash
Contributions instead of F AS 87?
First, if no rate recovery would be available until cash ERISA
contributions were required, United Water Idaho would still be
required by GAAP to record the FAS expense on its books and
revenues with no matching rate recovery amount. Then, at the time
that cash contributions would be required, it is quite possible that the
Company will not have the financial reserves and strength to cover
such contributions, because insufficient rate recovery was provided in
the past. Essentially, providing rate recovery at a fraction of the
program costs puts the Company in a compromised financial position
745 Degann , Re 11
United Water Idaho Inc.
most likely forcing the Company to reduce and/or eliminate future
pension plan benefits in entirety for active employees. By deferring
the costs of benefits promised (essentially by insisting on an interest
free loan with balloon payments at the end), the PUC is gambling with
the retirement security of active long-service employees. In fact, this
is precisely the situation that FAS 87 was trying to correct numerous
companies opting to recognize only "pay-as-you-" cash costs
instead of matching accrual costs with revenue. It was all too common
for companies to make benefits promises, book no program costs and
later renege on promises by eliminating benefits when the cash costs
were too great a burden. Essentially, a decision to apply ERISA
Minimum Cash Contributions instead of F AS 87 may force a decision
by the Company to reduce or eliminate the promised pension benefits
for United Water Idaho active employees retiring in the future.
Second, this approach has equally serious long-term
impacts on the Company s customers , as was the case when ERISA
existed in 1974 prior to the accounting profession issuing the FAS 87
standard in 1985. Without the discipline and requirements of F AS 87,
companies had too much discretion under ERISA to defer the costs.
For regulated companies, the ERISA approach forces future customers
to pay for past costs.
Third, ERISA Minimum rules require that pension deficits be
funded in a very short time (3 to 5 years), much akin to a balloon loan
746 Degann, Re 12
United Water Idaho Inc.
structure. This makes the problem of deferring what is being spent
today much more severe. There is never any guarantee that a
Company can later pay for amounts spent today, and chances of
payment later are riskier when the payments are so large that are being
deferred. United Water Idaho s current pension plans have plan assets
insufficient to cover existing benefits promised by some $3.5 million.
This suggests cash funding of millions of dollars each year, when the
time comes for the payments. As the plan actuary, I expect such cash
contributions to be required in the next 3 to 5 years, with the ERISA
Minimum Contribution requirements already applying for the
bargained plan in 2003 and 2004, with future cash contributions
forecasted to dramatically accelerate. If no rate recovery is provided
using the traditional F AS 87 accrual method, the Company will not
have proper financial reserves to make these payments. Only FAS 87
expense accrual adequately prepares the Company to be able to make
these cash contributions.
Does this conclude your testimony?
Yes.
747 Degann, Re 13
United Water Idaho Inc.
(The following proceedings were had in
open hearing.
COMMISSIONER KJELLANDER:And we'll move now to
cross.
MR. WALKER:Thank you , Mr. Cha i rman .
CROSS - EXAMINATION
BY MR. WALKER:
Isn't it true that FAS 87 is, regardless of
what's been said , it's strictly a financial reporting tool for
financial reporting purposes, is it not?
It is
- -
it is a method for recognizing the cost
of employee benefits in the Company's books on a consistent
method over the working lifetime of the plan.
Is there anything in the language of FAS 87 that
mentions regulatory recovery?
I doubt it.I don t think so.
And referring to your table on page 5 of your
testimony where you illustrate the funded status of the
plans --
Yes.
- -
isn I t it true that the market value of the
assets you included in your table does not include any
receivables due to the plans that were incurred for the 2004
748
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
DEGANN (X-Reb)
United Water
plan years?
I believe that that table probably does reflect
receivables.
Okay.Isn t it true that it I s possible for the
FAS 87 expense to be a negative amount?
It is possible for FAS 87 - - for FAS 87 to
generate pension lncome , yes, that is correct.
And yet it would be impossible for the Company to
contribute a negative amount of cash into the plan.Isn t that
correct?
Tha t is correct.
On page 7 of your testimony, line 16, you testify
that FAS 87 expense avoids volatility from year to year.
tha t correct?
It tries -- it attempts to avoid volatility, yes.
But isn't it true that the ERISA minimum
contribution for these plans has remained relatively
unchanged?
That is true because
During the past five years?
That is true because the plans have been
overfunded, and when you I re overfunded , you don t make
contribut ions.
While at the same time, the FAS expense has
varied by nearly a million dollars at the Idaho level , has it
749
HEDRI CK COURT REPORTING
O. BOX 578, BOISE , ID 83701 DEGANN (X - Reb)
United Water
not?
It has varied.
And just so we're clear , we re talking about the
same time period where ERISA stayed relatively stable and the
FAS varied by over a million dollars?
Because the plans were overfunded and no
contributions could have been made.
And isn't it true that you also testify on
page 7, line 18, that FAS 87 avoids underfunding?
Well , I think the bet ter word would be
underaccruing" is probably the better word.
Q .Is that what your testimony says?
I t says underfunding
. "
Isn I t it true that FAS 87 doesn't address the
amount of cash contributions that the Company makes; it only
addresses the amount of expenses the Company records on the
books?
FAS 87 deals with the cash in the plan, so by
that nature, it addresses cash.
Okay.So isn't it true that even if the Company
were to recover the FAS 87 expense in rates and it still
contributed the ERISA minimum contribution to the plan , this
would have no bearing on the underfunded status of the plan?
I m sorry, could you say that again?It was a
it tIe bi t too long for me.
750
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
DEGANN (X - Reb )
United Water
Isn't it true that if the Company were to recover
the FAS 87 expense in rates
Yes.
- -
and it still contributed the ERISA mlnlmum
contribution to the plan , then this would have no bearing on
the underfunded status of the plan?
The Company would have to contribute its ERISA
minimum , period, or change
- -
or change its plan.
When was the last time United Water contributed
more than the ERISA minimum contribution?
I don I t ever recall that it has contributed more
than the -- well , no , it may have contributed more in 2003 , I
don't recall.
MR . WALKER:Nothing further, Mr. Chairman.
COMMISSIONER KJELLANDER:Thank you.
Let's move to Mr. Purdy.
MR . PURDY:No questions.
COMMISSIONER KJELLANDER:Mr. Eddie.
MR. EDDIE:No quest ions.
COMMISSIONER KJELLANDER:Mr. Strickling.
MR. STRI CKLING :No quest ions.
COMMISSIONER KJELLANDER:Mr. Campbell.
MR . CAMPBELL:I don't dare.
COMMI S S IONER KJELLANDER:Are there questions
from members of the Commission?
751
HEDRICK COURT REPORTING
O. BOX 578, BOI SE , ID 83701 DEGANN (X - Reb )
Uni ted Water
COMMISSIONER HANSEN:I have none.
COMMISSIONER SMITH:I guess I'll be brave.
EXAMINATION
BY COMMISSIONER SMITH:
In your answer to some additional questions from
Mr. Miller , you talked about the exposure of costs rising in
the near future?
Yes.
What drives those kinds of increases?
Several things.The - - I would say that there
are two drivers and one
- -
two resul ts in one driver.The
resul ts are that the asset base has suffered some losses
against its actuarial assumptions in the last few years.
This asset base is the
The cash in the plan.
Cash in the plan.Okay.
Cash in the plan.
As you probably recall , the markets were very,
very strong through 2000 and for the year 2000.The pI an was
thus overfunded , and because it was overfunded, the ERISA
requirements not only didn t require but didn t even permit
contributions to be made.When the market changed, assets went
down , and therefore , that particular lssue changed.
752
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 DEGANN ( Com - Reb )
United Water
The second was that the interest rates that the
government requlres us to use for ERISA funding have declined
as well because the interest rates and bond rates have
decl ined.So you have a combination of declining interest
rates which increase the iabili ties , declining assets which
decrease the assets against those liabilities, and the
requirement therefore to make up the difference.
The volatili ty, however , comes from the fact that
the government requires that these plans when they become
underfunded be funded on a very fast basis, so they install
what is called this item called a deficit reduction
contribution.They require that the deficit that's generated,
having come from these two items, be funded very quickly over a
period of between three and five years.FAS doesn't require
that; it's a different method.That I s where that volatility.
So the driver is the government.The issues are
the decline in the interest rates and the decline in asset , in
the market val ue of the assets.
Thank you.
COMMISSIONER KJELLANDER:Ready for redirect.
MR. MILLER:No redirect.
COMMISSIONER KJELLANDER:Okay.
Thank you, and we appreciate your testimony
today.
THE WITNESS:Thank you.
753
HEDRI CK COURT REPORTING
BOX 578,BOI SE 83701
DEGANN ( Com - Reb )
Uni ted Water
MR . MI LLER :And may the witness be excused?
COMMISSIONER KJELLANDER:Yes , without objection.
(The wi tness was excused.
COMMISSIONER KJELLANDER:I believe we I 11 return
now to Staff , and I believe Staff has at least one more
wi tness.Is that correct?
MR. STUTZMAN We actually have three more , but
we can probably get one more done today.
COMMISSIONER KJELLANDER:Okay.Let's try it.
MR. STUTZMAN Okay.We will call Carolee Hall
to the stand , please.
CAROLEE HALL,
produced as a witness at the instance of the Staff, being first
duly sworn , was examined and testified as follows:
DIRECT EXAMINATION
BY MR. STUTZMAN
Would you please state your name and spell your
last name for the record?
Carolee Hall , H-
And where are you employed?
m employed with the Idaho Public Utilities
Commission.
754
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 Hall (Di)Staff
In what capacity?
m a telecom analyst.
And did you prepare and prefile written testimony
in this case?
Yes , I did.
And does that consist of approximately
page s
Yes, it does.
Do you have any correct ions or changes to make to
your prefiled testimony?
not.
were to ask you the questions that are
contained in your prefiled testimony today, would your answers
be the same?
Yes , they would.
Do you have any exhibits as part of your
testimony?
Yes, I do, Exhibits 117 through 119.
Do you have any changes or correct ions to your
exhibi ts?
No, I do not.
Okay.
MR. STUTZMAN Mr. Chairman, I I d ask that the
prefiled direct testimony of Ms. Hall be spread upon the record
as if read , and Exhibi ts Nos. 118 - - excuse me
- -
11 7 through
755
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
Hall (Di)Staff
119 be admitted in the record.
COMMISSIONER KJELLANDER:Thank you.Wi thout
obj ection , we I 11 spread the testimony across the record as
read, and admit the associated Exhibits 117 , 118, and 119.
(The following prefiled direct testimony
of Ms. Hall is spread upon the record.
756
HEDRI CK COURT REPORTING
O. BOX 578, BOISE , ID 83701 Hall (Di)Staff
Please state your name and business address.
My name is Carolee Hall and my business address
472 West Washington, Boise, Idaho 83702.
By whom are you employed and in what capaci ty?
I am employed by the Idaho Public Utilities
Commission as a Telecommunications Analyst.
Please describe your work experience and
educa t ional background.
I have been with the Commission Slnce April 1997.
I have completed a Regulatory Studies program offered
through NARUC at Michigan State University.I have al
attended National Exchange Carrier Association (NECA)
training seSSlons where federal issues associated with the
changing telecommunications industries were topics of
discussion.
In October 2004 I completed an advanced Utilities
Finance and Accounting seminar for Financial Professionals
in New York.Seminar instruction was provided by the
Financial Accounting Institute and covered various fields of
study including Corporate accounting and auditing, taxation,
management and cost of capital.
Prior to coming to work for the Commission, I
worked for two years as a Financial Manager for a
competitive long distance provider.I graduated from Boise
State University in 1993 with a B.A. in Finance.
CASE NO. UWI-04-4
04/06/05 757
HALL, C (Di)
STAFF
. 15
22 '
What is the purpose of your testimony in this
proceeding?
The purpose of my testimony is to present the
Staff's recommendations for the overall cost of capi tal for
United Water Idaho to be used in calculating the revenue
requirement for this case.I will specifically address the
overall capi tal structure wi th the cost of capi tal for debt,
minori ty interest (preferred stock), and return on common
equity as it pertains to the overall rate of return.
Describe your testimony regarding the return on
equi ty?
My testimony will focus primarily on the return on
equi ty portion in general as it pertains to the capi tal
structure of the Company.Staff. wi tness Terri Carlock will
be the primary cost of capi tal wi tness and address this
issue in her testimony.
Please summarize the parenti subsidiary
relationship for United Water Idaho.
Uni ted Water Idaho s common stock is not traded.
It is a wholly owned subsidiary of United Waterworks, Inc.,
which is owned by Uni ted Water Resources Inc., which all are
ultimately owned by Suez Lyonnaise des Eaux , a French
Corporation that holds many water companies and other
business endeavors , throughout the world.
CASE NO. UWI -04-
04/06/05 758
HALL, C (Di)
STAFF
OVERVIEW OF CAPITAL STRUCTURE AND RECOMMENDATIONS
Will you please briefly summarlze your
recommendations?
Staff is recommending a cost of debt of 6.45% and
a cost of Minority Interest (Preferred Stock) of 5%.Staff
has used, and recommends, a point estimate of 10% for return
on common equi ty.The recommended overall weighted cost of
capital of 8.10% is used to calculate the revenue
requirement.Please see Staff Exhibit No. 117.
How many Exhibits will you be sponsoring with your
testimony?
I have three Exhibits identified as Exhibit Nos.
117 through 119.
Have you reviewed the testimony and exhibits of
United Water s witness Ms. Pauline Ahern with AUS
Consul tants?
Yes I have.
Please identify the relative time period used in
your analysis.
The historical test year used in this case
August 1, 2003 - July 31, 2004. My testimony uses December
31, 2004 for the capital structure with proformed debt
changes so current cost rates reflect financing costs that
are relevant when rates are established in this case.
Do you have any adj ustments to the December 31
CASE NO. UWI-O4-
04/06/05
HALL , C (Di)
STAFF759
2004 data?
Yes.On March 22, 2005, the Company notified
Staff of two recent financial activities it was making to
avoid interest rate creep. First, the Company repaid a $10
million medium term note that was to mature in February
2025.This note had a stated interest rate of 8.84%.The
second event was to refinance an Idaho Water Resource tax-
exempt revenue bond instrument that had an outstanding
balance of $19 975,000 and a maturity date of October 2024.
By refinancing this debt instrument, the Company reduced the
interest rate from 6.4% to 4.7% resulting in a pre-tax
savings to the total Company of approximately $280,000.
using the December 31 , 2004 capital structure with the two
stated adj ustments, Staff is able to capture these known and
measurable changes for ratemaking purposes.These
activities also improved the Company s debt-to-equity ratio
from 55.10% debt and 44.9% equity to 53.41% debt and 46.59%
equi ty.In doing this, the Company was able to bring its
overall debt-to-equity ratio closer in line to the composite
statistics for water utili ties listed in Value Line.
Overall, this is beneficial to the Company and for Idaho
customers as it will help maintain credit ratings.
Would you please recap the capi tal structure of
the Company reflecting the December 31, 2004 numbers?
Yes.Again Staff is proposing an overall rate of
CASE NO. UWI -W- 04-
04/06/05
HALL, C (Di)
STAFF760
return on rate base of 8.10% and a Return on Common Equity
0 f 1 0 % a s ref 1 e c t e d in Exh bit No. 11 7 .
Is the proposed capital structure consistent with
the Company s current credit rating?
This capi tal structure allows the Company toYes.
fund its required capital expenditures 'while increasing the
equity ratio contributing to maintaining credit ratios that
support the cont inuance of its current \ A' credi t rating.
How does maintenance of a strong credit rating
benefit customers?
The credi t rating gl ven to a company has a direct
impact on the cost that a company will lncur to obtain
capi tal necessary to support its current and future
operating needs.A strong credit rating directly benefits
customers by reducing immediate and future borrowing costs
related to the financing needed to support regulatory
operat ions.
, .
Are there other benefits?
During periods of capi tal marketYes.
disruptions, a company wi th a higher credi t rating has an
easier time accessing capital for various proj ects.This is
not necessarily the case with lower rated companles, which
often find themselves unable to obtain capi tal or, incurring
increased costs associated with financing and/or collateral
requirements.Such access to capi tal provides companies
CASE NO. UWI-04-
04/06/05
HALL , C (Di)
STAFF761
with more alternatives when attempting to meet current and
future capi tal proj ects to meet consumer demand.
DEBT
Financing Calculations
How did the Company calculate the embedded debt
cost?
As shown in Exhibi t No. 118, the Company took the
face value of the debt issuance (Column 4 "outstanding
amount") and subtracted the unamortized net discount,
premium and expense in Column This calculation resulted
in the current net proceeds value in col umn 6.
The second step in its calculations was to take
the face value again in Column 4 and multiply it by ~he
stated interest rate of the issuance in Col umn 7 resul ting
in the annual interest expense in Column The annual
interest expense was then added to Col umn 9 (Amort i za t ion of
net di scount premium and expenses) resul t ing in an annual
cost number in Column 10.
The third and final step in the Company s embedded
debt calculation was to take the annual interest and
amortization costs (Column 10) divided by the Net Proceeds
( Co 1 umn 6) By doing this, the Company has reflected the
issue costs in the unamortized cost figures and in the
annual amortization.Staff believes that the Company has
not reflected the discounting properly, thereby inflating
CASE NO. UWI -W- 04-
04/06/05
HALL , C (Di)
STAFF76~
the embedded cost rate and the overall long-term debt cost.
How did you calculate the Company s cost of long-
term debt?
Also shown in Exhibit No. 118 I used the data
provided by the Company to calculate the cost of debt for
Uni ted Water.In order to calculate the long-term debt cost
(the Company refers to this number as the embedded cost rate
In Column 11) the annual cost of debt (column 10) comprised
of the annual interest expense (column 8) pI us the
Amortization of Net Discount Premium and Expense (Column
were used.I took the Company s annual cost of debt (Column
10) and divided that by the amount of debt outstanding
(Column 4) This accurately reflects the discounting of
issuance costs to properly allow the Company to recover
rates the annual interest cost and the annual amortization
of issuance costs.
Please summarize the differences between your
calculations and those of the Company
As mentioned earlier, in my calculations I used
the annual interest and amortization costs (Column 10)
divided by the face value or outstanding amount (Column 4)
Please refer to Staff Exhibit No. 118.Given these
calculations, a proper embedded cost rate of 6.45% was
derived.The Company calculated its embedded cost rate to
be 6.90% after it made its adjustments to debt previously
CASE NO. UWI-04-
04/06/05
HALL , C (Di)
STAFF763
discussed.The Company s calculation differs from Staff'
because the annual cost is divided by the unamortized net
proceeds (col umn 6)
In other cases before the Commission , the Staff'
proposed debt cost calculation has been utilized.Another
method also accepted by the Commission reflects embedded
cost of debt rate using the net proceeds at the time
issue but the interest cost only, not the interest plus
amortization costs , as the numerator used to reflect the
annual cost when calculating the embedded cost of debt rate.
For calculating the cost of debt, did you use
Idaho specific numbers or the consolidated numbers provided
by the Company?
I ran various scenarlO analyses for calculating
the cost of debt and capi tal structure.It is critical to
assure that Idaho customers receive the benefit of the
Department of Water Resource Revenue bonds in Idaho.Staff
determined that by using the consolidated numbers provided
by the Company, Idaho customers continue to receive this
benefit with the Company-wide sponsored debt and capital
structure.
MINORITY INTEREST (PREFERRED STOCK)
Did you have any adjustments to the Company
costs for its minority interest (preferred) stock?
No, the minori ty interest has not changed from the
CASE NO. UWI -W- 04-
04/06/05 764
HALL, C (Di)
STAFF
previously approved rate and is reasonable.
COMMON EQUITY
What legal standards have been established for
determining a fair and reasonable rate of return for the
Company?
The legal test of a fair rate of return for a
utility company was established in the Bluefield Water Works
decision of the Uni ted States Supreme Court and is repeated
specifically in the Hope Natural Gas case.
In Bluef ield Water Works and Improvement Co. V
West Virginia Public Service Commission , 262 U. S. 679, 692
43S.Ct.675,67 L.Ed. 1176(1923), the Supreme Court stated:
A public utility is entitled to such rates
as will permit it to earn a return on the
value of the property which it employs for
the convenience of the public equal to that
generally being made at the same time and in
the same general part of the country on
investments in other business undertakingswhich are attended by corresponding risks
and uncertainties; but it has no consti tutional
right to profits such as are realized or
anticipated in highly profitable enterprises
or speculative ventures. The return should
be reasonably sufficient to assure confidence
in the financial soundness of the utility andshould be adequate, under efficient and
economical management, to maintain and support
its credit and enable it to raise the money
necessary for the proper discharge of its
public duties. A rate of return may be
reasonable at one time and become too high or
too low by changes affecting opportunities for
investment, the money market and businessconditions generally.
The Court stated in FPC v Hope Natural Gas Company
CASE NO. UWI-04-4
04/06/05
HALL, C (Di)
STAFF765
320 U.S. 591 , 603, 64 S.CT. 281, 88 L.Ed.333 (1944)
From the investor or Company point of view
it is important that there be enough revenue
not -only for operating expenses but also for
the capi tal costs of the business. These
include service on the debt and dividends
on the stock. By that standard the return
to the equi ty owner should be commensurate
with returns on investments in other enterpriseshaving corresponding ri sks Tha t return
moreover , should be sufficient to assure
confidence in the financial integrity of theenterprise, so as to maintain its credi t andto attract capital. (Citations omitted.
The Supreme Court decisions in Bluefield Water
Works and Hope Natural Gas have been affirmed in In
Permian Basin Area Rate Case, 390 , U. S. 747 , 88 S. Ct 1344
20 L.Ed 2d 312 (1968) and Duquesne Light Co. V. Barasch, 488
s. 299, 109 S. Ct. 609, 102 L. Ed.2d.646 (1989); Hayden
Pines Water Company v. IPUC, 122 ID 356, 834 P. 2d 873
(1992) As a resul t of these Uni ted States and Idaho
Supreme Court decisions , three standards have evolved for
determining a fair and reasonable rate of return:(1) the
Financial Integrity or Credit Maintenance Standard;(2) the
Capital Attraction Standard; and,(3) the Comparable
Earnings Standard.If the Comparable Earnings Standard
met, the Financial Integri ty or Credi t Maintenance Standard
and the Capital Attraction Standard will also be met, as
they are an integral part of the Comparabl e Earnings
Standard.
CAS E NO. UW I - W - 04 - 4
04/06/05
HALL, C (Di)
STAFF766
Did Staff consider these standards in its analysis
and recommendations?
Yes.These standards were considered in all of
Staff's return analysis upon which its recommendations are
based. It is also noteworthy to recognize that the fair rate
of return that allows the utility Company to maintain its
financial integrity and to attract capital is established
assuming efficient and economic management, as specified by
the Supreme Court in Bluefield Water Works.
Please define the term "cost of common equity
capital" and provide an overVlew of the process to determine
this cost.
The cost of common equi ty, or equi ty capi tal , is
the profit that investors expect to receive.Equi ty
investors expect a return on their capital commensurate with
the risks they take and consistent with returns that might
be available from other similar investments.This profit or
return is paid to shareholders as dividends or retained
the Company to grow the equity investment and future
returns.Unlike returns from debt and preferred stocks,
however, the equity return is not directly observable in
advance and therefore , it must be calculated or inferred
from capi tal market data and trading acti vi ty.
Would you please provide a narrative example to
illustrate the cost of equity?
CASE NO. UWI-04-
04/06/05
HALL , C (Di)
STAFF767
A very simplified example would be that I purchase
a stock for $30 per share.If the stock's expected dividend
during the year is $1.00, the expected dividend yield is
percent ($1.00 / $30 = 3 percent) Now , let's assume that
the stock (being extremely stable) lncreases in value to
$31.50 one year after purchase.I have then gained another
5 percent in the expected total rate of return ($1.5 /
$30.00 = 5 percent) As a resul t of buying my stock at $30
per share, I should expect a total return of 8 percent:
percent dividend yield and 5 percent appreciation.
Therefore, my total expected rate of return at 8 percent is
the appropriate measure of the cost of equi ty capi tal
because it is this rate of return that caused me to commi t
the $30 of equity capi tal in the first place.Should the
stock be riskier, I would have required a much higher return
to be compensated for taking on that risk.
Has Staff analyzed the cost of equity and
established a range for United Water Idaho?
Yes, using the three Companies in Value Line, I
calculated a water utilities industry cost of equity of 10%
and recommend that this rate be authorized for United Water
Idaho.Staff witness Terri Carlock will be providing
testimony with respect to the cost of equity and she will
support the equity ranges around the 10% point.
In your opinion , do you believe that the 10%
CASE NO. UWI-W-04-
04/06/05 768
HALL, C (Di)
STAFF
Return on Equity is in line with the composite Value Line
returns for the industry?
According to Value Line s composi teYes.
statistics for water utilities industry (October, 2004 and
January 2005) the return on shareholder s equity and common
e qu i t Y for 2 0 04 and 2 0 0 5 was 9. 5 % .For the years of 2007 -
2009 it is projected to be at 10%.
Did you review any recent Idaho rate cases where
the Commission established the return on equi ty rate?
The Idaho Commission recently authorizedYes.
Avista Utilities and Idaho Power Company rates of 10.4% and
10.25% respectively.
Will a 10% return on equity provide the Company
the opportunity to maintain its current bond ratings and
borrowing 'ability in the capital markets?
Yes, Staff bel ieves it will.According to Value
Line, the Composite Water Utility Industry return on equity
has been 8.8% in 2003 and 9.5% in 2004 and 2005.
Through its own actions , the Company s debt-to-
equity ratios were improved with its debt retirement and
refinancing.Wi th these financial adj ustments, the equi
ratio was increased and the debt ratio decreased, thus
maintaining the Company s ability to access the capital
markets wi th a good bond rating.Staff believes that the
projected 2007 - 2009 return rates of 10% will continue to
CASE NO. UWI-04-
04/06/05
HALL, C (Di)
STAFF769
afford the Company this opportunity.
The Company maintains that it needs a common
equity cost rate of 11.2% glven various risk factors
presented by the Company.Would you please comment on these
assertions?
Risk is the uncertainty or unpredictabilityYes.
of the future results of a company.The greater the range
wi thin which future resul ts are likely to fall, the greater
the risk associated with an investment in , or extension of
credi t to the company.Certain factors may include high
rates of technological changes, such as is occurring in the
telecommunications industry.Technological changes are not
substantial for water utilities so this is not a significant
risk issue for Uni ted Waterworks.Other risk factors may
include uncertainty about demand.In the monopoly
environment in which United Water Idaho currently operates
this risk is minimal compared to competitive industries like
Micron , Simplot or most local businesses in Idaho.The
Company s request for a 11.2% return on equity is higher
than needed given the environment in which it operates.
The Company s consultant, witness Ahern,
discussed the risks associated wi th Uni ted Water and a beta
study.Do you agree with the Company s position?
No.Of the three Val ue Line companies used in the
sample, two of the companies have betas of .7, and the third
CASE NO. UWI-04-
04/06/05
HALL , C (Di)
STAFF770
6 '
Company has a beta of .75.These betas are all well under
the market indicator of 1., therefore the sample presented
by the Company reflects a lower than market risk for these
water utilities.
Did you perform any other equity analysis for the
Company?
Yes, under the direction of Staff witness Terri
Carlock , I prepared a discounted cash flow analysis (DCF)
See Staff Exhibi t No. 119.
Were you able to calculate a DCF for Uni ted Water
Idaho?
Uni ted Water Idaho s cost of equi ty cannot be
directly calculated from its own market data because United
Water Idaho is a subsidiary of Uni ted Waterworks Inc.
United Waterworks Inc. lS a wholly owned subsidiary of Suez
a French conglomerate , and, only Suez has publicly traded
common stock.Independent market data required to determine
cost of equity directly for the regulated water utility
operations of United Water Idaho simply is not available.
The DCF analysis shown on Exhibi t No. 119 uses the three
sample companies as listed in Value Line Investment Survey.
Staff wi tness Carlock will expand upon this analysis in her
testimony.
Given the Staff analysis discussed in your
testimony, would you please summarize your recommendations?
CASE NO. UWI-04-
04/06/05
HALL, C (Di)
STAFF771
Yes, Staff recommends a set point of 10% as an
appropriate return for Common Equi ty.For the cost of debt
the recalculated composite rate using the appropriate
calculation derived a 45% cost. The Minority Interest rate
of 5% did not change.Staff reflects the Company s recent
debt changes as they improved the Company s debt-to-equity
ratios, thereby benefiting t'he Company as well as Idaho
customers.Finally, Staff recommends an overall rate of
return of 8.10% as the point authorized for use in the
revenue requirement calculation.
Does this conclude your direct testimony in this
proceeding?
Yes it does.
CASE NO. UWI-04-
04/06/05
HALL , C (Di)
STAFF772
(The following proceedings were had in
open hearing.
(Staff Exhibit Nos. 117 through 119,
having been premarked for identification , were admitted into
evidence.
MR. STUTZMAN Thank you, Mr. Cha i rman .And I
previously indicated that Ms. Hall would be sponsoring and
supporting the Stipulation and the cost of capital , so with the
Chair's permission , I I d like to ask a few questions on that
point.
COMMISSIONER KJELLANDER:Wi thout obj ection.
MR. STUTZMAN Okay.
BY MR. STUTZMAN:Ms. Hall, are you familiar with
and have you reviewed the settlement weighted cost of capi tal
between the Staff and United Water?
Yes , I have.
What are its prlmary components?
There are two components.One was the cost of
debt calculation , and the other was the return on equity.
Do you believe the settlement on the cost of debt
in the Agreement is reasonable and fair?
I do.The Company and Staff differed in their
calculation of the debt only as it relates to the recovery of
issue costs, discounts , and premiums.The difference was . 45
percent.That was split to reach the settlement debt rate of
773
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
Hall (Di)Staff
675 percent.
Okay.Thank you.Do you believe the settlement
term on the return on equi ty in the Agreement is reasonable and
fair?
Yes, I do.The return on equity of 10.3 percent
was wi thin the reasonable range, and the rate is similar to
return on equity rates recently authorized by the Commission.
Okay.Do you believe that the Commission should
approve the Settlement Agreement?
I do.The settlement rates were well within the
range of reasonableness , and the Staff believes that the
settlement will allow the Company to recover its costs and
maintain its credit rating for future capital requirements.
Okay.Thank you, Ms. Hall.
MR. STUTZMAN:Mr. Chairman , that concludes the
questions that I have.I did have the Settlement marked as
Exhibit No. 131.I didn't distribute it because we filed it.
I understand the part ies all have a copy of it.But I thought
that there's a reference to it in some of the wi tness
testimony, so I thought we'd assign it Exhibi t No. 131 , and
without objection , I'd like that admitted.
COMMISSIONER KJELLANDER:And wi thout obj ection
we I 11 admi t Exhibi t 131.
(Staff Exhibit No. 131 was marked for
identification and admitted into evidence.
774
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 Hall (Di)Staff
MR. STUTZMAN Ms. Hall That's all I have.
ready for cross-examination.
Okay.Let's go toCOMMISSIONER KJELLANDER:
MR . PURDY:Neither I nor Mr. Eddie have any
HEDRI CK COURT REPORTING
O. BOX 578, BOI SE , ID 83701
Mr. Purdy.
Mr. Strickling.
MR. STRICKLING:No questions.
Mr. Campbe 11 .
Thank you.
Mr. Miller.
Are there any questions
No.Okay.
questions.
No opportunity for redirect, so I believe we can
(The wi tness was excused.
And we'll go ahead and
MR. STUTZMAN Thank you , Mr. Cha i rman .We will
And as Mr. Lobb is
COMMI S S IONER KJELLANDER:
COMMI S S IONER KJELLANDER:
MR . CAMPBELL:No questions.
COMMISSIONER KJELLANDER:
MR. MILLER:No questions.
COMMISSIONER KJELLANDER:
from members of the Commission?
COMMISSIONER SMITH:No.
COMMISSIONER KJELLANDER:
say, "Thank you.
THE WITNESS:Okay.
COMMISSIONER KJELLANDER:
get ready wi th another wi tness
call Randy Lobb to the stand , please.
COMMISSIONER KJELLANDER:
775
Hall (Di)Staff
headed to the stand , it will be the intent of the Commission to
break this evening either at or before five 0 I clock , with the
understanding that there will be a public hearing later this
evening in which Commissioner Hansen has graciously agreed to
chair in my absence , and just wanted to let you know at least
what the time frame was for this evenlng
MR. MILLER:Along those lines , I I m not sure how
much other cross-examination other witnesses (sic) might have
for Mr. Lobb.Given the time that it is currently, if the
Commission agrees , it might be best to defer my
cross-examination until tomorrow morning after
COMMISSIONER KJELLANDER:Let I S see how things
proceed.
MR. MILLER:Okay.
RANDY LOBB
produced as a wi tness at the instance of the Staff , being first
duly sworn , was examined and testified as follows:
DIRECT EXAMINATION
BY MR. STUTZMAN
Please state your name for the record and spell
your last name.
My name is Randy Lobb.That's L-
776
HEDRI CK COURT REPORTING
P. O. BOX 578 , BOISE , ID 83701 LOBB (Di)Staff
And where are you employed and in what
capaci ty?
m employed at the Idaho Public Utilities
Commission as the administrator of the utili ties division.
Thank you.In that capacity, did you prepare and
prefile written testimony in this case?
Yes , I did.
Does that consist of approximately 13 pages?
Yes.
Do you have any correct ions or changes to your
prefiled testimony?
I have one change on page 8 , 1 ine The number
ten" in "nearly ten million" should be "five,
" "
nearly five
million.
Okay.Any other changes or corrections?
No.
I f I were to ask you the quest ions contained in
yo~r prefiled testimony today, would your responses be the
same?
Yes, they would.
Did you have any exhibits as part of your
testimony?
No, I did not.
Okay, thank you.
MR . S TUT ZMAN :I d move that the testimony of
777
HEDRI CK COURT REPORTING
O. BOX 578, BO IS E , I D 83701 LOBB (Di)
Staff
Randy Lobb be spread upon the record as if read.
COMMISSIONER KJELLANDER:Okay.Without
objection , we'll spread the testimony across the record as
read.
(The following prefiled direct testimony
of Mr. Lobb is spread upon the record.
778
HEDRICK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701 LOBB (Di)Staff
Please state your name and business address for
the record.
My name is Randy Lobb and my business address
472 West Washington Street, Boise, Idaho.
By whom are you employed?
I am employed by the Idaho Public Utilities
Commission as Utilities Division Administrator.
What is your educational and professional
background?
I received a Bachelor of Science Degree in
Agricul tural Engineering from the Uni versi ty of Idaho in
1980 and worked for the Idaho Department of Water Resources
from June of 1980 to November of 1987.I rece i ved my Idaho
license as a registered professional Civil Engineer in 1985
and began work at the Idaho Public Utilities Commission in
December of 1987.My duties at the Commission currently
include case management and oversight of all technical
staff assigned to Commission filings.I have conducted
analysis of utility rate applications, rate design, tariff
analysis and customer peti tions.I have testified in
numerous proceedings before the Commission including cases
dealing wi th rate structure, cost of service, power supply,
line extensions, regulatory policy and facility
acquisitions.
What is the purpose of your testimony in this
CASE NO. UWI -W- 04-
04/06/05
(Di) 1
779
LOBB , R.
STAFF
case?
The purpose of my testimony in this case is to
describe the policy position taken by the Staff with regard
to the Company s proposed calculation of test year rate
base and annualizing plant adjustments and explain the
rational e support ing the pos i t ion.
Please summarize your testimony.
Staff proposes to establish the revenue
requirement for Uni ted Water Idaho (UWI;Company)us lng
rate base levels based on a test year average the
monthly averages uslng July 2003 through July 2004 for the
Company s proposed historic test year.Staff further
proposes to include known and measurable plant additions
through December 31, 2004 in the July 31 , 2004 rate base
total for calculation of the 13 -month average.The
additional five-month period proposed by Staff for making
known and measurable plant adjustments allows the Company
to update its historic test year to more current levels
while reducing revenue/expense mismatches for adjustments
out of the test year.It also allows Staff sufficient time
to effectively evaluate and incorporate actual booked costs
its case.The December 31,2004 deadl ine for adjusting
historic test year values coincides wi th the close
calendar year 2004 and generally consistent wi th the
true-up to actual period allowed in the most recent Idaho
CASE NO. UWI-04-
04/06/05
LOBB , R
STAFF
(Di) 2
780
Power general rate case.
In a further effort to provide a revenue
requirement more reflective of expected costs, Staff
proposes to allow one notable exception to the December 31
2004 test year plant adjustment deadline and average rate
base calculation.That exception is to include investment
associated with the Columbia Water Treatment Plant (CWTP)
as if it were in service for the entire test year.Staff
also proposes that the Commission allow reasonable revenue
producing and expense reducing test year adjustments as
proposed by the Company to fully recognize the economic
impacts the treatment plant is expected to have on the
Company s annual revenue requirement.Given the size of
the proj ect and its impact on test year rate base, expenses
and revenues, Staff believes adjustments for the plant
should be allowed even though actual expenses/revenues are
not known and measurable.Annualizing or adding major
plant addi tions such as this as if it were in service for
the entire test year lS consistent with treatment of major
plant additions in the recently completed Idaho Power and
Avista rate cases.
Why did Staff find it necessary to set a deadline
and propose a methodology for calculating test year rate
base and incorporating post-test year plant investment?
The Staff makes its proposal for three primary
CASE NO. UWI -W- 04-
04/06/05
(Di) 3
781
LOBB , R.
STAFF
reasons.The first reason is to establish some certainty
and consistency in the process a utility uses when
selecting a historic test year, making proforma adj ustments
and determining annual revenue requirement.
establishing guidelines, utilities will consistently
calculate test year rate base and properly incorporate rate
base adjustments.The second reason is that it will reduce
the e~pense/revenue mismatch identified by the Commission
to occur when the costs of plant adjustments are added as
if they were in service for a whole year without adjusting
for any benefits.The third reason is that it will allow
Staff to focus on the Company s filing wi th the expectation
that adjustments will be known and measurable and that
revisions to originally filed information will be provided
In time for Staff to complete a proper analysis.
What historic test year is used by UWI in this
case and what adjustments does it propose?
The Company has used a historic test year that
runs from August 1, 2003 to July 31, 2004.The rate case
was actually filed with the Commission on October 7, 2004.
The Company has proposed many adjustments to the test year
data.Some of the tradi tional adj ustments are for such
items as weather normalization, partial billing periods and
Other adjustments areother known and measurable changes.
for estimated impacts of the Columbia Water Treatment Plant
CASE NO. UWI -W- 04-
04/06/05
LOBB, R.
STAFF
(Di) 4
782
( CWT P) However , many of the adj ustments are for budgeted,
anticipated or estimated investments that the Company plans
to make through May 31, 2005.In fact the Company proposes
90 post-test year plant additions to rate base based on
cost estimates of anticipated proj ects.The Company then
uses a year-end rate base that incorporates all of the
post-test year additions as if they were in service for the
entire test year.
How does UWI' s post-test year adjustments compare
to those proposed by other companies in recent rate cases?
Idaho Power Company in Case No. IPC-E- 03 -13 filed
a 2003 test year with 6 months of actual expenses, revenues
and investments and 6 months estimated.The Company made
it's filing on October 16, 2003 and provided updated actual
test year balances to the Commission prior to the Staff
prefile for hearings in late March and early April 2004.
Various normalizing, annualizing and known and measurable
adjustments were made to test year revenues and expenses.
In addi tion, the average of the monthly average rate base
was used to recognize that some plant was in service for
only part of the test year.Finally, only three maJ or
plant addi tions were added beyond the end of the test year.
These three maJ or proj ects were included in the rate base
calculation as if they were in service for the entire test
year.
CASE NO. UWI-04-
04/06/05
LOBB , R.
STAFF
(Di) 5
783
In Case No. AVU-04-, Avista used a historic
test year from January 1, 2002 to December 31, 2002.The
Company then included various normalizing, annualizing and
known and measurable adjustments to test year revenues and
expenses.It too used an average of the monthly averages
to establish rate base levels.The Company also included
only four maj or plant addi tions beyond the test year; two
generation proj ects and two transmission proj ects.These
four major projects were included in the rate base
calculation as if they were in service for the entire test
year.
Did the Commission approve the test year with
post-test year plant additions as proposed by the companies
In these two cases?
Yes.However, in both cases the Commission
expressed specific concern regarding annualizing plant
adjustments to include plant investment added late in the
test year or after the test year as if it were in place for
a full year.In Order No. 29505, in Case No. IPC-03-13,
the Commission stated:
We generally believe that including
investment in the calculation of average
year rate base as if it were in service
the entire year when it was not... creates
a mismatch between test year revenue and
expenses.
In Order No. 29602 , In Case No. AVU-04-1, the
CASE NO. UWI -W- 04-
04/06/05
LOBB , R.
STAFF
(Di) 6
784
Commission stated:
Rather than deny the Company
annualizing plant rate base outright or
requi re the Company to wai t for its next
rate case to include the plant in rates,we accept staff's proxy proposal for
calculating imputed revenues and expensereductions.
The Commission went on to say:
Henceforth, if the Company seeks full
recovery of plant investment as if the
plant had been in operation a full year
it must present a corresponding
adjustment to revenues and expenses.
Did the Commission allow a year-end rate base in
these cases?
, the Commission required that rate base be set
at the average of the 13 monthly average for the test year.
The Commission also allowed these companies to include
limited major plant additions completed after the test year
as if they had been in service for the entire year provided
revenue producing or expense reducing benefits from these
proj ects were also included.
Is the UWI filing consistent with these
Commission orders?
No, not with respect to determination of test
year rate base levels or including test year ratepayer
benef i ts that resul t from plant investment completed after
the end of the test year.While the Company did add test
year adjustments to reflect the revenue producing and
CASE NO. UWI -W- 04-
04/06/05
LOBB , R.
STAFF
(Di) 7
785
expense reducing effects of the single large CWTP post ~test
year addition , it used an adjusted test year , year-end rate
base total that results in a revenue requirement for plant
additions as if the other post-test year plant additions
had been in service for the entire test year.This
treatment added nearly $10 million in post-test year plant
additions to rate base for the entire test year without any
revenue producing or expense reducing adj ustments.
How does UWI' s proposed test year adj ustments
this case compare to previous general rate filings made by
the Company?
In Case No. UWI - W- 97 - 6, the Company used a test
year of July 1 , 1996 to June 30, 1997.In addi tion to the
standard normalizing, annualizing and known and measurable
expense adjustments, the Company included over 100 post-
test year plant addi tions through February of 1998 totaling
approximately $5.2 million.In Case No. UWI - W - 00 -1, the
Company used a test year of October 1, 1998 to September
30, 1999 with 70 post-test year plant adjustments through
April of 2000 totaling $4.8 million.In both of these
cases the Company based its investment amounts on budgeted
estimates and then trued-up to actual cost after its filing
wi th the Commission.The Company also used a year-end rate
base as if these plant additions had been in service for
No revenue produc ing or expense-the entire test year.
CASE NO. UWI -W- 04-
04/06/05
LOBB , R.
STAFF
(Di)
786
reducing adjustments were made to the test year for this
plant.
If the Commission allowed multiple expected plant
additions beyond the test year in each of these preVlOUS
UWI cases wi thout corresponding revenue/ expense
adj ustments, why should the Commission not allow similar
treatment in this case?
Because the Commission has Slnce recognized an
inequity in including the cost of plant additions in test
year revenue requirement without incorporating the revenue
producing / expense reducing effects of such proj ects The
Commission has established boundaries that limit this
mismatch by requiring the use of average rather than year-
end rate base and limiting post-test year plant additions
to large projects with associated benefits incorporated in
the test year.Also in the prior cases, the plant
projections were better justified as known and measurable
wi th a longer time period for Staff to verify the actual
pI ant numbers.I discuss this further later in my
testimony.
What type of additional problems do you foresee
if the Commission allows the continued use of year-end test
year rate base and unrestricted post-test year plant
adj ustments?
Beyond the mismatch created by adding plant
CASE NO. UWI - W - 04 - 4
04/06/05
LOEB , R.
STAFF
(Di) 9
787
investment costs without corresponding test year benefits,
allowing utilities to project post-test year investment
based on anticipated budgets is contrary to the principal
that test year adj ustments should be known and measurable.
Further revenue/expense adjustments based on estimates
designed to eliminate the cost/benefit test year mismatch
for an ever increasing number of post-test year rate base
additions ultimately results in a forecasted rather than
historic test year.I do not believe it is the intent of
the Commission to move to forecasted test years.
Moreover, UWI has continued to expand its time
period for including estimated post -test year plant
additions in its rate case filings.In the 97 - 6 case, the
Company included 100 expected proj ects for 8 months after
the end of the test year.In the 00-1 case, the Company
included 70 expected proj ects up to 7 months after the end
of the test year.In this case the Company has added
anticipated proj ects for ten months after the end of the
test year.While the Company hopes to satisfy the known
and measurable principal by providing actual costs for each
proj ect prior to or at the hearing, it provides no time for
the Staff to verify or evaluate, through audit, the actual
costs submitted.
Finally, if the Commission allows UWI to continue
including unlimited post-test year plant adjustments using
CASE NO. UWI-04-
04/06/05
(Di) 10
788
LOBB, R.
STAFF
a year-end rate base without offsetting revenue/expense
adjustments, then every Idaho utility can be expected to
the same.The statutory time frame for processing the
company s rate case application is intended to reduce
regulatory lag while allowing sufficient time for
Commission review.The time period for processing a rate
case In Idaho is already shorter than that for surrounding
states.However, if cost information is continuously
updated to the time of hearing, Staff and ul timately the
Commission do not have sufficient time for adequate review.
This is particularly true if Staff must also evaluate
estimated revenue producing/expense reducing impacts
such plant additions when they are added to test year rate
base on a year-end basis.
Are there any other differences in what Staff
proposes in this case and what the Commission approved in
the most recent Idaho Power and Avista general rate cases
with respect to test year rate base calculations?
Yes.There is one significant difference.
both the Idaho Power and Avista cases, no plant addi tions
completed beyond the test year were included in the
calculation of test year rate base other than the limited
large plant addi t ions previously described.In this case,
Staff proposes that UWI be allowed to include plant
additions proposed by UWI at the actual amount booked for
CASE NO. UWI-04-
04/06/05
LOEB, R.
STAFF
(Di) 11
789
non-CWTP plant investment through December 31, 2004 as
the investment were made by July 31 , 2004 , the end of the
test year.The proposal allows the post-test year plant
investment to be included for one month in the calculation
of average rate base without requiring associated revenue
producing or expense reducing test year adjustments.This
treatment is consistent wi th the Commi ssion ' s Idaho Power
ruling that allowed six months of estimated investment, to
be trued up to actual investment and included in the test
year calcufation of average rate base.
Staff views this treatment as a compromise' that
allows estimated investment to be trued up to actual
investment during the processing of the case and included
in the average rate base calculation.In the Idaho Power
case the number of months investment was allowed in the
rate base calculation was dependent upon when in the test
year investment was made.In the UWI case, all plant
additions completed following the test year were added
after the end of the test year and are therefore, only
included in the rate base average for one month.Allowing
plant to be included in rate base on this limi ted basis
greatly reduces the potential for revenue/expense mismatch
which reduces the need for further test year adj ustment
What is the revenue impact of the Staff'
proposal?
CASE NO. UWI-04-
04/06/05
LOBB , R.
STAFF
(Di) 12
790
Staff witness Harms has determined that Staff'
rate base proposal will reduce the Company s proposed
annual revenue requirement by $2.13 million.Addi tional
details regarding the revenue requirement impact are
provided in Ms. Harms testimony in this case.
Would you please summarize your recommendation?
Yes.Staff proposes to use an average of the
monthly average rate base to establish test year rate base
for ratemaking purposes.The July 2004 monthly average
would include plant addi tions proposed by UWI at the actual
booked dollar amount through December 31, 2004.Actual and
projected plant investment in the CWTP through May 31, 200S
would be included in the rate base total as if it were in
servlce for the entire test year.The Company proposed
revenue produc ing and expense reduc ing adj us tment
associated with the CWTP would be included in the revenue
requirement calculation.Revenue producing and/ or expense
reducing adjustments to test year revenue requirement would
not be required for non-CWTP post-test year plant additions
included in the test year rate base average.
Does this conclude your testimony in this
proceeding?
Yes, it does.
CASE NO. UWI -W- 04-
04/06/05
LOBE , R.
STAFF
(Di) 13
791
(The following proceedings were had in
open hearing.
MR. STUTZMAN:Mr. Lobb is available for
cross - examina t ion.
COMMISSIONER KJELLANDER:Mr. Purdy.
MR . PURDY:Yes, thank you.
CROS S - EXAMINA T I ON
BY MR. PURDY:
Mr. Lobb, though you didn t testify regarding the
Stipulation or Agreement entered into between Community Action
and United Water and the issues associated with that Agreement,
I was advised that you are the appropriate witness to ask
questions pertinent to that Agreement.Is that a fair
Tha t 's correct.
- -
statement?
Yes.
Along those lines, I assume that you are familiar
with that Agreement?
Yes,have rev i ewed it.
Okay.And,fact,didn sit in on theyou
workshop that was publicly noticed and conducted in late
February that led to that Agreement?
Yes, I did.
792
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID
LOBB (X)
Staf f83701
And during the course of that workshop, is
fair to say that you weighed in with your opinions regarding
the issues that we discussed?
Yes.
Okay.Yet, obviously, Staff has not taken a
formal opinion in this case regarding whether the Commission
should either accept or rej ect that Agreement?
That I S correct, no testimony was filed on that
issue.
Okay.So getting to the components of the
Agreement, my first question is do you have any conceptual
problems with the idea of a lower-priced initial block rate as
we have agreed to wi th Uni ted Water for the purpose of
frankly, assisting low- income customers, yet wi thout
undermining the, you know , summer conservation price signals?
Well , I think wi tness Sterling talked a lot about
the potential problems with establishing an initial block rate
or a tiered block rate , some of the information that we would
like to have.You know, if we re going to establish an initial
block rate, it seems ike it should have some relevance to the
data that underlies the water consumption, and to establish a
three ccf initial block rate that provides some 35 cents a
month in rate relief for low-income customers, it seems a
little short in terms of , you know , an item that might be
viewed as low- income assistance.
793
HEDRI CK COURT REPORTING
O. BOX 578, BOISE , ID
LOBB (X)Staff83701
All right.So let me see if I can characterize
what you I re saYlng:You're not opposed to the idea of the
block rate; you seem to think it should be of a greater amount
of consumption?
Well, yeah, I think it should be established
after reVlew of the information , and if we re going to
establish a tiered block rate, we should look at the underlying
information, rather than just establish it at a mlnlmum level
in conjunction with a Stipulation, you know, to satisfy
low- income needs.
strike that.
Well , is there some particular
- -
well, let me
This Agreement was entered into and presented to
the Commission Staff prior to the prefile deadline for both
Staff and Intervenor testimony.Is that correct?
did not seek
issue?
That's correct.
All right.So is there some reason that Staff
the necessary information to weigh in on the
It was just really late filed.We got it just
days before our testimony was due , and so we chose not to
address that and to answer questions about that.
Let me make this simple.The Staff doesn'
really oppose the purposes and the obj ecti ves of the
Stipulation , and, you know , we're not necessarily opposed to
794
HEDRI CK COURT REPORTINGP. O. BOX 578, BOISE , ID 83701
LOBB (X)Staff
~ .
the tiered rate structure.We I ve made that proposal before.
We I re not opposed to the proj ect Share concept.We'
interested in the underlying costs of that program.The other
aspects that conservation
- -
that the low- income targeted
conservation programs I think Staff agrees is a good idea.
re not really opposed at all to the principles proposed as
part of the Stipulation.
Okay.What would it take, in your oplnlon then
in terms of additional information or procedure for this
Commission to be equipped to make a ruling on whether to adopt
a - - some kind of a block or tiered rate in this - - well , I'll
leave it at that.
Well , I thought it was important to recognlze
that
- -
the lack of information.The Staff has proposed if a
further investigation or information provided in a separate
proceeding or a future rate case, perhaps that we could better
develop a rate design that would work or be meaningful.
I don t think
- -
I thought it was al so important
to point out that we don't want to be too quick to change rates
In between rate cases or change rate design in between rate
cases.It causes confusion.We want to make sure, as a staff,
that any scrambling or changing of rate design has the
consequences intended.So we would just like to look at it
more closely and provide
- -
have more information to view a
rate design than we had in this case.
795
HEDRI CK COURT REPORTING
O. BOX 578, BOISE, ID
LOBB (X)
Staf f83701
And when was the last general rate case filed by
United Water?
I believe it was a '99 test year, 2000 rate case.
So roughly half a decade ago?
Yeah , that I s correct.
Well, don't you see a dilemma, Mr. Lobb , in that
if now we are required to wait until United Water files for
another rate case before we engage in modifying the Company'
rate design, that - - well , does that trouble you that we would
potentially have to wait that long?
Well , we do have the - - we do have a
summer/winter differential.I think we have lower rates in the
winter.I think that provides
- -
it helps to provide a
subsistence level of cost for low- income customers.So I think
we have a rate design that people are comfortable wi th.
think it's working fairly well.
There has been a minimum block in the past.
think it was associated wi th a minimum customer charge.That
was eliminated.We proposed
- -
in several past rate cases we
proposed various types of rate design changes based on lots of
information, and we've pretty much maintained
- -
the Commission
has maintained the rate design that is currently in place.
I don't know how long it I s going to be before the Company comes
in for another rate case, but I'm not sure that we have the
urgency.
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Well, you indicated that you have a subsistence
level buil t into your current rate design.Am I incorrect or
isn t it true that all consumption during the summer month
billed at a 25 percent higher rate?
That I S true, but the 25 percent higher rate in
the summer months allows a smaller or a lower rate in the
winter months.
All right.
And , essentially, to a large extent , outdoor
water consumption is discretionary.
But isn I t it also true that the vast maj ori ty of
customer bills for all customers
- -
well, I should say all
residential customers
- -
are incurred during the summer
months?
That's true, because of outdoor
- -
outdoor water
use.
All right.Then Well , let me ask you this:
sounds like you say - - you're saying that, conceptually, you
don t have a problem wi th the idea of an ini tial block rate , we
need more information, it's too low perhaps as agreed to
between CAPAI and Uni ted Water.What I s the down side to the
Commission approving the Agreement as reached between the two
parties, if any?
Just complicated, more complicated rate design.
Sorry.More complicated what?
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More complicated rate design.
All right.Is it your opinion that United Water
feels it I s too complicated to implement this rate design?
I don't know how United Water feels.Apparently,
they reached the Stipulation , they're willing to provide a
minimum block.Certainly, it wouldn t be overly problematic.
m not sure it would be overly useful.
All right.Last area I wanted to ask you about:
What about the idea of , as I discussed with Ms. Ottens, a
budgeted billing concept as opposed to a traditional level pay?
So in other words, you are still billed the same summer rate
for summer consumption , but you are given essentially an
extended period of time to pay that amount off , perhaps above a
certain percentage.I guess you could structure some mechanism
like that in any number of ways.Do you see that as a viable
means of assisting low-income customers?
It seems, to me, that it would have more impact,
it would be more beneficial to low-income customers, than a
three ccf bimonthly block in the summer.It does nothing to
affect the huge bills that could potentially be incurred during
the summer months, and I think it I s the payment of those bills,
whether you split it into two months or you have it In a single
month, it seems, to me , the ability of customers to pay those
bills in the time frame required is very difficult.So,
spreading those bills out on some type of budget pay would seem
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0::
to make some sense in assisting low-income customers to pay
their bills.
Okay.Thank you.That's all I have.
COMMISSIONER KJELLANDER:Mr. Eddie.
MR. EDDIE:Just a few questions.
CROSS-EXAMINATION
BY MR. EDDIE:
Mr. Lobb, were you here yesterday during Company
witness Rhead' s testimony?
Yes , I was.
And particularly with regard to difficulty in
acqulrlng sufficient supplies -- water supplies -- to cover
summer 2005?
Yes.
Would you agree that the context of that
testimony is that there is the likelihood of some urgency
acqulrlng sufficient supplies or meeting customer demand in the
current water environment that we find ourselves here in the
Treasure Vall ey?
Certainly.
One of the policies underlying establishing an
inverted block rate would be to send a stronger conservation
signal to customers if the Commission were to decide to adopt
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it?
Well, that I s probably true, and I think we need
to look at a couple different things.I mean , 2005 is
particularly acute because of the water condi tions.And I
think inverted block rates, while they I re perhaps a solution to
somewhat immediate needs, but probably longer term needs as an
al ternati ve maybe to supply-side resources, if you could send
proper prlce signals and reduce consumption in that way.
Okay.The difficulty in changing rate designs in
between rate cases are not insurmountable difficulty, is it?
No.
Not that a rate design change happens every year
but Idaho Power has a PCA where rates change just about every
year?
That's true, but those are usually uniform, and
one of the things about rate design changes is they're not
really very uniform.Some customers win and some customers
lose, and that's the hard part.
I think Il ve heard Commissioner Smith in the past
characterize block rates as something of a blunt tool?
Pardon me?
I believe I've heard Commissioner Smith or one of
the Commissioners characterize a block rate as something of a
blunt tool, but nevertheless , one of the tools that we have to
send a conservation signal.My question is whether it would be
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unreasonable to establish a block rate, an ini tial block rate,
based upon the general cri teria that had been put forth by
Mr. Sterling or Mr. Woj cik, for example, setting a block rate
at average indoor use or average wintertime use within each
appropriate billing category?
Well, again , the Staff has made those types of
proposals in the past.I personally have made proposals with
regard to establishing first block rates based upon either
customer characteristics such as residential, commercial
public, whether or not you should set a single block rate based
on historic usage of individual households.Obviously, if you
just do an average for some group of customers, you know , maybe
nobody is at that average, people use more or less.So it'
really difficult to establish a minimum block that I s really
representative of a block of customers that might use water in
different ways.
I guess my point is that you're always going to
be imperfect in establishing the block and that a general
cri teria could be a reasonable approach , and that, furthermore,
if I may continue, that data such as average wintertime use or
average which would be representative of average indoor use
would be easy data to acquire in a matter of perhaps a few days
or a week?
Certainly you could get some information that
wouldn I t take you long to get.Like I say, there I s been first
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block rates in the past where you got, I think , 600 - - or , six
ccf bimonthly was the first block, if you will, associated with
a mlnlmum customer charge.
Okay.Thank you.
MR. EDDIE:Nothing further.
COMMISSIONER KJELLANDER:Mr. Strickl ing.
No quest ions.MR. STRICKLING:
COMMISSIONER KJELLANDER:Mr. Campbe 11 .
No questions.MR . CAMPBELL:
COMMISSIONER KJELLANDER:Ready for Mr. Miller.
MR. MILLER:What would be the Commission'
attitude about starting my cross tomorrow morning, if I could
ask?
COMMISSIONER KJELLANDER:Well , you've already
asked.Why don't we
- -
does it need to be connected up?
There I S no breaking point wi thin that?
MR. MILLER:I was just thinking, gl ven the hour
of the day and the likely areas of cross in conjunction with
the likely areas of Company rebuttal, the areas would go
together bet ter , more understandable, if they all came
- -
they weren't broken up by 12 hours.
COMMISSIONER KJELLANDER:Okay, let me just ask
this question and propose it broadly:We have another day of
hearing scheduled and certainly don t want to see it extend
beyond Thursday.Is there anyone who thinks that this should
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be going into Friday, and might I get some kind of commi tment
that we don t stray too far into the end of the day tomorrow
that we even have to worry about extending this hearing into
Friday?
MR. MILLER:From the Company's point of view
I 1 m quite confident that we probably have no cross of
Ms. Carlock now that the
- -
given the status of the
Stipulation, so we only have cross left for Mr. Lobb.And that
only leaves the spreading of the testimony of the Company'
rebuttal witnesses and the cross-examination of those three
wi tnesses, which I would think could be accomplished in the
course of the day.
COMMISSIONER KJELLANDER:Mr. Stutzman, any
thoughts?
MR. STUTZMAN:I guess from our perspective,
can t imagine going past tomorrow.
COMMISSIONER KJELLANDER:Anyone else have any
thoughts they would like to add to this?Mr. Campbe 11 .
MR . CAMPBELL:Mr. Chairman, I can assure you
won t go past tomorrow from my standpoint, because I cannot
attend tomorrow given a prior client commitment.
COMMISSIONER KJELLANDER:Okay.Anyone else want
to add a thought or two?
MR. EDDIE:Don Woj cik , our wi tness, is going to
be available starting by his flight comes in at 10:15.
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don t know how much cross folks have of him.
COMMISSIONER KJELLANDER:10: 15?
MR. EDDIE:His flight comes in at 10:15.
COMMISSIONER KJELLANDER:So the earliest he
would be ready would be probably 11: OO?
MR. EDDIE:Elevenish.
COMMISSIONER KJELLANDER:Okay.
MR. EDDIE:Perhaps after lunch would be an ideal
time for him.
COMMISSIONER KJELLANDER:Okay.It's our - - it
would be our intent then to break for now , and we will have the
public hearing tonight.Again, Commissioner Hansen will be the
chair of that public hearing.And then tomorrow morning start
time , 9: 0 0 a. m. ?9:00 a.And with that , I want to thank
everybody again for doing the best to keep on track , and we'll
wrap this up again tomorrow.
(The witness left the stand.
(The hearing adj ourned at 4: 40 p. m. )
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