42398PUC.docx

1 BOISE, IDAHO, THURSDAY, APRIL 23, 1998, 1:20 P.M.
2
3
4 COMMISSIONER NELSON: Okay. Let's go back
5 on the record in case UWI-W-97-6. And we'll go to you,
6 Mr. Miller.
7 MR. MILLER: Thank you very much,
8 Mr. Chairman.
9
10 RANDY LOBB,
11 produced as a witness at the instance of the Staff,
12 having been previously duly sworn, resumed the stand and
13 was further examined and testified as follows:
14
15
16 CROSS-EXAMINATION
17
18 BY MR. MILLER: (Continued)
19 Q Good afternoon.
20 A Good afternoon.
21 Q Still just a few more questions on the
22 Island Woods, if I could. Your investment model, which
23 is Exhibit 103, uses as one of the important inputs, I
24 guess, the customers connected as of the end of the test
25 year.
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1 A Well, it's the -- I guess you could say
2 that, yes. It uses Gradilone's customers as included in
3 the test year.
4 Q Right. Mr. Linam in his rebuttal -- do you
5 happen to have his rebuttal with you?
6 A Yes.
7 Q Thank you. Give us Exhibit No. 14.
8 A Yes.
9 Q And as one of the -- as inputs -- well, let
10 me back up. Is Exhibit 14 a replication of the model
11 which you set forth in Exhibit 103?
12 A Yes, that's my understanding.
13 Q Mr. Linam shows us results based on current
14 customers as of now I think in column 3.
15 A Yes.
16 Q And model results based on projected
17 customers that Mr. Linam projects that would exist within
18 some reasonable time in the future.
19 A Yes, that's my understanding.
20 Q And then looks at current customers at
21 proposed rates --
22 A Yes.
23 Q -- in Exhibit 5, and takes another look at
24 your customer count based on proposed rates.
25 A Yes.
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1 Q All right. So the only thing I do want to
2 point out here, I guess, is there are multiple ways of
3 looking at the subsidy calculation.
4 A Well, my method is the same that the
5 Company used. They did not pro forma the test year to
6 reflect additional customers or revenue derived at
7 proposed rates.
8 Q And Mr. Gradilone's study was done for the
9 purpose of revenue projections for rate case purposes.
10 A That's right.
11 Q Right. So I guess you could say, to be
12 consistent, we could use the same method for all
13 purposes.
14 A I'm not sure I follow.
15 Q Well, the purpose of the analysis here is
16 not revenue projection for rate case purposes, as I
17 understand it, but evaluation of presence or absence of
18 subsidy.
19 A To the extent that the numbers are used in
20 the rate case, that establishes the level of the subsidy.
21 Q Right. But if you used current customers
22 in the calculation, the subsidy in fact disappears,
23 doesn't it?
24 A Well, except for you set rates based on the
25 lower numbers. If you pro forma the test year for the
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1 higher numbers, then the subsidy would disappear
2 perhaps. But if you don't include them in your test
3 year, then you formalize the revenue deficiency and you
4 set new higher rates based on that.
5 Q Right. Yeah, I understand that
6 completely. The only point I'm making is that the
7 drawback, I guess, of using test year customers is that
8 we know that number is inaccurate.
9 A Perhaps so. That was the number that the
10 Company used, and if they come in for a rate case next
11 year and they include the new higher numbers and new
12 revenue, then it would certainly justify a higher
13 acquisition revenue requirement.
14 Q So just to summarize here the possible
15 approaches to this sort of evaluation, the Commission
16 could follow a very mathematical approach only looking at
17 one assumption regarding the number of customers, run it
18 through the model, and it either works or it doesn't
19 work, or the Commission could exercise judgment in
20 determining the materiality -- whether any subsidy that
21 exists is truly material, or it could do multiple
22 screens, if you will, to analyze the magnitude and
23 existence of any subsidy. So I guess what I'm
24 suggesting is there's sort of a mathematical
25 run-it-through-the-model approach or there's a
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1 judgmental approach.
2 A Certainly, and I've already agreed that the
3 Commission consider other factors.
4 Q So you're not suggesting that the
5 Commission can't consider other factors in evaluation of
6 this?
7 A Not at all.
8 Q Very good. That was a long way to get to
9 it.
10 All right. Let's then go to your testimony
11 regarding the North State and Garden City acquisition.
12 And you have, as I understand it, Exhibit No. 105?
13 A Yes.
14 Q Which is again the same investment model
15 used or shown in previous exhibit, although applied now
16 to the North State project. And what does this model
17 show with regard to the presence or absence of subsidy?
18 A This model shows that if the revenue
19 requirement requested by the Company in this case --
20 well, it shows that the revenue requirement requested by
21 the Company in this case can be supported by the revenue
22 generated from the increase in customers.
23 Q So with respect to North State/Garden City,
24 the model shows that even under your assumptions, that
25 there is no subsidy from the system as a whole to Garden
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1 City/North State?
2 A Only with respect to the purchase price,
3 which did not include any supply.
4 Q We'll come to supply. But with respect to
5 the purchase price, there is -- your model shows no
6 subsidy?
7 A That's correct.
8 Q Very good. Notwithstanding that, the
9 Staff, though, finds a reason to oppose inclusion, which
10 is a belief that the property as it existed in the hands
11 of the seller was contributed to the seller by
12 developers?
13 A That's correct.
14 Q Did the Staff advance the same or similar
15 argument to the Commission in Case 95-2, which was the
16 underlying acquisition case?
17 A Yes.
18 Q Did the Commission accept that argument in
19 that case?
20 A I don't believe -- I thought they did. My
21 understanding was that they -- well, actually, let me put
22 it this way. I don't believe that they said yes or no on
23 that issue. My understanding was that they referred that
24 issue to the general rate case.
25 Q And the Commission did, though, require a
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1 showing by the Company that revenues were sufficient to
2 cover the stand-alone revenue requirement? That much is
3 clear.
4 A Subject to check, I'll agree that they did
5 say that in the order.
6 Q And that has been demonstrated to your
7 satisfaction?
8 A With respect to the purchase price.
9 Q All right. In his rebuttal testimony,
10 Mr. Linam indicates that if the Commission had accepted
11 that argument in Case 95-2, the Company would not have
12 consummated this exchange. Do you recall that testimony?
13 A Yes, I believe -- I believe I do.
14 Q Any reason to disbelieve that?
15 A If he says that's what the Company would
16 do, then I would have to believe that that's what they
17 would have done.
18 Q Does the Staff have any concern, I guess,
19 about the fairness of recommending disallowance based on
20 a previously unaccepted theory when it is clear that the
21 Company would not have proceeded with the transaction had
22 that theory been accepted when it was first advanced?
23 MR. WOODBURY: Mr. Chairman, I'd object
24 here. The premise of the question is that the Commission
25 rejected Staff's analysis in that case, and I would refer
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1 the Commission to Order No. 26646 when the Company tried
2 to bring this matter back to the Commission for
3 clarification, and the Commission was quite clear as to
4 what it said in the prior orders, and that's not as
5 Mr. Miller is attempting to summarize.
6 COMMISSIONER NELSON: Mr. Miller, do you
7 want to respond?
8 MR. WOODBURY: You can read through it.
9 MR. MILLER: I think the worst thing in the
10 world is for opposing counsel to try and tell the
11 Commission what it said. I think the Commission will
12 read its orders and decide. It's kind of like that
13 remark attributed to Carl Sandburg who was asked what one
14 of his early poems meant, and he said, "When I wrote that
15 poem, only God and I knew what it meant. Now only God
16 knows." A little regulatory humor. Sorry.
17 Q BY MR. MILLER: Now, again with respect to
18 the future water supply issue going beyond now the
19 purchase price -- oh, let me ask just one question on
20 purchase price.
21 If the Commission does not include the
22 purchase price in rate base and if the revenue produced
23 by the system by North State/Garden City is more than
24 adequate to cover the revenue requirement associated with
25 the investment, what way does the subsidy then flow?
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1 A I would characterize it as a benefit to the
2 existing ratepayers.
3 Q So when existing people get it, it's a
4 benefit; when it goes the other way, it's a subsidy? Is
5 there a distinction here?
6 A Well, there's a choice. And the choice of
7 the Company to pay for plant, the question raises with
8 every acquisition that the Company makes as to -- with
9 regard to how much they pay. And if they choose to
10 acquire a system, I would hope that it would have benefit
11 to the ratepayers as well rather than be a detriment to
12 the ratepayers.
13 Q Certainly. All right. Now, with respect
14 to the future supply issues, can we turn to Mr. Linam's
15 Exhibit No. 16?
16 A Yes.
17 Q Am I correct that this exhibit is similar
18 to No. 15 in that it replicates the investment model that
19 you developed, then shows results with some different
20 assumptions?
21 A Yes.
22 Q And if the Commission thought the different
23 assumptions were appropriate, then the concern about
24 future supply costs is diminished under Mr. Linam's
25 analysis?
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1 A If the Commission deems those numbers to be
2 correct, that would be true.
3 Q And again, I don't want to argue with you.
4 I'm just trying to point out for the Commission what its
5 choices are.
6 All right. Now I'd like to ask some
7 questions in the area of the Redwood Creek/Northwest
8 Pipeline issue. Are you with me?
9 A Yes.
10 Q Okay. And just by way of introduction, am
11 I correct that certain wells in the Redwood vicinity have
12 been connected to the Hidden Hollow Reservoir by pipe in
13 order to provide service to the main service level?
14 A According to the Company, they have made
15 the connection, that's correct.
16 Q And the connection actually exists to your
17 knowledge, does it not?
18 A I believe so, although I don't have
19 absolute knowledge of that.
20 Q For the purpose of our questions, can we
21 assume that it does?
22 A Yes.
23 Q Very good. Thank you. Now, you questioned
24 the investment in your direct testimony based on an
25 analysis that the deficiency of supply in the main
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1 service level is small, therefore, calling into question
2 the need for this investment. Is that a --
3 A No, I wouldn't characterize it that way.
4 Q How would you characterize it?
5 A Clearly, the supply -- the service of the
6 main service level is not entirely located within the
7 main service level. Therefore, if you look at the main
8 service level on a stand-alone basis, it shows that there
9 is a supply deficiency with respect to the demand. What
10 I've indicated is that the deficiency has not gotten
11 worse over the years, it's gotten better.
12 Q Have you examined Mr. Brown's rebuttal
13 Exhibit No. 17?
14 A Yes, I have.
15 Q He shows -- this, of course, is in terms of
16 peak day demand.
17 A Yes.
18 Q Peak day demand in 1997 of 29 million gals
19 per day?
20 A Yes.
21 Q And peak day supply of 23 million gallons
22 per day?
23 A Yes, I see that.
24 Q I assume you agree that it's the utility's
25 obligation to build and have adequate services or
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1 facilities in place to meet peak day demand?
2 A Yes, I agree that that's probably -- that
3 that is true, yes.
4 Q Part of the utility's obligation to serve
5 implies an obligation to meet that level of demand?
6 A Yes.
7 Q Mr. Brown's exhibit for 1997 shows a
8 deficiency of about six million gallons per day on a peak
9 day basis?
10 A That's what it shows.
11 Q Do you think that a water company should
12 have the ability to refill storage tanks on a daily
13 basis?
14 A Yes, I do.
15 Q At some point in each 24-hour period, the
16 storage facilities should be full?
17 A That's true, and they should use the
18 resources they have available to do that.
19 Q And if a company is unable to fill at any
20 one time during a 24-hour period, would you agree that
21 there is some indication of a supply problem?
22 A It depends on what choices they make with
23 respect to use of their facilities, and I believe that
24 there are facilities that were available in 1997 that
25 were not necessarily utilized on those days when refill
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1 did not occur.
2 Q I guess as part of that, you imply that
3 less expensive wells could have been installed to meet
4 the deficiency as opposed to construction of this long
5 pipe facility?
6 A Perhaps, but I primarily look to Swift
7 No. 1, which has been deemed to be a less than desirable
8 water quality well. It has a capacity of 1.4 million
9 gallons per day. The Company also has water purchase
10 contracts from Garden City that I don't believe were
11 necessarily fully exercised during that period.
12 In addition to that, there has been wells
13 completed since 1997 that are available in 1998 that were
14 not available in '97.
15 Q Well, did you yourself perform any
16 engineering or hydrological or other studies to determine
17 if wells were a realistic option?
18 A I gathered information with respect to
19 existing wells in the west main service level where
20 observation wells have been drilled, what their depths
21 are, the depth to water, pumping water levels, that sort
22 of thing, yes, to some extent.
23 Q Are you aware that the Company provides --
24 performs, I guess, detailed studies of its supply options
25 and demand requirements?
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1 A I hope they do, yes.
2 Q Do you have any specific evidence that the
3 Company ignored its own studies to favor this investment
4 over less expensive options?
5 A The evidence that I have is that they have
6 recently constructed a well in this area at approximately
7 $300,000 per million MGD. The Company has also indicated
8 in earlier testimony in the 95-1 case that the cost of
9 serving the North State area and providing 1 million MGD
10 of capacity -- or 1 MGD of capacity would be around
11 $300,000.
12 I understand they have drilled wells -- at
13 least they've drilled one well in an area of the main
14 service level where they had not previously attempted to
15 drill a well, which would be on Gary Lane. They also
16 drilled an observation well at the Horseshoe
17 Bend/Highway 55 extended south of State Street and
18 deduced that apparently the water quality was
19 insufficient to complete a well there. And I also
20 understand that the capacity of the Gary Lane well was
21 not sufficient even though they had identified a water
22 supply with water quality that they believed was
23 sufficient.
24 Now, I think you kind of get into the area
25 of the water quality question, what's sufficient, what's
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1 not, and what your options truly are. Clearly, their
2 decision not to use the Swift well is one based on water
3 quality and not capacity, so, you know, you could look at
4 the water purchase agreement options with respect to
5 purchasing water from Garden City and what that costs,
6 what it costs them to operate their Swift No. 1 well,
7 what have they -- what they've previously paid for other
8 wells in the area, and certainly look to next year, which
9 we have one season to go through before 8 million MGD is
10 added to the system. To me, that's an important factor
11 to consider the choice that the Company made here to
12 extend to these remote wells.
13 Q Certainly, you can point to other, as you
14 have, considerations, but you don't have any specific
15 evidence, though, that the Company ignored its own
16 planning process to prefer this option over some others?
17 A I haven't seen their planning process.
18 Q Okay.
19 A I'm not absolutely familiar with how they
20 plan or what options they actually look at. They say
21 they're starting a -- they're involved in developing a
22 master plan. I have not seen that, so I can't say that
23 they did or did not follow their plan.
24 Q All right. Very good. Now, another reason
25 you advanced to oppose the project starts on page 11 on
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1 line 20 through page 12 on line 21 in which you cite the
2 possibility of increased consumption in the Eagle area.
3 A Yes.
4 Q Could you look at Exhibit 108 for us,
5 please, Mr. Lobb?
6 A Okay.
7 Q Do you see anything in this agreement that
8 obligates United Water to do anything more than provide
9 supplemental water for fire flows?
10 A Well, as I pointed out in my testimony,
11 item number one, provision of water, clearly states,
12 "United Water agrees to provide City additional water
13 and -- and supplemental fire flows." To me, that's very
14 clear.
15 Q As you read through the rest of the
16 agreement, though, do you see anything that obligates the
17 Company on anything other than fire flows?
18 A The only other place in the contract that
19 does mention additional water is under item B of recitals
20 which states, "Eagle desires to obtain an additional
21 source of water, including for fire protection
22 purposes."
23 Q So that would be it?
24 A Those are the only other areas that I see.
25 Q And do you recall Mr. Linam's rebuttal
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1 testimony where he indicates that the Company's
2 understanding of this agreement is that the only
3 obligation is with respect to supplemental fire flows?
4 A I've read his testimony in that regard.
5 Q All right. If we could refer your
6 attention now to Exhibit No. 9, are you aware of anything
7 in that agreement that requires the Company to do
8 anything other than provide emergency backup service?
9 A No.
10 Q And of course, even if the Company, as it
11 obviously has, has entered into these agreements with
12 neighboring systems, United still has its public utility
13 obligation to serve the demand within its certificated
14 territory?
15 A Yes, it does.
16 Q And its obligation to serve in that area is
17 not relieved just because there's not a good source of
18 supply within the area?
19 A I would agree.
20 Q Let's go to, if we could, Mr. Lobb, the
21 Boise River diversion issue. I think your testimony in
22 that respect starts on page about 16.
23 A Okay.
24 Q The Company has testified both in its
25 direct and rebuttal testimony that because of a
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1 requirement or a mandate from the Department of
2 Transportation, the facilities had to be constructed in
3 1996 or the opportunity to construct those facilities
4 would be lost in the future. Do you recall that
5 testimony?
6 A Yes, I do.
7 Q Do you have any reason to doubt or disagree
8 with that testimony?
9 A I don't recall any information, written
10 information, that supported that position in our request
11 for -- in our production request regarding documentation
12 of the river diversion. I don't --
13 Q Pardon me. Go ahead.
14 A I don't have any other -- any information
15 that would refute that.
16 Q So in the absence of any information to
17 refute it, for the purpose of our questions, can we
18 assume it's true?
19 A We can do that.
20 Q Very good. The Company has also testified
21 that if this opportunity was lost or not exploited, any
22 future water supply options could be either nonexistent
23 or at least more expensive. I wonder if you have any
24 reason to disagree with that.
25 A I guess I would question nonexistent.
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1 Q Okay.
2 A I think for a price. And, you know, we've
3 talked about the economics of the situation, and I've
4 agreed that the economics of the situation justifies the
5 diversion in my testimony. However, whether it could
6 never be done under any circumstances in the future I
7 would question.
8 Q Fine. It certainly would have been, in
9 economic terms, more expensive to the Company and its
10 customers?
11 A I believe that it would be in the future,
12 yes.
13 Q If the Company had ignored this opportunity
14 and later constructed more expensive facilities, wouldn't
15 the Company be subject to criticism for not pursuing
16 least cost options just as you have I think criticized
17 the Company for failing to do that in connection with
18 Redwood Creek and Northwest Pipeline?
19 A It could.
20 Q So doesn't the utility in this circumstance
21 find itself something of a catch-22, if you will? If the
22 Company acts within the only window of time available to
23 it, the Company is criticized or can be criticized for
24 investing too soon. If it waits till later, the Company
25 can be criticized for not pursuing least cost options.
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1 A I think that's the nature of the business
2 and the perspectives of the various parties involved,
3 yes.
4 Q Your concern expressed about inclusion of
5 the investment in rate base has to do with a present
6 versus future customer impact?
7 A Yes, there does appear to be a mismatch
8 there.
9 Q Of course, the Company is continually in
10 the process of developing resources in order to meet its
11 foreseeable demand, correct?
12 A Yes, planning.
13 Q And for some types of resource, the
14 planning horizon can be lengthy?
15 A This is probably as far out as I've seen
16 planning for a future resource.
17 Q It's not like we're planning to meet demand
18 thirty years from now, though.
19 A No. I think it would be akin to trying to
20 secure water rights for the future or something of that
21 nature.
22 Q If I can just divert here. If the Company
23 had secured a water right -- one of the reasons advanced
24 with respect to the transaction is the Company doesn't
25 yet have water rights, but if it acquired the water
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1 rights now, wouldn't it be criticized for acting too
2 soon?
3 A It would be difficult to say with regard to
4 water rights. Construction costs, construction
5 alternatives I think can be fairly well identified or at
6 least estimated in the future. What your current options
7 are to construct a diversion and where it would be and
8 the length and that sort of thing are physical
9 constraints that I think you can put an estimate on.
10 Whether or not you're going to be able to
11 acquire water rights in the future I think is -- and how
12 much you might have to pay in the future versus what you
13 have to pay today could be anywhere. I think it's a much
14 more difficult prospect to try to determine if you're
15 saving any money by purchasing those water rights at a
16 million dollars today, and so they are different, I
17 believe.
18 Q It's a small point anyway, but it is true,
19 I guess, or you'd agree that a utility can't wait until
20 this week to acquire resources to serve customers that
21 might come on next week?
22 A I agree there are certain aspects that have
23 to be done well in advance.
24 Q And similarly, one of the problems of
25 course with utility plant is that capacity in these
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1 industries kind of comes on in lumps; in other words, you
2 can't build to serve each individual customer as it comes
3 on?
4 A I would agree that there's different levels
5 of lumpiness, obviously.
6 Q And if the Company fails to anticipate or
7 build for foreseeable demand within a reasonable planning
8 horizon, isn't a potential alternative that service to
9 existing customers can be impaired?
10 A I think that can occur, yes.
11 Q You also give us Staff Exhibit No. 110,
12 which is an internal memo from the City of Boise.
13 A Yes.
14 Q And as I understand it, that's a memo from
15 a Mr. Carl Ellsworth to members of the Boise City
16 Planning Department?
17 A That's correct.
18 Q As I understand the context, the river
19 diversion was subject to approval by Ada County Planning
20 and Zoning?
21 A Yes, I believe that's correct.
22 Q And because it's within the Boise area of
23 impact, it's either the law or the policy of Ada County
24 P&Z to consult with City of Boise as to whether or not
25 variances should be granted or approvals should be given?
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1 A I believe that's the case. I'm not really
2 involved in what their exact process is, but that's my
3 understanding.
4 Q This is close enough. And is it your
5 understanding that this memo was prepared by
6 Mr. Ellsworth to the decision-makers inside of Boise City
7 as they determined whether or not to support the project
8 in front of Ada County Planning and Zoning?
9 A That appears to be the case, yes.
10 Q Now, if we spend a little time on the
11 letter, from looking at it itself and confining ourselves
12 to it itself, Mr. Ellsworth doesn't say how he came to
13 believe there was any commitment from United Water, does
14 he?
15 A No.
16 Q It doesn't say "I have been told"?
17 A No. He says, "We have been assured."
18 Q It's possible, is it not, that
19 Mr. Ellsworth never had a direct conversation with anyone
20 from United Water who had authority to make any
21 commitments of that nature?
22 A I simply don't know that.
23 Q You don't know. It's possible that he's
24 recording something that somebody else said to him?
25 A You can't tell from this letter.
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1 Q Right. Now, is it your understanding that
2 Boise City eventually supported the project in front of
3 Ada County Planning and Zoning?
4 A I assume they did. I don't know what their
5 position was before the Planning and Zoning Commission.
6 Q Have you reviewed the comments filed by
7 Boise City at P&Z?
8 A No, I have not.
9 Q Weren't they part of the information you
10 obtained in your discovery from United Water?
11 A Perhaps they were. That was a voluminous
12 amount of information. I went to the Company offices a
13 couple times. I don't recall that, although this letter
14 was in there, in United Water's response.
15 Q Right. Well, is there anything in the
16 public comments -- and I can get them, I guess, if we
17 need them -- to indicate that decision-makers at Boise
18 City relied on this Staff memo in deciding to support the
19 project?
20 A Not to my knowledge.
21 Q Isn't it an experience similar to the
22 Commission here where you prepare a memo for the
23 Commission and include things that the Commission later
24 doesn't particularly rely on in making its decision? I
25 suppose that's happened once or twice.
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1 A I suppose. I try to base mine on -- you
2 know, if I say the Company said something, then I try to
3 include that as accurately as possible.
4 Q But whether or not decision-makers attach
5 weight to that or not is kind of beyond your control.
6 A Sure. They decide how much weight to give
7 it.
8 Q You also include in your testimony a
9 discussion of aesthetic water quality issues?
10 A Yes.
11 Q And it starts on page 17.
12 A Yes.
13 Q I take it that as a general matter, Staff
14 agrees or believes that improvement of aesthetic water
15 quality is a good thing?
16 A Yes.
17 Q The question is how much to reasonably
18 spend in that area and how to measure impacts or
19 benefits?
20 A Yes.
21 Q You've provided an amended Staff
22 Exhibit 13, I think.
23 A Yes.
24 Q Or Staff Exhibit 113 --
25 A Right.
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1 Q -- in which you attempt to quantify
2 spending for aesthetics as a percentage of the rate
3 request.
4 A Yes.
5 Q And not to put too fine of a point on it,
6 but isn't each of the projects listed here a project
7 which also has systems supply benefits?
8 A Theoretically, that's the case, but clearly
9 there are some that do not do that.
10 Q But there are -- virtually any -- not
11 virtually any, but most water supply investments have
12 more than one function if you analyze it in this way,
13 that is, they have providing a level of supply and they
14 have a function of providing a quality of supply.
15 A I would agree there are differences in the
16 choices made and the costs that are incurred that can be
17 divided between water quality and quantity.
18 Q And you'll agree that at least from the
19 Company's perspective, a number of the investments on
20 Exhibit 113 had both supply and quality benefits?
21 A That was the intent, I believe. Yes, I
22 would agree.
23 Q So it's a little difficult to say with
24 absolute precision that now 10 percent of the rate
25 increase is solely attributable to quality?
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1 A I would have to agree that this exhibit is
2 just a rule of thumb or a bench mark or a rough estimate
3 of the type and order of magnitude that the Company is
4 expending for aesthetic water quality, yes.
5 Q And with that in mind, then, that this is
6 just sort of a one-dimensional look at it, I take it it's
7 the Staff's position that the overall level of spending
8 in this area is not too high, or is it just you don't
9 know yet or you're still concerned about it?
10 A Perhaps it would be better to characterize
11 it as a consideration of the choices that are available
12 to the Company and maybe more on what the Company uses as
13 a criteria for determining how much to spend and when to
14 spend it and what decisions to make that may result in a
15 more costly quantity in order to achieve some quality
16 goal objective.
17 Q And Mr. Linam in his rebuttal testimony
18 provides something of a background on the thought process
19 that the Company engages in as it acquires supply sources
20 both to meet supply obligations and quality obligations.
21 Do you recall that testimony?
22 A Yeah, very generally.
23 MR. MILLER: All right. Very good.
24 A small technical glitch. I was supposed to have a piece
25 of paper and I don't.
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1 COMMISSIONER NELSON: Let's go off the
2 record for a minute.
3 (Off the record.)
4 COMMISSIONER NELSON: Okay. Let's go back
5 on the record.
6 Q BY MR. MILLER: I apologize for the
7 confusion. I was going to direct your attention to one
8 of your interrogatory answers to the production requests
9 that were served by the Company. I don't have it with
10 me, so I'll just try and ask you about it.
11 Recognizing, of course, the Company's
12 belief that the Boise River project for at least one or
13 two reasons should be included in rates now and
14 recognizing your testimony that you didn't necessarily
15 object to that, you were asked a question in
16 Interrogatory 22 that -- and the question essentially was
17 should AFUDC continue on this project to recognize
18 prudent investment and to match the cost of the customers
19 who will benefit; and if not, why not?
20 And was your answer to that question,
21 "Yes. If the Commission finds the river diversion was a
22 prudent investment at this time but should not be allowed
23 in rates, then AFUDC should continue"?
24 A Yes.
25 Q Is that still your position?
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1 A Yes.
2 MR. MILLER: That was it. Those are all
3 the questions I have, Mr. Chairman. Thank you.
4 COMMISSIONER NELSON: Okay. Thank you,
5 Mr. Miller.
6 Questions from the Commission?
7 Commissioner Hansen.
8
9 EXAMINATION
10
11 BY COMMISSIONER HANSEN:
12 Q Mr. Lobb, on page 19, line 17, you state
13 that the Company has not specified what its standard for
14 water quality is nor has it indicated how it will measure
15 if its projects have been successful. Are you saying
16 it's your opinion the Company hasn't set direction as to
17 where they want to be concerning water quality?
18 A Well, Mr. Linam in his rebuttal testimony
19 has indicated that their goal is generally to meet the
20 secondary standards for iron and manganese. Those are
21 voluntary standards. And sometimes they're able to do
22 that and sometimes they're not. Otherwise, it sounds
23 like it's simply to try to eliminate customer complaints
24 to a large extent.
25 I know in our water quality report -- or in
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1 our water quality investigation, we identified several --
2 or a couple wells that were replaced or repaired in an
3 attempt to reduce the iron and manganese levels. They
4 were able to do that.
5 In some of those cases -- I think in both
6 cases that I'm thinking of, the Overland well was one,
7 they still didn't meet the secondary level for
8 manganese. And actually, complaints that resulted after
9 the repair seemed to be just as high or higher than
10 complaints that we had received prior to the repair, so
11 one of the problems in addressing this type of issue is
12 you can shoot for your objective, but it doesn't mean
13 that people are going to perceive their problems -- or
14 water any better than it was before, particularly if the
15 price is increasing.
16 Q So are you saying, then, in your opinion,
17 does United Water have a cost effective water quality
18 improvement program or don't they, or are they just
19 throwing money at a problem of -- a customer type
20 problem. Or do they really have, in your opinion, a goal
21 set and a certain quality identified that they want to
22 reach? Is that what we're spending this money for or are
23 we just going out and throwing it at a problem that maybe
24 a few customers may have here or there?
25 A I think they have a goal to provide as good
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1 of water as they possibly can. I'm just not sure how
2 much is too much and where you cross the line and you
3 lose the cost efficiency that you might have been able to
4 measure at one time. I'm not sure you can measure it.
5 If you eliminate 100 percent of your
6 customer complaints with respect to staining, for
7 example, but in order to do that, you greatly increase
8 the cost, and a customer calls and complains for chlorine
9 or something else that may have been a small matter
10 before but you still have a complaint, I'm not sure where
11 you -- what you really accomplish in those cases,
12 particularly if you base it on customer complaints and
13 customer perceptions.
14 Q So if we go back -- and not to belabor
15 this, but if we go back to your statement that starts on
16 line 17, you're saying, then, though, that you don't
17 think that they have in place -- anyway, you're not aware
18 of how they can measure whether these projects are
19 successful or not, or the money they're spending on
20 quality improvement, if I read that right, you're saying
21 they really can't measure whether it's successful or not;
22 is that correct?
23 A I think they will try to measure customer
24 complaints, staining complaints, after they repair a
25 particular well or replace a particular water supply with
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1 a water supply that has a lower level of iron and
2 manganese. I think they'll attempt to measure that.
3 Whether or not they get 50 percent reduction, is that
4 good? What if they have the same number of customer
5 complaints?
6 I think that's the way that they've
7 indicated they're going to try to measure these things.
8 I'm not sure what that will ultimately tell them. In
9 some instances, it may drastically reduce water quality
10 complaints, rust-colored water related complaints.
11 Q So if we had -- if we approve so many
12 thousands of dollars in this rate case to improving
13 quality, what could you tell the customers -- from your
14 knowledge, what would you think you could tell the
15 customers that they were going to benefit from from
16 spending this kind of money? Is there a goal out there
17 that you're going to reduce iron by a certain
18 percentage? Is there a goal the Company has in your mind
19 to eliminate staining, the smell or odor of the water?
20 Do we have any guidelines that you're shooting for that
21 you're spending this money to your knowledge?
22 A Well, I guess the goal is to, first of all,
23 I think meet the standards for iron and manganese because
24 those seem to be the biggest problem. Perhaps it would
25 be to reduce the iron and manganese levels for most of
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1 the year.
2 I think what you'd want to relay to the
3 customers is we're making a balanced attempt to reduce
4 the complaints and the perceptions of the customers that
5 their water quality is poor. At the same time, we also
6 recognize that it's very costly to do that and we want to
7 balance the cost increases that will result from trying
8 to make this improvement with actual reduction in water
9 quality complaints. I don't think you want to just say
10 we're going to spend whatever it takes to get to the
11 secondary levels of -- the secondary contaminant levels
12 for iron and manganese.
13 Q So my last question, then, in your opinion,
14 the overall spending by the Company in the past for water
15 quality, has that been effective?
16 A I think -- let's see. Overall, I really
17 don't have a basis for measurement. I think the -- I
18 don't really recall the exact trend of customer
19 complaints, and really, clearly they have reduced the
20 levels of iron and manganese in the water supplies that
21 they use mostly, most of the time, so in that regard,
22 they have been successful in spending money to reduce
23 those levels.
24 I also believe that to a large extent -- or
25 to some extent, at least, colored water related customer
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1 complaints have been reduced in the past few years, but I
2 don't recall that that was -- exactly what percentages
3 without really looking into that.
4 COMMISSIONER HANSEN: Okay. That's all.
5 COMMISSIONER NELSON: Thank you.
6 Commissioner Smith.
7
8 EXAMINATION
9
10 BY COMMISSIONER SMITH:
11 Q Mr. Lobb, your discussion with Commissioner
12 Hansen leads to my question, which is, as a policy
13 matter, should the Commission not encourage the Company
14 to address customer complaints in the manner that it has
15 been?
16 A I think they should work as closely with
17 the customers as they can and try and make customers
18 understand the complexities of solving water quality
19 problems system-wide.
20 Q If your white clothes came out rusty when
21 you used your washing machine, would that be an adequate
22 response?
23 A It would certainly be a big problem.
24 Q Yeah.
25 A I would want to know --
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1 Q How big of a problem would it be for your
2 wife?
3 A It would be a big problem. I don't know if
4 everybody looks at it the way I do, but there are
5 consequences of living in certain parts of the system.
6 The supplies -- the Company doesn't create the supplies
7 that are there, and I would want to make sure that the
8 Company addressed the issue, explained to me what they
9 were doing, explain the alternatives and the
10 difficulties.
11 But personally, if it got right down to it,
12 I'd probably do something myself to solve that
13 situation. I wouldn't put up with it. I wouldn't expect
14 the Company to spend everybody's money unrestrained in an
15 attempt to solve my stained clothes problem.
16 Q Have we in the past tried that approach of
17 having customer meetings and explaining costs versus
18 unknown benefits?
19 A I have not personally participated in those
20 types of meetings.
21 Q Thank you.
22 A We may have done that.
23 COMMISSIONER SMITH: Thank you.
24 COMMISSIONER NELSON: Thank you.
25
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1 EXAMINATION
2
3 BY COMMISSIONER NELSON:
4 Q I have just a couple of questions. On the
5 Boise River diversion project, what was your
6 recommendation in this case? I didn't see that -- I
7 guess I didn't understand it fully.
8 A My recommendation was to allow it in rate
9 base.
10 Q Well, that's what I thought. On the North
11 State or the Garden City exchange, did I understand that
12 you felt that the revenues justified the purchase price
13 but not the water supply; was that what you --
14 A Yes. If the Commission so decided to allow
15 the purchase price into rate base, the revenues
16 generated -- the incremental increase in revenues
17 generated from the exchange would cover at least the
18 purchase price. There would be no additional revenue
19 from these -- from this customer group to cover any water
20 supply to serve them.
21 Q Is the customer count in that area the most
22 current information available that you used or is there a
23 controversy there?
24 A I think the disagreement -- I used the
25 customer numbers in the North State area that
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1 Mr. Gradilone used to determine the amount of revenue
2 that would be generated in the test year.
3 We did have a significant difference in the
4 number of customers that I used and the number of
5 customers that Mr. Linam used in one of his rebuttal
6 exhibits, and the reason is that I used the net increase
7 as a result of the exchange. They actually reduced --
8 there was actually 382 customers lost from the system in
9 this exchange.
10 Q Well, so his 927 number doesn't take into
11 account the Marigold area --
12 A No.
13 Q -- of customers that were lost?
14 A That's my understanding.
15 Q Okay. And I know you spent some time going
16 over this with Mr. Miller, but on the Hidden Hollow
17 pipeline --
18 A Uh-huh.
19 Q -- is the controversy not that it isn't
20 prudent but that you felt there were cheaper options
21 available?
22 A I felt that they've already made the
23 decision to build the Marden water treatment plant. The
24 situation I believe in this area of the system is pretty
25 much the same as it was last year and the year before.
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1 While there are deficiencies in the main
2 service level, they have added capacity, they have
3 capacity that they did not use last year because of water
4 quality problems that could be available if they -- if
5 they have demand levels similar to those that occurred in
6 '94, which were very large, much larger than anything
7 that's been experienced lately, and so they have
8 essentially one summer period before they improve their
9 situation by 8 million gallons a day of very good quality
10 water, so it seems that the timing was perhaps, in my
11 opinion, not good.
12 I think these supplies will be available in
13 the future and during the time -- once they get the
14 Marden treatment plan on line, I believe their situation
15 will be much better and it will give them time to infill
16 so they don't have to build long, cross-country pipelines
17 to this water supply.
18 Q So are you saying they should have deferred
19 the Hidden Hollow line until there were more customers
20 out there?
21 A I believe they should have deferred the
22 Hidden Hollow line until sometime after Marden was
23 constructed and put in service and infill occurred
24 between the existing main service level and the Eagle
25 area. That way, development could expand the
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1 distribution system rather than a single large pipeline.
2 At least at that point, they'll be able to tell what the
3 development is that occurs in the Eagle area, how much
4 water supply will be needed in the Eagle area, and you
5 won't have the potential, at least, of a long pipeline
6 going to an area with no water or bringing water from an
7 area -- or using a pipeline to an area that has no water
8 coming back.
9 Q I think I know what you mean.
10 A All right.
11 COMMISSIONER NELSON: Redirect,
12 Mr. Woodbury.
13 MR. WOODBURY: Thank you, Mr. Chairman.
14
15 REDIRECT EXAMINATION
16
17 BY MR. WOODBURY:
18 Q Mr. Lobb, with respect to the Hidden Hollow
19 Reservoir, do you know when that reservoir came on line,
20 when it was completed?
21 A Not exactly. It might have been '96, late
22 in '96. I'm not sure.
23 Q Did the Company have other supplies
24 available to fill the Hidden Hollow Reservoir without
25 constructing the Northwest Pipeline?
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1 A According to their information, they had
2 the Swift No. 1 available in '97 and it was not used. In
3 addition to that, I believe they had extra capacity from
4 purchases that was not utilized or perhaps could have
5 been utilized if they chose.
6 Q Okay. There was some discussion regarding
7 the Company's planning process in the Redwood Creek on
8 Northwest Pipeline. Did Staff request documentation
9 memoranda regarding that planning process?
10 A I'm sorry. Could you repeat the question?
11 Q Did Staff request as a production request
12 from the Company documentation, memoranda regarding their
13 decision to go forward with the Northwest Pipeline?
14 A Yes, we did.
15 Q And how did the Company respond?
16 A The Company said that the information was
17 too voluminous to send over.
18 Q And did you go out to the Company to review
19 that documentation?
20 A Yes.
21 Q And what was there?
22 A I believe it was a drawing of an energy
23 grade line, hydraulic grade line from the wells to the
24 reservoir, and several other pages of information.
25 Q Something that could have been provided and
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1 the Company's response was it was voluminous in their
2 mind?
3 A There wasn't very much information that I
4 saw that was associated that was documentation for the
5 pipeline.
6 Q Mr. Miller directed your attention to
7 Exhibit 109 of yours, which is a December 2nd, 1997
8 agreement with the City of Eagle --
9 A Yes.
10 Q -- to provide emergency backup water. Does
11 there exist any other agreements with Eagle City? And I
12 direct your attention to Exhibit 108.
13 A Yes. Exhibit 108 is an additional
14 agreement.
15 Q And does Exhibit 108 not say that,
16 "Recital B, Eagle desires to obtain an additional source
17 of water, including for fire protection," and then under
18 their paragraph 1, "United Water agrees to provide to
19 City additional water and supplemental fire flow"?
20 A Yes.
21 Q And the term of that agreement was one year
22 from the date, which was August 1st, 1997. Is there --
23 to your knowledge, is this agreement still in effect?
24 A To my knowledge, it is.
25 Q And under the term, also it's deemed
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1 automatically extended for successive one-year periods
2 unless terminated under the provisions provided. Has
3 United Water indicated to you that it's their intention
4 to terminate that agreement?
5 A They have not indicated that.
6 Q With respect to your Exhibit 110, a letter
7 from -- interdepartment memo, Bill King -- to Bill King
8 from Carl Ellsworth, who provided this letter to Staff,
9 do you recall?
10 A The letter -- this letter I obtained from
11 the records of United Water.
12 Q Did you not see that letter earlier? Don
13 Reading, Coalition of United Water Customers, provided
14 that?
15 A Yes. In addition to that, I had seen it
16 previously from that source.
17 Q And Boise City was a party to the Coalition
18 of United Water Customers, wasn't it?
19 A Yes.
20 Q And as you indicated, this memo was
21 reflected in the Company documents --
22 A Yes.
23 Q -- when you examined those?
24 And did the Company, as reflected in its
25 documentation, respond to correct any misperception? Did
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1 you see any other memo related to this?
2 A No.
3 Q Okay. Mr. Lobb, with respect to the
4 Company's investment, did you participate in the
5 Eagle/United Water certificate case?
6 A Yes, I did.
7 Q And would you agree that United Water, to
8 the extent that it's able to finance internally
9 investment, is perhaps in a better position than some
10 other water companies? In that case, it was Eagle Water
11 Company.
12 A Yes.
13 Q And do you think -- the Company in going
14 forward with some of its investment, and I would point
15 out I guess its investment in that particular case the
16 middle and high schools, do you know what -- can you
17 remember what the level of investment was to provide
18 service to those two schools in round figures?
19 A Well, it would be a function of the
20 facilities required to purchase Redwood Creek
21 distribution and wells and the main lines that go to the
22 high school and the junior high and interconnect with the
23 Floating Feather well and purchase of that well. I
24 believe that the amount requested is roughly 850 to 900
25 thousand, something in that neighborhood.
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1 Q Okay. And in this particular case, we have
2 the Company's investment of Northwest Pipeline at
3 $940,000; is that correct?
4 A According to their prefiled testimony, yes.
5 Q And to the east Boise River diversion of
6 how much?
7 A I believe that's nearly 1.9 million.
8 Q And do you know, did the Company come in
9 and work with Staff prior to engaging in -- at least
10 indicate to Staff that it was going to be making these
11 investments?
12 A The only one of the three that I was aware
13 of, I didn't actually know the time frame, was the river
14 diversion. I did participate with Mr. Brown on a site
15 tour of that prior to construction.
16 Q And do we have -- do we regulate any other
17 large utilities like Idaho Power prior to making any
18 large investment in hydro facilities that really comes in
19 and asks almost for some sort of pre-assurance, at least
20 apprise the Commission of the direction that it's going?
21 A Yeah, I believe that is the case for many
22 of the utility investment.
23 Q And do you know whether United Water did so
24 in these cases for the Northwest Pipeline or the east
25 Boise River diversion? Did they make any application?
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1 A No. The first I became aware of the
2 Northwest Pipeline was in their rate filing.
3 Q And do you believe that essentially the
4 Company is at some risk in making that because the
5 prudent decision is going to be made at a later date?
6 A In this particular case, that's true.
7 MR. WOODBURY: Mr. Chairman, I have no
8 further questions.
9 COMMISSIONER NELSON: Mr. Miller.
10
11 CROSS-EXAMINATION
12
13 BY MR. MILLER:
14 Q Just a couple to touch on items that were
15 brought up for the first time in cross -- or redirect
16 with respect to the discovery responses on the -- that
17 you viewed at the water company --
18 A Yes.
19 Q -- I just wanted to clear up. I suppose
20 there can be a dispute about what's voluminous and what
21 isn't voluminous, but the Company made them available to
22 you, correct?
23 A Yes.
24 Q They didn't do anything to try to make it
25 hard for you to see them?
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Wilder, Idaho 83676 Staff
1 A Oh, no. No.
2 Q Good. You were asked whether the Company
3 with Northwest Pipe or any of the others sort of gave the
4 Staff a heads-up on what was being contemplated. Isn't
5 it true that when a utility company does that, the Staff
6 is always very careful to thank them for the information
7 but not make any commitment about what the Commission
8 will or won't do in terms of approval?
9 A That's generally the case, yes.
10 MR. MILLER: Thank you, Mr. Chairman.
11 COMMISSIONER NELSON: Thank you. Mr. Lobb,
12 thank you for your testimony.
13 (The witness left the stand.)
14 COMMISSIONER NELSON: Let's take a break
15 until quarter to 3:00 or so.
16 (Recess taken.)
17 COMMISSIONER NELSON: Okay. We'll go back
18 on the record.
19 Mr. Fothergill, we'll go to you.
20 MR. FOTHERGILL: Yes. We call Thomas
21 Power.
22
23
24
25
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1 THOMAS MICHAEL POWER,
2 produced as a witness at the instance of the Idaho
3 Citizens Coalition, having been first duly sworn, was
4 examined and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. FOTHERGILL:
9 Q For the record, will you state your name
10 and occupation?
11 A Yes. My name is Thomas Michael Power. I'm
12 professor and chairman of the economics department at the
13 University of Montana, but I'm appearing here as an
14 independent consultant on behalf of Idaho Citizens
15 Coalition.
16 MR. FOTHERGILL: Mr. Chairman, we have a
17 small problem with pagination in this testimony, so we
18 have two page 1s, and what I'd like to do is identify the
19 second page as page 1A, and then --
20 COMMISSIONER NELSON: I see. All right.
21 We'll identify the page 1 that starts "including the
22 Boise River diversion in rate base" as page 1A.
23 MR. FOTHERGILL: Thank you.
24 Q BY MR. FOTHERGILL: Are you the same Thomas
25 Michael Power that has submitted for filing with this
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Wilder, Idaho 83676 Idaho Citizens Coalition
1 Commission testimony consisting of thirteen pages, and
2 appendix describing your qualifications, it would be
3 seventeen pages?
4 A Yes.
5 Q Are there any changes or emendations that
6 you'd like to make to your testimony?
7 A No.
8 Q If I should ask you the same questions
9 today that you responded to in your testimony, would your
10 answers be the same?
11 A Yes, they would.
12 MR. FOTHERGILL: We would ask that
13 Dr. Power's testimony be spread upon the record.
14 COMMISSIONER NELSON: So ordered.
15 (The following prefiled direct
16 testimony of Dr. Thomas Michael Power is spread upon the
17 record.)
18
19
20
21
22
23
24
25
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Wilder, Idaho 83676 Idaho Citizens Coalition
1 DIRECT TESTIMONY OF THOMAS MICHAEL POWER
2
3 1. Introduction, Qualifications and Outline
4 Q Please state your name and occupation.
5 A My name is Thomas Michael Power. I am
6 Professor of Economics and Chairman of the Economics
7 Department at the University of Montana, Missoula,
8 Montana, 59812. I am appearing in these proceedings,
9 however, as an independent consulting economist on behalf
10 of the Idaho Citizens Coalition.
11 Q Have you previously testified before this
12 and other regulatory commissions as an expert witness?
13 A Yes. I have testified before this
14 Commission on numerous occasions in the past. I have
15 also testified before federal and state regulatory
16 commissions throughout the country on more than
17 seventy-five occasions. A brief summary of my
18 professional experience and training is attached as an
19 Appendix A to this testimony.
20 Q What issues will you address in your
21 testimony?
22 A My testimony will focus upon the following
23 topics:
24 a. The inappropriateness of including the cost of
25 the Boise River diversion in United Water's
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Case No. UWI-W-97-6 Power, Di 1
Idaho Citizens Coalition
1 ratebase.
2 b. The reasons for delaying the implementation of
3 any rate increase until this rate case, including
4 the cost of service, revenue spread, and rate
5 design portions, are completed.
6 c. The need for continued regulatory efforts to
7 control the impacts of the growth in utility
8 demand on the rates paid by all customers.
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
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Case No. UWI-W-97-6 Power, Di 1A
Idaho Citizens Coalition
1 II. Including the Boise River Diversion in Rate Base
2 Q What is the Boise River Diversion?
3 A It is a water intake structure on the Boise
4 River and about 3,000 feet of 30 inch main that was laid
5 through the Surprise Valley Canyon Wall cut for State
6 Highway 21. In the future this will supply a second
7 surface water treatment plant that will serve southeast
8 Boise.
9 Q Is this facility now providing water
10 service to United Water customers?
11 A No. There are no pumps installed. There
12 is no water flowing. There is no second water treatment
13 plant constructed. United Water does not even have water
14 rights that would allow it to operate the diversion.
15 Q Why then was this diversion project
16 constructed?
17 A United Water explains that this was an
18 opportune time at which to construct this facility for
19 future use. In 1996 it could cooperate with several
20 other organizations that foresaw a need for additional
21 water from the Boise River (e.g. Micron, Simplot, and
22 Surprise Valley) to develop the diversion. In addition,
23 there was a narrow window of opportunity to place the
24 associated water main under Highway 21 as it was being
25 reconstructed. United Water argues that if it had not
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Case No. UWI-W-97-6 Power, Di 1A-1
Idaho Citizens Coalition
1 participated in the project in 1996 it would have faced
2 much higher costs in the future to do the same thing.
3 Building ahead of need and actual use was cost effective,
4 it says, for that reason.
5 Q Do you dispute the business logic of United
6 Water's decision to participate in the construction of
7 the Boise River Diversion?
8 A I have not critically analyzed the
9 information United Water has presented in support of its
10 construction decision, but assuming that that information
11 is correct, building ahead of need may well have made
12 business sense.
13 Q Does that mean that you support inclusion
14 of the $1.9 million dollar cost of this project in the
15 rate base?
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1 A No. This is plant designed for future use.
2 United Water makes no attempt to argue that this plant is
3 currently used and useful in providing any water service
4 whatsoever to its customers. It should not be included
5 in rates until that future date at which it can be put to
6 actual use.
7 Q Would it be unfair and un-business-like to
8 exclude the Boise River Diversion from rate base until it
9 is put to use?
10 A Absolutely not.
11 First of all, I doubt that United Water expected
12 to be able to include it in rates at this time. United
13 Water is well aware of the Idaho statute that requires an
14 investment to be actually used and useful in the
15 provision of services to customers before it can be
16 included in the rate base. The law allows an exception
17 for "extreme emergencies" but a lower cost business
18 opportunity is hardly an "extreme emergency."
19 Second, United Water appears to have promised the
20 City of Boise that it would not seek to include its share
21 of the capital costs of this facility in rate base until
22 the project was being fully used. [City of Boise
23 memorandum to Bill King from Carl Ellsworth dated August
24 12, 1996]
25 Third, the equities run the other way. Current
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1 customers should not be asked to pay for facilities whose
2 benefit will primarily be enjoyed by future customers.
3 United Water says that the new water treatment plant will
4 not be required until the year 2005. Thus, the benefits
5 of the Boise River Diversion are expected to come many
6 years from now when population growth justifies the
7 building of another water treatment plant. There is no
8 way for current customers to benefit from that now. That
9 is the reason they should not be paying now. When these
10 facilities are finally put to use, United Water assures
11 us that those future customers will be better off because
12 of this pre-build than if United Water had not acted
13 ahead of time. Those future customers who get that
14 benefit should be the ones
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1 who pay for the facilities. Anything else would involve
2 a serious mismatch in costs and benefits. That is the
3 logic of legally prohibiting utilities from charging
4 existing customers for pre-built facilities.
5 Fourth, normal market conditions would impose a
6 similar discipline on competitive businesses. A firm
7 that builds ahead of the market because this will reduce
8 future costs cannot charge current customers for those
9 investments. It has to wait until the expected future
10 customers actually materialize and their needs allow the
11 excess facilities to be put to use before they can charge
12 customers anything for those pre-built facilities. Such
13 facilities are an investment made by stockholders in
14 expectation that certain markets and conditions will
15 develop. It is only after those expectations are
16 confirmed that it is logical to allow the utility to bill
17 their customers for that investment.
18 Q Does United Water accept the general
19 principle that investments that are not fully utilized to
20 provide current water service should not be included in
21 the rate base?
22 A Yes. In its proposal for how the
23 investment in water supply for the Island Woods area
24 should be handled, United Water says that since only 62
25 percent of the capacity of this supply is currently
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1 utilized by customers, "We are only requesting rate base
2 inclusion of 62% of the investment in the source with the
3 remainder being placed in plant held for future use."
4 (Linam, 14 at 11-13) The same logic should be applied to
5 the Boise Water diversion.
6 Q What is your recommendation to this
7 Commission on the Boise River Diversion investment?
8 A It should be denied rate base treatment
9 until such time as it is actually used and useful in
10 providing water service to customers.
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1 III. Delaying Implementation of Any Rate Increase Until
2 after the Cost of Service Decision
3 Q Is this rate case being conducted in an
4 integrated manner?
5 A No. This rate case has been "bifurcated"
6 with the revenue requirement issues being heard and
7 decided first. A later hearing will then be held to
8 consider and decide cost of service, rate spread, and
9 rate design issues.
10 Q Is this the way that Idaho statutes and
11 Commission rules envision a rate case proceeding?
12 A I assume that this Commission can organize
13 a rate case in any way that it thinks will facilitate its
14 decision making. Statute and rules, however, call for
15 the utility to submit cost of service information at the
16 time it applies for permission to modify its rates.
17 United Water, of course, has not done that yet in this
18 case. In that sense, these proceedings are only dealing
19 with part of this rate case. The rest of the rate case
20 is still to be heard. When a decision is reached in this
21 part of the rate case, it will be a partial decision.
22 Q Why do you emphasize the partial nature of
23 this first phase of the bifurcated case?
24 A Because it is not clear than any revenue
25 requirement increase determined in this first part of the
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1 case should be implemented until the entire case is heard
2 and the responsibility for that revenue requirement is
3 determined.
4 Q Are you saying that if a revenue
5 requirement deficiency is determined in this first phase,
6 there should be no rate increase authorized until after
7 the second phase of the case is completed?
8 A Yes. It is only then that the case will be
9 complete and the fair, just, and reasonable allocation of
10 any rate increase among customer classes will have been
11 determined. Before that, one can be almost certain that
12 the rate increase will be allocated in an unfair manner
13 among the various rate
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1 classes since there will be no factual basis for that
2 allocation absent a cost of service study.
3 Q Are there other reasons that accurate rates
4 cannot be set on the basis of only the revenue
5 requirement information?
6 A Yes. As the Coalition of United Water
7 Customers pointed out to the Commission in responding to
8 Ms. Sharon Ullman's motion to consolidate the revenue
9 requirement and cost of service parts of the case, the
10 rate design proceeding can have a potential impact on
11 revenue requirement because certain rate design
12 initiatives may increase or decrease water consumption
13 and enhance sales. In that sense, the two parts of the
14 case cannot be logically separated.
15 Q Would this not be unfair to United Water if
16 they have in fact established that they have a revenue
17 deficiency?
18 A No. It is United Water that chose to
19 spread the whole rate case over a longer period of time
20 by bifurcating it. That was their request. The
21 Commission accommodated their request but did not commit
22 itself to authorizing a rate increase before it knew to
23 whom that rate increase should go. The bifurcation was a
24 convenience to the utility.
25 Q But surely you recognize that there is a
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1 time value of money that United Water will be losing?
2 A There is also a time value of money to
3 consumers. In fact for most households their time value
4 of money (discount rate) is above that of corporations
5 like United Water. Consumers regularly run up credit
6 card debts even though the interest rate is 18 to 21
7 percent. Analysis of consumer appliance efficiency
8 investments also show that consumers have very high time
9 values for money.
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1 Q Is the separation of the revenue
2 requirement phase of the case from the cost of service
3 and rate spread part of the case just a matter of
4 administrative efficiency?
5 A No. This is a common strategy by utilities
6 who seek to reduce the level of public outcry over rate
7 increases. When customers do not know how much they may
8 be asked to pay in increased rates, the level of
9 opposition to the rate increase is reduced. Utilities
10 seek to strip away one of the most controversial aspects
11 of the case from the decision about how much money the
12 utility will be allowed to collect overall. In the
13 hearings surrounding the determination of revenue
14 requirement each party can hope that its burden will be
15 less than the average. This helps diffuse overall
16 opposition to the rate increase. This is particularly
17 the case when disproportional rate increases are
18 ultimately proposed for residential customers. The
19 separation of the case into two parts allows the ultimate
20 increase to be partially defused and reduces the public
21 opposition to the overall increase.
22 Q Does this not just remove an emotional
23 issue from the determination of an altogether separate
24 factual determination about revenue requirement?
25 A No. The level of scrutiny afforded utility
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1 requests is definitely affected by the size of the
2 consequences of what it is the utility is asking for.
3 This is only logical. One does not put as much effort
4 into analyzing the request of a two percent increase as
5 one would for a twelve percent increase. This is not
6 just a matter of stripping emotion away from an objective
7 issue. Separating the two parts of the case can reduce
8 the degree of scrutiny that is given the utility's
9 request.
10 Q Do you object to this strategy?
11 A Not necessarily. My point is that it has
12 to be seen for what it is, a strategy adopted by the
13 utility to increase the likelihood that it will receive a
14 larger
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1 share of the increase it has asked for than it might
2 otherwise receive. The utility adopts this strategy in
3 order to enhance its revenue flow. For that reason, it
4 should accept the costs that go with adopting this
5 strategy of dividing the case into halves: It should
6 accept the delay in the implementation of any rate
7 increase that ultimately gets approved until the entire
8 case is completed.
9 Q Did the Commission settle this issue
10 already with its Order No. 27293 in which it denied
11 Ms. Sharon Ullman's motion to consolidate the two parts
12 of the case?
13 A No. The Commission decided that it was
14 "administratively efficient" to keep the two parts of
15 the case separate. It did not rule on whether the
16 proportional rate increases that United Water proposes
17 flow from this part of the rate case would in fact be
18 fair, just, and reasonable. As indicated above, I do not
19 think the record in this part of the case will have
20 demonstrated that any allocation of a rate increase meets
21 this test.
22 Q What is your recommendation to the
23 Commission?
24 A If the Commission approves an overall
25 increase in United Water's revenue requirement, it should
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1 delay adopting higher rates until after the cost of
2 service and rate spread part of this case is completed.
3
4 IV. The Cost of Growth
5 Q Why do you propose to discuss the costs
6 associated with growth in this part of the case rather
7 than saving it for the cost of service and rate design
8 portion?
9 A Because it is in the revenue requirement
10 part of the case that the costs of growth are most
11 directly confronted. It is important for the Commission
12 to remember that cost causality as we move from one part
13 of this rate case to the next. The origin of the
14 increased cost should not be forgotten.
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1 Many of the additional costs for which United Water seeks
2 recovery are not the result of national forces over which
3 United Water has no control such as inflation or high
4 interest rates or federal government regulations. The
5 sources of the additional costs are local in origin and
6 need to be addressed.
7 Q What has the recent history of rate
8 increase requests from United Water been?
9 A In this rate case United Water is seeking a
10 15.5 percent rate increase. In 1994 it asked for a 43.5
11 percent rate increase but was authorized to increase its
12 rates by "only" about 25 percent. In 1993 it sought a
13 27.4 percent increase but was "only" granted a 11.2
14 percent increase. With the expansion of the water
15 treatment plant and ongoing investment in serving new
16 customers, one can expect United Water to be requesting
17 additional rate increases in the near future.
18 Over the last five years, if United Water were to
19 be given the full increase it is seeking in this case,
20 rates will have increased about 60 percent, an annual
21 increase of about 9.8 percent per year. This rate of
22 increase has been about four times the rate of inflation.
23 Clearly this is a disturbing trend that does not seem to
24 be abating.
25 Q What are the major forces driving the
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1 United Water's request for increased rates in this case?
2 A As with all of the Boise area water utility
3 cases over the last decade, the cost of meeting the water
4 demands of the constantly expanding population of
5 residents and businesses has been one of the primary
6 causes of the increase in costs. In addition, there have
7 been changes in water quality regulations that have led
8 to additional treatment costs. Finally, concerns with
9 the aesthetic quality of the water provided to customers
10 in certain areas has led to additional investments.
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1 Q Does United Water's testimony provide
2 details on how population growth leads to higher costs?
3 A Yes. Mr. Linam's testimony justifies the
4 investment in the Boise River diversion purely in terms
5 of growth: "With the dramatic increased demand
6 projection in southeast Boise, United Water Idaho had to
7 develop plans to significantly increase water supply to
8 this area." The data he offers in support of this
9 investment documents the following: The Gowen service
10 level has gained 2,100 customers during the 1990s. The
11 growth rate has been 9.3 percent annually from 1990
12 through 1996, a rate three times that of overall customer
13 growth. Almost a third of the overall system growth is
14 occurring in this area. The Ada Planning Association
15 projects that annual growth at about this same rate
16 (8.6%) will continue through the year 2000. United Water
17 projects similar growth (8.3%). This growth is projected
18 despite the fact that this area has been designated as a
19 groundwater management area because the southeast Boise
20 aquifer cannot supply even the current residents' needs.
21 Thus growth is taking place in an area where water will
22 necessarily be brought in from "outside." Local ground
23 water pumping or use of existing irrigation water will
24 not be possible. In addition, this growth is taking
25 place at considerable distance from existing water
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1 treatment facilities. As a result, just the transmission
2 line alone from existing facilities to this area of
3 growth (something United Water intends to avoid with the
4 Boise River diversion) would cost $10 million.
5 Q Is it reasonable for all customers to be
6 paying costs incurred in order to provide water service
7 to new customers who chose to locate in an area with
8 inadequate water supply requiring high cost supplemental
9 sources of supply?
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1 A No. Water supply is no different than
2 building supplies or grass sod supply or swimming pool
3 supply. Customers making the demand for the good or
4 service should, unless there are over-riding social
5 concerns, pay the full cost of the goods or services they
6 demand and use. Only when the prices they are directly
7 asked to pay fully reflect those costs can customers act
8 responsibly in the consumption decisions they make. To
9 "socialize" those costs encourages irresponsible
10 behavior: Customers ignore the real costs associated
11 with their decisions and act as if those costs did not
12 exist. The other side of the coin is that others who got
13 no benefit and were not responsible for those costs being
14 incurred see their purchasing power reduced as they
15 subsidize others' consumption.
16 Q Has this Commission recognized this
17 principle in the past?
18 A Yes. It has supported tariffs that sought
19 to hold new customers who imposed unusually high costs on
20 the overall system responsible for a significant part of
21 those costs. Unfortunately, the Idaho Supreme Court has
22 twice overruled the Commission on particular efforts to
23 enforce this principle.
24 Q Has the principle that new growth should
25 pay for the additional costs it incurrs been rejected
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1 entirely by the courts?
2 A Certainly not. Customers can be asked to
3 pay for the facilities that bring commodity from the
4 distribution system to their individual property.
5 Developers can be asked to pay the costs of extending the
6 distribution system into and through their developments.
7 To a greater or lesser extent, these types of
8 contributions to fund the expansion of utility systems in
9 Idaho continue to be implemented today.
10 Q What has the logic of the Idaho Supreme
11 Court been in striking down certain types of "hookup"
12 fees?
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1 A The court has argued that it is
2 discriminatory to distinguish between new customers and
3 old customers because the cost of service is not
4 different between the two groups:
5 "While it is true that the cost of service has
6 increased, the cost has increased proportionately
7 for each Boise Water customer. There is no
8 difference in the cost of service between
9 customers who connected to Boise Water's system
10 before July 25, 1994,and those who have connected
11 or will connect to the system from that date
12 forward. Each new customer that has come into the
13 system at any time has contributed to the need for
14 new facilities." [Docket No. 21714, 1996 Opinion
15 No. 23, March 5, 1996, p. 8]
16 As the Idaho Supreme Court has pointed out by
17 citing my own testimony cases in the appealed cases,
18 there is an abstract economic logic to this position: If
19 existing customers were to reduce their use, then new
20 customers' demand would not trigger the need for
21 additional supply expenditures. In that sense, one could
22 claim that new customers do not cause the new costs any
23 more than old customers. As I have always pointed out,
24 this logic leaves a considerable amount of common sense
25 behind.
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1 Q These Idaho Supreme Court decisions seem to
2 block this Commission from doing anything about the way
3 in which growth constantly drives up rates. Is this
4 true?
5 A No. As pointed out above, the Commission
6 has continued to require that those responsible for some
7 of the costs of growth pay those costs directly. The
8 Supreme Court decisions were based upon factual
9 assertions that there were no differences between the
10 cost of service to new and old customers. Where it can
11 be shown that there is a clearly identifiable cost
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1 of service associated with serving certain customers, it
2 would appear that those costs can be legally passed on to
3 the customers responsible.
4 This would suggest that in the future this
5 Commission will want United Water to analyze its costs in
6 such a way that the incremental costs of serving certain
7 groups of customers can be clearly documented so that
8 differential rates can be legally based upon them.
9 In particular, when new supply facilities are
10 required to serve certain geographic areas, the costs
11 that are unique to those geographic areas should be
12 determined and considered for inclusion in
13 geographic-based rates. Where new facilities both
14 enhance the overall system as well as provide service to
15 new areas, the analysis should seek to allocate the costs
16 between the two purposes. What the Idaho Supreme Court
17 decisions demand is not that the effort to hold cost
18 causers responsible be abandoned but only that a greater
19 effort be put into documenting who is causing what cost.
20 With that information in hand, differential rates become
21 appropriate and nondiscriminatory.
22 Q Does that conclude your prefiled direct
23 testimony?
24 A Yes, it does.
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1 (The following proceedings were had in
2 open hearing.)
3 MR. FOTHERGILL: We then submit him for
4 cross-examination, Mr. Chairman.
5 COMMISSIONER NELSON: Okay. Mr. Miller.
6 MR. MILLER: Thank you, Mr. Chairman. Just
7 one point. As you recall, once again the Company had
8 previously filed a motion to strike a portion of
9 Dr. Power's testimony regarding implementation of rate
10 increases resulting from this phase. As you recall, the
11 Commission indicated that motion was premature.
12 Yesterday when we dealt with a similar objection to
13 Ms. Ullman's testimony, I believe it was the
14 understanding that if the testimony is admitted, it would
15 be still subject to the objection previously stated and
16 subject to the reasons set forth in the written motion to
17 strike, so just for the record, we would expect the same
18 understanding with respect to this testimony.
19 COMMISSIONER NELSON: Your continuing
20 objection to that part of Dr. Power's testimony is noted.
21 MR. MILLER: Very good.
22 COMMISSIONER NELSON: Ms. Ullman, did you
23 have questions of Dr. Power?
24 MS. ULLMAN: Yes, I do.
25
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1 CROSS-EXAMINATION
2
3 BY MS. ULLMAN:
4 Q Dr. Power, you have in your testimony
5 stated that you believe a rate increase in this case, if
6 granted, should be delayed, the implementation of that
7 rate increase should be delayed. Can you please explain
8 your reasons for that?
9 COMMISSIONER NELSON: Mr. Miller.
10 MR. MILLER: It seems to me, Mr. Chairman
11 and members of the Commission, that United Water filed a
12 motion to strike raising legal and equitable arguments.
13 Each of the parties filed a response to the motion to
14 strike in the nature of a reply to the motion which is
15 before the Commission. Our whole point had been that the
16 decision on whether to implement or not implement was
17 properly -- should have been raised by a motion in which
18 the Company -- the Commission could consider legal
19 arguments rather than including it in testimony.
20 I'm content to have the record be as it is
21 and the Commission make its decision based on the filings
22 that have already been made, but I do think it's unfair
23 to now reargue the motion or, alternatively, if there's
24 going to be argument on the motion, we should have a
25 motion argument and let each party have the opportunity
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Wilder, Idaho 83676 Idaho Citizens Coalition
1 to present its views rather than just reiterate what is
2 in this testimony.
3 I had intended not to cross-examine on it,
4 but if -- you know, trying to present legal and policy
5 arguments through cross-examination is a waste of
6 everybody's time, so we would like the motion with
7 respect to implementation date to be considered as a
8 motion and considered by the Commission in that context
9 rather than argue the testimony in cross-examination.
10 COMMISSIONER NELSON: Ms. Ullman, you and
11 Dr. Power have, shall I say, supported each other in your
12 testimony on this point, and so your questions to him
13 would be considered friendly cross rather than
14 cross-examination, so I guess I would -- I would ask you
15 to limit your questions to perhaps points of contention
16 between the two of you or areas where you're trying to
17 elicit further information from him on views that you
18 don't agree with.
19 Q BY MS. ULLMAN: Dr. Power, are you familiar
20 with the letters that have been filed by ratepayers in
21 this case? Have you had any opportunity to look those
22 over?
23 A No, I have not.
24 Q You have not.
25 MS. ULLMAN: I think I'll just stop there.
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1 Thank you.
2 COMMISSIONER NELSON: All right. Thank
3 you.
4 Mr. Woodbury, do you have questions for
5 Dr. Power?
6 MR. WOODBURY: No. I wasn't party to any
7 prior motions to strike or anything, but I think
8 Dr. Power has his testimony and Staff has no questions.
9 COMMISSIONER NELSON: Thank you.
10 Mr. Miller.
11 MR. MILLER: Just a few very briefly.
12
13 CROSS-EXAMINATION
14
15 BY MR. MILLER:
16 Q With respect to the Boise River diversion,
17 a number of your arguments have surfaced earlier, so I
18 won't repeat those.
19 There is one point of your testimony I'd
20 like just to be sure I understand, and that is your point
21 that normal market conditions would impose similar
22 discipline on competitive businesses.
23 A Yes.
24 Q I always hate to argue economics with an
25 economist, but if you assume that you had competing firms
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1 in what you would consider to be a competitive
2 environment all producing a similar sort of a product and
3 if each of those firms received a mandate from government
4 that it had to construct, say, pollution control devices,
5 is there anything about the operation of a competitive
6 market, assuming it to be competitive, that would
7 preclude each of the firms or companies from raising
8 their prices to recover the governmentally-mandated
9 investment?
10 MR. WOODBURY: Excuse me. Mr. Chairman,
11 I'd like to object to the underlying premise of that
12 question that there was a -- because as this argument of
13 the Company relates to the east Boise River diversion, it
14 is the Company's contention that there is a mandate from
15 government, and I believe that that is not an assumed
16 fact, you know, so I guess I'd like to qualify any
17 discussion of that to that extent.
18 If we want to get into whether this is in
19 fact a mandate of government, I believe that this is a
20 hypothetical question that really has no relevance to
21 this case, you know, without a determination as to
22 whether a mandate existed. That's disputed. You know,
23 the Company can go forward, I guess, but I think maybe it
24 needs to lay the premise rather than in a hypothetical
25 but under the facts of this particular case.
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1 COMMISSIONER NELSON: Mr. Miller.
2 MR. MILLER: Well, two points. First, in
3 order for a hypothetical to be permitted, all that's
4 required is there be some evidence to support the
5 existence of the assumed hypothetical. It doesn't have
6 to be proven to certainty that that evidence is true.
7 There just has to be some evidence to support it.
8 Secondly, there is no contention but
9 that -- well, I guess I'm perplexed by Mr. Woodbury's
10 point of view since Staff witness Lobb supports the
11 conclusion of the project in rate base.
12 And also, the question is aimed at what we
13 believe is a fundamental misperception of Dr. Power's
14 testimony where he assumes that it was just a voluntary
15 business decision to build now when in fact we believe
16 that the record is to the contrary.
17 COMMISSIONER NELSON: I'm going to overrule
18 the objection.
19 THE WITNESS: All right. In the
20 hypothetical that was provided, if I understand the
21 hypothetical, where the government mandates that certain
22 pollution standards be met, in a competitive market, the
23 firm or firms that were able to meet those standards with
24 the least cost expenditure would be able to sell their
25 product at a lower price and would prevent other firms
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1 who chose a more costly way of meeting those air
2 pollution standards or water pollution standards, would
3 prevent those firms from fully recovering the investment
4 that they made simply because they had not succeeded in
5 choosing the least cost source, so markets don't allow,
6 even in the context of a mandate, to meet certain
7 standards. Markets don't allow simply any expenditure
8 that firms happen to make to be recovered.
9 Q BY MR. MILLER: Well, obviously, that's the
10 case. But competitive markets, depending on the
11 efficiency of the firm, offer the opportunity for the
12 recovery of investments and, of course, some firms will
13 be more successful than others, right?
14 A Competitive markets allow the recovery of
15 least cost investments in serving customers.
16 Q Sure, and that's my only point.
17 Now, another area of your testimony is --
18 has to do with the cost of growth and a proposal for the
19 creation within the United Water service territory of I
20 guess what you'd call geographically de-averaged rates?
21 A Yes.
22 Q Mr. Linam provides testimony indicating at
23 least another point of view as to why that's not such a
24 swell idea. Have you reviewed that testimony?
25 A Yes, I have.
720
CSB REPORTING POWER (X)
Wilder, Idaho 83676 Idaho Citizens Coalition
1 Q Are you aware that on prior occasions
2 proposals for geographically de-averaged rates for United
3 Water Company have been considered and rejected at the
4 Commission?
5 A I'm trying to think back through the cases
6 that I've been involved in, which stretch back to the mid
7 '80s, and I -- I'm a professor, so I have a professional
8 right to be absentminded, but I don't recall that.
9 In any case, I think that's -- I don't
10 think that's relevant. The Commission has tried a
11 variety of things to deal with this problem. And the
12 Idaho Supreme Court in its wisdom has turned aside some
13 of those efforts, and given that changing context and
14 what I perceive to be an ongoing problem, and the
15 Commission may perceive to be an ongoing problem too, I
16 think the Commission wants to -- or ought to be
17 reevaluating whatever the tools are that might be
18 available to help constrain the overall burden that's
19 being placed on Boise area water consumers.
20 Q Would you agree that insofar as the current
21 case is concerned, there is not presently adequate
22 information for the Commission to implement a mechanism
23 of geographically de-averaged rates even if as a policy
24 matter and a legal matter the Commission thought it was
25 appropriate?
721
CSB REPORTING POWER (X)
Wilder, Idaho 83676 Idaho Citizens Coalition
1 A I think that's true in the first phase of
2 the case here. And as my testimony indicated, I was
3 simply trying to connect the two phases of the case to
4 sort of maintain some institutional memory when it came
5 to rate design as to why rates were having to be changed
6 to begin with.
7 Q So it may be an idea worth studying,
8 considering, and pondering, but it's an issue for the
9 future in terms of implementation and full decision,
10 correct?
11 A That depends on the decision that the
12 Commission makes on the part of my testimony that we
13 apparently are not going to discuss today. How far in
14 the future, the decision may be made at the conclusion of
15 this case, both phase one and phase two.
16 Q Right, but certainly you're not arguing
17 that at phase one we suddenly dream up a system of
18 de-averaged rates?
19 A Right. You're right.
20 MR. MILLER: All right. That's all I
21 have. Thanks.
22 COMMISSIONER NELSON: Thank you. Do we
23 have questions from the Commission?
24 COMMISSIONER HANSEN: No.
25 COMMISSIONER NELSON: Commissioner Smith?
722
CSB REPORTING POWER (X)
Wilder, Idaho 83676 Idaho Citizens Coalition
1 COMMISSIONER SMITH: I don't.
2
3 EXAMINATION
4
5 BY COMMISSIONER NELSON:
6 Q Okay. I had one question, Dr. Power, on
7 page 1A of your testimony. You talk about the Boise
8 River diversion and you argue that this is a facility for
9 future use and should not be in rate base now. Would you
10 be in favor of allowing a return of rate base rather than
11 a return on rate base or are you in favor of disallowing
12 the whole thing?
13 A I think there's a twofold decision the
14 Commission has to make. One is whether it's appropriate
15 for this project to be brought to the Commission or to be
16 included for rate treatment at this time. It can
17 conclude that it's not appropriate but allow the utility
18 to accumulate carrying charges and allow the investment
19 and those carrying charges to be evaluated seven or ten
20 years in the future when that -- when it's appropriate to
21 bring that investment to the Commission for rate
22 treatment.
23 The key here has nothing to do with
24 punishing the utility. I'm not the least bit interested
25 in punishing the utility for making a decision that may
723
CSB REPORTING POWER (Com)
Wilder, Idaho 83676 Idaho Citizens Coalition
1 have been a good business decision. The question is who
2 should carry the risks associated with that business
3 decision, the business decision of a private utility, a
4 private business, and I'm urging that that risk be
5 carried by the Company until that plant is shown to be
6 used and useful and actually providing service to
7 customers at that time.
8 And things may change or things may turn
9 out exactly the way the utility expected or they may turn
10 out dramatically differently. We won't know that until
11 the plant is put to use. At that time, the investment
12 and the carrying charges can be considered for inclusion
13 in rates.
14 Q Well, I haven't done any calculation, but
15 isn't there also a risk that if you accumulate AFUDC for
16 seven or eight years and then begin depreciating that and
17 charging the cost out, it's more expensive overall than
18 depreciating it today?
19 A Well, then it was a terrible mistake. The
20 utility is investing money now in anticipation that it
21 will be able to save costs. Now, the saved costs have to
22 not only cover that capital invested now but the carrying
23 costs of that capital. There's no avoiding the carrying
24 costs of that capital, so if the Commission is scared at
25 the size of this thing when one accumulates the carrying
724
CSB REPORTING POWER (Com)
Wilder, Idaho 83676 Idaho Citizens Coalition
1 costs, one should be scared about the investment because
2 that's a very real part of the investment.
3 If one can't use the avoided cost, the
4 saved costs associated with early building or
5 pre-building a part of it, if one can't use those avoided
6 costs to justify the carrying charges, then a mistake has
7 been made, a business mistake has been made.
8 Q Okay. You wouldn't say we should be scared
9 about an investment that represents potentially two
10 percent of the rate base, would you?
11 A I think that the Commission has and the
12 Company has the obligation to be worried about all
13 substantial expenditures by the utility. I don't
14 remember who the politician was that said a billion here,
15 a billion there tends to add up, so I think one has to be
16 careful with a $2 million investment which will incur
17 carrying charges for seven to ten years before customers
18 can receive any benefit associated with it.
19 That's going to be a large amount of money,
20 and one -- I think one should ask the business, the
21 private business, to carry that risk until conditions
22 work out so that that investment in that property is
23 actually being put to use and customers are actually
24 benefiting from their good business decisions.
25 COMMISSIONER NELSON: Okay. Thank you. I
725
CSB REPORTING POWER (Com)
Wilder, Idaho 83676 Idaho Citizens Coalition
1 believe that was Everett Dirksen that said that.
2 MR. FOTHERGILL: We have no cross,
3 Mr. Chair.
4 COMMISSIONER NELSON: Okay. Thank you,
5 Mr. Fothergill.
6 Dr. Power, thank you for coming down today
7 and testifying.
8 THE WITNESS: Thank you.
9 (The witness left the stand.)
10 COMMISSIONER NELSON: And then I believe at
11 this point in the case, we're ready to go to your
12 rebuttal, Mr. Miller.
13 MR. WOODBURY: Mr. Chairman, if I could
14 interject at this point. Procedurally I have had
15 discussions with Mr. Miller with regard to a portion of
16 their rebuttal testimony, filed rebuttal testimony that
17 deals with an adjustment they make for Micron
18 consumption, and I would like to at this point object to
19 inclusion of that. It's not actually -- it's not
20 rebuttal. It is a rather late filed adjustment, a rather
21 significant adjustment.
22 We've heard Mr. Miller yesterday express to
23 the Commission on numerous occasions his concern that
24 they be treated with fairness and that the Company be
25 provided with an opportunity to analyze and respond, and
726
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 Staff is in that same position with respect to the filing
2 with Micron.
3 We are making a significant adjustment for
4 a significant customer of United Water. If the Company
5 is extrapolating off of two billing periods forward, you
6 know, I don't think that it's sufficient to say that
7 Staff might have an opportunity for surrebuttal because
8 we have -- we just don't know even the questions to ask
9 at this point in time without doing some proper
10 discovery.
11 I would say that, you know, what the
12 Company intends to show is a letter -- an unsigned letter
13 back from the Company that Staff has from Mr. Chapman at
14 Micron, but Micron also was part of the coalition of
15 customers that is not before the Commission today.
16 There's just not sufficient time when you have a filing
17 late Monday on the 13th and the hearing starts the
18 Wednesday of the prior week for Staff to respond to this,
19 and we think the adjustment at this late date is
20 inappropriate and we would move to either strike -- well,
21 I guess we'd move to strike all related testimony in the
22 Company's filing.
23 COMMISSIONER NELSON: Before I go to
24 Mr. Miller, are you proposing that if you had
25 surrebuttal, that would be --
727
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 MR. WOODBURY: No.
2 COMMISSIONER NELSON: -- sometime down the
3 road?
4 MR. WOODBURY: I'm saying at this point in
5 time without having -- you know, being able to ask
6 questions of the Company, ask questions even of Micron,
7 we're unable -- perhaps when we take the second phase of
8 this case it might be appropriate to do a one-item
9 adjustment at that point that would give -- you know, the
10 Company could roll that into its rate design cost of
11 service and it would provide Staff with adequate time to
12 review that.
13 COMMISSIONER NELSON: Mr. Miller, do you
14 want to respond?
15 MR. MILLER: Thank you, Mr. Chairman, yes.
16 First, the adjustment to which Mr. Woodbury refers is in
17 the rebuttal testimony of Mr. Healy with a small
18 supporting item of testimony in the rebuttal testimony of
19 Mr. Brown. The Company's proposed order of rebuttal
20 witnesses is Mr. Hanley, Mr. Brown, Mr. Linam, and
21 Mr. Healy.
22 We would prefer, if the Commission would
23 agree, to argue Mr. Woodbury's motion specifically when
24 it's presented so that the Commission has an opportunity
25 to review in advance and see what precisely is involved.
728
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 I can indicate -- so I'd like to suggest that the
2 Commission defer ruling on the motion until it's -- until
3 the offending testimony is actually presented and you can
4 see precisely what it is.
5 By way of preliminary comment, of course,
6 each of the objections that I had yesterday with respect
7 to late filed things were not successful, so it's
8 something of a two-way street. A utility cannot
9 successfully reject -- or object to late filed material,
10 yet we're criticized for doing the same.
11 Secondly, there does not appear to be any
12 absolute prohibition against introducing adjustments in
13 rebuttal testimony. Staff seems delighted to accept
14 adjustments that go the other way, particularly a
15 substantial reduction that the Company has proposed with
16 respect to its cost of debt, so the argument appears to
17 be lack of time to reply, not that it's objectionable per
18 se.
19 And I will indicate that we have two
20 counsel offering to make all of our witnesses available
21 in effect in formal deposition so that Staff and Staff
22 counsel could ask any questions that they wanted to kind
23 of clarify the adjustment if it was necessary, and we
24 have conceded or offered to concede that surrebuttal by
25 Staff on the issue certainly would be appropriate. But
729
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 let me just make those comments now and then ask that the
2 Commission take this matter up when it's specifically
3 presented to the Commission.
4 COMMISSIONER NELSON: Mr. Woodbury, would
5 you have an objection -- would it bother you to renew
6 your objection when Mr. Healy takes the stand and perhaps
7 the Commission could discuss this in the interim?
8 MR. WOODBURY: I don't have any problem
9 with the Commission discussing it. I would like to make
10 some comments with respect to Mr. Miller's argument.
11 COMMISSIONER NELSON: Well, I don't want to
12 get into just an argument between attorneys.
13 MR. WOODBURY: No, it's not. It's just
14 pointing out some facts. He said that the Company has
15 been willing to make adjustments going one way and
16 indicates that this is going the other and so the Staff
17 is opposing it. But the cost of debt adjustment that he
18 refers to was an adjustment made not by the Company in
19 its rebuttal but was an adjustment made by Staff in its
20 direct case.
21 COMMISSIONER NELSON: This is exactly the
22 argument I don't want to get into. Let's discuss that
23 with the witness.
24 MR. WOODBURY: Well, then, may I also say
25 that the distinction is the one adjustment that was made
730
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 with respect to cost of debt was a known and measurable
2 as opposed to this, which is a forecast.
3 COMMISSIONER NELSON: Okay. So I can
4 surmise from that that you don't remind renewing your
5 objection when Mr. Healy takes the stand.
6 MR. WOODBURY: No, I don't.
7 COMMISSIONER NELSON: Okay. With that --
8 MR. WOODBURY: But I think that it's maybe
9 not just Mr. Healy's testimony because Mr. Hanley
10 addresses it also as far as a Micron adjustment. He's
11 the first witness.
12 COMMISSIONER NELSON: Mr. Hanley's the cost
13 of capital witness, isn't he?
14 MR. WOODBURY: Yeah, I thought he had
15 that. I could be mistaken. Well, I thought that they
16 all touched on it, but I'll renew it at the beginning of
17 all their testimonies just to make sure something doesn't
18 sneak in.
19 COMMISSIONER SMITH: Mr. Chairman.
20 COMMISSIONER NELSON: Commissioner Smith.
21 COMMISSIONER SMITH: I guess it would just
22 help me, Mr. Woodbury, if you have a motion to strike, to
23 give me pages and lines because, otherwise, it's very
24 difficult for me to know exactly what it is you're
25 referring to. Thank you.
731
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 COMMISSIONER NELSON: That's a good point.
2 Mr. Miller, if you want to call Mr. Hanley.
3 MR. MILLER: Yes. Mr. Hill will call
4 Mr. Hanley.
5 COMMISSIONER NELSON: Fine.
6 MR. HILL: The Company calls Frank Hanley.
7 Thank you, Mr. Chairman.
8 And, Mr. Chairman, while Mr. Hanley's
9 taking the stand, I'd like to request an opportunity to
10 take five or ten minutes to elicit some factual
11 information from Mr. Hanley relating solely to the facts
12 of corporate ownership in this case which, at least in my
13 perception, could have become somewhat confused during
14 yesterday's examination of Staff's cost of capital
15 witness. We will pledge to limit this information to
16 facts only and try to avoid any argument and try to keep
17 it as brief as possible.
18 COMMISSIONER NELSON: All right. Go ahead.
19 MR. HILL: Thank you very much.
20 COMMISSIONER NELSON: Mr. Hanley is still
21 under oath.
22
23
24
25
732
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 FRANK J. HANLEY,
2 produced as a rebuttal witness at the instance of United
3 Water Idaho, having been previously duly sworn, resumed
4 the stand was further examined and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. HILL:
9 Q We're going away from pipes and wells and
10 now talking about how those pipes and wells are
11 financed.
12 Mr. Hanley, you're the same Frank J. Hanley
13 that has previously submitted direct testimony in this
14 proceeding, are you not?
15 A Yes.
16 Q And before we begin to identify and submit
17 your prefiled rebuttal testimony, let me ask you if you
18 were here during the examination by Company counsel and
19 the Commission of Staff's cost of capital witness.
20 A Yes, I was.
21 Q And with regard to the facts in this case
22 surrounding or related to the particular corporate
23 ownership of equity at various corporate levels, have you
24 submitted in your prefiled direct testimony a simplified
25 representational corporate graph, if you will?
733
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 A Yes, I have done so. The current corporate
2 structure of United Water Resources is summarized
3 graphically in Exhibit No. 12, schedule 3, page 1.
4 Q That shows, among other things, that United
5 Water Idaho and the other utility's subsidiaries of
6 United Waterworks -- let me ask it this way. United
7 Water Idaho and the other utility subsidiaries of United
8 Waterworks, how are they capitalized on their books of
9 account?
10 A They're capitalized as 100 percent equity,
11 which is a reality since they do no external financing on
12 their own.
13 Q Now, in the case of United Water Idaho,
14 there is a slight difference as it relates to the other
15 subs of United Waterworks, is there not, related to the
16 preferred stock?
17 A Yes. United Water Idaho actually has some
18 preferred stock, something in the -- I think $606,000 at
19 the end of the test year in this case, that goes back
20 many, many years, I'm told, I don't know exactly when,
21 probably thirty or forty years ago when it was issued.
22 And relative to the total capital of United Water Idaho,
23 it's diminimus. It's clearly under one percent.
24 Q So the nearly 100 percent equity capital
25 structure of United Water Idaho, would you consider that
734
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 to be an appropriate or reasonable capital structure for
2 ratemaking purposes?
3 A Not at all. In fact, for ratemaking
4 purposes, I would have to say it would be ludicrous. It
5 would result in an extremely unreasonable revenue cost of
6 capital to be passed on to consumers.
7 Q Who owns and provides the financing for
8 United Water Idaho?
9 A United Waterworks is the sole
10 shareholder/owner of United Water Idaho and is the sole
11 source of all of its external financing which is in the
12 form of long-term debt capital.
13 Q When you say the sole source of financing,
14 you're referring to the financing supporting the utility
15 assets of United Water Idaho and the other United
16 Waterworks subsidiaries?
17 A Yes, that's correct.
18 Q Has there been any change in the manner in
19 which these utility assets, rate base assets, are
20 financed related to the 1994 merger of United Water
21 Resources and the former GWC Corporation?
22 A No, not at all. As a result of that
23 merger, the only thing that really changed was the name
24 of the former owner of -- called General Waterworks, and
25 the name simply now is called United Waterworks, and
735
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 instead of Boise Water, it's now called United Water
2 Idaho. The names have changed but the relationships are
3 exactly identical.
4 Q And what is the actual capital structure of
5 United Waterworks?
6 A United Waterworks, what I would call is the
7 actual capital structure I would like to refer to now,
8 which is really the capital structure at the end of the
9 test year on a pro forma basis that reflects debt
10 issuances which are known and measurable and have
11 occurred subsequent to the end of the historical test
12 year, that capital structure consists of 54.98 percent
13 long-term debt, 0.14 percent, the minority interest,
14 which is that United Water Idaho very small amount of
15 preferred stock, and 44.8 percent common equity capital,
16 and that is basically summarized in Exhibit No. 13,
17 schedule 8.
18 Q And that's attached to your rebuttal
19 testimony?
20 A Yes, it is.
21 Q How does this actual United Waterworks
22 capital structure compare to water utility industry
23 averages?
24 A Well, it compares quite favorably, and I
25 would have to say, to use the cliche, it's right in the
736
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 ballpark. On part of my rebuttal exhibit, Exhibit
2 No. 13, schedule 3, which consists of two pages, I
3 summarize capital structure ratios recently, in fact, as
4 of September 30, 1997, for companies in the industry, and
5 it is shown there that a 44.88 percent common equity
6 ratio falls very much in line with any of the groupings,
7 whether they be my primary proxy group that I relied upon
8 of five water companies, and that shows a 45.93 percent
9 common equity ratio.
10 The C.A. Turner water companies group,
11 which Staff witness Carlock relied upon in part, not for
12 capital structures purposes but for cost of equity
13 purposes, that group has a common equity ratio of 48.8
14 percent on average. And even the Value Line group, which
15 includes I think non-representative American Water Works
16 and United Water Resources, but even including those
17 companies, it's 42.2 percent common equity ratio.
18 The point is that it's very much in line --
19 the United Waterworks ratio of 44.88 percent equity is
20 very much in line with the industry and, therefore,
21 reasonable I think by any standard, which would obviate
22 the need for any hypothetical capital structure.
23 Q Thank you, Mr. Hanley. Let's go on now and
24 identify your prefiled rebuttal testimony. In the course
25 of your duties on behalf of the Company in this case,
737
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 have you caused to be prepared prefiled rebuttal
2 testimony?
3 A Yes, I have. I've prepared prefiled
4 rebuttal testimony that consists of twenty pages.
5 Q And attached to that prefiled rebuttal
6 testimony is one exhibit?
7 A It's one exhibit that has been designated
8 No. 13 and it consists of eight schedules.
9 Q Do you have any additions or corrections to
10 make to that testimony or exhibit?
11 A I have just one which is inconsequential
12 but needs to be done grammatically. Page 12 of the
13 rebuttal testimony at line 16 towards the end of the
14 line, it says "are." It says, "Ms. Carlock's approach
15 are." I have no idea how that "are" got there, but it
16 should say "which," w-h-i-c-h. That's the only
17 correction that I have.
18 Q And with that correction, is the
19 information in your prefiled rebuttal testimony true and
20 correct to the best of your knowledge, information, and
21 belief?
22 A Yes, sir.
23 Q And you adopt the same as your sworn
24 testimony in this proceeding?
25 A I do.
738
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 MR. HILL: Mr. Chairman, I move that the
2 prefiled rebuttal testimony of Frank Hanley be spread on
3 the record as though read and that his exhibit be marked
4 for identification.
5 COMMISSIONER NELSON: Thank you, Mr. Hill.
6 So ordered.
7 (The following prefiled rebuttal
8 testimony of Frank J. Hanley is spread upon the record.)
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
739
CSB REPORTING HANLEY (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 PURPOSE
2 Q Please state your name, occupation and
3 business address.
4 A My name is Frank J. Hanley and I am
5 President of AUS Consultants - Utility Services. My
6 business address is 155 Gaither Drive, P.O. Box 1050,
7 Moorestown, New Jersey 08057.
8 Q Are you the same Frank J. Hanley who
9 previously submitted prepared direct testimony in this
10 proceeding?
11 A Yes, I am.
12 Q What is the purpose of this testimony?
13 A The purpose of this testimony is to rebut
14 the prepared direct testimony of Terri Carlock, Staff
15 Witness of the Idaho Public Utilities Commission
16 concerning various aspects of her fair rate of return
17 recommendation for United Water Idaho, Inc. (UWID or the
18 Company).
19 SUMMARY
20 Q Please briefly summarize your rebuttal
21 testimony.
22 A I will demonstrate that Ms. Carlock's
23 recommended use of a hypothetical capital structure is
24 entirely inappropriate for several reasons. First, she
25 erroneously assumes that United Water Resources, Inc.
740
Hanley, Re 1
United Water Idaho, Inc.
1 (UWR), UWID's grandparent, supplies capital to UWID.
2 Second, there is no basis to utilize hypothetical capital
3 structure ratios when the capital structure ratios
4 proposed by the Company are reasonable, as will be
5 demonstrated. Third, and finally, UWID's parent, United
6 Waterworks, Inc. (UWW) has a stronger credit rating than
7 UWR
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
741
Hanley, Re 1A
United Water Idaho, Inc.
1 and UWR is dependent on UWW and other subsidiaries and
2 not vice versa. Accordingly, there is no support in
3 reality or theory for Ms. Carlock's position on capital
4 structure.
5 I will also show that Ms. Carlock's recommended
6 common equity cost rate range is understated because it
7 is inappropriately premised upon UWR. Moreover, her
8 comparable earnings analyses are flawed.
9 In the course of my rebuttal testimony, I will
10 utilize, on a pro forma basis, UWID's capital structure,
11 based upon UWW, in order to reflect all of UWW's
12 permanent financings which have occurred subsequent to
13 the end of the historical test year, June 30, 1997.
14 My testimony is structured by topic.
15 Q Have you prepared an exhibit in support of
16 your rebuttal testimony?
17 A Yes, I have. It has been denoted Exhibit
18 No. 13 and it consists of 8 schedules.
19 CAPITAL STRUCTURE
20 Q As justification for her use of a
21 hypothetical capital structure, Ms. Carlock states at
22 page 24, lines 18-25, the following:
23 United Water Idaho does not directly raise funds
in the markets. The debt funds are issued at the
24 United Waterworks level and the equity funds are
retained through earnings or raised at the United
25 Water Resources level. Therefore, the actual
742
Hanley, Re 2
United Water Idaho, Inc.
1 capital structure shown on the books of United
Water Idaho has been provided by and supported by
2 one of the parent entities.
3 Q Please comment.
4 A In order to support the use of a
5 hypothetical capital structure, she necessarily
6
7 /
8
9 /
10
11 /
12
13
14
15
16
17
18
19
20
21
22
23
24
25
743
Hanley, Re 2A
United Water Idaho, Inc.
1 assumes that UWR supplies capital to UWW. That is not
2 the case. UWW issues the debt funds, and UWW's equity is
3 generated only through retained earnings. In Exhibit No.
4 12, Schedule 3, page 2, I demonstrated that UWW's common
5 equity balance has increased only by retained earnings
6 since the April 1994 merger with UWR. Exhibit No. 13,
7 Schedule 1, page 1, shows that through December 31 1997,
8 the situation remains unchanged, i.e., the only increase
9 in UWW's common equity since April 1994 has been through
10 the retention of earnings. Consequently, Ms. Carlock's
11 comment "or raised at United Water Resources level" is
12 completely unfounded and contrary to fact.
13 It is true that UWID's capital has been provided
14 by and supported by one of the parent entities -- UWW,
15 and only UWW.
16 Q You have demonstrated that no equity
17 capital has flowed from UWR to UWW since the April 1994
18 merger. Have any other forms of capital flowed from UWR
19 to UWW?
20 A No. I explained fully this point in my
21 prepared direct testimony beginning at page 24, line 21
22 through page 26, line 8. It shows that all of the debt
23 and preferred stock securities of UWR and its
24 subsidiaries, other than UWW, are specifically committed
25 to other entities and secured by their own assets and
744
Hanley, Re 3
United Water Idaho, Inc.
1 earnings. Consequently, it is clear that no such funds
2 could be used by UWW and cannot finance UWID's rate base.
3 Q Has Ms. Carlock properly focused upon
4 UWID's rate base risk in formulating her position with
5 regard to capital structure?
6
7 /
8
9 /
10
11 /
12
13
14
15
16
17
18
19
20
21
22
23
24
25
745
Hanley, Re 3A
United Water Idaho, Inc.
1 A No. By focusing entirely upon UWR, and a
2 hypothetical capital structure extremely similar to that
3 of UWR and its subsidiaries on a consolidated basis,
4 Ms. Carlock violates the basic financial tenet of risk
5 and return.
6 Q Please explain.
7 A It is a well-accepted financial tenet that
8 the expected return on an asset is commensurate with the
9 risk of the asset. In this proceeding, the fair rate of
10 return must be applied to UWID's rate base.
11 Consequently, the question at hand for both capital
12 structure and common equity cost rate is how is that
13 asset financed and what is the risk of the investment in
14 that asset (UWID's rate base).
15 I have demonstrated in both my direct testimony
16 and supra that the only external capital financing UWID's
17 rate base is derived from UWW. Ms. Carlock's entire rate
18 of return study stems from a blatantly erroneous premise
19 -- that the risk of investment in UWID's rate base is
20 synonymous with the investment in UWR.
21 Q At page 24, line 25 through page 25, line 3
22 of her testimony, Ms. Carlock states:
23 The UWID capital structure should be double
leveraged to reflect this relationship. Rather
24 than double leverage the capital structure, I
believe a hypothetical capital structure is
25 appropriate.
746
Hanley, Re 4
United Water Idaho, Inc.
1 Please comment.
2 A It seems clear that Ms. Carlock's proposed
3 use of a hypothetical capital structure is simply an
4 indirect way of applying double leverage since her
5 recommended capital structure is not significantly
6 different than UWR's consolidated capital structure.
7 Double leverage is an erroneous concept which stems from
8 the idea
9
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15
16
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20
21
22
23
24
25
747
Hanley, Re 4A
United Water Idaho, Inc.
1 that the cost of common equity of a wholly-owned
2 operating utility is the same as the composite overall
3 cost of capital of the parent holding company. The
4 double leverage concept assumes that all of the capital
5 employed by the parent holding company is proportionately
6 invested in all of its subsidiaries. As a practical
7 matter, the double leverage concept is inappropriate
8 because 1) it is discriminatory; 2) its application
9 disregards the fundamental concept of rate base/rate of
10 return regulation; and 3) its application is based upon
11 an assumption which is at odds with reality.
12 Q Why is double leverage discriminatory?
13 A It is discriminatory because it singles out
14 a sole corporate shareholder. Double leverage is only
15 claimed to exist in a situation where there is but one
16 corporate shareholder, as in the case involving a
17 wholly-owned subsidiary. The use of double leverage
18 never occurs where a substantial minority interest
19 exists. This was recognized by the Maine Supreme
20 Judicial Court which stated that "the Commission is
21 unable to cite to us any authority in which a double
22 leveraging adjustment or a consolidated capital structure
23 has been applied where a substantial minority interest
24 exists.1
25 Q Why does application of double leverage
748
Hanley, Re 5
United Water Idaho, Inc.
1 disregard the basic fundamental principal of rate
2 base/rate of return regulation?
3
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8 /
9
10
11
12
13
14
15
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17
18
19
20
21
22
23 1 New England Tel. & Tel. Co. v. Maine Pub. Utils.
Commission, 27PUR4th 1, 42 (1978). Source: Charles
24 F. Phillips, Jr., The Regulation of Public Utilities,
1993, Public Utilties Reports, Inc., p. 392.
25
749
Hanley, Re 5A
United Water Idaho, Inc.
1 A Double leverage ignores the risk rate to
2 which the common equity investment in the property rate
3 base of the subsidiary is exposed. Only by random chance
4 could the risk rate of common equity investment in UWID's
5 rate base be equal to the parent company's composite
6 overall cost of capital, or as in the case of Ms.
7 Carlock's hypothetical common equity ratio equal to UWR's
8 cost of common equity.
9 Q Why is double leverage based upon an
10 assumption which is at odds with reality?
11 A The concept is predicated upon the
12 assumption that all of the capital employed by the parent
13 company is invested proportionately in all of its
14 subsidiaries. As I have demonstrated clearly both in my
15 direct testimony and supra, such is not the case for UWR.
16 Indeed, none of UWR's capital, or the capital of any of
17 UWR's subsidiaries other than UWW can possibly finance
18 UWID's rate base.
19 In view of the foregoing, Ms. Carlock's use of a
20 hypothetical capital structure is nothing more than a
21 back door approach to double leverage which is blatantly
22 incorrect for the reasons described supra.
23 Q Does the financial literature support the
24 use of actual capital structure unless it is clearly
25 unsound?
750
Hanley, Re 6
United Water Idaho, Inc.
1 A Yes. For example, Bonbright2 states:
2 [t]he use of a hypothetical or `typical'
capitalization substitutes an estimate of what a
3 capital cost would be under non-existing
conditions for what it actually is or will soon be
4 under prevailing
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13
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16
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18
19
20
21
22
23
24 2 James C. Bonbright, Albert L. Danieslon, David R.
Kamerschen, Principles of Public Utility Rates,
25 Public Utilities Reports, Inc., 1998, p. 309.
751
Hanley, Re 6A
United Water Idaho, Inc.
1 conditions. However, if the existing capital
structure is clearly unsound or is extravagantly
2 conservative, the rule may need to be modified in
the public interest. (italics in original)
3
4 This suggests that the only time the use of a
5 hypothetical capital structure should be employed is if
6 the actual capital structure is "clearly unsound or
7 extravagantly conservative."
8 Q Has there been a recent rate case
9 determination for another subsidiary of UWW which
10 supports the use of UWW's actual capital structure?
11 A Yes. In the recent United Water
12 Pennsylvania, Inc. (UWPA) rate case (Docket Nos.
13 R-000973947 and R-00973947 C0001 through C0014), the
14 Pennsylvania Public Utility Commission (PA PUC) found
15 that the use of UWW's capital structure was reasonable
16 and appropriate. In its Opinion and Order dated January
17 29, 1998 at pp. 46-50, the PA PUC stated:
18 In the Recommended Decision, the ALJ recommended
that we adopt a capital structure proposed by
19 UWPA, which is the actual consolidated capital
structure of UWW. Among the reasons provided by
20 the ALJ for his recommendation are the following:
all of UWPA's external capital requirements are
21 raised by UWW; UWW's capital structure is similar
to the capital structure used by companies of
22 similar risk; UWW issues its own debt and its
bonds are rated separately and differently from
23 UWR; since the merger in 1994, none of the capital
financing efforts of UWR have flowed down to UWW
24 or UWPA (R.D. pp. 82-83)... The record
establishes that the only capital available to
25 finance the rate base of any subsidiary of UWW,
752
Hanley, Re 7
United Water Idaho, Inc.
1 including UWPA, is the capital raised by UWW.
Furthermore, UWPA's Witness Hanley's rejoinder
2 testimony shows that the only change in the common
equity of UWW since the 1994 merger has been from
3 an increase in retained earnings. Since the 1994
merger, no equity has ever flowed from UWR to
4 UWPA... Based upon our analysis of the record in
this proceeding, we conclude that the use of UWW's
5 capital structure as the capital structure of UWPA
is reasonable
6
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14
15
16
17
18
19
20
21
22
23
24
25
753
Hanley, Re 7A
United Water Idaho, Inc.
1 and appropriate.
2 Q Can you cite an example of a regulatory
3 decision at the federal level which supports the use of
4 the actual capital structure?
5 A Yes. The Federal Energy Regulatory
6 Commission (FERC) in its Order issued September 17, 1992
7 in Docket Nos. RP92-137-000 and RP92-108-000 re
8 Transcontinental Gas Pipe Line Company stated at pp. 7-8:
9 The Commission's policy is to use the actual
capital structure of the entity that does the
10 financing for the regulated pipeline-whether that
entity is the regulated pipeline itself or its
11 parent. The capital structure of the entity that
does the financing in the marketplace is developed
12 by management to respond to the perceived needs of
investors, and as a result it usually provides a
13 better starting point than Commission efforts to
develop a reasonable hypothetical capital
14 structure. ...If, however, the use of the actual
capital structure of the entity in the market
15 securing the pipeline's capital, with appropriate
risk adjustments in the allowed rate of return
16 would produce anomalous results, then the
Commission will use a hypothetical capital
17 structure.
18 My testimony herein shows that UWW is the financing
19 entity, not UWR, and that the capital structure proposed
20 by UWID is reasonable, in line with other similar risk
21 entities, and thus not anomalous. Consequently, the
22 actual capital structure should be used. There is no
23 basis to use a hypothetical capital structure.
24 Q Is, in fact, UWW's credit rating separate
25 and different from that of UWR?
754
Hanley, Re 8
United Water Idaho, Inc.
1 A Yes. As shown on Exhibit No. 13, Schedule
2 1, page 2, S&P's corporate credit rating for UWR is A-,
3 or lower than that of UWW whose corporate credit rating
4 is A.
5
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755
Hanley, Re 8A
United Water Idaho, Inc.
1 Q As partial defense for her use of
2 hypothetical capital structure which includes a 40%
3 common equity ratio, Ms. Carlock leans upon the Value
4 Line water utility industry published forecasted common
5 equity ratio for the year 1998 of 40%. Is there any
6 merit to reliance upon such a 40% common equity ratio?
7 A No. The Value Line industry capital
8 structure ratios to which Ms. Carlock refers are those of
9 the six Value Line water companies which, as a group, are
10 not relevant for use to establish a cost of common equity
11 for UWID. I explain the reasons why at page 19 of my
12 prepared direct testimony, specifically at lines 11
13 through 19. Generally, it is because these companies are
14 enormously larger than UWID and include companies such as
15 American Water Works Company and United Water Resources,
16 Inc. Itself, both of which are very large and
17 geographically diverse.
18 In addition, the 40% equity ratio which Ms.
19 Carlock relies upon is a weighted average based upon the
20 forecasted total capital and common equity ratios. As
21 shown on Exhibit No. 13, Schedule 2, the forecasted Value
22 Line 1998 common equity ratio of 40% is derived from a
23 weighted average of 40.1%, rounded down. As shown,
24 American Water Works Company receives 55.9% of the total
25 weight, while United Water Resources, Inc. receives 19.9%
756
Hanley, Re 9
United Water Idaho, Inc.
1 of the weight. These two companies, which have the
2 lowest and non-representative capital structure ratios,
3 receive more than 3/4 weighting. I have shown that the
4 arithmetic average of all six companies' forecasted
5 common equity ratio is 44.2%. Moreover, when American
6 Water Works and United Water Resources
7
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11
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13
14
15
16
17
18
19
20
21
22
23
24
25
757
Hanley, Re 9A
United Water Idaho, Inc.
1 are excluded from the average, the average common equity
2 ratio is 47.4% which was quite similar to, and indeed
3 slightly higher than, the initially proposed common
4 equity ratio applicable to UWID based on UWW and is
5 higher than the pro forma UWW common equity ratio at June
6 30, 1997 of 44.88% as will be discussed infra.
7 Q You have already explained why Ms.
8 Carlock's reliance upon UWR is incorrect. Have you
9 previously explained in full detail why size has a
10 bearing on risk and hence on capital structure?
11 A Yes. I explained why size has a bearing on
12 risk in my prepared direct testimony beginning at page
13 13, line 18 through page 15, line 22.
14 Q As part of her comparable earnings
15 analyses, Ms. Carlock analyzed the C.A. Turner water
16 utilities. Strangely, she did not analyze the capital
17 structure ratios of those C.A. Turner water companies.
18 Have you prepared an analysis of the average capital
19 structure ratios of the C.A. Turner water companies?
20 A Yes, I have. My analysis of the C.A.
21 Turner water companies' capital structure ratios is
22 contained in Exhibit No. 13, Schedule 3, which consists
23 of two pages. The capital structure ratios shown are as
24 of September 30, 1997, i.e., those contained in the
25 February 1998 issue of C.A. Turner Utility Reports, the
758
Hanley, Re 10
United Water Idaho, Inc.
1 same issue relied upon by Ms. Carlock for her comparable
2 earnings analysis of those companies. As shown on page 2
3 of Exhibit No. 13, Schedule 3, the average capital
4 structure for the C.A. Turner water companies consisted
5 of 49.23% long-term debt, 1.93% preferred stock, and
6 48.84% common equity capital. Please
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14
15
16
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18
19
20
21
22
23
24
25
759
Hanley, Re 10A
United Water Idaho, Inc.
1 take note that the typical average preferred stock ratio
2 is only 1.93% and that includes UWR itself. If UWR were
3 excluded, the average preferred stock ratio is only
4 1.38%.
5 Q Because all of the companies in your
6 primary proxy group of five water companies, as well as
7 the secondary and less meaningful proxy group of six
8 Value Line water companies are included in the C.A.
9 Turner water company group, have you also shown the
10 September 30, 1997 average capital structure ratios for
11 those two proxy groups?
12 A Yes. Their averages are also shown on
13 Exhibit No. 13, Schedule 3, page 2. They are for the
14 proxy group of five water companies, 52.19% long-term
15 debt, 1.88% preferred stock, and 45.93% common equity
16 capital; and for the proxy group of six Value Line water
17 companies, they are 55.15% long-term debt, 2.58%
18 preferred stock, and 42.27% common equity capital. Of
19 course, the proxy group of six Value Line water companies
20 does include the non-representative American Water Works
21 Company and UWR itself as discussed supra. Were American
22 Water Works and United Water Resources excluded, the
23 September 30, 1997 average capital structure for the
24 remaining companies in the Value Line group would be
25 53.92% long-term debt, 0.94% preferred stock, and 45.14%
760
Hanley, Re 11
United Water Idaho, Inc.
1 common equity.
2 Clearly, all of the foregoing ratios affirm that
3 the UWW capital structure ratios upon which the filing
4 was made, and the June 30, 1997 capital structure ratios
5 on a pro forma basis to reflect the effect of the sales
6 of long-term debt,
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24
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761
Hanley, Re 11A
United Water Idaho, Inc.
1 and related retirements of long-term debt issues which
2 have occurred subsequent to June 30, 1997, as discussed
3 infra and shown in Exhibit No. 13, Schedule 7, page 2.
4 Those ratios are 54.98% long-term debt, 0.14% minority
5 interest, and 44.88% common equity capital. Both sets of
6 ratios, i.e., the actual as contained in UWID's rate
7 filing, and the pro forma at June 30, 1997 are
8 conservatively reasonable and in line with companies of
9 comparable risk. Ms. Carlock's proposed use of
10 hypothetical capital structure ratios is without merit
11 because those ratios are similar to and in line with
12 those of comparable risk water companies. Consequently,
13 there is no basis for her indirect attempt at double
14 leverage by using hypothetical capital structure ratios
15 similar to those of UWR. As I pointed out in my direct
16 testimony at page 26, line 9 through page 27, line 4,
17 UWR's financial health depends upon its subsidiaries.
18 UWW has a higher credit rating of A than UWR's credit
19 rating of A-. UWR's lower credit rating confirms that it
20 is dependent upon its subsidiaries and not vice versa as
21 Ms. Carlock's testimony suggests.
22 Q Notwithstanding all of the errors contained
23 in Ms. Carlock's approach which you described supra, are
24 there any gross inconsistencies in the manner in which
25 her recommended overall cost of capital is calculated?
762
Hanley, Re 12
United Water Idaho, Inc.
1 A Yes. The hypothetical capital structure
2 ratios which she recommends are fictitious, but strangely
3 similar to UWR's actual capital structure ratios.
4 Although she used hypothetical capital structure ratios
5 because of UWR, she utilized UWW's debt cost rate which
6 is inconsistent in view of UWW's higher
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24
25
763
Hanley, Re 12A
United Water Idaho, Inc.
1 credit rating of A, in contrast to UWR's lower credit
2 rating of A-. In addition, she utilized UWW's minority
3 interest preferred stock cost rate of 5% and not the UWR
4 actual preferred stock cost rate of 6.57% for 1996
5 related to a 9.48% preferred stock ratio3, even though
6 her hypothetical preferred stock ratio is 8%. In
7 contrast, the C.A. Turner water companies had an actual
8 1996 preferred stock cost rate of 5.10% related to an
9 average preferred stock ratio of only 1.94% (including
10 American Water Works and UWR as discussed supra).
11 Finally, she was also inconsistent by her use of a common
12 equity cost rate based upon UWR (evidenced by a DCF
13 calculation based only on UWR as well as by her
14 comparable earnings analysis which focused upon UWR as
15 the benchmark) despite the use of UWW's long-term debt
16 and minority interest cost rates in a hypothetical
17 capital structure remarkably like UWR's actual
18 consolidated capital structure. Ms. Carlock has violated
19 basic financial tenets by the use of an unjustified
20 capital structure and the application of non-comparable
21 cost rates to those capital structure ratios. Moreover,
22 she has disregarded the risk/return relationship of
23 investment in UWID's rate base. UWID's rate base is not
24 financed by UWR and the risk associated with investment
25 in it is, therefore, not that of UWR as posited by
764
Hanley, Re 13
United Water Idaho, Inc.
1 Ms. Carlock.
2 PRO FORMA LONG-TERM DEBT COST RATE
3 Q Previously, you alluded to a pro forma
4 capital structure which would reflect the
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11
12
13
14
15
16
17
18
19
20
21
22
23
24 3 Calculated based on preferred dividends for the
year/average preferred stock, i.e., average of
25 beginning and end of year balances.
765
Hanley, Re 13A
United Water Idaho, Inc.
1 reality of actual debt issuances which have occurred
2 subsequent to June 30, 1997 up through February 28, 1998.
3 Please explain.
4 A It is reasonable to reflect known and
5 measurable changes which have occurred subsequent to the
6 end of the test year, June 30, 1997. As detailed in Note
7 1 of Exhibit No. 13, Schedule 4, there have been five new
8 issuances of long-term debt by UWW which have occurred
9 subsequent to June 30, 1997 as well as the early
10 retirement of two high yield notes payable issues. The
11 end result of these issuances and early retirements is to
12 effectively reduce the long-term debt cost rate from the
13 actual 8.25% to the pro forma 7.80% at June 30, 1997.
14 This new long-term debt cost rate is properly reflected
15 in a revised overall cost of capital calculation which I
16 will discuss infra.
17 COMMON EQUITY COST RATE
18 Q In Ms. Carlock's comparable earnings
19 analyses, she included achieved returns on book common
20 equity for electric, gas distribution, and water
21 utilities. Please comment.
22 A The use of earned returns of other
23 utilities has long been recognized in the financial
24 literature as being useless in establishing a common
25 equity cost rate for a regulated utility. Phillips4
766
Hanley, Re 14
United Water Idaho, Inc.
1 states with regard to the use of earnings on book common
2 equity of regulated firms:
3 ...returns of regulated firms must always be used
with extreme caution. At best, they reflect what
4 the informed judgments of
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24
25 4 Id., p. 398.
767
Hanley, Re 14A
United Water Idaho, Inc.
1 regulatory commissions have permitted such
utilities to earn and may not be indicative of
2 what could have been earned in the competitive
market.
3
Also, Morin5 states:
4
In defining a population of comparable-risk
5 companies, care must be taken not to include other
utilities in the sample, since the rate of return
6 on other utilities depends on the allowed rate of
return. The book return on equity for regulated
7 firms is not determined by competitive forces, but
instead reflects past actions of regulatory
8 commissions. It would be hopelessly circular to
set a fair return based on the past actions of
9 other regulators, much like observing a series of
duplicate images in multiple mirrors.
10
11 Because of the circularity of the use of earnings on book
12 common equity of other regulated utilities, such rates of
13 earnings are not relevant to establishing a common equity
14 cost rate which is consistent with the competitive
15 marketplace where water utilities have no monopoly.
16 Q In her analysis of the expected returns on
17 the book common equity of industrial companies of
18 16%-17%, Ms. Carlock states at the top of page 17 of her
19 testimony that she adjusted that range by a risk
20 differential, i.e., beta of .55 for UWR, which resulted
21 in a risk adjusted range of 8.8%-9.4% (16%-17% x .55).
22 Is her conclusion of a range of returns on book equity of
23 8.8%-9.4% after that beta adjustment correct?
24 A No. Her methodology is not correct because
25 she applied a beta of .55 against the total returns. As
768
Hanley, Re 15
United Water Idaho, Inc.
1 noted previously, I do not agree with her use of UWR, and
2
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21
22
23
24 5 Roger A. Morin, Regulatory Finance - Utilities' Cost
of Capital, Public Utilities Reports, Inc., 1994,
25 p. 395.
769
Hanley, Re 15A
United Water Idaho, Inc.
1 hence UWR's beta as a proxy for risk of common equity
2 investment in UWID's rate base. Nonetheless, her
3 approach is theoretically flawed.
4 Q Please explain why her approach is
5 theoretically flawed.
6 A The entire concept of beta stems from the
7 Capital Asset Pricing Model (CAPM) and the security
8 market line. Exhibit No. 13, Schedule 5, which consists
9 of four pages, is an excerpt from Eugene F. Brigham's
10 Fundamentals of Financial Management, Fifth Edition,
11 textbook. Page 3 shows that the beta is calculated based
12 upon the slope of the security market line which
13 intercepts the required rate of return at the risk-free
14 rate. In other words, beta measures equity risk premium
15 on a relative basis over and above the risk-free rate of
16 return. This is clearly demonstrated by Dr. Brigham in
17 his Figure 4-9 shown on page 129 of his textbook and
18 replicated herein as Exhibit No. 13, Schedule 5, page 3.
19 As an example, if the expected total return is 16% and
20 the risk-free rate is 6%, then beta should be applied
21 only against the difference of 10%. Thus, using her beta
22 of .55, the indicated cost rate would be 11.5% (6.0%
23 risk-free rate + (.55 (16%-6%)).
24 Q Have you calculated what the proper range
25 of comparable earnings cost rates would be for UWR and
770
Hanley, Re 16
United Water Idaho, Inc.
1 your proxy group of five water companies based on UWR's
2 beta of 0.55 and an average beta for the group of 0.60,
3 respectively?
4 A Yes, I have. I have shown that information
5 in Exhibit No. 13, Schedule 6, which consists of three
6 pages. My calculations are summarized on page 1. As
7 shown on page 1, the current risk-free rate as measured
8 by the average prospective
9
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24
25
771
Hanley, Re 16A
United Water Idaho, Inc.
1 yield on 30-year U.S. Treasury Bonds is 5.9%. Applying
2 the respective betas against the resultant equity risk
3 premiums of 10.1%-11.1%, respectively, the resultant
4 ranges of comparable earnings cost rates consistent with
5 financial theory are 11.46%-12.01% if based on UWR
6 (albeit erroneously) and 11.96%-12.56% based upon my
7 proxy group of five water companies which is most
8 comparable to UWID. Even if one were to base comparable
9 earnings cost rate on UWR, it would be 11.74%, the
10 midpoint of the range of 11.46%-12.01%, supra. The
11 midpoint comparable earnings range for my proxy group of
12 five water companies is 12.26% derived from correct
13 application of Ms. Carlock's beta approach, or quite
14 close to the 12.6% comparable earnings cost rate which I
15 calculated based on this same proxy group using the
16 methodology discussed in detail in my direct testimony at
17 page 63, line 14 through page 67, line 22.
18 Q Please comment upon Ms. Carlock's
19 comparable earnings analysis derived from companies
20 selected upon the basis of beta, safety rank, and
21 timeliness as described at page 14, line 23 through page
22 15, line 19 of her direct testimony.
23 A The result of that analysis is summarized
24 on Exhibit No. 101, Schedule 12, page 2. It shows an
25 average comparable earnings cost rate of 11.53%, which
772
Hanley, Re 17
United Water Idaho, Inc.
1 confirms the reasonableness of my recommended 11.50%
2 common equity cost rate.
3 Q Please summarize your analysis of
4 Ms. Carlock's comparable earnings analyses.
5 A The use of the earned returns of other
6 regulated utilities is circular and not relevant to the
7 determination of an opportunity return rate, as discussed
8 supra. The analysis, summarized in Schedule 12 of
9 Exhibit No. 101 substantiates an
10
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19
20
21
22
23
24
25
773
Hanley, Re 17A
United Water Idaho, Inc.
1 11.53% common equity cost rate. Proper analysis of her
2 range of industrial returns on equity indicate common
3 equity cost rates ranging from 11.46% to 12.56% as shown
4 on Line No. 6, Schedule 6, page 1, of Exhibit No. 13 and
5 discussed supra.
6 Q Do you have any comment with regard to
7 Ms. Carlock's DCF analysis based upon UWR?
8 A Yes. Her DCF analysis based upon UWR
9 should be totally disregarded because: UWR is of lesser
10 credit quality than UWW; UWR is dependent upon its
11 subsidiaries including UWW; and UWR supplies no external
12 capital to UWID, directly or indirectly. Consequently,
13 UWR's common equity risk rate is not related to the risk
14 of common equity investment in UWID's property rate base.
15 Q In Exhibit No. 101, Schedule 14, Ms.
16 Carlock recasts your summary page of common equity cost
17 rates resulting from the application of your various cost
18 of common equity models, based on the primary proxy group
19 of five water companies upon which you base your
20 recommendation of common equity cost rate, to include the
21 single stage growth DCF model common equity cost rate of
22 9.8%. In your analysis, you considered that cost rate of
23 9.8% as not meaningful. Can you now illustrate why it is
24 not meaningful?
25 A Yes. I have prepared Schedule 7 of Exhibit
774
Hanley, Re 18
United Water Idaho, Inc.
1 No. 13 which consists of four pages. On page 1, I have
2 shown the pro forma capital structure at June 30, 1997 as
3 discussed supra, while the details of that capital
4 structure are shown on page 2. As shown on page 1, the
5 pro forma long-term debt cost rate is 7.80% while the
6
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25
775
Hanley, Re 18A
United Water Idaho, Inc.
1 minority interest cost rate of 5.00% remains unchanged.
2 For purposes of demonstrating the gross inadequacy of a
3 9.80% common equity cost rate only, I have used it as the
4 cost rate for purposes of calculating the opportunity for
5 coverage of interest charges before income taxes. As
6 shown on Schedule 7, page 1, based on UWW's capital
7 structure, pro forma at June 30, 1997, the long-term debt
8 ratio is 54.98%, minority interest is 0.14%, and common
9 equity ratio is 44.88%. With a 9.80% common equity cost
10 rate, the opportunity for before-income tax interest
11 coverage is only 2.72 times. UWW's bond rating by S&P is
12 A and its business position is "average". Reference to
13 Schedule 7, page 3 shows that S&P requires before-income
14 tax interest coverage of 3.00 times in order to obtain
15 and maintain an A bond rating for a water utility with an
16 "average" business position. Obviously, before-income
17 tax interest coverage of 2.72 times is substantially
18 below that level confirming that such a 9.80% common
19 equity cost rate cannot be considered a reasonable
20 opportunity cost rate. Consequently, it is incorrect to
21 consider it when formulating a reasonable estimate of
22 common equity cost rate. On Schedule 7, page 4, I have
23 once more shown the basis of my recommendation of common
24 equity cost rate of 11.50%. It includes a business risk
25 adjustment. As explained in my direct testimony at page
776
Hanley, Re 19
United Water Idaho, Inc.
1 68, line 21 through page 69, line 12, an adjustment of an
2 additional 20 basis points is appropriate to reflect
3 UWID's extremely small size and the four major risk
4 factors discussed at page 11, line 2 through page 12,
5 line 16 of my prepared direct testimony. A correct
6 interpretation of Ms. Carlock's comparable earnings
7
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9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
777
Hanley, Re 19A
United Water Idaho, Inc.
1 analysis as discussed supra confirms my recommended
2 common equity cost rate of 11.50% as conservative.
3 REVISED OVERALL COST OF CAPITAL
4 Q Have you reflected a revised overall cost
5 of capital, i.e., one which reflects the known and
6 measurable issuances of long-term debt as well as the
7 early retirements of two high cost debt issues which have
8 occurred subsequent to the end of the historical test
9 year, June 30, 1997?
10 A Yes. I have shown such information on
11 Schedule 8 of Exhibit No. 13. As shown on Schedule 8,
12 the overall cost of capital is now 9.46%, revised
13 downward from the 9.76%, as filed. The long-term debt
14 cost rate has been revised downward from 8.25% to 7.80%,
15 while the minority interest and common equity cost rates
16 remain at 5.00% and 11.50%.
17 Q Does the indicated opportunity for
18 before-income tax interest coverage of 3.02 times, shown
19 on Schedule 8 of Exhibit No. 13, confirm the
20 reasonableness of the revised overall cost of capital
21 which includes an 11.50% common equity cost rate relative
22 to UWW's pro forma common equity ratio of 44.88% at June
23 30, 1997?
24 A Yes, it does. This is based upon the fact
25 that UWW has an A bond rating and an "average" business
778
Hanley, Re 20
United Water Idaho, Inc.
1 position. Reference to Exhibit No. 13, Schedule 7, page
2 3, shows that S&P's financial benchmark of pretax
3 interest coverage for an A rated water utility with an
4 "average" business position is 3.00 times.
5 Q Does this conclude your rebuttal testimony?
6 A Yes.
7
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9
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11
12 /
13
14
15
16
17
18
19
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21
22
23
24
25
779
Hanley, Re 20A
United Water Idaho, Inc.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER NELSON: Mr. Fothergill, do
4 you have questions for Mr. Hanley?
5 MR. FOTHERGILL: No, I don't.
6 COMMISSIONER NELSON: Ms. Ullman.
7 MS. ULLMAN: I do, just a couple.
8
9 CROSS-EXAMINATION
10
11 BY MS. ULLMAN:
12 Q Mr. Hanley, on page 4 of your rebuttal
13 testimony starting with line 5, you state, "It is a
14 well-accepted financial tenet that the expected return on
15 an asset is commensurate with the risk of the asset."
16 And I'm wondering, with regard to that statement, the
17 customers of United Water, do they have a choice as far
18 as water provider?
19 A I wouldn't think that they do, although I
20 frankly don't understand in my own mind the correlation
21 between that sentence of my testimony and the question,
22 but the answer is I don't think so.
23 Q Okay. So basically, the map that we
24 received yesterday over this service territory
25 certification area, United Water is the sole provider of
780
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 drinking water; is that correct?
2 A I believe so. I couldn't say about every
3 single customer in every part of the service territory.
4 Generally, that would be my belief.
5 Q Okay. And would you agree that people need
6 water to live?
7 A Yes.
8 Q So can you please then explain how risky --
9 how much risk there is involved that this Company with
10 this monopoly has?
11 A Well, I think on a risk scale, if you
12 looked at the security market line, I would say it's very
13 substantial as you move out away from a risk-free rate.
14 Clearly it's not as risky as many other enterprises in
15 the universe of companies, but clearly there's some
16 substantial risk there.
17 But in any event, from a cost of capital
18 viewpoint, we looked at comparable risk companies to come
19 up with the recommendations. Staff witness Carlock and
20 I, for example, our recommendation at least with regard
21 to common equity cost rate in terms of a point estimate
22 isn't really substantially different and we essentially
23 did the same kind of observations in looking for
24 comparable risk, so in that context, the recommendations
25 made herein reflect the appropriate level of risk for the
781
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 type of endeavor that it is.
2 Q Okay. I guess you'll have to forgive my
3 perspective as a layperson, but can you compare the risk,
4 for example, that a bank would take in loaning money if
5 my husband and I would like to refinance our house, which
6 we could get a loan somewhere in the neighborhood of
7 7 percent or a little bit less, compared to the risk that
8 United Water is taking to receive a 9.46 percent rate of
9 return on investment?
10 A Yes, ma'am. I don't think you can compare
11 the two. First of all, the loan that the bank would make
12 to you I presume, in order to get that approximate
13 7 percent rate, would be a secured first mortgage on the
14 property, and if you didn't make your payments after a
15 reasonable length of time, they'd foreclose and you'd
16 lose your house.
17 The 9.46 percent to which you refer is a
18 composite of the overall cost of capital and it includes
19 a portion of equity capital, and so the risk you could
20 relate to that portion of equity capital would be the
21 equity that you and your husband put into the house. And
22 heaven forbid you didn't make your payments and the bank
23 foreclosed, you'd lose your equity, and in that context,
24 I think you would conclude that you and your husband,
25 your capital was at substantial risk.
782
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q And if my husband and I for some reason
2 cannot pay our water bill for a number of months, what
3 would happen?
4 A You as a customer of this Company?
5 Q Yes.
6 A I must confess I don't know exactly what
7 the policy is, how much of a grace period there is or
8 whatnot, so I cannot give any definitive answer.
9 Q But would you agree that if we stopped
10 paying our bill that we would then stop receiving water
11 at some point in time?
12 A At some point, I think that's a reasonable
13 assumption. And if you just chose to not pay your bill
14 because you felt you were disgruntled or whatever, then
15 you probably deserve to lose your water. On the other
16 hand, if you couldn't afford to do it, you probably could
17 get some sort of welfare assistance or whatnot, which is
18 sort of another aspect from the regulatory environment.
19 Q So now we go back to the question of risk.
20 How much risk is there that any significant portion of
21 United Water's 58,000 customers will not pay their water
22 bills?
23 A I have no idea.
24 MS. ULLMAN: Okay. Thank you.
25 COMMISSIONER NELSON: Thank you,
783
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Ms. Ullman.
2 Mr. Woodbury.
3
4 CROSS-EXAMINATION
5
6 BY MR. WOODBURY:
7 Q Mr. Hanley, how are you this afternoon?
8 A I'm fine, thanks. And you?
9 Q Good, thanks. Referring to your rebuttal
10 testimony, Exhibit No. 13, schedule 7, page 3 --
11 MR. WOODBURY: I would like to first
12 indicate while you're looking up that, I have reviewed
13 Mr. Hanley's testimony with respect to Micron, and he
14 only addresses a potential Micron adjustment in his
15 direct testimony in an assessment of risk. That occurred
16 I believe on page 11 of his direct, and Staff has no
17 intention to move to strike that.
18 COMMISSIONER NELSON: Thank you.
19 Q BY MR. WOODBURY: Are you at that page?
20 A I am, sir, yes.
21 Q May I ask you what is the Standard and
22 Poor's bench mark on total debt to total capital
23 percentage for an A-rated water utility in an average
24 business position level of four?
25 A 52 percent.
784
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q And what is the debt ratio shown for an
2 A-rated water utility in an average business position
3 level of three?
4 A 53 percent.
5 Q On Exhibit 13, schedule 1, page 2 --
6 A Yes, sir.
7 Q -- isn't it true that both United
8 Waterworks and United Water Resources Inc. show a
9 business profile of three?
10 A No. I think it's -- I think it's four,
11 which is average.
12 Q Are you looking at schedule 1, page 2 of 2?
13 A Are you talking about the business
14 position?
15 Q Business profile.
16 A You said three.
17 Q Business profile, I said three, and that's
18 what appears on my sheet, your exhibit, Exhibit 13,
19 schedule 1, page 2 of 2. Do you have a --
20 A Yes, I'm looking. Just bear with me a
21 moment, please.
22 Q Okay. The top of that schedule is credit
23 profiles for January 20, 1998.
24 A Yes.
25 Q Okay. Is it three that's reflected or
785
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 four?
2 A That shows three, yes.
3 Q Isn't it accurate also to state that your
4 revised debt cost rate of 7.8 percent is the same as
5 calculated by Staff witness Carlock?
6 A Well, it turns out by coincidence that it's
7 the same, but Ms. Carlock did not reflect all of the
8 issues that have occurred subsequent to the end of the
9 test year, but the end result is diminimus. It averaged
10 out to 7.80, but I reflected all of the issuances.
11 Q Your 7.8 percent is a better 7.8 percent
12 than hers?
13 A Yes, sir, that's right.
14 MR. WOODBURY: Mr. Chairman, I have no
15 further questions.
16 Thank you, Mr. Hanley.
17 COMMISSIONER NELSON: Thank you. Questions
18 from the Commission?
19 Mr. Hanley, thank you for your testimony.
20 MR. HILL: No redirect.
21 COMMISSIONER NELSON: Okay. Thank you.
22 MR. HILL: Mr. Chairman, I guess I'd ask at
23 this point if Mr. Hanley could be excused.
24 COMMISSIONER NELSON: If there's no
25 objection, Mr. Hanley's excused.
786
CSB REPORTING HANLEY (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 MR. HILL: Thank you.
2 (The witness left the stand.)
3 MR. MILLER: All right. Thank you,
4 Mr. Chairman.
5 COMMISSIONER NELSON: We're ready for your
6 next witness.
7 MR. MILLER: Very good. We would call
8 Daniel Brown.
9
10 DANIEL BROWN,
11 produced as a rebuttal witness at the instance of United
12 Water Idaho, having been previously duly sworn, resumed
13 the stand and was further examined and testified as
14 follows:
15
16 DIRECT EXAMINATION
17
18 BY MR. MILLER:
19 Q Sir, would you state your name, please?
20 A Daniel Brown.
21 Q Are you the same Daniel Brown that
22 testified yesterday in the direct phase of the Company's
23 case?
24 A Yes, I am.
25 Q In connection with this proceeding, have
787
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 you had occasion to prepare rebuttal testimony consisting
2 of six pages?
3 A Yes, I have.
4 Q Before we go to the exhibits, are there any
5 additions or corrections that should be made to the
6 rebuttal testimony?
7 A Yes. On page 2, line 23, it should read
8 "Duncan's Landing." And on page 3, line 3, the "1.44"
9 should be "2.00."
10 Q And what's the reason for that change?
11 A Just a clerical mistake.
12 Q Now, are there exhibits that accompany your
13 testimony?
14 A Yes, there are three exhibits, 17, 18, and
15 19.
16 MR. MILLER: Could I approach the witness,
17 Mr. Chairman?
18 COMMISSIONER NELSON: Yes.
19 (Mr. Miller approached the witness.)
20 Q BY MR. MILLER: Accompanying your rebuttal
21 testimony was an Exhibit 19, which was an unsigned letter
22 from I believe John Chapman of Micron Technology?
23 A That is correct.
24 Q Have I handed you a corrected Exhibit 19?
25 A Yes.
788
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q And what is that?
2 A This exhibit reflects the same -- basically
3 the same letter with having been signed by the
4 representative of Micron, Mr. John Chapman.
5 Q Does corrected Exhibit 19 contain one
6 sentence at the bottom that wasn't included in
7 Exhibit 19?
8 A Yes. There was a modification, that is
9 correct.
10 Q What's the purpose of that modification?
11 A Just to indicate that Micron is not bound
12 to use exactly this amount of water or that if their
13 requirements exceed this amount, that they could demand
14 more from United Water.
15 MR. MILLER: All right. With that,
16 Mr. Chairman, we would ask that the direct rebuttal
17 testimony of Mr. Daniel Brown be --
18 Q BY MR. MILLER: Oh, let me ask you this.
19 If I asked you the questions that are set forth in your
20 rebuttal testimony today, would your answers be the same?
21 A Yes.
22 Q To the best of your knowledge, are they
23 true and correct?
24 A Yes.
25 MR. MILLER: Mr. Chairman, we would ask
789
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 that the rebuttal testimony of Mr. Brown be spread on the
2 record as if read and that exhibits -- and that the
3 accompanying exhibits be marked.
4 MR. WOODBURY: Mr. Chairman.
5 COMMISSIONER NELSON: Mr. Woodbury.
6 MR. WOODBURY: At this time Staff would
7 renew its objection and motion to strike from Mr. Brown's
8 testimony starting on page 6, lines 3 through 20 and
9 Exhibit 18 and corrected Exhibit 19 for reasons discussed
10 earlier.
11 Also, Staff would indicate in looking at
12 the United Water corrected Exhibit Number 19, we are
13 talking about a commitment on the part of Micron for 12
14 to 24 months, and yet then they qualify that by saying,
15 "These estimates are not binding on Micron Technology as
16 future conditions may cause changes in your water
17 demands," and I would suggest that this is not a known
18 and measurable change. If this were to have occurred in
19 the test year, this would not have been -- it would be
20 viewed as an anomaly, and so Staff would renew its motion
21 to strike and would indicate that the opportunity to
22 present surrebuttal is meaningless in this particular
23 case and we feel that the adjustment is inappropriate.
24 COMMISSIONER NELSON: Why don't we take a
25 ten-minute break, and during that time, the Commission
790
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 will have a chance to discuss the objection.
2 Did you want to respond to that before
3 we --
4 MR. MILLER: Well, I'd just like to ask one
5 question in support of our opposition to the motion.
6 COMMISSIONER NELSON: All right.
7 MR. MILLER: Well, let's see. Actually,
8 this will -- the difficulty is that the whole of the
9 testimony on this issue is split between Mr. Brown's
10 testimony and Mr. Healy's rebuttal testimony, so for the
11 Commission to get a full picture of what is involved and
12 what the underlying facts are, you really have to look at
13 both sets of testimony, and I'm just trying to think of a
14 suggestion.
15 COMMISSIONER NELSON: Can you direct us to
16 the part of Mr. Healy's testimony that deals with this?
17 MR. MILLER: Certainly. It would be
18 page 29 starting at line 20 and Exhibit 29. And I guess
19 what I'm trying to -- would like to suggest is that --
20 MR. WOODBURY: Mr. Chairman, for the
21 record --
22 MR. MILLER: May I finish?
23 MR. WOODBURY: Sure, but for a direct cite
24 as to the page numbers, it does start at line 20 on page
25 29, but it goes through line 25 on page 30 of Mr. Healy's
791
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 testimony.
2 MR. MILLER: What I'm trying to think of is
3 a procedural way that we could get this before the
4 Commission and let the Commission see what's involved and
5 then the Commission make a determination if there's
6 enough information before the Commission to reject or
7 accept the adjustment or if it's -- if there are other
8 adequate opportunities to give the parties an opportunity
9 to respond or if the Commission, after examining it in
10 full, believes that the adjustment comes too late, then
11 that's what the Commission decides. All we'd like is
12 adequate opportunity to get this before the Commission
13 for its consideration.
14 COMMISSIONER NELSON: Thank you. Okay.
15 Let's take a break.
16 MR. MILLER: So if it would come in subject
17 to a later ruling on a motion to strike or some
18 opportunity for us to at least get it before the
19 Commission and let you make a decision.
20 COMMISSIONER NELSON: Okay.
21 (Recess taken.)
22 COMMISSIONER NELSON: Okay. We'll go back
23 on the record. During the break, the Commission had a
24 chance to consider Mr. Woodbury's motion and agrees that
25 this information was filed too late for the other parties
792
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 to have an appropriate chance to respond.
2 We think that one way and the way that
3 we'll handle this is that on this one issue, we'll allow
4 the applicant to bring this back and make it part of the
5 rate design phase when you have hopefully better
6 information as to actual usage and we'll address it at
7 that time. So as to those portions of Mr. Brown's
8 testimony and Mr. Healy's testimony that we discussed, we
9 will strike that testimony.
10 MR. MILLER: All right. Thank you,
11 Mr. Chairman. I take it implicit in the Commission's
12 ruling and would be confirmed subsequently in an order is
13 that when included in the subsequent rate design
14 proceeding, which was not intended to be a revenue
15 requirement proceeding, that rates could change in that
16 proceeding to reflect this adjustment if the Commission
17 finds it appropriate.
18 COMMISSIONER NELSON: That's correct. We
19 felt that this amount of possible change in revenue was
20 not going to be enough to change rates in any significant
21 proportion, and so we could deal with it at that time.
22 MR. MILLER: All right. Let's see. Then
23 the witness is available for cross-examination.
24 COMMISSIONER NELSON: All right. Then we
25 will order the balance of Mr. Brown's testimony and mark
793
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 the exhibits identified.
2 (The following prefiled rebuttal
3 testimony of Daniel Brown is spread upon the record.)
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
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24
25
794
CSB REPORTING BROWN (Di-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q Please state your name and business
2 address.
3 A Daniel Brown, 8248 W. Victory Road, Boise,
4 Idaho, 83709.
5 Q Are you the same Daniel Brown who sponsored
6 direct testimony in this case?
7 A Yes, I am.
8 Q What is the scope of your rebuttal
9 testimony?
10 A My rebuttal testimony will address the
11 following items: maximum day demands versus supply for
12 the main service level, the alleged assurances made to
13 the City of Boise regarding rate base treatment of the
14 River Intake Project and the Micron adjustment.
15 Q Do you concur with Staff witness Lobb's
16 assessment of the Main Service Level source of supply
17 capacity versus maximum day demand for the period of 1993
18 through 1999.
19 A Not entirely. I agree with Mr. Lobb's
20 historic maximum day figures shown in his Exhibit
21 No. 107; however, our records indicate different
22 capacities for the source of supply data and the 1998 and
23 1999 maximum day demands. We also disagree with the
24 implications these numbers generate. Mr. Lobb states on
25 page 11, lines 10 through 12, "Deficiencies have grown as
795
Brown, Reb 1
United Water Idaho Inc.
1 high as 9 in 1994 and 7.6 in 1996 but are currently less
2 than 4 MGD." Our data differs with the 1994 deficiency
3 at 7.02 MGD, 1996 at 6.07 and 1997 at 6.37 MGD. To state
4 that the company need not look to improve its source
5 capacity due to this apparent reduction in deficiency for
6 1997 loses sight of the fact that all of the ingredients
7 leading to the major peak of 1994 are still in place. If
8 1997 demands had been similar to 1994, the deficiency
9 would have been between 7 and 8 MGD,
10
11 /
12
13 /
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15 /
16
17
18
19
20
21
22
23
24
25
796
Brown, Reb 1A
United Water Idaho Inc.
1 essentially the same as 1994. System design and planning
2 have to take into account major peaks, such as 1994. The
3 Company forecasts future maximum day demands based upon
4 the previous peak demands, making adjustments as
5 necessary to reflect growth and other factors, such as
6 conservation. With the inclusion of the 2.0 from the
7 Floating Feather/Redwood Creek Project, the deficiency
8 after the Marden Plant expansion in 1999 becomes 0.21
9 MGD.
10 The major differences we have with Mr. Lobb's
11 source of supply analysis for the Main Service Level, for
12 the years 1997 through 1999, are in regard to the Swift
13 Well #1, the 27th Street Well, the additional purchase of
14 water from Garden City, Duncan's Landing and the Floating
15 Feather/Redwood Creek supply. Mr. Lobb lists Swift Well
16 #1 in his source of supply analysis for 1997 through
17 1999. The Company does not include this source as the
18 water quality is very poor and, in 1997, a replacement
19 well was drilled, Swift Well #3. Swift #1 would be
20 available for use only in emergency conditions and is
21 therefore not listed for planning purposes. This site is
22 also the subject of an Aquifer Storage and Recovery pilot
23 project (ASR) which is intended to determine the
24 feasibility of storing high quality water in the Swift #1
25 aquifer during the off-season and pumping it to the
797
Brown, Reb 2
United Water Idaho Inc.
1 system during the peak demand period.
2 Mr. Lobb includes 0.50 from the 27th Street Well
3 in 1997. This source was not available during peak
4 season and should not be listed for 1997. The
5 "additional purchase" of water from Garden City, 1.3
6 MGD, is listed for 1999. The contract indicates this
7 supply is for 1997 and 1998 only, and thus should not be
8 included for 1999. Duncan's Landing is listed at 0.50
9 for 1997 through 1999.
10
11 /
12
13 /
14
15 /
16
17
18
19
20
21
22
23
24
25
798
Brown, Reb 2A
United Water Idaho Inc.
1 This is an isolated subdivision from the balance of the
2 Main Service Level and therefore should not be included
3 in this analysis. Mr. Lobb also omits the inclusion of
4 the Floating Feather/Redwood Creek supply at 2.00 for the
5 years 1998 through 1999.
6 Mr. Lobb's Attachment 4 to his response to
7 Interrogatory No. 23 reflects correct data for 1997, with
8 the exception of the above mentioned modifications. He
9 makes an assumption that these supply capacities are
10 constant and can also be applied for the years 1993
11 through 1996. In reality, well capacities typically
12 change somewhat every year. This may be due to equipment
13 wear and replacement, aquifer conditions and well
14 efficiencies. Exhibit 17 reflects data taken from peak
15 season operations for the Main Service Level sources for
16 the years 1993 through 1997. The data indicates the
17 actual production capabilities of these sources.
18 Q Discuss the basis for the Company's
19 decision to proceed with the Northwest Pipeline project.
20 A Our initial plan to add source of supply
21 capacity to the westerly portion of the Main Service
22 Level was the State Street Well project coupled with the
23 Sloan to Highway 55 main line project. The budgeted
24 amount for these two projects were $360,000 and $650,000,
25 respectively. A 1,000 foot deep test well was drilled
799
Brown, Reb 3
United Water Idaho Inc.
1 to explore for the production well design. Two
2 productive zones were discovered at depths less than 300
3 feet. The anticipated individual capacity of these zones
4 was estimated at 250 gpm or less, for a total of about
5 0.50 - 0.75 from the site. This would have resulted in a
6 cost of $1,350,000 to $2,020,000 per MGD. It was
7
8 /
9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
800
Brown, Reb 3A
United Water Idaho Inc.
1 concluded that making a similar expenditure by tying into
2 the Floating Feather system, but with a known capacity
3 (2.0 MGD), was a much better solution. Taking Mr. Lobb's
4 number for the total expenditure associated with this
5 project of $1,800,000 results in an average cost of
6 $900,000 per MGD. This cost is less than the cost for
7 the expanded Marden Water Treatment Plant of
8 approximately $1,250,000 per MGD and much less than the
9 cost of drilling wells, which would have provided a less
10 reliable source.
11 Q Staff Exhibit No. 110 is a copy of an
12 interdepartmental correspondence from Mr. Carl Ellsworth
13 of the Public Works Department and Mr. Bill King of Boise
14 City Planning. It reports that the Boise Public Works
15 Department staff had discussed and met with
16 representatives of UWID and others. Did you attend
17 various meetings with the Boise City Public Works
18 Department and other entities such as Surprise Valley
19 Partnership, J.R. Simplot Company, and Micron Technology?
20 A Yes. I recall attending an on-site meeting
21 with representatives of those entities listed.
22 Q Do you recall a conversation with
23 Mr. Ellsworth concerning this project?
24 A I don't recall any specific conversations
25 with Mr. Ellsworth. He may have very well been involved
801
Brown, Reb 4
United Water Idaho Inc.
1 in the general discussions of the overall project.
2 Q Do you recall communicating to Mr.
3 Ellsworth any commitment concerning whether the River
4 Diversion Project would or would not be requested to be
5 included in rate base?
6 A No. I don't recall discussing this subject
7 with Mr. Ellsworth or anyone else at this on site
8 meeting.
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
802
Brown, Reb 4A
United Water Idaho Inc.
1 Q Do you recall any discussions or
2 indications from Mr. Ellsworth or anyone from the Boise
3 City Public Works Department that their approval of this
4 project in any way was contingent upon whether or not
5 inclusion of this project in rate base would or would not
6 be requested?
7 A No.
8 Q If you were asked for such a commitment, do
9 you or did you have authority to make such a commitment?
10 A No, and if asked for such a commitment, I
11 am sure I would have relayed this lack of authority to
12 them.
13 Q Did you ever receive any indication at any
14 point in the project that the Boise City Public Works
15 Department was not going to approve this project if the
16 Company intended to request it be included in rate base
17 prior to a treatment plant actually being built?
18 A No.
19 Q Are there any circumstances that might have
20 contributed to misunderstanding regarding this issue?
21 A Possibly. At the time we were engaged in
22 this phase of the Boise River Intake Project, the Company
23 had a rate case pending before this Commission. It is
24 quite likely I told Boise City representatives that the
25 Company would not seek to include the investment in the
803
Brown, Reb 5
United Water Idaho Inc.
1 rate base that was then pending, which, of course, we did
2 not. As noted, I do not have authority to make
3 commitments for the Company regarding future rate cases
4 and did not make any such commitments.
5
6 /
7
8 /
9
10 /
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
804
Brown, Reb 5A
United Water Idaho Inc.
1 It seems possible, however, that comments regarding the
2 then pending case may have been given a broader meaning
3 than intended.
4 (Testimony stricken, page 6, lines
5 3-20.)
6
7 /
8
9 /
10
11 /
12
13 /
14
15 /
16
17 /
18
19 /
20
21 /
22
23 /
24
25 /
805
Brown, Reb 6
United Water Idaho Inc.
1 /
2
3 /
4
5 /
6 Q Does this conclude your rebuttal testimony?
7 A Yes it does.
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
806
Brown, Reb 6A
United Water Idaho Inc.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER NELSON: We'll go to
4 Ms. Ullman, if you have questions.
5 MS. ULLMAN: I have no questions.
6 COMMISSIONER NELSON: You have no
7 questions.
8 Mr. Woodbury, do you have questions of
9 Mr. Brown?
10 MR. WOODBURY: Yes, I do.
11
12 CROSS-EXAMINATION
13
14 BY MR. WOODBURY:
15 Q Mr. Brown, how are you?
16 A Good.
17 Q May I refer you to your rebuttal
18 Exhibit 17, and I have a question regarding the '95 and
19 '96 demand. The first question is the peak day demand
20 in 19 -- are you there?
21 A Yes.
22 Q The peak day demand in 1997 is an estimate
23 based on a 1994 per customer demand, is it not?
24 A 1997?
25 Q Yes.
807
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 A I believe that's an actual demand.
2 Q That's an actual? It's not extrapolated
3 1994?
4 A I don't believe so.
5 Q Okay. And '98 and '99, how are those
6 computed?
7 A Those were based upon the 1994 peak demand
8 rate with minor adjustment for projections on water
9 conservation.
10 Q And '95 and '96 are actuals also, then?
11 A That is correct.
12 Q Okay. You indicate in your Exhibit 17 that
13 the Broadway well, which had a capacity of 1.77 million
14 gallons per day in 1997, falls to 1.3 million gallons per
15 day in 1998 and '99. That's a decline of almost 30
16 percent. Has this decline been documented in peak day
17 1998?
18 A Well, certainly it isn't documented in peak
19 day of 1998 because that occurs in July.
20 Q Then is it the Company's position that this
21 capacity can never be restored?
22 A We have had a -- we have experienced
23 declining capacity at Broadway over the last several
24 years and numerous problems in drawdown and the
25 production capacity for this well, and as a result, we
808
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 have redesigned the pump. We this year are installing a
2 new pump in the well, which is at this 1.3 MGD capacity.
3 Q Referring you to your rebuttal testimony
4 page 2, you state that system design and planning have to
5 take into account major peaks and adjustments as
6 necessary to reflect growth and other factors such as
7 conservation. Could you please describe the Company's
8 water conservation programs?
9 A As I'm not actively involved in the
10 conservation program, I can only speak from my
11 observation of the program where we have customer
12 assistance programs where we provide information for
13 landscaping, we have the water audit program where we
14 have representatives go to individual homes and evaluate
15 their irrigation systems. And beyond that, I really
16 can't speak.
17 Q When the Company feels that it is reaching
18 deficiency peak, I remember in the past that we'd get
19 announcements from the mayor and the Company,
20 alternate-day sprinkling. And how does that play into
21 the Company's decision process? When does it make that
22 request of its customers?
23 A From my experience, I have probably seen
24 the Company go to the public, go on TV, radio -- I'm just
25 speaking from memory -- maybe three or four times, and
809
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 that is when water tanks are very low and the levels in
2 the water tanks are continuing to decline. That is about
3 the only time that we have in my experience requested the
4 public to cease watering and those things.
5 Q And most recently, when did that occur?
6 A I can't say.
7 Q Did that occur in 1994 when you reached
8 your peak then?
9 A It may very well have been in 1994, but I
10 can't speak to that with certainty.
11 Q Nothing since then?
12 A Not that I'm aware of.
13 Q And do you recall in 1994 what effect this
14 request put out to your customers had with respect to the
15 demand and the supply?
16 A Again, I can't say exactly that it was
17 1994, but generally speaking, the customers are
18 responsive, we see a recovery in the water levels in the
19 water tanks, we're able to catch back up basically. And
20 one of the key reasons we do this -- certainly we want to
21 maintain pressure to the customers so they have water for
22 domestic needs, but one of the key reasons is to retain
23 sufficient water in the water storage tanks for fire
24 protection, so one of our objectives is to recover and
25 maintain that capacity in our storage systems.
810
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q Are you familiar with the irrigation or
2 sprinkling practices of Boise as far as turf, Boise
3 customers generally?
4 A I'm not sure what your question is.
5 Q The question is -- well, let me ask you, do
6 you have any lawn where you live? Are you a United Water
7 customer?
8 A I'm right now in an apartment.
9 Q Good answer. Well, those of us that have
10 lawns, are you familiar at all with the proper watering
11 recommendation for turf in Boise? What does the
12 Company -- if a customer were to call up and say how
13 often should I water my lawn, what does the Company
14 respond?
15 A Well, that's not an obvious answer.
16 Certainly there are many complicating factors. What time
17 of the year are we talking about? Are we talking about
18 July?
19 Q We're talking about July, August.
20 A Generally speaking, we are looking at, from
21 what I recall, evapotranspiration rates somewhere in the
22 range of about a quarter of an inch a day, as I recall,
23 so it requires -- what we really don't want to see,
24 generally speaking, are customers who water every day for
25 a small amount of water because it promotes a shallow
811
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 root system and, thereby, when it does get hot, the grass
2 dries, dies quicker, so we are -- we want to see
3 customers irrigate every other day or every third day and
4 irrigate generally deeper. But again, this is not my
5 area of expertise, and I'm speaking just from a casual
6 perspective of that program that we promote.
7 Q What is the best time of day to water a
8 lawn?
9 A Certainly it is best to irrigate in the
10 cooler time of the day, which would be early morning.
11 There's some question about irrigating at night or late
12 like between 11:00 and 3:00 in the morning. There's some
13 concerns about the promotion of disease in the lawn. I
14 really have heard that. I don't know if that's true.
15 But generally speaking, what we see in experience is that
16 around 3 o'clock in the morning is when the majority of
17 the sprinkling systems or a large quantity of sprinkling
18 systems initiate.
19 Q Certainly you don't want your customers to
20 be watering every day. You say every other day or every
21 third day, but as part of -- did the Company participate
22 in a conservation program recently this spring at -- I
23 think they took place in the evenings at Idaho Power
24 Company.
25 A I believe so.
812
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q And do you know whether experts were
2 brought in indicating that the proper type of watering
3 for July-August is essentially deep watering once a week?
4 A As I said, this is certainly not my area of
5 expertise and I did not attend that program.
6 Q You're not aware of whether the materials
7 that you send out to your customers as bill stuffers make
8 that recommendation?
9 A I'm not in that department. I don't know
10 what we've sent out.
11 Q With respect to Staff Production Request
12 No. 22, do you recall whether the Company listed the
13 Swift well No. 1 at 1.44 million gallons per day as a
14 source of supply in the main service level west of 36th
15 Street?
16 MR. MILLER: Do you have that with you? Do
17 you need to look at it?
18 THE WITNESS: Yes, I do.
19 Q BY MR. WOODBURY: Did the Company list
20 Swift well No. 1?
21 A Which one was that again?
22 Q Production Request No. 22.
23 A 22. Yes, it was listed, and it should have
24 been noted that it was to be held in reserve for
25 emergency conditions.
813
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q It should have been noted. Was it noted?
2 A No, it was not, but it should have been.
3 Q What is emergency conditions? Is there
4 a -- have you got a definition that United Water uses as
5 far as what emergency is?
6 A I would say when we are in a position where
7 we need to be notifying our customers to restrict water
8 usage.
9 Q So this was like -- the last time this
10 occurred maybe was 1994?
11 A That would be the characteristics of the
12 operation that I would say that would be when we are
13 simply nearing a point where we are unable to deliver
14 pressure to the system.
15 Q So emergency situation is a situation where
16 you're asking the customers to curtail their usage?
17 A I would consider that emergency condition.
18 Q And is that a reasonable response of the
19 Company to conditions of supply deficiency?
20 A Well, I believe this gets back to the
21 question again that we've debated through this case, a
22 question of water quality and some of the subjective
23 aesthetic qualities of Swift well No. 1. For instance,
24 the manganese level, which manganese is the --
25 Q No. Excuse me.
814
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 MR. MILLER: Let him complete his answer,
2 please.
3 MR. WOODBURY: But the answer is
4 unresponsive to the question.
5 MR. MILLER: Well, make that objection
6 rather than interrupt him.
7 MR. WOODBURY: I make the objection that
8 the answer is unresponsive to the question.
9 COMMISSIONER NELSON: Just a second.
10 Mr. Brown, why don't you go ahead and finish your answer
11 to this question.
12 THE WITNESS: The direction I was going was
13 that the water quality of this well is basically nineteen
14 times the aesthetic standard or recommended contaminant
15 level for manganese. And when that water is pumped into
16 the system, we get instantaneous water quality calls. We
17 do not want to use this water until it is the last
18 resort.
19 Q BY MR. WOODBURY: Okay. That's your
20 answer?
21 A You'd have to repeat the question to know
22 if I have not --
23 Q My question was whether asking customers to
24 curtail usage is an appropriate way of the Company
25 responding to deficiencies in supply, and you responded
815
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 with a discussion of the water quality of Swift No. 1.
2 Do you think that your answer was responsive to my
3 question?
4 A Not specifically, no.
5 Q What is the answer to my question?
6 A This is an ultimate -- asking the customers
7 to curtail usage is the ultimate response. When we have
8 done everything we can to increase our capacity to
9 deliver as much water as possible and we cannot keep up
10 with that demand, the only solution that you have at that
11 point is to reduce the demand.
12 Q Okay. And do you recall in '94 for how
13 long a period that emergency existed?
14 A Again, I can't say for sure that it
15 happened in 1994, but the last time I recall this
16 occurred, it was for a two- to three-day period, I
17 believe.
18 Q Prior to 1997, though, getting back to -- I
19 guess I'm moving through your rebuttal testimony and your
20 discussion of Staff's supply analysis, and the first
21 issue that you did discuss was Swift well No. 1. You
22 would agree, though, that prior to 1997, that well was
23 operated routinely to meet summer peaks?
24 A Yes, it was.
25 Q And that you could have operated that well
816
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 during 1997 peak period but elected not to?
2 A That is correct.
3 Q It's my understanding that you're going to
4 be using the Swift well No. 1 as an aquifer storage
5 recovery pilot site?
6 A That is correct.
7 Q And when would -- when would that -- has
8 that program already started?
9 A We are working on the permitting, certain
10 preliminary design. Most of that activity will happen
11 during 1998 with the actual -- we anticipate the actual
12 physical work to take place in 1999.
13 Q And it's my understanding that it's the
14 Company's hope, I guess, that implementation of such a
15 program will help ameliorate water quality problems which
16 the Swift well has, Swift well No. 1?
17 A That is correct. What --
18 Q Well, wasn't it your testimony that you
19 expect to make the water much better quality?
20 A Well, I think what I would like to do is
21 just explain a little bit what the ASR is intended to do.
22 Q Okay.
23 A The aquifer storage and recovery project is
24 one in which the pristine or high quality water is
25 injected into the aquifer. And tests -- and this is a
817
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 common practice in Florida and other states where the
2 high quality water is injected into the aquifer, and then
3 it is able to be pumped out of the aquifer during demand
4 periods.
5 And what we find or what has been found is
6 that about in the 90 percent range of the original water
7 and water quality is able to be pumped out of the well
8 during those periods, so in essence what's happening is
9 we're pumping a bubble of high quality water, and then in
10 the summertime, we just pump that bubble back up.
11 And what we experience generally is during
12 the July and August -- between maybe the middle of June
13 to the middle of September, we see demands that are
14 somewhere in the range of 30 percent higher during this
15 peak demand period, and that is the period where this
16 well would be made available to pump that water back
17 out.
18 The major objective of this is to take
19 advantage of existing facilities and our ability to meet
20 those peaks with those existing facilities in the area
21 where they are located. And we certainly do hope that
22 that is a successful project. We feel that would be very
23 good for the customers.
24 Q And again, when do you expect that that
25 will be fully operational?
818
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 A I would not anticipate that to be
2 operational before probably the summer of the year 2000.
3 Q Moving to the 27th Street well which you
4 cover on rebuttal also at page 2, Staff had included 0.50
5 million gallons per day for 1997, and you responded that
6 this source was not available during the peak season of
7 '97. Will it be available to meet peak demand in 1998?
8 A Yes, it will.
9 Q Moving to the Garden City purchase, does
10 the Company's water purchase agreement with Garden City
11 allow the purchase of extra capacity during peak period
12 if the city has surplus capacity available?
13 A Yes.
14 Q Did the Company request additional capacity
15 from Garden City in 1997?
16 A What we found in 1997 -- to answer your
17 question, I'm not sure.
18 Q You're not sure?
19 A But what we found was there were
20 limitations on the ability of Garden City to deliver the
21 quantity of water that we had planned in the contract, so
22 whether we had asked for additional quantity or not, it
23 didn't appear that they were able to deliver.
24 Q Would the request for additional capacity
25 come from you or somebody else in the Company?
819
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 A That would come from the operations side of
2 the Company, which --
3 Q Which would be who?
4 A Generally speaking, that would be Ben
5 Hepler.
6 Q Ben Hepler, okay. But you're unaware as to
7 whether or not the Company made a request for water,
8 additional water in 1997?
9 A No, I'm not.
10 Q Does the Garden City water purchase
11 contract contain provisions for extension?
12 A I believe it does.
13 Q And has the Company requested an extension?
14 A I don't believe so.
15 Q But the contract itself indicates that the
16 supply is for '97 and '98 only, as you indicate, right?
17 A For the -- I believe for the 1.3 million
18 gallons per day.
19 Q Yes.
20 A That is correct.
21 Q You also have a contract with Garden City
22 for an additional 0.50 million gallons per day related to
23 Duncan's Landing?
24 A I believe that is correct.
25 Q And did the Company use any of that --
820
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Duncan's Landing, what's the status of that development?
2 A That subdivision is just now getting under
3 way. I'm not sure if we are actually constructing the
4 water mains yet, but I do know that it's in that
5 preliminary stage for construction. I would anticipate
6 construction during 1998.
7 Q But there is an existing contract with
8 Garden City for supply?
9 A For a delivery point at Duncan's Landing.
10 Q And the term of that contract, do you know,
11 is for how long?
12 A I'm not aware.
13 Q Would you accept, subject to check, maybe
14 '97 through '99?
15 A Sure.
16 Q Okay. And the Company didn't use that
17 capacity last year. Did the Company request that that
18 unused capacity be used to meet part of their 1997 peak
19 demand?
20 A The only location where we have the ability
21 to take water from Garden City is at the location that I
22 mentioned earlier that we -- I believe we were unable to
23 get the full amount of the contractual flow from Garden
24 City during 1997, so had we asked for another half
25 million gallons to be delivered at that point, we do not
821
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 believe they would have been able to deliver that. And,
2 in fact, the Duncan's Landing delivery point is at the
3 Duncan's Landing subdivision.
4 Q And I understand that. Wasn't the
5 interconnection, though, with United Water's system
6 upgraded as part of that Garden City exchange in the
7 North State area improvement?
8 A It certainly was.
9 Q And are you indicating that the connection
10 will not hold the amount of water that you're otherwise
11 entitled to?
12 A The connection that we have made with
13 Garden City, the water main and distribution system north
14 of State Street is capable of receiving certainly the
15 amount of water that is requested within the contract.
16 Garden City was unable to deliver that water to it.
17 Q This inability of Garden City, when did
18 Garden City's inability manifest?
19 A During peak season of last year.
20 Q All during the season?
21 A Subject to getting the exact data, I'm
22 speaking from --
23 Q Are we speaking of maybe just one day?
24 A Oh, no, certainly not. The majority of the
25 peak season.
822
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q The majority of the peak season, which is
2 what period?
3 A From May through September.
4 Q May through September. And was this a
5 default under the contract that you have with Garden
6 City?
7 A It is.
8 Q And did you take efforts to attempt to cure
9 that or secure specific performance under the contract?
10 A Again, that is an area that is not within
11 my area of the operation.
12 Q But your area is supply, especially peak
13 demand, and you're looking at all of your suppliers, and
14 Garden City being one of them.
15 A My responsibility regarding that project
16 was the construction of the interties and all along the
17 United Water site of this project.
18 Q Did Mr. Hepler represent to you that we are
19 unable to obtain the water that we're otherwise entitled
20 to under the Garden City contract?
21 A I was aware that we were having
22 difficulties receiving the water. I don't know that it
23 was Mr. Hepler. I simply am not in a position to speak
24 with authority on those matters.
25 Q Aren't your entitlements to water from the
823
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Garden City contract, as I recall that particular case --
2 I mean, this was good-priced water, and as far as Company
3 supply, really, you couldn't put in alternate type of a
4 supply source and receive water for that price.
5 A It was a good rate.
6 Q And it would have been in the Company's
7 advantage, then, to pursue specific enforcements of
8 rights under that contract.
9 A You would have to speak to the management
10 regarding that. That's out of my area.
11 Q Will there be a rebuttal witness that would
12 have better knowledge coming up?
13 A Yes.
14 Q Who?
15 A Mr. Linam.
16 Q Linam.
17 A Or Mr. Healy.
18 Q Healy. On page 3 of your rebuttal, you
19 state that Staff assumes that supply capacities are
20 constant, and in reality, well capacities typically
21 change somewhat every year. How does the Company plan
22 for this capacity variability? How is that reflected in
23 your exhibit, if at all?
24 A Well, I believe that by experience, we know
25 that they will change on a year-by-year basis. How much
824
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 each well will change going one, two, three years into
2 the future is basically speculation. We do our best
3 to -- as one well declines, we perhaps will replace a
4 pump in another well that will make up capacity.
5 I think you'll see, if you look back on
6 those capacities that are in that exhibit, that some go
7 up, some go down as we may rehabilitate a well, replace a
8 pump. So generally speaking, we plan that our source of
9 supply capacity will remain constant --
10 Q And so you --
11 A -- going into the future, but we --
12 COMMISSIONER NELSON: Mr. Woodbury, let Mr.
13 Brown answer the question.
14 THE WITNESS: But we know looking back that
15 that was not the case in the past.
16 Q BY MR. WOODBURY: Well, then, your
17 assumption that supply capacities will remain constant is
18 the same assumption that Staff made?
19 A Not at all. We have actual data to know
20 what it was in the past. We can only speculate what it
21 will be in the future. We cannot -- we don't know when a
22 pump may need to be replaced in 1999 or to the year
23 2000. At this point in time, the best we can do is to
24 assume that those capacities will remain constant in the
25 future.
825
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q Going forward?
2 A Going forward. Going back, we know that
3 that is not the case.
4 Q Of course. We can correct for that.
5 Well, even looking backwards, looking at
6 the historical figures I guess of production, is the
7 Company able to make any determination on a going forward
8 basis as to what percentage of its capacity is at risk?
9 Is that part of your analysis?
10 A What we have found is that, generally
11 speaking, our projects for redrills and pump replacements
12 have across the system had the effect of maintaining our
13 baseline source of supply, so on that basis, we plan that
14 the capacity on a well-by-well basis will remain constant
15 into the future.
16 Certainly we know that that is not going to
17 be the case, but we do not -- we can't look in our
18 crystal ball and know exactly which well is going to
19 decline 5 percent or which one will decline 8 percent or
20 which one will decline none at all.
21 Q Okay. Looking at your discussion on
22 page 3, I believe, you speak of the expanded Marden water
23 treatment plant and attach a cost to that of $1.25
24 million per million gallons; is that correct?
25 A It's on page 3 or -- I believe that's
826
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 page 4.
2 Q Page 3 of your rebuttal?
3 A Page 4.
4 Q Okay. I'm sorry. Isn't that the average
5 cost per million gallons for the entire plant after the
6 expansion?
7 A That is correct.
8 Q And the incremental cost of expanding
9 Marden by 8 million gallons is only 700,000 -- or 700,000
10 per million gallons?
11 A That would be correct from that
12 standpoint. However --
13 Q Well, did -- go ahead.
14 A However, there were facilities installed
15 with the original plant that were designed toward a 16
16 MGD capacity so that the total capacity dollars per
17 million gallons from the water treatment plant should
18 encompass the entire cost versus the capacity of the
19 plant.
20 Q And those costs are already included in
21 rates, aren't they?
22 A They are.
23 Q Yes.
24 A Well, not -- no, that's not true. There
25 was at least a half a million dollars that were not
827
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 included. I believe it was a half a million dollars.
2 Q The estimated cost of the expansion is $5.6
3 million?
4 A That is correct.
5 Q With respect to your Exhibit 110 -- wait a
6 minute -- the Carl Ellsworth memo, Staff's Exhibit 110,
7 that's a letter dated August 12th, 1996, or interoffice
8 memo dated then, correct?
9 A Yes, I believe that's true.
10 Q Do you have a copy in front of you?
11 A I -- yes, I believe I do. Just a moment.
12 Q You address this starting at page 4 running
13 through page 6 of your testimony in rebuttal, and you
14 state that you recall an on-site meeting. Where did that
15 meeting take place?
16 A It was on the westerly bank of the Boise
17 River at the new Highway 21 bridge.
18 Q Were you the only representative from
19 United Water there?
20 A Yes, I was.
21 Q And do you recall, this was -- this letter
22 was also revealed in the Company's documentation with
23 respect to the east Boise River diversion. Had you seen
24 that letter before when it came in to the Company?
25 A I do not recall seeing that letter.
828
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q Or memo. I'm sorry.
2 A That memo. At the time we were involved in
3 the approval process for the river intake, we received a
4 copy of this packet. And as with numerous conditional
5 use applications and planning and zoning applications
6 that we process from time to time, you look to see what
7 the conditions of approval were, and nowhere in the
8 conditions or recommended conditions for approval was
9 there any statement regarding rate base treatment of this
10 project. And all I can surmise is when we -- when it was
11 revealed that that was not -- that there was nothing
12 regarding that, that all the conditions were ones that we
13 could live with, we filed the packet away.
14 Q Are you indicating that you did not review
15 the packet of information or documentation that was filed
16 with you and you did not review that letter at that
17 point?
18 A I did not review that letter at that point.
19 Q Okay. In looking at your testimony on
20 page 4 and the top of page 5, I guess, you say I don't
21 recall any specific conversations, I don't recall
22 discussing rate basing, I don't recall discussions
23 regarding approval being contingent on deferred rate
24 base. You say that?
25 A Yes.
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Q And then yet as it goes on, "Are there any
2 circumstances," the question is, "that might have
3 contributed to a misunderstanding regarding this
4 information?"
5 And then all of a sudden, your memory
6 improves and you say, possibly, quite likely I told the
7 city this and it seems possible, however, that they might
8 have confused my statements. Do you have any direct
9 recollection of in fact the conversation that took place?
10 A The only thing that I surmised in reviewing
11 this information are two basic points. One is the letter
12 speaks of assurances made to the city. Had the context
13 of the conversation been one such that the city was
14 asking are you -- can you assure us that United Water
15 will not place this facility in rate base until it is
16 placed in operation, had the context of the conversation
17 been that, I would certainly have passed that on to
18 management for that response.
19 Number two, there was a case before the
20 Commission at that time. It may have been, as I say
21 here, that their question, assuming that question was
22 raised, was in regard to the current case, and my answer
23 then would have been, no, it wasn't, because I knew --
24 because it was not included in that case.
25 Q You don't have any independent memoranda or
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 notes regarding that meeting?
2 A We would have provided them had we had it.
3 Q I can't remember what I did in '96, and it
4 always mystifies me how the people in the senate hearings
5 can.
6 Isn't the Gowen service level currently an
7 exporter of water to all other service levels?
8 A In combination, the Gowen service level and
9 what we term Columbia for the purposes of most of the
10 discussion we've had here -- those have been combined --
11 do export water to other service levels.
12 Q Did the Company construct the southeast
13 Boise water supply project in order to bring supplies to
14 the Gowen service level?
15 A That was a portion of the reason for the
16 project, yes.
17 Q And in exchange for Micron's economic
18 participation in that pipeline project, didn't United
19 Water agree to forego pumping to the largest production
20 wells in the main service level?
21 A No.
22 Q Did you -- where are the -- where are the
23 Gowen well and Oregon Trail wells located?
24 A In the Gowen service level.
25 Q In the Gowen service level. Excuse me.
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Did you agree to forego production of those wells?
2 A That's in the contract.
3 Q And how large are those wells, the
4 capacity?
5 A Speaking from memory, the Gowen well was
6 approximately 1,300 gallons per minute and Oregon Trail
7 was approximately 600 gallons per minute.
8 Q So they've got a combined capacity of about
9 3 million gallons per day?
10 A Near 3 million gallons per day.
11 Q And do you recall that -- do you recall
12 execution of the agreement with Micron, southeast Boise
13 water supply project agreement?
14 A I recall the agreement.
15 Q You are -- actually, you're a signator to
16 that agreement?
17 A I may have attested.
18 Q Attestation?
19 A Yes.
20 Q The language on page 2 of that agreement
21 says, "The Company will cease production from the Gowen
22 well and the Oregon Trail well but will retain the
23 ability to use these wells as emergency backup supplies
24 under guidelines agreed to between the Company and
25 Micron."
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 Earlier in your testimony, you indicated
2 that an emergency exists when the Company is required to
3 curtail -- take efforts to curtail use by your
4 customers. And is that -- are we speaking of emergency
5 in that same context with respect to the southeast Boise
6 water supply project agreement?
7 MR. MILLER: Pardon me, Mr. Chairman. I'm
8 sure it's just a defect on my part due to the lateness of
9 the day, but I wonder if we could just get an indication
10 of what the relevance of this line of inquiry is.
11 MR. WOODBURY: The relevance of the line of
12 inquiry is to what sources of supply are available to the
13 Company during periods of emergency. We've indicated
14 that the Gowen Field level is essentially a supply
15 resource to the main service level. If the deficiencies
16 occur in the main service level, can the Company use the
17 Gowen well and the Oregon Trail well to try to apply
18 waters to meet that deficiency.
19 I think it's relevant. I want to know
20 actually under the southeast Boise water supply agreement
21 how the Company views its rights under that agreement to
22 exercise its access to those wells.
23 COMMISSIONER NELSON: Does Mr. Brown
24 address source of supply in an emergency or is he
25 addressing source of supply under normal conditions --
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 MR. WOODBURY: I think he addresses --
2 COMMISSIONER NELSON: -- in his rebuttal?
3 MR. WOODBURY: He addresses -- Mr. Brown is
4 the one that addresses source of supply under any
5 conditions, but certainly peak day conditions are -- and
6 we've already had discussion regarding emergency
7 conditions and as far as what is available to the Company
8 to meet that supply.
9 This was actually a line that Mr. Linam had
10 referred to Mr. Brown, and I thought that that was -- you
11 know, unless Mr. Brown wishes to pass the ball back to
12 Mr. Linam, but I think that Mr. Linam was not a signator
13 to the agreement, perhaps wasn't around when it was
14 negotiated in March of '95, and Mr. Brown would be the
15 better person to ask the question of.
16 MR. MILLER: Again, perhaps it's just lack
17 of understanding on my part. It does seem to me that
18 it's beyond the scope of the witness's testimony who
19 discussed supply in the main service level and not in
20 other areas.
21 And it also appears to me -- I had wanted
22 to raise this before, but there is in the Staff testimony
23 no testimony along the lines that is attempted to be
24 introduced in cross-examination. It's almost as if the
25 technical Staff has a case and the Attorney General's
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 office has a case, essentially a whole new case being
2 raised in cross-examination. And certainly some latitude
3 should be allowed, but it is kind of getting to the point
4 that it's troublesome.
5 COMMISSIONER NELSON: Mr. Woodbury, I
6 don't --
7 MR. WOODBURY: I think that the answer can
8 be short, you know. I don't have, you know, extensive
9 cross beyond this period, but what is at issue and the
10 need for the Northwest Pipeline and even the need for the
11 southeast Boise diversion project is increased demand and
12 need for supply.
13 We've had Mr. Brown's testimony and
14 exhibits talking about deficiencies occurring in all of
15 these periods. Mr. Lobb's testimony said the Company
16 didn't rely on resources that it had available to it.
17 I'm just exploring -- continuing to explore that with
18 Mr. Brown, who is the most appropriate witness to answer
19 the questions.
20 COMMISSIONER NELSON: All right. I would
21 remind you that it's never been established that there
22 was an emergency or curtailment period any time in recent
23 memory.
24 MR. WOODBURY: Well, then, I don't know why
25 we're constructing the Northwest Pipeline.
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 COMMISSIONER NELSON: I think that's an
2 appropriate argument to make, but you're discussing those
3 contracts in the context of emergency.
4 MR. WOODBURY: May I proceed?
5 COMMISSIONER NELSON: Yes.
6 Q BY MR. WOODBURY: Mr. Brown, with respect
7 to the language that I read to you, and I'll read it
8 back, "The Company will cease production from the Gowen
9 well and the Oregon Trail well but will retain the
10 ability to use these wells as emergency backup supplies
11 under guidelines agreed to between the Company and
12 Micron," has the Company entered into any understanding
13 with Micron with respect to the guidelines for use of
14 those wells?
15 A I believe this contract is currently under
16 negotiation with Micron as far as the final disposition
17 of those wells, and as far as how they will be used or
18 will not be used in the future more appropriately would
19 be addressed by Mr. Linam as I'm not a part of the
20 negotiation on the contract.
21 Q Isn't it -- but the negotiations on the --
22 with respect to the contract is only with respect to
23 reimbursement because of the developer.
24 A That's not true. That's not true. I'm
25 aware and I'm only aware that it is regarding the
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CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 disposition of the well, that they may be transferred in
2 title to Micron, and their ability to be used for
3 emergency purposes would not be available in the future.
4 Q Okay. There are just two parties to the
5 southeast Boise water supply project agreement, Boise
6 Water Corporation and Micron Technology. The reservation
7 of a right to use those wells would not be something that
8 would be proposed by Micron. It would have been
9 important to Boise Water. Would you agree with that?
10 A It's an important -- it is important to
11 both parties.
12 MR. WOODBURY: Okay. I don't wish to
13 belabor this. Staff has no further questions of
14 Mr. Brown.
15 COMMISSIONER NELSON: Thank you,
16 Mr. Woodbury.
17 Are there questions from the Commission?
18 I have just one or two.
19
20
21
22
23
24
25
837
CSB REPORTING BROWN (X-Reb)
Wilder, Idaho 83676 United Water Idaho Inc.
1 EXAMINATION
2
3 BY COMMISSIONER NELSON:
4 Q Do you know Carl Ellsworth?
5 A I'm acquainted.
6 Q All right. So you would know if you were
7 talking to him in a conversation?
8 A I would know it if I was talking to him in
9 a conversation.
10 Q In regard to the transfer of water between
11 Garden City and United Water, was the failure to deliver
12 last year due to a physical problem or a capacity problem
13 of Garden City's?
14 A I can't speak specifically to that. At
15 this point in time I don't recall if it was pump
16 selection, if they had selected the wrong pump, or if
17 simply their distribution system was not able to deliver
18 the water to the pump.
19 Q But as far as the connection between United
20 Water and Garden City, is there adequate capacity there
21 that the delivery could have been made?
22 A I certainly believe there is.
23 COMMISSIONER NELSON: Thank you.
24 Redirect, Mr. Miller.
25 MR. MILLER: Mr. Chairman, given the
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CSB REPORTING BROWN (Com)
Wilder, Idaho 83676 United Water Idaho Inc.
1 extensive nature of the cross-examination and likelihood
2 that I might have some redirect and given the time, I
3 wonder if we could take up the redirect in the morning.
4 COMMISSIONER NELSON: This will not extend
5 it too much, will it?
6 MR. MILLER: In fact, it will compress it.
7 COMMISSIONER NELSON: Thank you. With that
8 promise, why, we will recess for the day, and it would be
9 my proposal to reconvene at 8:30 in the morning for the
10 purpose of finishing the hearing during the morning.
11 MR. MILLER: Very good.
12 (The Hearing recessed at 5:00 p.m.)
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Wilder, Idaho 83676