20230404Customer Hearing Transcript Vol II.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF VEOLIA WATER IDAHO INC. FOR )CASE NO. VEO-W-22-02
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR WATER SERVICE IN )
THE STATE OF IDAHO )
_______________________ ___________ )

BEFORE
COMMISSIONER ERIC ANDERSON (Presiding)
COMMISSIONER JOHN HAMMOND
COMMISSIONER EDWARD LODGE
PLACE: Commission Hearing Room
11331 West Chinden Blvd.
Building 8, Suite 201-A
Boise, Idaho
DATE: April 4, 2023
VOLUME II - Pages 41 - 716
A P P E A R A N C E S
For the Staff: Chris Burdin
Deputy Attorney General
IPUC
11331 W. Chinden Blvd.,
Bldg. No. 8, Suite 201-A
PO Box 83720
Boise, ID 83720-0074

For Veolia Water Idaho: Preston N. Carter
Givens Pursley LLP
601 W. Bannock Street
Boise, ID 83702
For Ada County: Meg Waddel
Ada County Prosecuting
Attorney's Office/Civil
Division
200 W. Front Street, Room 3191
Boise, ID 83702
For Sharon M. Ullman: Sharon M. Ullman, pro se
5991 E. Black Gold Street
Boise, ID 83716
For Micron Technology: Thorvald A. Nelson
Austin Rueschhoff
Holland & Hart, LLP
555 17th Street, Suite 3200
Denver, CO 80202
For City of Boise: Mary R. Grant
(Of Record) Deputy City Attorney
Boise City Attorney's Office
105 N. Capitol Blvd.
PO Box 500
Boise, ID 83701-0500
CSB REPORTING 42 APPEARANCES
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I N D E X
WITNESS EXAMINATION BY PAGE
Marshall Thompson Mr. Carter (Direct) 51
(Veolia) Direct Testimony 53
Rebuttal Testimony 78
Mr. Burdin (Cross) 91
Mr. Nelson (Cross) 94
Ms. Ullman (Cross) 103
Catherine Cooper Mr. Carter (Direct) 105
(Veolia) Direct Testimony 107
Rebuttal Testimony 117
Jarmila Cary Mr. Carter (Direct) 126
(Veolia) Direct Testimony 128
Rebuttal Testimony 159
Mr. Burdin (Cross) 201
Mr. Rueschhoff (Cross) 203
Ms. Grant (Cross) 208
Commissioner Hammond 210
Michael Wilson Mr. Carter (Direct) 213
(Veolia) Direct Testimony 215
Rebuttal Testimony 230
Mr. Burdin (Cross) 241
Commissioner Hammond 242
Harold Walker, III Mr. Carter (Direct) 244
(Veolia) Direct Testimony 246
Rebuttal Testimony 363
Ann Bui Mr. Carter (Direct) 447
(Veolia) Direct Testimony 449
Rebuttal Testimony 466
Mr. Nelson (Cross) 485
Ms. Grant (Cross) 512
Ms. Waddel (Cross) 521
Ms. Ullman (Cross) 523
Mr. Carter (Redirect) 524
David Njuguna Mr. Carter (Direct) 525
(Veolia) Direct Testimony 528
Rebuttal Testimony 551
Mr. Burdin (Cross) 564
Mr. Rueschhoff (Cross) 565
CSB REPORTING 43 INDEX
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I N D E X (Continued)
WITNESS EXAMINATION BY PAGE
Anupa Jacob Mr. Carter (Direct) 572
(Veolia) Direct Testimony 574
Supplemental Direct Testimony 585
Rebuttal Testimony 600

Timothy Michaelson Mr. Carter (Direct) 608
(Veolia) Direct Testimony 610
Rebuttal Testimony 623
Mr. Burdin (Cross) 633
Mr. Nelson (Cross) 639
James Cagle Mr. Carter (Direct) 647
(Veolia) Direct Testimony 650
Rebuttal Testimony 671
Mr. Burdin (Cross) 710
Mr. Nelson (Cross) 711
Commissioner Hammond 715
CSB REPORTING 44 INDEX
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E X H I B I T S

NUMBER DESCRIPTION PAGE
FOR VEOLIA WATER IDAHO INC.:
1.Rate of Return, Schedule 1-19 Premarked
Admitted 245
2.Rate Schedules Premarked
Admitted 52
3.Test Year Plant Additions Premarked
and Retirements Admitted 106
4.Purchased Water Premarked
Admitted 106
5.Summary of Test Year Revenues Premarked
Under Present & Proposed Rates Admitted 609
6.Rate of Return, Schedule 1-19 Premarked
Admitted 527
7.Balance Sheet Per Books Premarked
June 30, 2022 Admitted 573
8.Statement of Income Premarked
Admitted 573
9.Statement of Operating Income Premarked
Per Books & Proforma, etc. Admitted 527
10.Details of Adjustments to Premarked
Operations & Maintenance Admitted 127
Expenses
11.Rate Base Summary Premarked
Admitted 527
12.Accumulated Deferred Income Premarked
Tax & Excess Deferred Income, Admitted 573
etc.
13.Distribution System Improvement Premarked
Charge, etc. Admitted 649
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E X H I B I T S (Continued)

NUMBER DESCRIPTION PAGE
FOR VEOLIA WATER IDAHO, INC.:
14.Comparison of Adjusted Cost Premarked
of Service with Revenues, etc. Admitted 448
15.P-E Multiples & Market/Book Premarked
Multiples as of 1/20/23 Admitted 245
16.Pro Forma Period Plant Premarked
Additions & Retirements Admitted 106
17.Summary of Historic Test Year Premarked
Revenues, etc. Admitted 609
18.S&P Global Ratings, Research Premarked
Update Admitted 649
19.Statement of Operating Income Premarked
Per Books & Proforma, etc. Admitted 527
20.Calculation of Depreciation Premarked
Expense, etc. Admitted 127
21.Rebuttal Rate Base Summary Premarked
Admitted 527
FOR THE STAFF:
142. Calculation of Predicted Identified 634
Residential Consumption Admitted 635
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BOISE, IDAHO, TUESDAY, APRIL 4, 2023, 9:00 A. M.

COMMISSIONER ANDERSON: Good morning, and
welcome to the Public Utilities Commission's new office
for those that haven't been here in our new Hearing Room.
Hopefully, our audio and everything works well today, I
think it will, and it's exciting to have everyone here
today.
This is the time and place set for a
technical hearing in Case No. VEO-W-22-02, further
identified as in the matter of the application of Veolia
Water Idaho, Inc., for authority to increase its rates
and charges for water service in the State of Idaho.
This hearing is taking place to consider
the general rate case filed with the Commission on
September 30th, 2022, seeking authority to increase
Veolia Water's general rate case for water service in
Idaho.
My name is Eric Anderson and I'm the Chair
of today's proceedings. I'm joined by Commissioner John
Hammond to my left and Commissioner Ed Lodge to my right
and we compromise -- comprise, excuse me, the Commission.
We don't compromise, I think we don't do that. I'm
having a hard enough time saying Veolia, so I'm
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struggling with that, but we do comprise the Commission.
Today we have Connie Bucy taking our court reporting and
if we talk too low or too fast, she will remind us and
advise us to slow down.
Let's begin this morning with taking the
appearances of the parties. Let's begin with the
Applicant, Veolia.
MR. CARTER: Hello, Chairman Anderson and
members of the Commission, my name is Preston Carter.
I'm with the law firm of Givens Pursley representing
Veolia Water Idaho, Inc.
COMMISSIONER ANDERSON: Welcome. Let's
move on to Staff.
MR. BURDIN: Thank you, Chair. My name is
Chris Burdin. I'm the Deputy Attorney General who is
assigned to this case representing Commission Staff.
COMMISSIONER ANDERSON: Thank you. Micron
Technology.
MR. NELSON: Good morning, Chair Anderson,
Commissioners, Thor Nelson and Austin Rueschhoff of the
law firm of Holland & Hart on behalf of Micron.
COMMISSIONER ANDERSON: Welcome. City of
Boise.
MS. GRANT: Mary Grant, Deputy City
Attorney, on behalf of the City of Boise.
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COMMISSIONER ANDERSON: Okay, and Sharon
Ullman.
MR. ULLMAN: Sharon Ullman, intervenor,
member of the public.
COMMISSIONER ANDERSON: Welcome. Are
there any parties that I have missed? Excuse me, Ada
County.
MS. WADDEL: Meg Waddel, Deputy
Prosecuting Attorney, here for Ada County.
COMMISSIONER ANDERSON: Welcome, and I'm
sorry, my oversight there. We'll get all the bumps out
of the road here soon I hope. Are there any preliminary
matters that need to come before the Commission prior to
us fully beginning? Mr. Carter.
MR. CARTER: Not from the Company's
perspective.
MR. BURDIN: No, Commissioner, no.
MR. NELSON: Chair Anderson, one thing
that I will just note for your purposes, Micron's two
witnesses, Mr. Gorman and Ms. York, will be flying into
Boise late this afternoon and so unclear exactly how the
day will progress, but just wanted to advise the
Commission that they will not be available to testify
until tomorrow morning. Should that need arise and we
move very quickly, I just wanted to let you know about
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that.
COMMISSIONER ANDERSON: Thank you. Do
they anticipate coming here in the afternoon if they
arrive early?
MR. NELSON: Not to my knowledge. Their
flight is not scheduled to land until 4:30.
COMMISSIONER ANDERSON: Thank you very
much for that information, Mr. Nelson.
MR. NELSON: Thank you.
COMMISSIONER ANDERSON: Any other
comments? Hearing none. We have scheduled a multi-day
hearing. I anticipate that not being the case. I think
we're going to be able to expedite this matter in a
shorter time frame than four days, so I would look
forward to that.
If there are no objections, we will break
for lunch close to noon, and possibly, as testimony
allows, we'll take one or two breaks in the morning.
I've asked our court reporter to give me a nod if she's
ready for one. Sometimes she need a little extra break,
so if we need a break, we'll take one.
Before calling the first witness, do the
parties intend to present direct and rebuttal testimony
to be spread across the record simultaneously?
MR. CARTER: Yes, Chairman Anderson.
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COMMISSIONER ANDERSON: Thank you. Thank
you very much. With that, we are ready to start with
their first witness and let's begin with Veolia.
MR. CARTER: Yes, Chairman, Veolia Water
Idaho calls Marshall Thompson.
MARSHALL THOMPSON,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Mr. Thompson, good morning.
A Good morning.
Q All right, Mr. Thompson, please state and
spell your name for the record.
A Yes, my name is Marshall Thompson, spelled
M-a-r-s-h-a-l-l T-h-o-m-p-s-o-n.
Q And are you the same Marshall Thompson
that filed direct testimony with exhibits and rebuttal
testimony with exhibits on behalf of Veolia Idaho, Inc.,
in this case?
A I am.
CSB REPORTING 51 THOMPSON (Di)
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Q And if I asked you the same questions
today, would your answers be the same?
A They would.
MR. CARTER: Commission, I'd ask that
Mr. Thompson's direct testimony and exhibits and rebuttal
testimony and exhibits be spread upon the record as if
read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread the direct and rebuttal
testimony and exhibits across the record as if read.
(Veolia Water Idaho, Inc., Exhibit No. 2
was admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Mr. Marshall Thompson is spread
upon the record.)
CSB REPORTING 52 THOMPSON (Di)
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Q.Please state your name and business address.
A.Marshall Thompson. Veolia Water Idaho, Inc.
8248 West Victory Road, Boise Idaho.
Q.What is your occupation?
A.I am the Vice President and General Manager of
Veolia Water Idaho, Inc. ("Veolia Water Idaho," "VWID" or
"Company").
Q.Please describe your educational background and
other qualifications.
A.I am a graduate of Central Washington
University with Bachelor of Arts degrees in both
Geography and Earth Science. I am also a graduate of
Washington State University with a Masters of Engineering
and Technology Management and a Graduate Certificate in
Construction Project Management. I am licensed for both
Water Distribution Management and Water Treatment in the
state of Idaho. As Manager of Operations for VWID, I have
previously provided testimony before the Idaho Public
Utilities Commission.
Q.Please describe your work experience.
A.I have been employed at Veolia Water Idaho,
formerly SUEZ Water Idaho Inc. and United Water Idaho
Inc., since January 2012. Prior to assuming my current
duties as General Manager of Veolia Water Idaho in 2018,
I worked as the Director of Operations for Veolia Water
CSB REPORTING 53 Thompson, Di 2
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Idaho. Prior to 2012 I was employed by the City of
Spokane Washington in a variety of utility focused
technical roles.
Q.Please describe your duties as General Manager.
A.My duties are to oversee the Company's
activities and responsibility of providing potable water
to customers. I provide general management direction and
oversight
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to the various departments of Engineering, Production,
Transmission & Distribution, Customer Service, Billing,
Information Technology, Finance and Planning, and
Administration in meeting their responsibilities for the
delivery of potable water, maintaining compliance, and
providing related services to customers.
These functions include planning for raw water
source, construction, maintenance and operation of the
treatment and pumping facilities, the distribution system
including mains, services, and storage tanks, responding
to customer needs regarding initial service or
discontinuing service by reading customer meters,
processing and delivering bills, and responding to other
customer needs through the Customer Service
Representatives.
My duties also include oversight and responsibility
for the Company's compliance with all regulations in
regard to safety, compliance with the Safe Drinking Water
Act, and other similar requirements.
Q.What is the purpose of your testimony?
A.I will testify regarding the major reasons for
the rate relief requested in this filing. I will also be
available to provide an overview of management and
operations. My testimony is organized as follows:
-Other Witnesses Pg. 4
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-Proposed Tariff Changes Pg. 5
-Impact of Proposed Rate Change Pg. 6
-Cost Management and Efficiencies Pg. 9
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-Rate Increase Drivers Pg. 12
-Tariff Design Pg. 15
Other Witnesses
Q.Please identify the other witnesses who will
testify on behalf of the Company and the topics on which
they will testify.
A.Mr. Harold Walker III, Manager Financial
Studies, Gannett Fleming Valuation and Rate Consultants,
LLC, will testify regarding his cost of capital analysis
and recommendations on an appropriate overall rate of
return for VWID.
Mr. Timothy Michaelson, Director Regulatory
Business, Utility Division for Veolia Water M&S
(Paramus), Inc., will testify regarding revenue and
associated adjustments.
Ms. Jarmila Cary, Finance and Customer Service
Director with Veolia Water Idaho, will testify regarding
certain operating expenses and associated adjustments.
Mr. Michael Wilson, Manager Financial Reporting and
Analysis with Veolia Water Idaho, will testify regarding
certain operating expenses and associated adjustments.
Mr. David Njuguna, Manager Regulatory Business,
Utility Division for Veolia Water M&S (Paramus), Inc.,
will testify regarding revenue requirement, depreciation
expense and rate base.
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Ms. Catherine Cooper, Director of Engineering with
Veolia Water Idaho, will testify regarding pro-forma
capital additions and retirements, plant in service, and
purchased water expense.
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Mr. Matthew Kahn, Tax Manager, Utility Division for
Veolia Water M&S (Paramus) Inc., will testify regarding
ratemaking considerations resulting from the Tax Cuts and
Jobs Act ("TCJA").
Mr. James Cagle, Vice President Rates & Regulatory
Affairs, Utility Division for Veolia Water M&S (Paramus),
Inc., will testify regarding the proposal for a
Distribution System Improvement Charge Mechanism.
Mr. Mohammed Zerhouni, Controller & Chief Accounting
Officer at Veolia Water M&S (Paramus), Inc. will testify
on the certain operating expenses , as well as
amortization expenses.
Ms. Ann Bui, consultant, Black and Veatch will
testify regarding the Customer Load Study, Cost of
Service Study and Rate Design.
Proposed tariff changes
Q.When was Veolia Water Idaho's last general rate
filing?
A.Veolia Water Idaho last filed for a general
rate increase in September 2020.
Q.What tariff changes is Veolia Water Idaho
proposing in this rate filing?
A.In this general rate filing, the Company
proposes changes to the rates for all customers based on
approximately $70 million in gross plant investment
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excluding contributions in aid of construction (CIAC)
from the last rate case, which included capital
investments through December 2020. Additional proposed
tariff language changes are discussed after the impact of
proposed rate change.
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Impact of Proposed Rate Change
Q.What is the current rate per hundred cubic feet
(ccf) of water (748 gallons)?
A.The current volumetric rate for water is
$1.5959 under the winter rate (Oct. to Apr.) for
bi-monthly billed customers and $2.0204 under the summer
rate, which means one penny will buy nearly 5 gallons of
water in the winter and about 4 gallons in the summer.
The current volumetric rate for water for monthly billed
customers who are on a different tariff than majority of
Veolia customers-former Eagle Water customers, whose
rates will phase-in to full rates over time-is $0.7980
under the winter rate (Oct. to Apr.) and $1.0102 under
the summer rate, which means one penny will buy 9 gallons
of water in the winter and about 7 gallons in the summer.
Q.How much water is the average residential
customer projected to use per year, and what does that
equate to on a cost per day at current rates?
A.The average residential customer is projected
to use approximately 97,000 gallons of water annually,
which equates to about 265 gallons per day as shown on
Company Witness Michaelson's Exhibit 5 - Schedule 5 and
Schedule 6. On average, that equals about $0.67 per day
plus an additional $0.38 per day for the average customer
charge.
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Q. How would the Company's proposed increase
impact the average residential customer?
A.The cost for 265 gallons per day, not including
Franchise or Idaho Department of Environmental Quality
(IDEQ) Safe Drinking Water fees, would increase by
approximately $0.16 per day for the volumetric charge and
approximately $0.09
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cents per day for the customer charge. For legacy Eagle
Water customers, the increase would be approximately
$0.09 cents per day for the volumetric charge and
approximately $0.05 cents per day for the customer
charge. The total increase for the average residential
customer at the Company's proposed rates is approximately
$7.59 per month, and for legacy Eagle Water customers
approximately $4.43 per month. The proposed rates would
become effective approximately mid-March 2023.
Q. What other tariff changes are proposed?
A. The Company is also proposing to reflect the
name change from Suez Water Idaho Inc. to Veolia Water
Idaho, Inc., eliminate 1 ¼-inch meters reference from the
tariff, and revise the service line connection from
one-inch or smaller to two-inch or smaller according to
NFPA 13D standards. Finally the Company proposes a new
tariff that contains a Distribution System Improvement
Charge as discussed in the testimony of Company Witness
James Cagle.
Proposed Tariff Change - Veolia Acquisition - Company
Name Change
Q. Please discuss the impact of the Veolia
acquisition of SUEZ?
A. As discussed in the testimony of Company
Witness Njuguna and as described in Case No. VEO-W-22-01,
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Suez Water Idaho Inc.'s ultimate parent company, SUEZ
S.A. merged with Veolia Environment S.A. SUEZ Water Idaho
Inc. subsequently changed its name to Veolia Water Idaho,
Inc. The name change was approved by the Commission in
Order No. 35442. The tariff needs to be updated to
reflect the name change.
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Proposed Tariff Change - Remove 1 ¼ inch Meter Size.
Q. What tariff changes are proposed?
A. Veolia proposes to remove references to (1-1/4
inch) meter size in the Tariff as Veolia no longer has
that size of meter in the system, or will not be
installing such meter sizes in the future, nor is any
customer being billed for that size of meter.
Proposed Tariff Change - NFPA 13D standards - change
service line connection to two-inch or smaller (<=2) from
one-inch or smaller.
Q. What tariff changes are proposed?
A. Veolia proposes to revise Sheet No. 35, Section
44 of the company's tariff to reflect a two-inch (<=2) or
smaller service line connection rather than a one-inch or
smaller (<=1) as the tariff reflects. Changing the tariff
language to reflect a 2" meter size requirement versus
the former 1" meter size will allow more residential
homes to be serviced with NFPA 13D fire protection
systems. This is a benefit to customers and the fire
department for fire protection purposes. In addition,
costs are reduced by only having to provide one service
instead of two (a domestic and a fire service) to these
homes. The proposed tariff change would include the
following language:
All private fire service connections from the main
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to the property line, including all valves, shall be
furnished and installed by the Company. All fire
service line connections will be separate from
potable service lines, except that residential fire
protection systems conforming to NFPA 13D standards
for flow through usage will be permitted on the
meter size range two-inch or smaller (<=2).
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Cost Management and Efficiencies
Q. Please discuss how Veolia has managed headcount
additions during a period of long-term growth in the
Treasure Valley.
A. In its 2020 rate case, Veolia sought to
stabilize the impact of trending community growth on
company staffing levels. In that filing, the Company
demonstrated that customer growth had significantly
outpaced employee additions during the period of
2010-2020, reaching a high of 997 customers per employee
in 2016. Graphs from the company's 2020 rate filing below
show the trend of metered customers per employee from
2000 to 2020 stabilizing around an average of 872.5
customers per employee in 2020.

(Chart in hard copy of transcript)
However, a the Company questions whether the 2020
average a healthy ratio of customers to employees
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compared to Veolia's peer utilities.
According to the American Water Works Association's
2021 Utility Benchmarking Study, the historic average for
Customers per Employee from that study' peer utility
group was 438.4 during a 2006-2020 monitoring period. The
graph below compares the trend with Veolia Water Idaho
metrics for the same period. Inclusive of customer
growth, the company's 2022 customer per employee ratio
remains well outside of industry averages at 782
customers per employee.
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(Chart in hard copy of transcript)
It is notable that the AWWA's 25th percentile area,
shaded in blue, indicates the extreme of higher staffing
levels beginning near the range of 300-350 connections
per employee. Veolia's 2022 metric of 782 leaves
considerable room for employee headcount growth before
the company approaches the AWWA median of its industry
peers.
Q.Please identify some areas where the Company
has been able to control its operating expenses for
power.
A.Veolia has worked hard to keep operating costs
in check in a number of ways, including the installation
of energy-efficient motors that help produce and deliver
water to residents, a partnership with Idaho Power and
its subcontractor consultant Cascade Energy to optimize
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energy usage from network facilities.
The chart below, provided by Idaho Power and Cascade
energy, demonstrates cumulative energy savings from the
Company's improvement efforts from its baseline period
ending December 2016.
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(Chart in hard copy of transcript)

Additionally, the Company regularly participates in
Idaho Power's Demand Response Program (previously
EnerNOC, Inc.). Since 2009, the participation has
provided payments to the Company in return for
temporarily interrupting the use of certain water pumping
facilities during the summer period of high electrical
demand at the request of Idaho Power. These payments go
directly to reduce the Company's purchased power expense.
Rate Increase Drivers
Q.Would you briefly explain why the Company is
seeking a rate increase at this time?
A.The increase is necessary for Veolia to
continue to provide quality service to customers and to
improve service by investing in new and replacement
infrastructure. For these reasons, the Company continues
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to make capital investments in utility plant. Veolia's
total plant in service investment net of CIAC from
January 1, 2021 to March 31, 2023 is approximately $70
million, an increase of about 14% over the Company's
Plant in Service at January 1, 2021 of
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approximately $512 million. An increase in rates is also
necessary in order to provide sufficient capital dollars
to maintain and improve quality service to our customers,
to provide adequate operating and maintenance coverage,
and to maintain a sound financial position.
Q.What are the major capital investments the
Company has made since the last rate case that contribute
to the increase in rate base?
A.The Company has invested in all areas of the
business including source of supply, water treatment,
pumping, transmission and distribution mains,
distribution storage, customer service lines, customer
meters, information technology, and general plant. Some
of the highlights include:
The Eagle Water Company Acquisition: $10.5M
acquisition that adds approximately 4,200 homes.
Residents benefit from 24-hour monitoring of the system
that enhances safety and service reliability for a water
system that had been without investment for decades.
Columbia Water Treatment Plant New Clearwell Tank:
$3.5M construction, serving Southeast Boise, which adds
storage capacity and fire protection.
Water quality investments, including:
- In the East First Bench area: Taggart Well Facility
Filtration Treatment System, water quality study,
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mainline replacements, ice pigging, and many other
efforts. The total cost of these investments was $4.5
million.
- Whistle Pig Storage Tank: $6.2M storage tank in
Southwest Boise. Improves water pressure, fire protection
and capacity for customers.
- New warehouse and shop buildings at the Victory Road
Operations Center.
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- New Vactor Truck to more efficiently work on pipeline
and other projects that require excavation.
Q.How has the Company increased stakeholder
outreach since the last rate case?
A.Veolia diligently pursued ways to engage the
community through multiple channels since the last rate
case. For example, Veolia has:
·Increased community awareness on capital
investments through greater outreach, and monthly
Resource Newsletter.
·Completed a full Cost of Service Study, including
an analysis of capacity in the water system.
·Created and led the Community Resource Board for
the Boise Bench and made improvements to water
quality in that area.
·Funded and shared the Treasure Valley Water
Report, a study of the region's available water
resources and future demands.
Built an online hub for capital project information.
Veolia will continue to build upon these existing
programs and seek new ways to connect with our customers
and stakeholders.
Tariff Design
Q.What is the Company's proposal for adjustments
to rates to recover any revenue increase that may be
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ordered by the Commission?
A.As explained in more detail in the testimony of
Company witness Michaelson, the Company is proposing a
uniform rate increase to all rate elements, except
private fire and miscellaneous service charges and fees
which will see no change. The Company is not proposing,
in this case, any change to the current general tariff
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design and is maintaining the 25% differential between
winter and summer volumetric rates.
Q.What is the current average annual residential
water bill using projected consumption?
A.The current average annual residential bill for
a customer using about 97,000 gallons of water is
$378.60, exclusive of IDEQ fees and city franchise taxes,
and the current annual average bill for customers of the
legacy Eagle Water system is $220.89.
Q.What would be the average annual residential
bill under the proposed rates in this filing, and what is
the overall increase request?
A.The average annual residential bill under
proposed rates for the customer using about 97,000
gallons would be $469.66, or an increase of 24.1%, or
about $7.59 per month or about $0.25 per day, and for
customers of the legacy Eagle Water system is $274.02,
about $4.43 per month or about $0.15 per day. The overall
increase requested in the present filing is $12,107,227
or 23.4%.
Q.Does this conclude your direct testimony?
A.Yes.
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Q.Please state your name, occupation and business
address.
A.My name is Marshall Thompson. I am the Vice
President and General Manager for Veolia Water Idaho,
Inc. ("Veolia" or "Company"). My business address is 8248
W. Victory Road, Boise, Idaho 83709.
Q.Are you the same Marshall Thompson that filed
direct testimony in this proceeding?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.The purpose of my rebuttal testimony is to
discuss the Direct Testimony of PUC Staff as listed ·
below:
·J. Bossard - Customer Notice and Press
Release for this Rate Case Application.
·J. Bossard - Company communication with the
Commission regarding trends in customer
billing concerns.
·J. Bossard - The Company's Cross Connection
Control Program
·T. Johnson - rejection of 2023 increase to
stand-by pay, overtime pay, and employee
incentives.
·M Eldredge - Regarding AMI implementation
·M. Eldredge - Suggested workshop
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·J York - Potential Special Contract
Q.Please provide a response to J. Bossard's
stated concerns that the Company's notice to customers
failed to identify the case number, and that the
Company's press release failed to notify customers that
they could file comments on the case.
A.The Company makes every effort to prefile
notices to the extent possible. However, details such as
the case number were not officially known at the time of
the Company's
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rate case application filing. (The case number is
assigned upon filing of the application.) Future press
releases from the Company will include clear public
notice on the ability to file comments in this rate case,
as was offered to customers individually in bill
messaging about this case.
Q.Please provide a response to J. Bossard's
recommendation that the company notify staff as soon as
they recognize a potential large-scale issue that will
affect customers.
A.The Company feels that it was prompt and open
with PUC consumer staff in addressing these late 2022
rebilling concerns. The Company directly coordinated with
staff on individual complaints as early as December 2022
in initial efforts that jointly identified this trend as
a potentially large-scale billing issue. The Company
provided further clarifying information to PUC consumer
staff on the rebilling situation through the following
month leading up to a joint meeting on this topic held
January 25th.
Q.What are the state of Idaho's water purveyor
requirements and responsibilities concerning cross
connection control programs?
A. Idaho rules for cross connection control
program administration can be found under the Department
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of Environmental Quality Rules for Public Drinking Water
Systems (IDAPA 58.01.08). These regulations outline
requirements for state water purveyors - public or
private - to implement a cross connection control program
that takes reasonable and prudent measures to protect the
water system against contamination and pollution from
cross connections.
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Q.Does the company have a cross connection
control program that has been reviewed by Idaho DEQ?
A. Yes it does. While Idaho DEQ does not formally
"approve" cross connection control programs for any water
purveyor, the agency has reviewed the company's program
and provided comments and guidance on its structure.
Q. Is J. Bossard's description of the Company's
cross connection control requirements, tracking, and
notification practices accurate?
A. No, unfortunately J. Bossard's testimony was
informed by misstatements in the Company's response to
commission production requests: No. 141 (DATABASE), 142
(TEST REPORTS, DISCONNECTIONS). Clarification on these
points will be offered later in my rebuttal testimony.
Q.Should the Company follow staff's
recommendations to adopt new digital tools for cross
connection control program administration?
A.No, updating the company's response to Request
No. 141, Veolia Water Idaho does in fact maintain a
digital database of cross connection program field
activities.
The following table shows specific cross
connection control program activities tracked in the
company's work management system. This table does not
include additional cross connection assignments conducted
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as part of all new in-fill and development projects.
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(Table contained in hard copy of transcript)
Q. Would you like to update the Company's response
to item (c) from Request No. 142?
A.Yes. The following table shows total backflow
test reports (PUC Staff 'Certificates') received by the
Company per year from private testing groups since 2020.
Testing has remained balanced around an annual average of
4,378 test reports per year since 2020. The Company is
seeking to increase testing numbers with the hard-copy
backflow awareness mailers and new communication efforts
initiated in 2022.
(Table contained in hard copy of transcript)
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Q. In light of the Company's miscommunication on
these production requests, how will you ensure program
details are better shared and understood in future
commission proceedings?
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A.The Company regrets omission of digital records
on these two production responses, and has already taken
steps to ensure greater care is taken in knowledge
transfer efforts between departing and newly hired staff
members. In the period from 2020-2022, the Company's
Cross Connection Control Program staff underwent 100%
turn-over in all roles from field support to program
management. While new staff members did their best to
respond to the commission's production requests with the
information they had access to, they lacked full
awareness of the Company's digital systems for program
management. Contributing to this were the large number of
production requests in the case and the request to
respond within an expedited timeframe, sometimes as
quickly as one week after the request was filed despite
the 21-day timeframe for responses allowed under the
Commission rules.
In 2022, the Company initiated an internal
review of its Cross Connection Control Program and will
continue with that effort in 2023. The purpose of this
review is to educate new managers and program staff on
the State of Idaho's Cross Connection Control program
requirements, and to fully detail the Company's program
specifics and field reporting workflows for clarity. At
the completion of this review, the Company would like to
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present an overview of its program to DEQ and PUC staff
for clarity and alignment.
Q.Please provide the Company's response to M.
Eldred's comments regarding AMI implementation.
A.M. Eldred, in his testimony, states "the
Company's rollout of AMI meters
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across their service territory could have been altered to
collect the necessary data". M. Eldred's statement is
contrary to the work and intent of the Company's AMI roll
out. AMI meters are installed to remotely collect
volumetric readings for the purpose of volumetric billing
and customer leak detection. While this system does
provide valuable information to the Company for planning
purposes, it is not deployed as a planning tool, nor
should it be. Company AMI meters will be found on all new
service connections, or as phased in replacements
targeting meters based on service age or operational
necessity in any given area of the service territory. The
system's current population of AMI meters (34% of all
meters) was shown by experts at Black and Veatch to be
well above the required number for a statistically
significant sample set needed for the Company's load
study assessment. The Company's AMI rollout has been in
progress since 2016 and will continue until around 2035.
Like many routine investments in the company distribution
infrastructure, AMI deployment is now considered
customary and routine. Such investments would be
bolstered and enhanced with consideration from the
commission on treating them as eligible for DSIC style
recovery mechanisms found in other state commissions.
Q.Please provide the Company's response to M.
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Eldred's comments regarding a new load study and cost of
service study and suggested workshop.
A.As always, the Company is happy to discuss
issues with Staff, including a future load study and cost
of service study. Any such discussion would evaluate the
practicality of a study's approach, as well the cost
benefit to customers. As described in the testimony of
Ann Bui, many of M. Eldred's suggestions were considered
and found to be unworkable from either the standpoint of
available billing data for analysis or effective
justification for the substantial cost associated with
developing new data-sets for such an effort. If the
Commission were to include such requirements in its
Order, the Company would request
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that any associated costs from currently unspecified data
gathering and analysis efforts be deferred for future
rate recovery.
Q.Please provide the Company's response to J.
York regarding a potential special contract.
A.No relevant information regarding Micron's
future plans are included in this case. As a result,
there is no feasible way to determine the information
necessary to determine rates based upon Micron's growth
which is slated to begin in 2025. When such information
is available, the costs associated with such plans can be
determined, and incorporated into a filing to be made
before the Commission addressing reasonably known
factors. The Company is happy to discuss a potential
special contract when such information is known and
measurable. However, without such information, the
Company believes this case is not the venue to develop
speculative rates.
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in
open hearing.)
MR. CARTER: And Mr. Thompson is now
available for cross-examination and questions by the
Commission.
COMMISSIONER ANDERSON: Thank you,
Mr. Carter. Does the Commission Staff have any
questions?
MR. BURDIN: Yes, Chair, thank you.
COMMISSIONER ANDERSON: Please.
CROSS-EXAMINATION
BY MR. BURDIN:
Q Good morning, Mr. Thompson.
A Good morning.
Q Just a couple of general questions.
Should customer rates be designed so that the amount a
customer pays is proportionate to the cost and value of
the service provided to them?
A Yes, I would say that's a general
principle.
Q And should customer rates be
differentiated based on the cost incurred to serve
different customer groups?
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A I think that depends on the analysis that
would show if there was a difference.
Q But if there was a difference?
A If there was a difference, certainly.
Q On page 6 of your rebuttal testimony, you
testified that AMI meters provide valuable information
for planning purposes. Can AMI meters determine a
customer's hourly water consumption?
A An AMI meter can provide hourly volumetric
rates.
Q And can AMI meters determine the amount of
customer consumption during the time of system peak
usage?
A They can.
Q Can the Company use this information to
determine the proportion of capacity cost of the total
system?
A It can. Your questions seem to be tending
more towards the specifics of the load study, which I am
not an expert on the specifics of the load study, if
that's the line of questioning.
Q Oh, yes, in your testimony, you testified
that it provides valuable information for planning
purposes, but that the Company doesn't deploy them for
planning purposes, and my question is could they be used
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for planning purposes, not if you are doing it, but could
they?
A I think certainly the information that can
be garnered from any instrumentation, I think metering
being one of those, at any hourly frequency can be used
for a variety of different purposes; planning analysis,
engineering design, a number of different functions.
Q And then does the Company have an
obligation to provide safe and reliable service to its
customers?
A Of course.
Q And is it the Company's position that it
does provide safe and reliable service to its
customers?
A Yes, that is our position.
Q And is the Company's position or would you
agree that the Company believes that it will continue to
provide safe and reliable service regardless of the
outcome of this case?
A Yes.
MR. BURDIN: Thank you. Mr. Chair, that's
all the questions I have. Thank you, Mr. Thompson.
COMMISSIONER ANDERSON: Thank you,
Mr. Burdin. Micron, Mr. Nelson, any cross?
MR. NELSON: Yes, Mr. Chair.
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CROSS-EXAMINATION
BY MR. NELSON:
Q Good morning, Mr. Thompson. My name is
Thor Nelson. I'm an attorney for Micron in this
proceeding. Let me first ask, it looks like you have a
copy of your testimony up there with you; is that
correct?
A I do.
Q Do you have a copy of the testimony of
Micron with you?
A I do not.
MR. NELSON: May I approach the witness?
COMMISSIONER ANDERSON: You may.
(Mr. Nelson approached the witness.)
COMMISSIONER ANDERSON: Mr. Nelson, please
give us an opportunity to reflect upon what you've
presented.
MR. NELSON: Yes, so Mr. Chair,
Commission, I've just presented the witness with a copy
of the direct testimony of Micron and in specific, the
direct testimony of Ms. Jessica York that I wanted to ask
him just a couple of questions about.
COMMISSIONER ANDERSON: Yes, allow us to
get to our books to determine where we're at.
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MR. NELSON: Absolutely.
COMMISSIONER ANDERSON: Please proceed.
Q BY MR. NELSON: Mr. Thompson, do you see
up there the direct testimony that Ms. York filed in this
proceeding?
A I do.
Q Great. Could I please ask you first to
turn to page 17 of that testimony and let me know when
you're there. The page numbers are in the bottom right
corner for your guidance.
A Thank you. I'm on page 17.
Q On page 17, starting at line 19, Ms. York
testifies that the Company's current COSS and rate design
do not separately identify an industrial class as the
Company claims that no customers currently meet its
definition of an industrial customer. Do you see that,
sir?
A I do.
Q And so would I be correct that -- would
you agree with me that the term COSS refers to a cost of
service study; is that fair?
A I assume that it does.
Q Okay. Is Ms. York's testimony here
correct that the Company relative to your operations here
in Boise does not currently identify an industrial class
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of customers?
A The Company currently does not have any
customers that have self-identified or requested being
classified as an industrial class of customer.
Q Okay. Could I ask you to turn to the next
page of Ms. York's testimony, page 18?
A I'm on page 18.
Q On page 18 from lines 5 to 8, Ms. York
there provides a citation from the Company's tariff
defining an industrial customer. Do you see that, sir?
A I do.
Q And Ms. York indicates the tariff says,
"An industrial customer shall designate any building or
combination of buildings in the same compound whose
primary use is for the manufacture, fabrication, and/or
assembly of any product." Do you see that, sir?
A I do.
Q And to the best of your knowledge, has
Ms. York correctly indicated the Company's defined -- how
the Company's tariff, excuse me, defines an industrial
customer?
A This is an excerpt footnoted from Sheet
No. 36 of the Company's current tariff, so I would
assumes it is directly referenced, yes.
Q Okay. Now, relative to Micron, if you
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look a little bit further down the page as Ms. New York
testifies, Micron is currently classified or identified
by Veolia as a commercial customer; is that correct?
A It is correct.
Q Now, if you could look to page 19 of
Ms. York's testimony, so the next page over, Ms. York
indicates that Micron is undergoing a major expansion in
Boise, Idaho. Do you see that, sir?
A I do.
Q Are you generally aware of the expansion
that Micron is doing and in particular the potential
impacts that would have on its water consumption?
A Yes, I'm generally aware of all of those
details.
Q Okay, and in particular, as Ms. York
indicates on, starting on, line 5, construction of this
new project is expected to begin in 2023 -- excuse me,
construction is expected to begin in 2023 with production
beginning in 2025. Do you see that, sir?
A I do.
Q Okay, and then further down Ms. York
indicates that this process is intended to then use water
for purposes of manufacturing. Do you see that, sir?
A I do.
Q So would you agree with me that at the
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time that then Micron completes this expansion project to
utilize water in manufacturing that at that point Micron
would be identified under your tariffs as an industrial
customer?
A I would agree that if Micron pursues
industrial activities under our water usage that they
would have every right to approach the Company for
classification as an industrial customer, certainly.
Q Okay. Now, if Micron did that, as we
indicated, but just to make it clear, currently Veolia
has no rate for that service in your tariffs; correct?
A That is incorrect.
Q Okay.
A Industrial customers would have the exact
same volumetric rate that a residential or a commercial
customer would have.
Q Okay. Let me ask you this question, then:
Would you agree with me that if Micron developed this
manufacturing enterprise that it is currently engaged in
and began to take service as an industrial customer that
it could be appropriate that the rate for that service be
something different from the rates currently in the
tariff for people who are not industrial customers?
A I don't think that I would agree with you.
As it sits right now, there's no way to determine what
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their actual volumetric usage would be or any other
determinants to determine whether or not they would
require an alternative rate, so when that information
would be available, we could come up with a cost plan to
respond to that and work with it when it's real. Right
now it seems like it's a little presumptuous given that
those uses that you're describing don't exist at this
time.
Q Okay. In your rebuttal testimony at
page 7, you discuss the issue that was raised by Ms. York
where Micron was asking or was suggesting that it enter
into a discussion with the Company about the possibility
of a special contract for service in light of the
expansion project. Do you recall that testimony, sir?
A I do.
Q And do I understand correctly that the
Company is willing to discuss a potential special
contract to take into account Micron's special
circumstances after this case is concluded and once you
have additional information about the impacts that
Micron's development will have on its water consumption;
is that fair?
A As I stated in that same section of
rebuttal testimony, the Company is happy to discuss any
potential special contract when such information becomes
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known and measurable. It is not so today, so in the
future, we would be happy to discuss whatever needs
Micron has as a customer.
Q Sure, and I appreciate that it's not here
today, but you don't file a rate case every year, do
you?
A We do not.
Q Sure, and so is it possible that there may
not be another rate case filing between now and 2025 such
that we may not have a chance to have this discussion in
a rate case setting between that time period?
A The rate case setting is not the only time
for Micron to approach us as a customer for conversation.
Q Fair enough, so is it your understanding
and is it your -- from your testimony, would you agree
that between now and a potential future rate case, the
Company would be willing to meet with Micron to discuss
the possibility of a special contract?
A Again, as I indicated in my rebuttal
testimony, the Company is more than happy to discuss a
potential special contract at any time given that the
details that would inform such a contract are known and
measurable.
Q Okay. Another alternative, and if you
want, you can look back to Ms. York's testimony at
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page 20, another alternative that she presented besides a
special contract was Veolia filing a rate for an
industrial class where water users might connect directly
to the transmission system. Do you recall Ms. York's
testimony on that subject?
A I do.
Q Okay. Is the Company willing to commit to
consider the possibility of creating an industrial rate
specially designed for customers who connect directly to
your transmission system as part of a future rate case
filing?
MR. CARTER: Chairman Anderson, if I may
sort of interpose a bit of an objection here. I don't
necessarily have an objection to that precise question.
My concern is the line of questioning appears to be
headed towards trying to have Veolia Water Idaho commit
itself to particular approaches when all the facts are
not known, so again, I think it's fair to answer that
question. I do want to interject that we don't head down
that path.
COMMISSIONER ANDERSON: Mr. Nelson, a bit
of a road map, just try to narrow it, if you may.
MR. NELSON: This was the last question I
have, so if Veolia doesn't object to this one, then I
think we're okay.
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COMMISSIONER ANDERSON: Carry on.
Q BY MR. NELSON: Do you recall the
question, sir?
A How about you restate the question?
Q Okay, sure. Is the Company willing to
commit in the next rate case to consider the development
of an industrial rate specially designed for large water
users who might connect directly to the transmission
system?
A With those specifics outlined, I would say
the Company is not ready to commit to that specific
request. In general terms, I think we're open to the
concept of talking with large industrial users about
rates that might suit their needs, but your question
seems overly tailored to a very specific outcome and I
don't think that that's something we would -- I'm not
ready to commit to that at this point without any further
facts to go off of.
MR. NELSON: Thank you. I have no further
questions.
COMMISSIONER ANDERSON: Thank you,
Mr. Nelson. City of Boise?
MS. GRANT: Nothing at this time, thank
you.
COMMISSIONER ANDERSON: Ada County?
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MS. WADDEL: Nothing at this time, sir.
COMMISSIONER ANDERSON: Ms. Ullman?
MR. ULLMAN: Just one question sort of
piggybacking off of Micron.
CROSS-EXAMINATION
BY MS. ULLMAN:
Q Micron has indicated their water usage is
going to increase substantially. From where would that
water come, what source, and would it impact residential
ratepayers in terms of availability of water?
A I think for the most specific answer to
that question, that might be best posed to our
engineering team when they're up on testimony, but I can
tell you that for the community at large, 70 percent of
the water that we produce in an average year comes from
area ground water sources, which would feed this area,
the area that Micron sits in, along with others, and 30
percent of the water that we produce comes from surface
water sources, specifically the Boise River, which is
also particularly sited near the Micron campus and their
facilities.
In fact, Micron runs its own water
treatment plant that draws from the Boise River as well,
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so predominantly right now Micron's water needs are
predominantly served by surface water in that area of
town.
COMMISSIONER ANDERSON: Thank you, and
just a piece of advice, if it's in the record that's
already been entered, let's not repeat questions if the
answers are already present.
So with that, Mr. Carter, would you like
any redirect?
MR. CARTER: No, Chairman Anderson.
COMMISSIONER ANDERSON: Thank you.
Without objection, we'll excuse the witness. Thank you
very much. Oh, excuse me, Commissioners? I've got to
get my own tempo down.
No questions from the Commissioners.
Thank you very much.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Carter, you
can call your next witness.
MR. CARTER: Thank you. Veolia Water
Idaho calls Catherine Cooper.
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CATHERINE COOPER,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Hello, Ms. Cooper, will you please state
and spell your name for the record?
A Cathy Cooper, C-a-t-h-y C-o-o-p-e-r.
Q Ms. Cooper, did you file your testimony
with the name Catherine Cooper indicated on it?
A I believe I did.
Q Okay, and are you the same Catherine
Cooper or Cathy Cooper that filed direct testimony and
exhibits and rebuttal testimony and exhibits on behalf of
Veolia Water Idaho, Inc., in this case?
A Yes.
Q And if I asked you the same questions
today, would your answers be the same?
A They would.
MR. CARTER: Commissioners, I'd ask that
Ms. Catherine Cooper's direct testimony and exhibits and
rebuttal testimony and exhibits be spread upon the record
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as if read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will direct that all direct and
rebuttal testimony and exhibits will be spread across the
record.
(Veolia Water Idaho, Inc., Exhibit Nos. 3
& 4 were admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Ms. Catherine Cooper is spread upon
the record.)
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Q.Please state your name, occupation and business
address.
A.My name is Catherine Cooper. I am the Director
of Engineering for Veolia Water Idaho, Inc. ("Veolia" or
"Company"). My business address is 8248 W. Victory Road,
Boise, Idaho 83709.
Q.Please summarize your educational background
and professional experience.
A.I am a graduate of the University of Colorado
at Boulder with a Bachelor of Science in Civil
Engineering. I completed my Master of Science in Civil
Engineering at the University of Washington in Seattle.
I have been a licensed Professional Engineer in the State
of Idaho since 1999.
I have been employed as a civil engineer for 28
years. My work experience includes 22 years at Boise
area consulting firms where I focused on water system
engineering. My experience includes preparing detailed
hydraulic calculations; designs for storage tanks, pump
stations, pressure reducing stations, pipelines, and well
houses; water system Master Facility plans; hydraulic
models; and project cost estimates. I was an Owner and
Managing Partner at my last consulting firm.
I have been employed by Veolia (formerly Suez)
since July 2016 as the Director of Engineering in Idaho.
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Q.Please describe your duties as Director of
Engineering.
A.I have oversight over the Company's capital
expenditure budget and short and long-term facility and
water supply planning. In addition, I manage selected
engineering projects for the Company.
Q.What is the purpose of your testimony?
A.The purpose of my testimony is to discuss:
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·Pro forma adjustments to the historic test year
(ending June 30, 2022) to recognize investments in
plant in service through March 31, 2023.
·Explanation of the purchased water expense and
adjustments thereto as it relates to drought
protection and weather conditions.
Q.What Exhibits are you sponsoring?
A.I am sponsoring the following Exhibits:
1. Exhibit No. 3 - Test Year Period Plant
Additions and Retirements
2. Exhibit No. 4 - Purchased Water
Q.Since the last general rate case, has the
Company continued to invest in utility plant in service?
A.Yes. The total plant in service investment net
of CIAC from January 1, 2021 to March 31, 2023 is
approximately $70 million, an increase of about 14% over
the Company's Plant in Service at January 1, 2021 of
approximately $512 million. The Company continues to
provide new and replacement utility plant in all areas of
the business including source of supply, water treatment,
pumping, transmission and distribution mains,
distribution storage, customer service lines, customer
meters, information technology, and general plant.
Q.Are these plant in service additions used and
useful in providing service to the Company's customers?
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A.Yes, they are. Additionally, the projects
included in the test year rate base from July 1, 2022
through March 31, 2023 will also be in service before the
time new rates that reflect these investments go into
effect.
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Q.Can you discuss, in general terms, the capital
additions planned to be placed in service from July 1,
2022 through March 31, 2023?
A.Yes. The capital additions include meters and
services, pumping equipment, new and replacement mains, a
new storage tank, treatment equipment, control equipment,
facility improvements, engineering studies, information
technology systems, and security upgrades. The test year
plant additions for this time period are detailed in two
locations with associated exhibits. Plant in service
additions for the period of July 1, 2022 to March 31,
2023 are summarized by account number in Exhibit No. 11,
Schedule 3 sponsored by witness Njuguna, and are also
listed by project name on the attached Exhibit No. 3.
Q. Does Exhibit No. 3 also show retirements, cost
of removal and salvage for the pro forma period?
A.Yes. The retirements include service lines,
meters, pumping equipment, new and replacement mains,
treatment equipment, control equipment, information
technology equipment, and facility improvements. The
cost of removal is included for additions that involve
removing an existing asset. In some cases there is no
existing asset to remove with the plant addition.
Salvage value is included for assets that are anticipated
to have an actual salvage value.
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Q. Will these plant additions be in service by the
end of the test year?
A.Yes. These plant additions are underway and/or
planned for completion by the end of the test year, March
31, 2023.
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Q. Will the plant additions shown on Exhibit No. 3
be used and useful in providing service to the Company's
customers?
A.Yes, they will.
Q. Please discuss the basis for Veolia Water
Idaho's purchased water expense in the pro forma amount
of $316,694 as shown on Exhibit No. 4.
A.The annual cost of surface water is dependent
on multiple factors including snowpack, drought
conditions, and summer high temperatures. Annual
purchased water costs have ranged from $329,862 to
$349,754 from 2021 to 2022. The Historic Test Year
purchased water cost was $378,302. It was higher than the
individual years largely because it included two natural
flow water bank rental charges due to timing of Idaho
Department of Water Resources (IDWR) processing of the
rental application. The test year purchased water costs
are described in Company witness Wilson's testimony,
Exhibit No. 10, Schedule 1, Adjustment No. 9.
Veolia's surface water portfolio is diverse,
balanced across natural flow water rights, storage
contracts, exchanges, irrigation district shares both
owned and leased, long term rental pool lease agreements,
and short term rental pool and natural flow water bank
rentals. Short term (one season) rental pool and natural
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flow rentals are used to make up any shortfalls in
surface water supply for the year when necessary.
Veolia anticipates the water market in the
Treasure Valley will tighten as growth continues over the
coming decades. In addition, drought and flood conditions
may be exacerbated as an effect of climate change. With
this in mind,
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Veolia is working towards more permanent surface water
arrangements to solidify surface water availability over
the long-term for our customers. Natural flow rights,
where available, are favored over storage rights that may
be more susceptible to drought conditions. Purchases are
preferred over leases.
The test year amount is lower than the historic
test year for two reasons 1) there is only one natural
flow water bank rental included, and 2) to reflect a
shift towards more storage water rental than natural flow
rental.
Q. Are the lease/contract costs generally known
and measurable related to purchased water expense?
A.Yes, the costs are generally known and
measurable. These agreements have been executed or are
in planning/progress, and are shown on Exhibit No. 4.
Q. Can you clarify why the purchased water expense
proposed in the test year period is less than the
historic test year expense by $61,608?
A.Yes. In the historic test year, there were two
charges for natural flow water bank rentals, one in 2021
and one in 2022. It is not expected to be typical that
two charges like this would occur in the same year, so
the best estimate of this total cost was made for the
test year period, which caused the majority of the
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decrease.
Q. Do you believe $316,694 as depicted on Exhibit
No. 4 is a reasonable allowance for purchased water
expense for rate making purposes?
A.Yes.
Q.Does this conclude your testimony?
A.Yes.
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Q.Please state your name, occupation and business
address.
A.My name is Catherine Cooper. I am the Director
of Engineering for Veolia Water Idaho, Inc. ("Veolia" or
"Company"). My business address is 8248 W. Victory Road,
Boise, Idaho 83709.
Q.Are you the same Catherine Cooper that filed
direct testimony in this proceeding?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.The purpose of my rebuttal testimony is to
discuss:
·Pro forma adjustments to the historic test
year (ending June 30, 2022). As actuals are
recorded through February 28, 2023, we have
utilized the actual balances as of February 28,
2023, and projected March 2023 resulting in
amounts very close to the original projection. My
testimony will address plant in service,
retirements, cost of removal, and salvage amounts
from January 1, 2023 to March 31, 2023.
·Schedule for Hidden Hollow Tank Painting and
Ustick Tank Painting.
Q.Which rebuttal exhibits are you sponsoring?
A.I am sponsoring the following Exhibit:
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·Exhibit No. 16 - Pro Forma Period Plant Additions
and Retirements March 2023
Q.Has the Company continued to invest in utility
plant in service after December 31, 2022?
A.Yes, the Company has invested a substantial
amount between January 1, 2023 and February 28, 2023 and
will continue to invest through March 31, 2023. The
Plant In Service projections versus actuals (with an
updated projection for March 2023) for time
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periods between July 1, 2022 and February 28, 2023 as
well as the amount projected to be included through March
31, 2023 are shown below.

(Table contained in hard copy of transcript)
From this summary, it can be seen that the Company
has and will continue to make substantial investments
(over $7.9M) in utility plant in service from January 1,
2023 to March 31, 2023. Investments from January 1, 2023
to February 28, 2023 are known and measurable, and the
March projection is updated with current information.
You can see that the Company has done a good job with the
projections and the overall total comparison is very
close to the original filing, within 3 percent. Staff
has reviewed detailed information for nearly every
project included in the current utility plant in service
projections (Exhibit No. 16) through the Data Requests.
Staff has not requested any adjustments or flagged any
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issues with the Company's projects. We request that the
Idaho Public Utilities Commission allow capex investments
through March 2023 to be recovered in this rate case in
order to encourage the Company to continue making capital
investments in the water system.
Please see the updated attached Exhibit No. 16
for the March projection of plant in service,
retirements, cost of removal, and salvage values.
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Witness Njuguna has used the Actuals through
February with projections for March to update Plant in
Service, Retirements, Cost of Removal, and Salvage values
in his Exhibit No. 21.
Q.Will these plant in service additions between
January 1, 2023 and March 31, 2023 be used and useful in
providing service to the Company's customers?
A.Yes, they will.
Q.The January and February investments are
actuals, can you discuss, in general terms, the capital
additions planned to be placed in service in March 2023?
A.Yes. The March capital additions include pump
upgrades, a water quality master plan for East First
Bench, upgrade of the programmable logic controllers at
Columbia Surface Water Treatment Plant, production
roll-up improvements including replacement sodium
hypochlorite generators, pressure reducing valve station
improvements, a new crew truck, agency main replacements,
replacement fire hydrants, short main repairs and
replacement, new and replacement services, and new and
replacement customer meters. These capital additions are
shown on Exhibit No. 16.
Q.Does the updated Exhibit No. 16 also show
retirements, cost of removal and salvage for March 2023?
A.Yes, the retirements include piping and
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electrical equipment, control equipment, disinfection
equipment, pumps, distribution piping, service materials,
and meters. The cost of removal is included for
additions that involve removing an existing asset.
Salvage value is included for assets that are anticipated
to have an actual salvage value.
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Q.Will these plant additions be in service by the
end of March 2023?
A.Yes. These plant additions are underway, and
mostly complete at the time of this update in early
March. They will be in service by March 31, 2023.
Q.Please provide an update on the timing of the
Hidden Hollow Tank interior painting project.
A.The Hidden Hollow tank interior painting
project was included in the company's proposed case as a
regulatory asset for recovery over the life of the
project (20 years). Work on the project began in October
2022. While the project is progressing well, additional
repairs were needed to the roof rafters, causing a slight
delay in the completion of the project. Currently the
project is scheduled to be completed on April 5th, 2023
and will return to service in April 2023. This slight
delay is unfortunate in that the Company will now have to
delay amortizing and recovering these costs through the
resolution of its next rate case filing.
Q.Please describe the Ustick Tank interior tank
painting project.
A. The Ustick Tank interior tank painting project
is a re-coating of the interior of Ustick Tank. The
project began in October 2022. Originally, the costs of
the tank painting project were not included in the
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Company's case as it was not planned to be complete until
April 2023. However, that project has progressed faster
than originally planned and will be complete before the
end of March 2023. As a result, we are proposing to
include the Ustick Tank interior painting costs (total of
$430,100) as a part of rate base and amortization expense
(over a 20 year period).
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in open hearing.)
MR. CARTER: Ms. Cooper is now available
for cross-examination and questions by the Commission.
COMMISSIONER ANDERSON: Thank you.
Mr. Burdin, does Staff have any questions?
MR. BURDIN: I do not have any questions
for Ms. Cooper. Thank you, Ms. Cooper.
COMMISSIONER ANDERSON: Micron, questions?
MR. RUESCHHOFF: No questions for
Ms. Cooper. Thank you.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: No, thank you, Commissioner.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions.
COMMISSIONER ANDERSON: Thank you. With
that, any questions from the Commission? Without
objection, we will excuse the witness. Thank you.
THE WITNESS: Thank you.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Carter, you
can call your next witness.
MR. CARTER: Veolia Water Idaho calls
Jarmila Cary.
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JARMILA CARY,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Will you state your name and spell your
name for the record?
A Jarmila Cary, J-a-r-m-i-l-a C-a-r-y.
Q And are you the same Jarmila Cary that
filed direct testimony and exhibits, rebuttal testimony
and exhibits, and corrected rebuttal testimony on behalf
of Veolia Water Idaho in this case?
A I am.
Q And if I asked you the same questions
today, would your answers be the same?
A They would.
Q Ms. Cary, you're going to have to really
lean into that microphone.
A I apologize, they would.
MR. CARTER: The Commission, I would ask
that Ms. Jarmila Cary's direct testimony and exhibits,
rebuttal testimony and exhibits, and corrected rebuttal
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testimony be spread upon the record as if read.
COMMISSIONER ANDERSON: Without objection,
we will spread the direct, rebuttal, corrected rebuttal,
and exhibits across the record as if read.
(Veolia Water Idaho, Inc., Exhibit Nos. 10
and 20 were admitted into evidence.)
(The following prefiled direct, rebuttal,
and corrected rebuttal testimony of Ms. Jarmila Cary is
spread upon the record.)
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Q.Please state your name and business address?
A.Jarmila M. Cary, 8248 West Victory Road, Boise,
Idaho 83709.
Q.By whom are you employed and in what capacity?
A.I am employed by Veolia Water Idaho, Inc.
("Veolia", "Veolia Water Idaho" or "Company") in the
capacity of Director of Finance and Customer Service.
Q.How long have you been employed by Veolia Water
Idaho?
A.I have been employed by Veolia Water Idaho,
Inc. (formerly SUEZ Water Idaho Inc. and prior to that,
United Water Idaho Inc.) since June 1997.
Q.Briefly describe your responsibilities during
your tenure at the Company.
A.As Director of Finance and Customer Service, I
have oversight over the Company's financial activities
including planning, variance analysis, operational
reporting, payroll, accounts payable, and development and
monitoring of business metrics. I participate in rate
filings, monitor capital expenditure investment, and
define and implement changes in management initiatives. I
am also the contact person within Veolia Water Idaho for
centralized functions such as Accounting, Audit, Tax,
Treasury and Procurement. In March 2018, my role expanded
to include oversight of the Customer Service department,
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including billing functions, call center, meter reading,
customer service field work activities, cashiering, etc.
During September 2020, the meter reading and customer
service field work activities were aligned with
Operations under the supervision of the Transmission and
Distribution Manager, while the office related customer
service functions including billing, call center and
cashiering functions remain under my supervision.
Additionally, I provided testimony before the Idaho
Public Utilities Commission in the Company's
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2011 general rate case UWI-W-11-02 and 2015 general rate
case UWI-W-15-01, 2018 filing Case SUZ-W-18-02 for
approval of sale and acquisition of Eagle Water Company,
the 2019 Case SUZ-W-19-01 filing for exemption from
Utility Customer Relation Rules 311(4) and (5) related to
customer contact requirements, accepting payments during
disconnection, and eliminating customer convenience fees.
In 2020 I provided testimony in Case SUZ-W-20-01
requesting authorization to eliminate collection of tax
gross-up payments associated with contributions in aid of
construction and most recently, I provided testimony in
the 2020 general rate case SUZ-W-20-02.
From January 2003 until April 2013, I was in a
supervisory role, as Manager of Accounting. I assisted
Company Witness Healy in formulating rate increase
requests and operating expense adjustments in the 2006,
and 2009 general rate cases. During April 2013,
accounting functions transitioned to the former SUEZ
Corporate office.
From 1997 until January 2003, I was in a Senior
Accountant role, performing general ledger accounting,
planning functions, variance analysis, etc. In that role
I also prepared annual reports to the Idaho Public
Utilities Commission and the Idaho State Tax Commission.
Q.What is your educational background?
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A.I was granted a Bachelor of Science in
Business, with a major in Accounting, from the University
of Idaho in December 1996 and attended NARUC Utility Rate
School.
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Q. In connection with the Company's current
application for an increase in rates and charges, what is
the scope of your participation and testimony?
A.My participation and testimony concerns
operating expenses of the Company. For this rate case
filing, Veolia Water Idaho used a test period consisting
of a 12-month period ending on June 30, 2022 ("Historic
Test Year") and a nine-month adjustment period ending on
March 31, 2023 ("Test Year"). For the Historic Test Year
data, Veolia has relied on its books and records, which
are prepared and maintained in conformity with the
Uniform System of Accounts prescribed by the Commission.
As discussed in more detail below, the operating expenses
that are included in the exhibits that I am sponsoring
are based on the Historic Test Year, as modified by
certain normalizing adjustments. The Historic Test Year
expenses are also adjusted for changes in costs that are
expected to take place in the adjustment period (or prior
to effective date of the rates) and measurable with a
reasonable accuracy at the time of this rate case filing.
Q.What exhibits are used to illustrate your
testimony?
A.The following Exhibits accompanying my
testimony:
·Exhibit 10, Schedule 1 - Operating and Maintenance
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Expense Adjustments:
·Adjustment 1 - Payroll
·Adjustment 2 - Workers Compensation
·Adjustment 3 - Pension Cash Contributions
·Adjustment 4 - Post-retirement Benefits Other
than Pension (PBOP)
·Adjustment 5 - Employee Healthcare
·Adjustment 8 - Payroll Overheads (Fringe
Benefit Allocation)
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·Adjustment 10 - Energy - Purchased Power and
Other Utilities
·Adjustment 11 - Chemicals
·Adjustment 12 - Subcontractors
·Adjustment 13 - Customer Billing Expenses
·Adjustment 17 - Office Expenses
·Adjustment 20 - General Insurance
·Adjustment 22 - Safety
·Adjustment 29 - Adjustment to Variable
Expenses Due to Volume Normalization
·Exhibit 10, Schedule 3 - Adjustment to Operating
Taxes
·Adjustment 1 - Property Taxes
Company Witnesses Wilson and Zerhouni will discuss
additional operating and maintenance expense adjustments
in their testimony and Exhibits.
Q.Please describe the approach you have taken in
preparing the exhibits for operation expenses.
A.I have relied on information and data produced
within the Company, and my own investigation thereof, as
the basis for adjustments in order to appropriately
reflect the costs expected to be incurred during the
period rates will be in effect as a result of this
filing.
Q.Please describe the various normalizing and
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annualizing adjustments, as well as known and measurable
adjustments, made to operating expenses as demonstrated
in Exhibit 10, Schedule 1.
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A.Adjustment No. 1, Payroll, increases payroll to
Operations and Maintenance expense by $989,331. Historic
Test Year Operations & Maintenance payroll expense (net
Payroll expense) is $6,672,277 and the Test Year amount
is $7,661,608. Historical Test Year gross payroll is
$10,083,343 (GL accounts 50100 through 50115) and Test
Year gross payroll is $11,578,450. The components of this
adjustment are:
Number of positions: The historic test year ending
June 30, 2022 consisted of 122 filled full-time employees
(66 Bargaining Unit and 56 non-bargaining). In the test
year, the Company work force is 137 full time employees
(75 Bargaining Unit and 62 non-bargaining). The net
increase of 15 positions from the test year is due to the
filling of vacancies and accounted for by the hiring of 1
- Operator, 2 - Operator 1 positions, 1 - Cross
Connection Control Specialist, 1 - Crew Chief, 4 -
Utility Person positions (one in a Crew Chief rotation),
1 - Customer Service Person (Field), 1 - Customer Service
Representative (Office), 1 - Administrative Executive, 1
- Operations Lead Customer Service Representative
Responder, 1 - Environmental Health & Safety (EH&S)
Specialist, and 1 - Communications and Community
Education Specialist. Company Witness Thompson's
testimony will discuss these positions in more detail.
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Wage adjustments: The adjustment includes the impact
of the April 1, 2023 contractually obligated actual pay
increase of 2.75% for Bargaining Unit employees. For all
Bargaining Unit employees, pay rates are applied to 2,080
hours in the test year. For Non-Bargaining employees, pay
rates reflect March 2023 anticipated wages subject to
true-up, reflecting a 4% change over 2022 and applied
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to 1,950 hours. The test year labor to Operations &
Maintenance amount is calculated using the historic test
year ratio of 66.17% of opex payroll to gross payroll
(calculated as Net labor accounts 50100 to 50125 divided
by Gross labor accounts 50100 to 50115).
Standby Pay, Shift Pay and Overtime Pay: The test
year adjustment includes standby pay and shift pay at pay
rates projected to be in effect when the rates are to be
effective in this case for Bargaining Unit employees as
well as shift pay for Customer Service Representatives
for rotational duties performed related to cashiering,
bankruptcy and billing functions. Overtime is included at
the historic test year level, in line with the three-year
average, adjusted by 2.75% for the bargaining unit
contractually obligated wage increase.
Incentive Programs: Incentive bonuses for Exempt and
Non-exempt employees are based on the award level
percentage by position, adjusted to test year wages.
Exempt employees may be eligible to participate in the
Company's Short Term Incentive Plan (STIP) if they meet
goal targets and criteria requirements. A target award,
based upon their job/salary grade, is established as a
percentage of base pay. Broadly, the incentive is based
on achievement in two goal categories: personal goals and
Company goals. Non-exempt, non-bargaining employees are
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eligible to participate in the Non-Exempt Incentive
Program. This plan is based upon meeting Safety and
Compliance Training goals. Bargaining Unit employees are
not eligible for incentive pay programs per bargaining
contract provisions.
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Q.Please continue describing the remaining
normalizing and annualizing adjustments, as well as known
and measurable adjustments made to operating expenses.
A.Adjustment No. 2, Workers Compensation,
increases workers compensation insurance by $19,889 from
the adjusted historic test year amount of $96,318. The
historic test year is adjusted to exclude IBNR (incurred
but not reported) reserves of $203,439 and add claims
payments of $52,276 recorded in liability GL account
26200, for a total normalizing adjustment of $255,715.
The test year amount is based upon the three-year average
of adjusted workers compensation expense percentage as a
ratio of gross payroll. The average for the last three
calendar years (2019 through 2021), produces a ratio of
1.004% of adjusted workers compensation expense to gross
payroll. Applying this ratio to the test year level of
gross payroll $11,578,450 results in test year expense of
$116,207.
Adjustment No. 3, Pension Cash Contributions,
increases pension expense by $32,766 from the historic
test year pension expense (service cost and interest
component) of $553,030. The Company is required to apply
FAS 87 in determining book expense. In Order No. 29838,
UWI-W-04-04, the Commission found that it was not
appropriate, for the purposes of determining rate
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recovery, to use the FAS 87 pension expense accrual. The
Commission determined that, for rate making purposes,
cash contributed to the pension plan is the appropriate
level to be recovered in rates. Pension cash
contributions from plan year 2019 through 2021 averaged
$1,350,351, however the Company's pension cash
contributions are expected to decrease to $585,796 based
on the year to date June 2022 amounts with
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a projection of the same level of contributions for the
remainder of the year. The current threshold established
in Case No. UWI-W-20-02 is $1,312,595. The Company is
proposing lowering the deferral threshold of pension cash
contributions to $585,796 to reflect the current level of
cash contributions. The Company is anticipating a similar
level of pension cash contributions in the calendar year
2023.
Adjustment No. 4, Post-retirement Benefits Other
than Pension (PBOP), increases expense by $42,509. The
historic test year amount is ($481,247) consisting of
$150,621 service costs and ($631,868) interest component.
The test year level of expense represents the FAS 106
expense of ($523,756) as contained in the Towers Watson
actuarial valuation for 2022, with a service cost of
$163,925 and interest component of ($687,681). This
adjustment is subject to change for actuarial valuations
anticipated in October 2022.
Adjustment No. 5, Employee Healthcare, decreases the
cost of providing medical, dental, group term life
insurance, and long term disability coverage to employees
who choose to be covered by Veolia benefits, by $353,303.
Vision insurance is entirely funded by employees.
Employees contribute approximately 10% toward the cost of
health care. The historic test year excludes $25,894 of
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IBNR - incurred but not reported claims reserve for a net
Adjusted Historic Test Year expense of $2,457,013. The
test year amount is based on historic test year employee
elections, rates in effect during the historic test year,
adjusted to the test year employee count of 137. The test
year Company expense is $2,103,710. This
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adjustment is subject to change when 2023 benefit costs
become known anticipated in October 2022.
Adjustment No. 8, Payroll Overheads (Fringe Benefits
Allocation), normalizes fringe benefit costs chargeable
to other than Operations and Maintenance expense and
increases historic test year expense by $81,157. The
historic test year credit is $1,547,567 and the test year
credit is $1,466,411. The Company uses a fringe benefit
allocation ("FBA") method to ensure employee benefits
follow labor charges. A portion of fringe benefit costs
are therefore transferred off the income statement to the
balance sheet, primarily following labor charged to
capital projects. The historic test year relationship of
capitalized payroll to gross payroll dollars is 33.83%.
This same rate is applied to test year benefit costs.
Adjustment No. 10, Energy - Purchased Power and
Other Utilities, increases expense by $97,600 from the
historic test year amount of $2,498,030 to the test year
amount of $2,595,630. The test year expense reflects
historic test year billing determinants priced at current
Idaho Power Company tariff base rates and does not
anticipate any additional price increases. Power expense
is reduced by $6,020 to reflect the anticipated proceeds
from Veolia's participation in the Idaho Power demand
response program previously administered by EnerNOC. Test
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Year expense also includes the historic test level
expense of other power, diesel fuel for generators,
natural gas, and other utility costs. The Test Year is
increased by $45,340, the historic test year amount of
power costs of 6 months of former Eagle Water facilities
that are not reflected in the historic test year amount.
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Q.Does the company defer any portion of Idaho
Power Company billings?
A.Yes, the Company follows Commission Accounting
Order No. 28800 in Case No. UWI-W-01-02 which allowed the
Company to defer Idaho Power Company's Power Cost
Adjustment (PCA) and Fixed Cost Adjustment (FCA) charges
and present the accumulated deferral for amortization
recovery in subsequent rate filings.
Q Briefly, how was the Test Year power expense
calculated?
A.Test Year power expense is based on twelve
months of Idaho Power Company's invoices for pumping and
distribution costs. Veolia consumed 35,437,034 kWh in the
historic test year and the same kWh and billing
determinants are used in the projection for the test year
period. These units were priced out at Idaho Power
Company tariff rates in effect as of June 2022 for
Schedules 7, 9S and 9P, Power Cost Adjustment rates per
tariff Schedule 55 and Fixed Cost adjustments per
Schedule 54. Added to this electricity expense is the
historic test year level of generator fuel, other power
and other utility costs, as well as 6 months of Eagle
Water power costs.
Q.How is power expense normalized to match
Company Witness Michaelson's test year revenue
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adjustments?
A.In Adjustment 29, Adjustments to Variable
Expenses Due to Volume Normalization, the historic test
year revenue volume adjustments reflected in hundred
cubic feet (CCF) result in a test year reduction to both
energy and chemical costs of $127,937 combined. These
adjustments are included in Exhibit 5,
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Schedules 2, 3, 4A through 4D and are explained in more
detail in the testimony of Company witness Michaelson.
Q.Please describe your next adjustment.
A.Adjustment No. 11, Chemicals, increases the
adjusted historic test year chemical expense of $435,668
by $158,707, to a test year expense of $594,376. The
historic test year amount is reduced by $36,754 for
chemical maintenance costs, $31,223 that were
reclassified to materials and $5,531 that were
capitalized. Treatment chemicals are utilized in the
water treatment process to disinfect drinking water, to
otherwise make water safe to consume, or to improve water
aesthetically. Historic test year quantities for each
chemical agent were totaled and priced out at the most
recent available price for the test year amount.
Adjustment No. 12, Subcontractors, includes legal
costs, professional services, temporary help, IT system
support costs, field contractors, water quality testing
fees, customer notification system fees, utility location
services, customer payment convenience fees which the
Company was authorized to pay on behalf of customers in
Case SUZ-W-19-01, Concur expense report & purchasing card
(P-card) processing fees, and other costs. The
adjustment increases the historic test year expense of
$811,173 by $19,282 to a test year amount of $830,455.
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The historic test year was adjusted to exclude a portion
of the Gallagher Benefit Services compensation study
costs in order to reflect a normalized annual cost
coinciding with Bargaining Unit contract renewals, as
well as an adjustment to reduce historic test year
expense by $16,518 due to timing of vibration analysis
testing costs that are reflected twice in the historic
test year, and to eliminate $5,100 of temporary
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help costs. The historic test year amount was increased
by $20,000 for new costs related to Itron Temetra's meter
reading software. The legacy Itron MVRS meter reading
system stopped being supported by the vendor,
necessitating the upgrade to a cloud based software.
SCADA - Supervisory Control and Data Acquisition system
maintenance and support fees provided by GeoSCADA are
increasing by an expected $10,000 due to the addition of
data points. The historic test year amount was also
increased by $27,500 which reflects costs to be incurred
this fall for well cleaning and tank inspections that
were not reflected in the historic test year due to
vendor availability and other timing issues.
Adjustment No 13, Customer Billing Expenses,
increases expense for customer billing related services
by $22,125 from the historic test year level of $301,338,
to the test year amount of $323,463. The test year amount
is based on the historic test year level of bill
generation and postage costs and eBilling (electronic
billing) services. It also includes a 1% customer growth
adjustment from the historic test year of $2,915, a 7.55%
postage rate increase for metered mail effective July 10,
2022, which equates to an increase of $11,066, as well as
a CSG (bill generation vendor) materials and processing
cost increase effective July and October 2022
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respectively, for a combined vendor bill generation cost
increase of $8,144.
Adjustment No. 17, Office Expenses, increases office
related costs by $73,730 from the historic test year
amount of $741,917 to a test year amount of $815,647. The
increase of $42,776 represents an increase in licensing
cost per contract with Cityworks, as well as the cost of
additional licenses needed for new
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employees. An addition of $20,000 reflects expected
postage costs for mailing the Customer Confidence Report
(CCR) to customers based on the low digital readership of
the CCRs, which is currently provided in an electronic
format. An increase of $821 reflects an increase in the
first-class postage cost of 3.45% effective July 10,
2022. The final adjustment to office expenses is the
addition of $10,133 of the Right Systems maintenance
support fee for the Company's UPS backup system cost
which was invoiced in late August 2022 for services
provided during the historic test year.
Adjustment No. 20, General Business Insurance,
increases expenses for business insurance, including
liability and property coverage by $151,177. The adjusted
historic test year amount is $91,348. It excludes
$226,899 of IBNR (incurred but not reported reserves) and
includes $91,123 of claims payments not reflected in the
historic test year book cost, captured in liability GL
account 26200 for a total normalizing adjustment of
$135,776. The test year amount of $242,524 is based on an
average of the two prior years, 2020 and 2021 adjusted
costs. General insurance premiums are captured in
Management and Service (M&S) fees as of 2016, and
deductibles for claims paid are captured in general
insurance expense from 2020 forward. Prior to 2020, both
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premiums and claims payments were included in M&S Fees.
Adjustment No. 22, Safety, increases the historic
test year amount of $154,824 by $40,582 to a test year
amount of $195,406. The adjustment is based on budgeted
amounts or prior actual costs for necessary training and
safety related costs. Uniform costs, Arc Flash personal
protective equipment (PPE) rental costs,
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fire suppression system inspections/alarm monitoring,
OSHA standards and safety equipment costs are reflected
per historic test year amounts. Hearing tests are based
on prior actual costs updated for 75 Bargaining Unit
employees. The cost of ArcFlash, Confined Space,
Trenching and Excavation training programs and Industrial
Hygienist Respirator/chemical/asbestos program assessment
and exposure monitoring are based on the anticipated cost
of these trainings as provided by the training vendors
and included in the test year expense to account for new
employees discussed in Adjustment No. 1. Other training
costs are based on prior expense amounts and adjusted to
reflect a yearly cost if the training program has a
longer than annual frequency.
Adjustment No. 29, Variable Expense Volume
Normalization, reduces historic test year operating
expenses for Power & Chemicals by $127,937 to coincide
with the revenue reduction adjustments made by Company
Witness Michaelson based on his review & analysis of the
downward consumption trend of Veolia customers. The ratio
of variable historic test year operating expenses (Energy
of $2,498,030 and adjusted Chemicals of $435,668)
totaling $2,933,699 to historic test year consumption
amount of 19,611,411 hundred cubic feet (CCF) is 14.921%.
Company witness Michaelson makes revenue adjustments to
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include Adjustment R1 - the annualization of historic
test year growth of 92,566 CCF, post-historic test year
Adjustment R2 customer growth of 95,358 CCF, Adjustment
R3 weather and usage adjustment of 1,474,286 CCF, and
Adjustment R4 Annualization of historic test year
existing Customers of 428,938 CCF, for a net volume
adjustment of 857,424 CCF per his Exhibit 5 Schedules 3,
4A through 4D.
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Since this consumptive decline must logically impact
power and chemical expense, the 857,424 CCF reduction
will decrease variable expenses by $127,937.
Q.Please explain Exhibit No. 10, Schedule 3, Page
1.
A.Exhibit No 10, Schedule No 3, Adjustment No 1,
Page 1 of 4, Property Taxes, reflect the historic test
year level of Ada County Property Tax of $1,769,525 and
will be subject to true up when the current levy rate
becomes known and 2022 year-end results are available.
The historic test year amount of $1,769,525 is increased
by $375,507 to the test year expense of $2,145,032.
For reference purposes the assessed value per Idaho
State Tax Commission's January 1, 2022 is $222,397,333
for year ended 2021. Using the last actual levy rate per
the November 2021 property tax bill of 0.9399% and $2,464
of irrigation district taxes produces $2,092,747
anticipated 2022 property tax expense.
The test year calculation using a 2022 year ended
anticipated valuation of $227,988,335 is based on the
same calculation methodology utilized by the Idaho State
Tax Commission and utilizes the same November 2021 levy
rate.
No levy rate increase is included in the test year
adjustment. The adjustment is based on a mix of known and
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measurable information, the actual 2021 levy rate
percentage, projected 2022 Operating Income and projected
2022 plant balances based on anticipated year end
results. This adjustment is subject to update when the
2022 levy rate is known and 2022 year-end financial data
is available.
Q.Why do you anticipate an increase in Property
Tax expense?
A.The Company filed its annual Operator Statement
for the calendar year ending December 31, 2021, with the
Idaho State Tax Commission (ISTC) in April 2022
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and will file the 2022 year-end report in early 2023. The
Operator Statement contains financial information that
allows the ISTC appraiser to value the Company based on
the capitalization of net operating income (NOI). The NOI
Weighted indicator of value is anticipated to increase in
the 2022 appraisal as compared to the 2021 appraisal, by
approximately $1.4 million. The financial information in
the Operator Statement also allows the appraiser to
calculate the cost indicator of value in a process that
mimics the rate base calculation used in this case. The
cost indicator is expected to increase by approximately
$21 million based on the utility plant investment
balance. The Operator Statement provides substantiation
of property tax exemptions for which the Company
qualifies. The value of the exemptions is expected to
increase by $1.2 million. The ISTC has a process for
determining the appropriate capitalization rate to apply
to the net operating income. The 2022 valuation indicated
a 6.67% capitalization rate. At the end of the process,
the ISTC certifies the Company's value to Ada County for
the actual calculation of taxes based on approved levy
rates. The Company has taken a conservative approach to
the applicable levy rate and capitalization rate by using
known test year amounts.
Q.Does this conclude your direct testimony?
A.Yes.
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Q.Please state your name and business address.
A.Jarmila M. Cary, 8248 West Victory Road, Boise,
Idaho 83709.
Q.Are you the same Jarmila Cary who previously
provided direct testimony in this case?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.I will address several adjustments proposed by
the Idaho Public Utilities Commission Staff ("Staff") and
certain intervenors regarding operating costs that are
discussed in my testimony, including:
·The proposed Test Year ending period,
·Salaries and Wages,
·Workers Compensation,
·Post-retirement Benefits Other than Pension
(PBOP),
·Employee Healthcare,
·Payroll Overheads (Fringe Benefit Allocation),
·Customer Billing Expenses,
·Office Expenses,
·General Insurance,
·Safety,
·Unadjusted Expenses - Miscellaneous Costs, and
·Adjustment to Variable Expenses Due to Volume
Normalization.
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Company Witnesses Wilson, Jacob, and Cagle will discuss
other operating and maintenance expense adjustments in
their rebuttal.
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I will also address several recommendations proposed
by Staff related to customer issues.
Q.Have you prepared any exhibits to support your
rebuttal testimony?
A.Yes. I have prepared the following rebuttal
exhibits:
·Exhibit 20 Schedule 1 - Operating Expense Summary
ºAdjustment 1 - Payroll
ºAdjustment 2 - Workers Compensation
ºAdjustment 4 - Post-retirement Benefits Other
than Pension (PBOP)
ºAdjustment 5 - Employee Healthcare
ºAdjustment 8 - Payroll Overheads (Fringe
Benefit Allocation)
ºAdjustment 13 - Customer Billing Expenses
ºAdjustment 17 - Office Expenses
ºAdjustment 20 - General Insurance
ºAdjustment 22 - Safety
ºAdjustment 29 - Adjustment to Variable
Expenses Due to Volume Normalization
ºAdjustment 30 - Unadjusted Expenses -
Miscellaneous Costs
Test Year End
Q.Please summarize the recommendations made by
Staff Witness English to the Company's proposed Test Year
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ending period.
A. The testimony of Staff Witness English proposes
to update the Company's test year to the 12 months ending
December 31, 2022 and removing all pro-forma 2023
adjustments.
Q.Do you agree with Staff's recommendations for
the proposed Test-Year ending period and eliminating all
pro-forma 2023 adjustments?
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A. No. It is the Company's opinion that
reasonable, known and measurable adjustments should be
included in the Company's operating expenses for
recovery, after Staff's proposed December 31, 2022 Test
Year end period. Costs that have already been incurred as
well as those that can be reasonably measured and have a
high degree of certainty of being realized before the
conclusion of a rate proceeding, before the new rates
will be in effect, should be included for Commission's
consideration to the extent possible. It is widely
accepted by the National Association of Regulated Utility
Companies (NARUC) that known and measurable adjustments
"should have a strong degree of certainty associated with
them, and that there should be a reasonable ability to
measure the item underlying the adjustment."1
Q.Please summarize the recommendations made by
Staff and Intervenors to the Company's Operating Expenses
that were discussed in your testimony.
A.The testimony of Staff Witness Johnson proposes
several adjustments, summarized as follows:
·Adjustment 7, proposes adjustments to payroll
related expenses by: eliminating $304,854 of wages
for 4 positions not filled as of December 31, 2022
including an Operator 1 position, Cross Conn
Control Specialist, Utility Person, and
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Environmental Health & Safety Specialist; removing
2023 pay increases of $402,776; removing 2023
increases for stand-by pay of $1,176; removing
2023 incentive pay of $597,450; and removing 2023
increases for overtime pay of $14,514.
·Adjustment 8 proposes to reduce worker's
compensation expense by $19,110.
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________________
1Rate Case and Audit Manual Prepared by NARUC Staff Subcommittee on
Accounting and Finance (2003).
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·Adjustment 9 proposes to reduce post-retirement
benefits other than pension $54,144 to December
2022 level.
·Adjustment 10 proposes to update healthcare
insurance costs to 2023 rates but based on
December 2022 employees for a reduction of
$70,501.
·Adjustment 11 proposes to reduce employee 401(k)
matching contributions by $44,890 based on
December 2022 employees.
·Adjustment 13 proposes to reduce Payroll Overhead
fringe benefits based on proposed payroll &
benefit cost updates for a reduction of $203,700.
·Adjustment 15 proposes to eliminate a customer
growth assumption for costs associated with
customer billing but updates costs to December
2022 level.
·Adjustment 17 proposes to reduces Office expenses
by $27,544 for Cityworks License costs and
eliminates Consumer Confidence Report (CCR)
postage mailing costs.
·Adjustment 22 proposes to remove $29,250 of Safety
Expenses for trainings no longer offered or those
that have yet to be scheduled.
·Adjustment 27 proposes to remove nine
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miscellaneous expenses $4,585 from the Company's
Unadjusted O&M - Miscellaneous Expense account.
Micron Intervenor Witness Groman's testimony
proposes to remove 15 full-time equivalent ("FTE")
employee positions included in the Company's
filing, for positions that were budgeted and not
yet filled as of June 2022 to reduce test year
operating costs by an estimated $800,000.
The testimony of Staff Witness Culbertson
proposes the following adjustments:
·Adjustment 1 proposes to update Unadjusted
Expenses to December 31, 2022 level.
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·Adjustment 21 proposes to revise General Insurance
Expense and Injuries and Damage claims by
eliminating $28,947 of claims costs.
·Adjustment 20 proposes to revise the test year
number from a two-year average 2020-2021 to a
three-year average 2020-2022, which would result
in a reduction of $36,405.
The testimony of Staff Witness Eldred proposes,
in Adjustment 28, to reduce Variable expenses due
to Revenue Normalization and to adjust the cost of
power and chemical expense due to the reduction in
weather normalized test year consumption using
Staff's December 2022 Test Year.
Payroll
Q.Do you agree with Staff Witness Johnson's
proposed Payroll and related employee costs adjustments
and those proposed by Micron Intervenor Witness Groman?
A. No, I do not agree with removing unfilled
positions that were not hired before Staff's proposed
Test Year ending December 31, 2022, with removing the
2023 Pay Increases, removing increase for Stand-By pay,
removing all Incentive Pay and increase for Overtime Pay,
or removing all 15 budgeted as-filed positions proposed
by Micron which were included in the Company's request.
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Unfilled Positions
Q.Have the 15 budgeted pro forma positions
as-filed been since filled, including the four unfilled
positions that were vacant as of December 31, 2022?
A. Yes, all but one of the 15 budgeted pro-forma
positions included in the Company's as-filed request have
been filled. Three of the four unfilled positions vacant
as of December 2022, which included the Operator 1
position, a Cross Connection Control Specialist and a
Utility Person, have since been filled. The remaining
unfilled position of the Environmental Health & Safety
Specialist is an active recruitment process. Candidates
for this position are being evaluated for selection. An
offer of employment is anticipated in March with the
background check process to commence immediately after
acceptance and the employee start date would be in April
2023, before conclusion of this case and the effective
date of new tariff rates from this proceeding.
2023 Pay Increases
Q.Are the Bargaining Unit employee contractually
obligated 2023 pay increases known and measurable?
A. Yes. The Company's collective bargaining
agreement reflects wage schedules by year and position.
The negotiated and contractually obligated wages and wage
increases are defined in the contract and include pay for
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Stand-by time, Overtime and Shift Pay. The contract
reflects a 2.75% increase in bargaining unit wages
effective April 1, 2023. The as-filed amount of
Bargaining unit employee wage increases is $161,610. The
Company's opinion is that wage increases should be
reflected on Bargaining unit employee payroll costs, as
well as stand-by pay and overtime pay because these wages
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are known, measurable and contractually obligated. It is
the Company's position that bargaining unit wage
increases should be reflected in payroll costs for
recovery.
Q.Are the Non-Bargaining Unit 2023 pay increases
known and measurable?
A. Yes. The Company is finalizing the 2022
performance evaluations for non-bargaining unit employees
in early March, the ratings guide wage increases. For
Non-Bargaining employees performance ratings consist of
25% individual objective performance and 75% Veolia
Values performance (Respect, Customer Focus, Solidarity,
and Innovation). The overall Non-Bargaining Unit 2022
performance rating completed in March 2023 resulted in an
wage increase of 3.6% with an effective date of April 1,
2023. The Company's as-filed position anticipated a 4%
increase in Non-Bargaining employee wages. The Company's
Rebuttal position removes 0.4% or $24,117 the difference
between the anticipated and actual wage increases for the
Non-Bargaining employees. Mr. Johnson proposed
eliminating all wage increases, a total of $402,776. The
Company's position is that pay increases are justified,
necessary to adjust for cost of living increases from
rising inflation, and to allow for competitive wages to
attract and retain talent. The Company requests recovery
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of $161,610 for Bargaining Unit employees wage increases
and $217,049 for Non-Bargaining Unit employees, a total
of $378,659.
Overtime & Stand By Pay
Q.Do you agree with Staff Witness Johnson's
proposal to remove the 2023 Overtime pay increases of
$14,514 and $1,176 pay increases for Stand-by pay?
A. No. Overtime pay and Stand-by pay rates are
identified in the collective bargaining unit agreement
and follow the established rates of pay. As of April 1,
2023 bargaining unit wages increase by 2.75% and Overtime
and Stand-by pay will follow suit. The
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Company's rebuttal position requests recovery of the
as-filed $14,514 wage increases for Overtime and $1,176
for Stand-by pay.
Incentive Pay
Q.Briefly describe the Company's incentive
programs.
A. The Incentive Programs are based on employee
performance as it relates to achievement of specific
objectives, as well as Company performance, both in terms
of safety and financial results. Employee goals are
structured with customer impact, Company performance, and
employee safety and wellbeing in mind. Incentive
objectives include efficiency and process improvements,
employee development, innovation, and new initiatives
that are above normal assigned employee duties. Incentive
Payments are rewarded when employees meet or exceed goal
targets, criteria requirements, safety, and compliance
training goals.
Q.Are the 2023 incentive pay amounts known and
measurable?
A. Yes. The 2022 objectives and achievements have
been evaluated for non-bargaining employees and the
incentive plan payments based on achieving those employee
goals and Company results are paid in March, 2023.
According to the negotiated collective bargaining
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contract the Company's Bargaining Unit employees do not
have an incentive pay component as part of their
compensation.
Q.What percentage of incentive pay is based on
individual goals and Company financial results?
A. The Non-Bargaining Hourly employee incentives
are based on performance in safety, required training,
and community engagement, and for year ended 2022 results
they total $18,879.
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The Non-Bargaining Salaried employee incentives
are based on individual goal achievement and Company
financial performance. For year end 2022 results,
Salaried employee incentive pay is $607,383 and comprises
approximately 57% of that amount based on non-financial
results or objective achievement for $347,116, and 43%
based on Company financial performance for $260,267. The
Company's rebuttal position requests recovery of the full
as-filed amount of Incentive pay of $597,450.
Wage Comparison
Q.Please discuss Staff Witness Johnson's average
wage comparison.
A. The average wage comparison Mr. Johnson
provided in his testimony from the Bureau of Labor
Statistics reflects historic wages appears to be based
on year 2021 pay data. The selected positions do not
necessarily align with the Company's positions. During
2022 the Company engaged a consultant to perform a
compensation assessment to compare Company wages to the
market provided to Staff in response to Production
Request No. 23. The specific job descriptions, not merely
job titles, were matched to and compared with market data
obtained from 17 compensation surveys. The surveys were
focused on studies specific to Idaho and the Pacific
Northwest. This assessment provided analysis of 45
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positions comparing base wages and total compensation
which includes incentive payments, and determined that
the Company's overall average base pay is in the 37th
percentile of market and total compensation including
incentive pay is in the 46th percentile of market. This
study supports the Company's rebuttal position to include
incentive pay as part of employees overall compensation
for recovery in rates.
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Q.Please summarize the Company's rebuttal
position for payroll costs.
A. The Company's rebuttal position is a test year
payroll amount of $7,645,650 and includes the impact of a
$24,117 or a 0.4% reduction in the non-bargaining wage
increase. This gross payroll change (or total payroll
which includes operating costs as well as payroll costs
that will be capitalized) must be adjusted by the
applicable Operating & Maintenance (O&M) ratio which is
based on the Historic Test year percentage of 66.17%
calculated in Company's Exhibit 10, Schedule 1. Applying
that Payroll O&M ratio to the $24,117 produces a rebuttal
adjustment of $15,958. The Company's rebuttal position
for Payroll will also flow through the associated
schedules and impact Workers Compensation, 401k, Payroll
Overheads (Fringe Benefit Allocation) and Payroll Taxes
as well. Employee 401k and Payroll taxes are discussed in
Company Witness Wilson's rebuttal testimony.
Workers Compensation
Q.Please discuss the Company's rebuttal position
for workers compensation costs.
A. The Company's rebuttal position for Workers
Compensation costs is based on the Company's rebuttal
position for payroll expense of $11,554,333 and reflects
a test year expense of $115,965, a reduction of $242 from
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the as-filed position.
PBOP - Post Retirement Benefits Other than Pension
Q.Do you agree with Staff Witness Johnson's PBOP
update to December 31, 2022 level?
A. Yes. The $577,900 amount is based on the latest
available Actuarial information.
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Healthcare
Q.Do you agree with Staff Witness Johnson's
Healthcare adjustment incorporating the Company's 2023
rates applied to December 31, 2022 actual count of
employees?
A. Yes in part. I agree with the update per
Company's response to Request No. 163 which updated the
Healthcare costs from 2022 rates to the now known 2023
rates. However, I disagree with excluding open positions
that were vacant as of December 2022 because those
positions that have since been filled, or will be filled
with a high degree of certainty, before the conclusion of
this rate proceeding. The Company's rebuttal position
reflects the 2023 updated healthcare costs applied to 137
as-filed positions for a test year amount of $2,414,650.
Payroll Overheads (Fringe Benefits Allocation)
Q.Please provide the impact of the Company's
rebuttal positions on payroll and related benefit costs
which drive the change to the Payroll Overhead (Fringe
Benefit Allocation) amount.
A. Incorporating the payroll and related benefit
cost updates per the Company's rebuttal position, changes
the Payroll Overheads fringe benefits allocation by
($110,498) to ($1,576,909). Mr. Johnson's Exhibit 110
included the full ($577,900) Post Retirement Benefits
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Other than Pension (PBOP) amount in error. The amount of
PBOP expense that should be reflected in the Payroll
Overheads - Fringe Benefit allocation is only the PBOP
service cost of $180,871. This is because only the
service cost portion can be included in capitalized
amounts.
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Customer Billing Expenses
Q.Do you agree with Staff Witness Johnson's
proposal to update test year costs to the December 31,
2022 amount and eliminate the 1% customer growth impact
on billing costs?
A.Yes. The Company can accept the proposed
changes to customer billing expenses as proposed by Mr.
Johnson.
Office Expenses
Q.Do you agree with Staff Witness Johnson's
proposal to eliminate Cityworks license costs for 4
vacant positions not filled as of December 31, 2022 as
well as the estimated postage costs for mailing the
Consumer Confidence Report?
A. No. This adjustment would eliminate costs that
the Company has already incurred for Cityworks licenses
for new employees and the cost for mailing Consumer
Confidence Reports (CCR) to customers which were paid in
March 2023. The CCR invoice reflects $23,553 of postage
that is estimated by the vendor based on current postage
costs for 100,000 printed customer notices. The Company's
rebuttal position for test year office expense is
$819,200 and includes as-filed Cityworks license cost and
reflects an increase of $3,553 for CCR postage costs per
Exhibit 20 Adjustment 18 Attachment A (CCR Invoice) which
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is sponsored by Company Witness Wilson who discusses the
advertising costs for printing the CCR mailers in his
rebuttal testimony.
Q.Please explain why Cityworks license costs are
necessary?
A. All field related work for construction and
maintenance related tasks is scheduled and tracked in the
Cityworks system. All employees who perform work in the
field must utilize the Cityworks system for their daily
work assignments and require a separate
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license. Supervisors, Managers and Administrative staff
along with the Customer Service Representative call
center staff utilize Cityworks as part of the daily work
flow process. The historic test year expense for
Cityworks licenses was $179,772. The Cityworks license is
a single user fee of $1,886 per user currently, charged
per year. There are currently 118 user licenses x $1,886
= $222,582. The current count of 118 licenses have been
paid and will cover newly hired and existing employee
license requirements.
Q.Please discuss why the Company mails the
Consumer Confidence Report when it may be provided to
customers electronically?
A.The Idaho Department of Environmental Quality
(IDEQ) and the Environmental Protection Agency (EPA)
require that customers be notified their annual Consumer
Confidence Report (CCR) is available to them. Idaho
allows all sizes of community public water systems the
option to deliver Consumer Confidence Reports (CCRs)
electronically. All community public water systems are
required to deliver CCRs to their customers by July 1st
of every year and provide a certification to the
Department that CCRs were delivered. According to the
IDEQ website, the Environmental Protection Agency (EPA)
interprets the requirement to mail or otherwise directly
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deliver to include electronic delivery.
The Company has provided electronic CCRs to
customers previously, but found that customers do not
access that information. Customers were notified via our
Facebook and Twitter pages, a digital banner ad on
IdahoStatesman.com with a link to a sponsored news
article about the CCR, and a bill message for customers
who receive their statement on paper or electronically.
All forms of notification let customers know how to find
their CCR on our website. After analyzing the click rate
on the Idaho CCR web page for the
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past two years, we determined less than 0.1% of our
customers are landing on the page. The Company feels
strongly that the CCR is an important document for
customers to review and understand what is in their
water, what tests are performed, and their results. Due
to the low digital readership of this important
information , which must be provided pursuant to
regulations, the Company's position is that this
information should be mailed to all customers. This type
of push notification will land the CCR in customers'
hands directly.
Safety Expenses
Q.Do you agree with Staff Witness Johnson's
Safety Expense adjustment to eliminate $29,250 training
costs that will not take place or be completed before the
conclusion of this rate case?
A. Yes.
General Insurance
Q.Do you agree with Staff Witness Culberton's
General Insurance adjustments?
A. Yes, in part. Mr. Culbertson's proposed 3-year
average of General Insurance costs is reasonable. I do
not agree with excluding certain general insurance costs
or claims that could be attributed to Company employees'
actions or errors. Insurance coverage for damages and
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liability is in place for a variety of events and
scenarios. While it may be argued that certain claims and
related insurance costs could or should be avoidable,
they result in a legitimate business expense whether a
Company employee was involved or not, or whose actions or
omission may have contributed to an accident. Insurance
claims and incidents are carefully reviewed, analyzed,
addressed with the insurance Company and by Company's
personnel. If deemed appropriate, counseling or
additional
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progressive discipline may be necessary, and further
training may be provided to employees to help prevent
similar situations from recurring. The Company emphasizes
a strong safety culture and provides a comprehensive
safety training curriculum to its employees, and
contractors, focusing additional effort on high risk work
situations or activities. Mr. Culbertson's Exhibit 134
reflects the as-filed General Insurance cost which were
later revised and provided to Staff in response to
Production Request No. 63 as Attachment No. 3 - Exhibit
10 Revised - Opex Adjustments.xlsx. This revision
corrected the excluded reserve amounts for Injuries &
Damage Reserve amounts which are essentially accruals of
actual costs that should not have been excluded from the
as-filed expense. The excluded reserves already
incorporated the Incurred But Not Recorded (IBNR) Reserve
amounts which are based on estimated costs and therefore
should still be excluded from operating expenses because
those amounts may necessarily not be known or measurable.
The excluded reserve revision increased year 2020 expense
from the as-filed $172,526 to a revised $580,298, the
2021 expense from $312,522 as-filed to $466,550 revised,
and the June 2022 Historic Test Year from $91,347
as-filed to a $271,746 revised. Using these updated
year-end figures with the December 2022 year ended
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insurance expense of $133,309 for the three-year average
that Mr. Culbertson proposes, would raise the test year
amount from Staff's position of $177,172 to $364,439 per
Staff's Adjustment 3 Exhibit 134. The Company's rebuttal
position includes the $28,947 of Staff's proposed
excluded claims costs for a test year amount of $393,386.
Unadjusted Expenses - Miscellaneous Costs
Q.Do you agree with Staff Witness Culbertson's
proposal to bring Unadjusted Expenses to December 31,
2022 level?
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A. Yes.
Q.Do you agree with Staff Witness Johnson's
Miscellaneous Cost adjustment?
A. Yes, in part. I agree that as part of
Unadjusted Expenses, Miscellaneous Costs such as Chamber
of Commerce fees, certain advertising expenses and
political contributions should be excluded from recovery
and not be borne by customers. The Company's rebuttal
position excludes $994 of costs that should have been
reflected as non-recoverable. However the Company's
position is that costs for customer outreach and
educational events should not be excluded. Mr. Johnson's
proposal excluded $4,585 of costs, including $3,592 of
costs for events such as the Company's Water Summit event
and two Company open house events for engaging and
educating customers that should be recoverable. These
three events Staff proposed to exclude were held at
Hilton Garden Inn locations and included rental of the
meeting space, audio-visual rental costs, coffee and
snacks.
Water Summit Event
As the water provider to more than a quarter of a
million people, we often get questions from local
leaders, the media, and our customers about how much
water we need and if we are prepared to meet demand. To
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add context, the Valley had endured a challenging drought
in 2021 that made headline news for months. We
commissioned the Treasure Valley Water Supply Report to
provide data on the water available now, what we can
expect water demands to be as the population grows, and
options - backed by facts - of how to meet those demands.
We also felt strongly that any findings should be made
public so our customers, community leaders, other
regional utilities, and our regulators had the same
information. We invited community leaders from across the
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valley, our regulators, irrigators, and the press. The
Commission sent a group of Staff to the event, as did the
Idaho Department of Water Resources, Department of Water
Quality, City of Boise, and many other stakeholders.
About 70 people attended, and the report was widely
distributed, both at the event and after. Logistically,
Veolia does not have a meeting space that would host that
many people. The Hilton Garden Inn hotel was a neutral
and central location to host everyone. Additionally,
Veolia has heard from stakeholders that they want more
transparency regarding what we do and why. That was a
point of concern during our rate case in 2020. This
supply report outlines avenues Veolia intends to explore
in order to meet community needs for the next 50 years.
It is an important planning tool that we made available
to everyone.
Customer Engagement & Education Events
The Company held two events open to all customers in
and around the Eagle area which were proposed to be
excluded from recovery by Mr. Johnson. These customer
engagement and education events allow new and existing
customers to meet and discuss topics with various Company
employees and obtain assistance. Customers are provided
opportunity to ask questions, raise concerns, learn about
various topics, access the company's customer website,
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sign up for customer conveniences such as paperless
billing and electronic payment options, view their
account information including consumption history, bill
and payment history, understand tariff rates, receive
conservation devices and advice, learn about water
quality, and system improvement projects that were
underway or planned.
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Adjustment to Variable Expenses Due to Volume
Normalization
Q.Please discuss the impact of the Company's
rebuttal positions on the Adjustment to Variable Expenses
Due to Volume Normalization.
A.Incorporating Company Witness Michaelson's
Volume Normalization updates will require an adjustment
to the Company's power expense and chemical expenses. The
variable expense associated with the change in Volume
Normalization is a difference of $2,089 of power &
chemical costs from the as-filed amount of ($127,937) to
the Company's rebuttal position of ($125,848). Company
Witness Michaelson's adjusted Test Year Consumption of
18,758,373 hundred cubic feet (CCF) is adjusted for the
impact of rebilled consumption due to under-reported
meter reads as provided in response to Production Request
No. 163 producing a Rebuttal Test Year amount of
18,817,988 CCF.
Customer Issues
Q.Please summarize the recommendations made by
Staff relating to customer issues.
A.The testimony of Staff Witness Bossard proposes
recommendations that would impact customers, including a
recommendation to submit the customer notice and press
release to the Commission for review prior to submitting
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its Application in future cases, a recommendation that
the Company communicate with the Commission when it
recognizes a possible issue that could generate
complaints from a significant number of customers, a
recommendation that the Company continue to support the
Veolia Cares Low Income Financial Assistance Program and
to increase the amount of the grant to reflect the
increase in rates for residential customers. Staff also
recommends that the Company increase the amount of
assistance an individual customer can receive in the
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same percentage as the rate increase for residential
customers granted in the final order to reduce the
effects of the rate increase and higher inflation levels.
Staff also recommends that the Company increase the
maximum household income level to reach more customers
threatened by disconnection for non-payment and prevent
additional disruption of customer service.
Press Release and Customer Notices
Q.Do you agree with Staff Witness Bossard's
testimony regarding the Customer Notification and
recommendation to submit the customer notice and press
release to the Commission for review prior to submitting
its Application in future cases?
A. Yes. While the Company's customer notice met
the Commission's Rules of Procedure, Rule 125
requirements, the press release did not because as Ms.
Bossard noted, it failed to inform customers that they
could file comments with the Commission. The Company
appreciates Staff pointing out that omission so it can be
addressed. While it would be preferred that the customer
notice and press release include the Application Case
Number assigned by the Commission, that does not appear
to be an explicit requirement of Rule 125. The Company
did not include the case number on the customer notices
because that information was not available at the time
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the notices were being printed. The Company will however
make a concerted effort in the future proceedings to
provide Commission Staff the opportunity to review the
customer notice and press release ahead of filing the
Application and to include the Application Case Number.
Q.Do you agree with Staff Witness Bossard's
recommendation to notify Staff as soon as the Company
recognizes a potential large-scale issue that will affect
customers?
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A. Yes. It is our priority to keep Commission
Staff apprised of potential large-scale issues that may
negatively impact customers and to address those concerns
as quickly as possible for customers. As the Company
became aware of under-reported meter readings in December
2022, the issue was discussed with Staff members via
phone. At the time the impact was not known and the
Company was responding to customer and Staff concerns.
The subsequent Company investigation determined that
fewer than 1% of customers were impacted. The Company
began reaching out to impacted customers to advise them
of the corrective actions that were taking place, and
what they should expect while tracking those instances.
As the Company's investigation progressed, information
was shared with Staff on a weekly basis as requested
regarding the number of customers impacted, and a virtual
meeting was held in January with Staff to provide
additional clarity and an update on the Company's
investigation. The Company has and will continue to work
with customers who face hardship in order to find a
solution to address their specific concerns and keep
Staff apprised of large-scale issues that may impact
customers in the future.
Service Level Standard
Q.Please address the Company's service level
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standards discussed in Staff Witness Bossard's testimony?
A. The Company's Average Speed of Answer target -
80% of customer calls answered within 60 seconds or less
was not achieved during the months of August, September
and October 2022, due to employee vacancies and leaves of
absence for medical reasons. During that time, customers
had a longer than normal average wait time before they
could speak to a Customer Service Representative, ranging
between 75 seconds and 170
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seconds. The Company was actively recruiting employees
during that time and utilized other available staff to
answer customer calls, however our service level was
below target during that time. After the open positions
were filled and employees returned from medical leave,
customer call wait times dropped below the target
threshold.
VeoliaCares Low Income Financial Assistance Program
Q.Please address the Company's Veolia Cares
low-income financial assistance program discussed in
Staff Witness Bossard's testimony?
A. The Company's Low-Income Financial Assistance
Program, Veolia Cares, provides financial assistance to
customers who qualify under the federal poverty
guidelines determined by El-Ada Community Action
Partnership. The amount of assistance an individual
customer is granted will increase in each subsequent rate
proceeding and change in the % change in rates granted by
the Commission in accordance with the Company's Case No.
UWI-W-15-01 Settlement Stipulation. The Company advises
customers of available assistance programs and resources
through its daily interactions with customers, via the
Company's website, other communication channels, and via
a pamphlet that is provided to all customers informing
them about financial assistance programs available as
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well as the federally sponsored program LIHWAP.
It is unclear from the testimony what "previous
lack of record keeping in the Veolia Cares program" Staff
Witness Bossard is referring to. The Company tracks the
number of customers who have received financial
assistance as well as the amount of funds provided by the
Company's shareholders to those customers. This
information has been shared with Commission Staff in
Production Request Nos. 125, 126 and 127. No additional
information is tracked or available outside of what is
required of all customers
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in order to obtain water service is available to Veolia.
No additional information is tracked about customers who
apply for, are granted eligibility for low-income
assistance by El-Ada or those that are disqualified. No
information regarding customer eligibility, income levels
or other information provided by customers to El-Ada in
order to determine eligibility is provided to nor
requested by the Company.
As recommended by Staff, the Company will
discuss with El-Ada the maximum household income levels
the agency uses in determining customer eligibility for
financial assistance specific to the Veolia Cares program
and discuss the feasibility of modifying those parameters
in order to broaden the reach of the Company's assistance
program to more customers.
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in
open hearing.)
MR. CARTER: Ms. Cary is now available for
cross-examination and questions by the Commissioners.
COMMISSIONER ANDERSON: Mr. Burdin,
anything?
MR. BURDIN: Thank you.
CROSS-EXAMINATION
BY MR. BURDIN:
Q Good morning, Ms. Cary.
A Good morning.
Q I have a few questions on consumer
confidence reports, CCR. Does the Idaho Department of
Environmental Quality mandate that the Company mail a
physical copy of CCR's to its customers?
A No, it does not require a mailed report.
Q You testified that the Company determined
that when presented with a link to a web page containing
the information less than 0.1 percent of its customers
visited the web page where the CCR's were hosted; is that
correct?
A That is correct.
Q Has the Company ever directly emailed the
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CCR's to its customers as a pdf or Word document?
A I don't believe so.
Q You testified that physically mailing the
CCR is a superior type of push notification because it
will land in the customer's hands directly; is that
correct?
A That is correct.
Q And what percentage of customers read the
CCR's when they are mailed physically?
A I do not have that information; however,
we have heard from customers during our outreach program
that they do read the printed version since they receive
it in the mail.
Q Did you hear from any customers that they
read the one that was linked to the website?
A No.
Q That's all I have for CCR's. Just a quick
question on the water summit event, how many water summit
events has the Company held?
A I believe there was one.
Q Just one, so would you agree that that
event is rather uncommon?
A It was a one-time meeting, yes.
MR. BURDIN: All right, thank you. That
is all the questions I have. Thank you, Ms. Cary.
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COMMISSIONER ANDERSON: Thank you,
Mr. Burdin. Micron?
MR. RUESCHHOFF: Yes, a few.
CROSS-EXAMINATION
BY MR. RUESCHHOFF:
Q Good morning, Ms. Cary. My name is Austin
Rueschhoff and I'm representing Micron in this case.
Good to meet you. I have a few questions for you about
your testimony regarding payroll expense. Kind of as a
preliminary matter, Veolia proposed a historic test year
in this case ending June 30, 2022; is that correct?
A That is correct.
Q And Veolia also proposed nine months of
adjustments post test year ending March 31st, 2023;
correct?
A That is correct.
Q So the adjustment period ended just last
week; is that right?
A That is correct.
Q Thank you. In your direct testimony at
the beginning of the case, you stated that in the
historic test year, Veolia's payroll consisted of 122
full-time employees; is that correct?
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A That is correct.
Q And you've proposed an adjustment of 15
additional employees up to 137; correct?
A That is correct.
Q And your testimony was that those
positions were unfilled at the time, but Veolia was in
the process of hiring or searching for employees for
those positions; right?
A Yes.
Q Okay. On page 6 of your direct testimony,
you listed those specific positions that were unfilled at
the time; is that right?
A Yes.
Q Your direct testimony.
A Yes.
Q And also on that same page of your direct
testimony, you stated that the adjustment for the 15
unfilled positions was nearly $1 million; is that
correct? I'm looking at line 2 of your direct testimony,
page 6.
A That is not the entire amount for the
positions. That would be the difference between the test
year amount.
Q The difference between the test year
amount and the adjusted amount; is that what you mean
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there?
A Right.
Q Okay, thank you. Moving to the testimony
you provide in your rebuttal testimony, you stated that
14 of those 15 positions had been filled at that time; is
that right?
A That's correct.
Q And three of those 14 were filled after
December 31st, 2022.
A That is correct.
Q Okay, so at the time of your rebuttal
testimony, one of those positions remained unfilled?
A Yes.
Q And is that position still unfilled, do
you know?
A That position is -- has been selected and
the pending start date is April 25th.
Q Okay. Ms. Cary, do you know what the
current employment level is for Veolia Water Idaho?
A As of the end of March, it was 134
employees.
Q Okay, so while you have hired 14 of those
15 positions, I guess that would say that there's also
been some reduction in employment; is that correct?
A That's correct.
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Q Okay, and you would agree with me that
that's sort of normal, right, that employment levels
generally fluctuate for a company?
A Yes.
Q People retire? People take other
positions, things like that?
A That's correct.
Q Okay, so even if Veolia can testify today
that you have filled 14 of those 15 previously unfilled
positions, there's no guarantee that that employment
level will stay at a consistent rate moving forward; is
that right?
A That is the level of employees that we
need to operate, so we would seek to fill those
positions.
Q Okay, you said that's the level of
employees that you need to operate. Were there any
deficiencies in Veolia's operating or customer service
when it had 122 employees?
A I don't believe there were deficiencies,
per se, but due to the growth of customers, we do need
additional staff in order to be able to provide the
service.
Q Okay. Did you provide any testimony about
how the hiring of additional employees would improve
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efficiencies or improve Veolia's operating?
A I believe that was covered in witness,
Company witness, Thompson's testimony.
Q Would you agree with me that hiring more
full-time employees would generally result in some
corresponding offsetting of costs for the Company?
A Not necessarily, no.
Q So for example, hiring more full-time
employees wouldn't reduce Veolia's contractor costs or
outside contractor costs?
A I don't believe generally that would be
the case.
Q Okay, and for example, overtime costs, you
have overtime costs that you discuss in your testimony,
is it your testimony that hiring more employees will not
reduce Veolia's overtime costs?
A The Company does have a certain amount of
overtime that is required for working after hours. Those
positions would be taking those roles. I don't believe
there would be a significant reduction in overtime, no.
Q Okay, and in fact, you, in your testimony
you, have an increase in overtime in 2023 for pro forma
wage adjustments; is that right?
A That is correct.
Q Okay, so it's your testimony that Veolia
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is going to hire more employees, but will not -- there's
no offsetting costs to reflect that?
A No reduction in overtime is anticipated,
that is correct.
Q Okay. Veolia now has more employees, but
does not have any offsetting negative adjustments to
reflect possible reduced expenses. Veolia's level of
total payroll expense is now overstated; would you agree
with that?
A I would not.
MR. RUESCHHOFF: Those are all my
questions.
COMMISSIONER ANDERSON: Thank you,
Mr. Rueschhoff. City of Boise?
MS. GRANT: Just one question.
CROSS-EXAMINATION
BY MS. GRANT:
Q With respect to the projected customer
growth, is it your testimony you believe that that
projected customer growth is commensurate with the
additional staff positions you're requesting?
A Yes.
Q And even though with historical trends in
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that customer growth, it was your testimony today that
you didn't believe there were any deficiencies in
customer service at 122 employees?
A That is correct.
Q So maybe you can restate the justification
for the additional 15 staff positions with respect to the
projected growth.
A I will refer to my testimony. The
Company's response to Request No. 65 which outlined the
reasons for the additional positions, the addition of the
positions was to fill the increased regulatory
requirements and system growth for the operator position.
The operator 1 roles were for a backfill position, which
was vacant. The crew chief position was also a backfill
position. The cross connection control specialist was
for system growth and to meet work demands. The four
utility positions were also backfill positions.
The customer service person, field
operation, that was a system growth and work demands
position. Customer service representative, that was the
call center position. That was also filling a vacant
position. The operations lead customer service
representative role was for system growth and work
demands as well.
The executive assistant position was for a
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backfill. The environmental health and safety specialist
position was also a vacant position, and the
communications specialist role was also for backfill.
MS. GRANT: Thank you.
COMMISSIONER ANDERSON: County of Ada?
MS. WADDEL: No questions.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions. Thank you.
COMMISSIONER ANDERSON: Thank you.
Commission Staff, questions? Commission.
EXAMINATION
BY COMMISSIONER HAMMOND:
Q Make sure it's on. I was struggling with
it as well, so my question is I think I heard you say
that overtime is required. Required why, I guess?
Because if you're hiring these new customers, I think the
logical or new employees, logic seems to indicate that
there might be a reduction in OT, but you said it's
required and I'm guessing under what circumstances or
legal obligations is it required?
A It would generally be for employees
working after hours and weekends that are not their
scheduled, regularly scheduled, shifts.
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Q And why would that be required?
A The Company has a requirement by the
Public Utilities Commission to reinstate when a customer
has been turned off for disconnection due to non-payment
within 24 hours. If the customer requests the
reconnection after hours between 4:30 and 6:30 or on the
weekends, the Company will dispatch employees to turn the
customer's service back on.
Q And are all those circumstances ones where
overtime is required or are there employees on shift
during their regularly scheduled shift that can cover
those reconnections/disconnections situations?
A I believe that answer would be better
answered by Company witness Thompson.
Q So the Company has no plans to reduce any
overtime cost; is that correct?
A The overtime per the case for the filing
was per the test year level and that is a level that we
expect to continue, that is correct.
Q And you mentioned a couple of times, a few
times, the term backfill and I just -- I generally
understand, I believe, what that means, but I guess for
purposes of the testimony, can you explain what that
is?
A Certainly. That was a role that was
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filled before and the employee either retired or left the
Company, so we have a vacancy, basically.
Q So how many of these positions that the
Company is proposing to add are backfill positions? I'm
not clear.
A Eleven of the 15 positions were
backfill.
Q In your discussion of, I think it was,
Response to Production Request No. 65, correct, the
explanation for these or the general explanation for
adding these employees, some of which I think you've
identified as backfill positions, are due to regulatory
requirements and system growth. What regulatory
requirements are in addition to anything that the Company
has to comply with today? Is there something new we're
unaware of?
A No, those would be existing requirements.
The only thing that would be possibly different would be
new water quality regulation that's coming.
COMMISSIONER HAMMOND: That's all the
questions I have. Thank you.
COMMISSIONER ANDERSON: Thank you. Any
other questions from the Commission?
Mr. Carter, would you like to redirect?
MR. CARTER: No, thank you.
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COMMISSIONER ANDERSON: Thank you. With
no objection, we will excuse the witness. Thank you very
much.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Carter.
MR. CARTER: Veolia Water Idaho calls
Michael Wilson.
MICHAEL WILSON,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Mr. Wilson, will you make sure your
microphone is on there? Okay, please state and spell
your name for the record.
A Michael Wilson, M-i-c-h-a-e-l W-i-l-s-o-n.
Q And are you the same Michael Wilson that
filed direct testimony and exhibits and rebuttal
testimony and exhibits on behalf of Veolia Water Idaho in
this case?
A Yes.
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Q And if I asked you the same questions
today, would your answers be the same?
A Yes.
MR. CARTER: Okay, Commission, I would ask
that Mr. Wilson's direct testimony and exhibits and
rebuttal testimony and exhibits be spread upon the record
as if read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread the direct and rebuttal
testimony along with exhibits across the record as if
read.
(Veolia Water Idaho, Inc., Exhibit Nos. 10
and 20 were admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Mr. Michael Wilson is spread upon
the record.)
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Q.Please state your name and business address.
A.Michael Wilson, 8248 West Victory Road, Boise,
Idaho 83709.
Q.By whom are you employed and in what capacity?
A.I am employed by Veolia Water Idaho, Inc.
("Veolia", "Veolia Water Idaho" or "Company") in the
capacity of Manager - Financial Planning, Reporting &
Analysis.
Q.How long have you been employed by Veolia Water
Idaho?
A.I have been employed by Veolia Water Idaho
(formerly SUEZ Water Idaho Inc. and prior to that, United
Water Idaho Inc.) since August 2004.
Q.Briefly describe your responsibilities during
your tenure.
A.On January 8, 2022 I was promoted to Manager -
Financial Planning, Reporting & Analysis. In this
position, I direct the preparation, consolidation, and
presentation of financial planning processes such as the
annual operating budget, reforecasting, medium term plan,
and monthly variance analysis. I lead the response to
internal and external audit inquiries, including the
Idaho Public Utilities Commission, ("IPUC") audit of the
Pollution Control Exemption filing. Additionally, I
prepare the annual reports for the IPUC and Idaho State
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Tax Commission.
Prior to my promotion as Manager, I was in a
Supervisor role for two years performing similar job
functions. Leading up to my Supervisor role, I held the
title of Sr. Financial Analyst for approximately 17
months which was a promotion from my initial role as
Accounting/Finance Clerk. In that role, I built
foundational knowledge of regulatory accounting
performing a variety of functions including payroll,
accounts payable, journal entry, and general ledger
account reconciliation.
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Over the course of my career at Veolia, I have assisted
in rate case data preparation and production responses.
Q.What is your educational background?
A.I was granted a Bachelor of Science in Computer
Science from Steven-Henager College in 2008 and a
Bachelor of Science in Business Administration from
Lewis-Clark State College in 2000. I also attended NARUC
Utility Rate School in the fall of 2020.
Q. In connection with the Company's current
application for an increase in rates and charges, what is
the scope of your participation and testimony?
A.My participation and testimony concerns
operating expenses of the Company. For this rate case
filing, Veolia Water Idaho used a historic test year
consisting of a 12-month period ending on June 30, 2022
("Historic Test Year") and a nine-month adjustment period
ending on March 31, 2023 ("Test Year"). For the Historic
Test Year data, Veolia has relied on its books and
records, which are prepared and maintained in conformity
with the Uniform System of Accounts prescribed by the
Commission. As discussed in more detail below, the
operating expenses included in the exhibits I am
sponsoring are based on the Historic Test Year, as
modified by certain normalizing adjustments. The Historic
Test Year expenses are also adjusted for changes in costs
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expected to take place in the adjustment period (or prior
to effective date of the rates) and measurable with a
reasonable accuracy at the time of this rate case filing.
Q.What exhibits are used to illustrate your
testimony?
A.The following Exhibits accompanying my
testimony:
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·Exhibit 10, Schedule 1 - Operating Expense
Adjustments:
·Adjustment No. 6 - Employee 401k
·Adjustment No. 7 - Other Employee Benefits -
Tuition
·Adjustment No. 9 - Purchased Water
·Adjustment No. 14 - Bad Debt
·Adjustment No. 15 - Materials
·Adjustment No. 16 - Vehicle Allocation
·Adjustment No. 18 - Advertising
·Adjustment No. 21 - IPUC Fees
·Exhibit 10, Schedule 3 - Payroll Taxes:
·Adjustment No. 2 - FICA Tax
·Adjustment No. 3 - Federal Unemployment
Insurance Tax
·Adjustment No. 4 - State Unemployment
Insurance Tax
Q.Please describe the approach you have taken in
preparing the exhibits for operating expenses.
A.I have relied on information and data produced
within the Company, and my own investigation thereof, as
the basis for adjustments in order to appropriately
reflect the costs expected to be incurred during the
period rates will be in effect as a result of this
filing.
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Q.Please describe the various normalizing and
annualizing adjustments, as well as known and measurable
adjustments, made to operating expenses as demonstrated
in Exhibit 10, Schedule 1.
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A.Adjustment No. 6, Employee 401k, increases
Historic Test Year Employee 401k expense by $71,977. The
Historic Test Year amount is $384,454 and the Test Year
amount is $456,431. The Historic Test Year level of
participation as a percentage of 401k expense to gross
payroll less incentives is 4.16%. This rate is applied to
the Test Year level of gross payroll minus incentives of
$10,981,000 as shown on Adjustment No. 1, supported by
Company witness Cary.
Adjustment No. 7, Other Employee Benefits - Tuition,
increases Historic Test Year expense by $1,602 for
tuition assistance. The Historic Test Year expense is
$13,032 for 122 employees and the Test Year amount is
$14,634 based on the Historic Test Year ratio of expense
to employees and applied to 137 Test Year employees.
Adjustment No. 9, Purchased Water, decreases
purchased water expense by $61,608 from the Historic Test
Year level of $378,302, to a Test Year level of $316,694.
The Historic Test Year included two natural flow water
bank rental fees due to timing of the payments. The
adjusted Test Year expense includes only one. Company
Witness Cooper provides an explanation of the Company's
purchased water program in her testimony.
Adjustment No.14, Bad Debt, increases bad debt
expense by $13,321 from the Historic Test Year level of
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$291,742 to a Test Year amount of $305,063. Adjustments
to the allowance for uncollectible reserves (Account
90405) are removed from the uncollectible expense
calculation. The Test Year amount is based on a Historic
Test Year bad debt expense to revenue ratio 0.5899%
applied to the Test Year revenue at current rates of
$51,717,859. Collection activities stopped in
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March of 2020 due to the Covid-19 pandemic. Collections
resumed as a phase-in approach during 2021 and reached a
normal threshold collection level in April 2021 for
Commercial customers and May 2022 for Residential
customers.
Adjustment No. 15, Materials, adjusts the Historic
Test Year expense of $278,045 by $28,279 to a Test Year
amount of $306,324. The adjustment increases the
Historic Test Year by $31,223 in maintenance material
costs excluded from 50635 (Chemical expense - Adjustment
No. 11 as discussed in Company witness Cary's testimony)
and decreases the Historic Test Year by $2,944 for a
capital expenditure reclassification.
Adjustment No. 16, Vehicle Allocation, increases net
expense by $467,768 from the adjusted Historic Test Year
level of $557,581 to a Test Year amount of $1,025,350.
The Company uses a vehicle allocation process to
distribute transportation costs to the applicable income
statement or balance sheet accounts. All components of
gross vehicle costs such as lease payments net of
proceeds from disposal, fuel, maintenance materials and
outside contractors, mechanic payroll and benefits,
insurance, depreciation, GPS service and others are coded
to a clearing account on the Company's balance sheet. On
a monthly basis, these costs are cleared to expense or
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capitalized based upon the time allocation of departments
with assigned vehicles. The Historic Test Year
allocation of gross costs to operations and maintenance
net expense is 56.587%.
Gross costs in the Historic Test Year were
$1,469,615 and increased to a Test Year amount of
$1,811,996. Applying the Historic Test Year allocation
of 56.587% results in a Historic Test Year net expense of
$832,494 and Test Year
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of $1,025,350. The increase is predominantly driven by
increased lease costs and higher fuel prices.
Per books, the Historic Test Year net expense amount
is $832,494 which is then adjusted to exclude test year
IBNR (Incurred but not reported claim reserves) of
$329,806 and include auto insurance claims payments (GL
Account 26200, Cost Element 682005) of $54,893 resulting
in an adjusted Historic Test Year amount of $557,581.
Net expense lease costs, net of proceeds, are
increasing in the Test Year by $234,003. The increase is
driven by the addition of one vehicle for new staff and
the replacement of 22 vehicles whose paid-off monthly
lease costs are either $13 or $27 monthly depending on
the lease provider. These vehicles are being replaced due
to general wear and tear, high mileage, and some
maintenance issues. The availability of replacement
vehicles was restricted over the last two years due to
production issues by vehicle manufacturers.
As lease agreements expire, vehicles are ultimately
disposed of, and any proceeds flow back into the vehicle
allocation process and reduce gross costs to be
allocated. The Company projects the proceeds will result
in a normalized annual amount of $10,500 based on a
3-year average.
Projected fuel prices are reflected in the Test Year
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as $4.68 per gallon for gasoline and $5.19 per gallon for
diesel per AAA average price in Boise on September 1,
2022. Historic Test Year average prices were $4.05 for
regular gasoline and $4.32 per gallon for diesel. Fuel
consumption is projected to be a total of 73,593 gallons
with 59,169 gallons of gasoline and 14,424 gallons of
diesel fuel.
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Increased fuel prices and a projected 5.5% increase in
fuel usage based on historical analysis accounts for an
increase in net expense costs of $43,356 in the Test
Year. All other categories of costs are increasing by a
combined net expense total of $70,176 consisting
predominantly of insurance and vehicle maintenance costs.
Adjustment No. 18, Advertising, is adjusted by
$10,598 from a Historic Test Year amount of $217,084 to a
Test Year of $227,683. The adjustment includes a
reduction of $2,000 to remove one extra month of RedSky
media costs from the Historic Test Year due to timing of
payments; a reduction of $8,000 to remove a Donahoe Pace
customer education media campaign cost doubled up in the
Historic Test Year due to timing of payments; a reduction
of $2,687 for non-recurring Eagle Water Company customer
townhall costs; and a reduction of $6,715 to remove
printing costs of the Rules & Regulations insert from
February 2022 which was reprinted in June 2022 to reflect
the May 1, 2022 rate change per SUZ-W-20-01 rate case.
The adjustment includes an estimated cost of $30,000 to
produce a printed version of the annual Consumer
Confidence Report to be mailed to each customer based on
the low customer digital readership for this important
regulatory required document.
Adjustment No. 21, IPUC Fees, increases Test Year
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IPUC Fees by $5,899 from the Historic Test Year expense
of $97,278 to the Test Year level of $103,177. The Test
Year amount is based on the Commission's 2022 utility
assessment rate of 0.1995% per invoice dated April 21,
2022 instructing Veolia to make a payment of $101,940.
This rate is applied to the Test Year projected revenues
as of April 2023 at current rates of $51,717,859 and is
subject to true up.
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Q.Please explain Exhibit No. 10, Schedule 3,
Adjustments No. 2, No. 3 and No. 4 - Payroll Taxes.
A.Exhibit No. 10, Schedule 3, Adjustments No. 2,
No. 3 and No. 4 combine to increase the Historic Test
Year level of payroll taxes by $124,798. Adjustment No. 2
indicates an increase in FICA taxes of $124,963.
Adjustment No. 3 reflects a decrease of ($378) in Federal
unemployment taxes. Adjustment No. 4 shows an increase
of $213 in Idaho State unemployment taxes. All payroll
taxes have been adjusted based on anticipated 2023
statutory limits and rates in effect for 2023.
Q.Does this conclude your direct testimony?
A.Yes.
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Q.Are you the same Michael Wilson who provided
direct testimony in this case?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.I will address several adjustments proposed by
the Idaho Public Utilities Commission Staff ("Staff")
regarding operating costs that are discussed in my
testimony including: Advertising expense, Vehicle
Allocation expense, Employee 401(k) and payroll taxes.
Q.Have you prepared any exhibits to support your
rebuttal testimony?
A.Yes. Rebuttal Exhibits:
·Exhibit 20 Schedule 1 - Operating Expense
Summary
o Adjustment 6 - Employee 401(k)
o Adjustment 7 - Other Employee
Benefit-Tuition Account
o Adjustment 16 - Vehicle Allocation,
Attachment A
o Adjustment 18 - Advertising,
Attachment A (CCR Invoice)
·Exhibit 20 Schedule 3
o Adjustment 2 - FICA
Q.Please summarize the recommendations made by
Staff to the Company's Operating Expenses that were
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discussed in your testimony.
A. Staff Witness Johnson recommended the following
adjustments to Operating Expenses, which were discussed
in my Direct Testimony:
·Adjustment 11 employee 401(k) matching
contributions is a flow through from Staff's
adjusted payroll expense.
·Adjustment 12 Other Employee Benefits -
Tuition proposes an adjustment to use Test
Year End December 31, 2022 actuals.
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·Adjustment 14 Payroll tax is a flow through
from Staff's adjusted payroll expense.
·Adjustment 16 reduces Vehicle Allocation by
removing the 2023 Mechanic wage increase,
eliminates lease costs for 22 new vehicles,
removes 5.5% projected growth in fuel
consumption, prices fuel at a more current
cost, and eliminates a 3% inflation
adjustment to materials and maintenance.
Adjustment 18 eliminates the advertising
expense for printing the Consumer Confidence
Report (CCR).
Payroll
Q.Do you agree with Staff Witness Johnson's
proposed adjustments to employee 401(k) Match, Other
Employee Benefit-Tuition Account, and payroll taxes-
FICA, FUI, and SUI?
A. Not entirely. Staff's proposal uses actual
401(k) Match expenses incurred in 2022. The 401(k)
amount should be based on the Company's rebuttal gross
payroll amount, less incentives. The Company's rebuttal
position for 401(k) expense is $455,428, a reduction of
$139 per Exhibit 20 Schedule 1 Adjustment 6 - Employee
401(k). Likewise, Payroll taxes- FICA, FUI, and SUI
calculations should be based on the Company's rebuttal
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amount for Test Year gross payroll of $11,554,333. The
Company's rebuttal position for FICA is $869,430. FUI
and SUI remain unchanged as filed.
The Company can accept Staff's proposed December
2022 actual amount for Company's Other Employee
Benefit-Tuition Account.
Advertising Expenses
Q.Do you agree with Staff Witness Johnson's
proposal to eliminate estimated printing costs for the
Consumer Confidence Report (CCR)?
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A. No. The Company's rebuttal position for Test
Year advertising expense is $248,647, which reflects
$20,965 of additional CCR printing costs per Exhibit 20
Schedule 1 Adjustment 18 Attachment A (CCR Invoice). The
February 28, 2023 CCR invoice reflects a total of $50,965
for printing costs, including sales tax, provided by the
vendor based on 100,000 printed customer notices. The
increase in costs is due to inflationary increases to
paper material costs and the service to manage the
printing and delivery to the post office. See testimony
by Company Witness Cary on the postage costs related to
the CCR.
Q.Please discuss why the Company proposes to mail
the Consumer Confidence Report (CCR) when it may be
provided to customers electronically?
A. The Company strongly believes the CCR is an
important document for customers to review and to
understand what is in their water, what tests are
performed and those test results. The Idaho Department of
Environmental Quality and the Environmental Protection
Agency require customers be notified when their annual
CCR is available. However, less than 0.1% of customers
clicked to the Idaho CCR web page the previous two years
using only an electronic notification. The Company's
position is this important and regulatory required
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information should be mailed to all customers. The
Company will continue to provide notification via our
Facebook and Twitter pages, a digital banner ad on
IdahoStatesman.com with a link to a sponsored news
article about the CCR, and a bill message for customers
who receive their statement on paper or electronically.
All forms of notification let customers know how to find
the CCR on our website; however, the printed mailer is
the version the Company feels is the most effective.
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Vehicle Allocation
Q.Do you agree with Staff Witness Johnson's
adjustments to pro forma vehicle expense (Vehicle
Allocation)?
A. No. Staff Witness Johnson's first adjustment
removes the 2023 pay increase for the Company's mechanic.
The mechanic is a union position and thus covered by the
current Collective Bargaining Agreement between the
Company and Union that is effective until March 31, 2024.
In the current agreement, the mechanic base hourly wage
is set to increase by 2.75% on April 1, 2023 and thus
should be included as filed.
Staff Witness Johnson's second adjustment
removes the pro forma lease expense of $198,000
associated with 22 new vehicles included in the Company's
case. These new vehicle leases are to replace old
vehicles with expired leases. Since the Staff's onsite
audit in January of 2023, the Company has received 15 of
the new leased vehicles sourced through our lease
provider, Element Fleet. See Exhibit 20 Schedule 1
Adjustment 16 - Vehicle Allocation, Attachment A, Page 1.
Additionally, our mechanic has worked with the local
Kendall Ford of Meridian dealership to secure the other 7
new leased vehicles. Four of those vehicles have
arrived, and the other three are confirmed by the
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dealership to arrive in mid-April. See Exhibit 20
Schedule 1 Adjustment 16 - Vehicle Allocation, Attachment
A, Pages 2-5. It is the Company's position to include
the $198,000 for these 22 new leases as filed.
Staff Witness Johnson's third adjustment
reduced fuel costs by revising both the combined average
price for regular and diesel and the total pro forma
gallons of fuel consumed. The as filed AAA price for
fuel on September 1, 2022 was revised by Staff Witness
Johnson to the price as of January 30, 2023. Given the
volatility in fuel prices,
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the Company proposes to use an updated average price of
regular fuel of $3.792 and $4.513 for diesel fuel as of
March 6, 2023 per AAA "Boise City" prices.

(Table contained in hard copy of transcript)
With regards to pro forma gallons of fuel consumed,
Staff Witness Johnson proposed to remove the 5.5%
estimated increase from the historical test year which
resulted in 69,756 gallons compared to the as filed
historic test year of 73,593 total gallons. The Company
proposes to use actual fuel consumed for the 12-month
period ending February 28, 2023 per Exhibit 20 Schedule 1
Adjustment 16 - Vehicle Allocation, Attachment A, Page 6.
The volume of all grades of regular fuel consumed during
that period is 56,254 gallons. This volume priced at the
AAA average price of $3.792 for regular is $213,315. The
volume of diesel fuel consumed for the same period was
17,169 gallons. This volume priced at the AAA average
price of $4.513 for diesel is $77,484. Total rebuttal
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fuel cost is $290,799 on 73,423 gallons which is a
reduction of $60,691 from the as filed amount.
Lastly, Staff Witness Johnson proposes to eliminate
the 3% inflation rate applied to the historical test year
materials and maintenance costs stating, "Commission and
Staff have historically opposed inflation adjustments
because they are not known and
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measurable". While projecting inflation may be
difficult, the impact of inflation during 2022 was known
and measurable as 2022 year-end material and maintenance
costs totaled $258,557. This is an increase of $42,487
over the as-filed historic test year amount of $216,070
which included the 3% inflation projection. The Company
does not propose to increase vehicle expense by the
actual 2022 year-end amount but stands by its as filed
position of $216,070 which includes a 3% inflation
increase compared to the 6.2% year-over-year 12-month
percent change in CPI-U, December 2022 for all items in
the West. See Exhibit 20 Schedule 1 Adjustment 16 -
Vehicle Allocation, Attachment A, Page 8.
Q.Please summarize the Company's rebuttal
position on vehicle expense.
A.The Company's rebuttal position on total
vehicle expense is $991,007, a reduction of $34,343 from
the as filed amount of $1,025,350.
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in
open hearing.)
MR. CARTER: Okay, and Mr. Wilson is
available for cross-examination and questions by the
Commission.
COMMISSIONER ANDERSON: Mr. Burdin, does
the Commission have questions?
MR. BURDIN: Thank you, yes.
CROSS-EXAMINATION
BY MR. BURDIN:
Q Good morning, Mr. Wilson.
A Good morning.
Q I have a few questions on 401(k)
contributions. Can employees reduce their 401(k)
contributions?
A Yes.
Q And can employees stop contributing to the
401(k) if they want to?
A Yes.
Q And so would you agree that it's possible
for 401(k) matching contributions to increase or decrease
depending on what the employees choose to do?
A Yes.
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MR. BURDIN: Thank you. That is all the
questions I have for Mr. Wilson. Thank you.
COMMISSIONER ANDERSON: Micron?
MR. NELSON: No questions, thank you.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: No, thank you, Chair.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions.
COMMISSIONER ANDERSON: Do the
Commissioner have any questions?
EXAMINATION
BY COMMISSIONER HAMMOND:
Q It just piqued my curiosity, I'm sure
there's a very good answer for it, I just was curious, on
page 5 of your testimony, starting at line 12, there's an
adjustment, Adjustment No. 9, identified, purchased
water. It appears the representation or the testimony is
that the purchased water expense decreased. Can you give
me an explanation why?
A Yes, as stated in my testimony, there were
two water bank rental fees that due to the timing of the
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payment of the invoice were recorded in the test year, so
we normalized the test year by removing the extra at the
same time.
COMMISSIONER HAMMOND: Thank you. That's
it.
COMMISSIONER ANDERSON: Mr. Carter,
redirect?
MR. CARTER: No.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will excuse the witness. Thank you
very much.
(The witness left the stand.)
MR. CARTER: Mr. Carter, you may call your
next witness.
MR. CARTER: Sure. Chairman Anderson, we
will call Mr. Harold Walker next. If there is a need for
a break, now might be a good one. I would expect
possibly more cross-examination for the next two
witnesses.
COMMISSIONER ANDERSON: I think I got a
negative shake from the court reporter, so we will
continue.
MR. CARTER: Great. Veolia Water Idaho
calls Harold Walker.
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HAROLD WALKER, III,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Hello, Mr. Walker. Let's be sure your
microphone is on.
A Testing?
Q Great, all right. Okay, Mr. Walker,
please state and spell your name for the record.
A Harold Walker, III, Harold, H-a-r-o-l-d,
Walker, W-a-l-k-e-r, III.
Q And are you the same Mr. Walker or, excuse
me, Harold Walker that filed direct testimony and
exhibits and rebuttal testimony and exhibits on behalf of
Veolia Water Idaho in this case?
A Yes.
Q And if I asked you the same questions
today, would your answers be the same?
A Yes.
MR. CARTER: Commission, I would ask that
Mr. Walker's direct testimony and exhibits and rebuttal
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testimony and exhibits be spread upon the record as if
read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread the rebuttal and direct
testimony along with the exhibits across the record as if
read.
(Veolia Water Idaho Exhibit Nos. 1 & 15
were admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Mr. Harold Walker, III, is spread
upon the record.)
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INTRODUCTION
Q.Please state your name and business address.
A.My name is Harold Walker, III. My business
address is 1010 Adams Avenue, Audubon, Pennsylvania
19403.
Q.By whom are you employed and in what capacity?
A.I am employed by Gannett Fleming Valuation and
Rate Consultants, LLC as Manager, Financial Studies.
Q.What is your educational background and
employment experience?
A.My educational background, business experience
and qualifications are provided in Appendix A.
SCOPE OF TESTIMONY
Q.What is the purpose of your testimony?
A.The purpose of my testimony is to recommend an
appropriate overall rate of return that Veolia Water
Idaho, Inc. ("VWID" or the "Company") should be afforded
an opportunity to earn on its water service rate base.
My testimony is supported by Exhibit No. 1, which is
composed of 19 Schedules.
SUMMARY OF RECOMMENDATION
Q.What is your recommended cost of equity?
A.My recommendation is that VWID be permitted an
overall rate of return of 7.77%, including a 10.80% cost
of common equity, based upon the Company's capital
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structure at June 30, 2022. My recommended cost of
common equity reflects VWID's unique risk
characteristics.
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Q.How did you determine your recommended common
equity cost rate?
A.I used several models to help me in formulating
my recommended common equity cost rate including
Discounted Cash Flow ("DCF"), Capital Asset Pricing Model
("CAPM") and Risk Premium ("RP").
Q.Is it important to use more than one market
model?
A.Yes. It is necessary to estimate common equity
cost rates using a number of different models. At any
given time, a particular model may understate or
overstate the cost of equity. While any single investor
may rely solely upon one model, different investors rely
on different models and many investors use multiple
models. Therefore, because the price of common stock
reflects a number of valuation models, it is appropriate
to estimate the market-required common equity cost rate
by applying a broad range of analytical models.
Q.Please summarize your common equity cost rate
recommendation.
A.There is no market data concerning VWID's
shares of common stock because VWID shares of common
stock are not publicly traded. Accordingly, due to the
lack of market data concerning the VWID's equity, I used
a comparable group of publicly traded companies to
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estimate the common equity cost rate. Based upon the
results of my entire analysis, I conclude VWID's current
common equity cost rate is at least 10.80%. The current
range of common equity cost for VWID is 9.60% (DCF),
11.60% (CAPM), and 11.30% (RP). Value Line Investment
Survey ("Value Line") is relied upon by many investors
and is the only investment advisory service of which I am
aware that projects earned return on equity. As a check
on the reasonableness of my common equity cost rate
recommendation, I reviewed
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Value Line's projected returns on common equity for
comparable utilities. Value Line's projected earned
returns on common equity for my comparable utilities
range from 10.6% to 10.8%. The range of the projected
returns suggests that my recommendation that VWID be
permitted an opportunity to earn 10.80% is reasonable, if
not conservative.
PRINCIPLES OF RATE REGULATION AND FAIR RATE OF RETURN
Q.What are the principles guiding fair rates of
return in the context of rate regulation?
A.In a capitalistic or free market system,
competition determines the price for all goods and
services. Utilities are permitted to operate as
monopolies or near monopolies as a tradeoff for a ceiling
on the price of service because: (1) the services
provided by utilities are considered necessities by
society; and (2) capital-intensive and long-lived
facilities are necessary to provide utility service.
Generally, utilities are required to serve all customers
in their service territory at reasonable rates determined
by regulators. As a result, regulators act as a
substitute for a competitive-free market system when they
authorize prices for utility service.
Although utilities operate in varying degrees as
regulated monopolies, they must compete with governmental
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bodies, non-regulated industries, and other utilities for
labor, materials, and capital. Capital is provided by
investors who seek the highest return commensurate with
the perceived level of risk; the greater the perceived
risk, the higher the required return rate. In order for
utilities to attract the capital required to provide
service, a fair rate of return should equal an
investor-required, market-determined rate of return.
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Q.WHAT CONSTITUTES A FAIR RATE OF RETURN?
A.Two noted Supreme Court cases define the
benchmarks of a fair rate of return. In Bluefield1, a
fair rate of return is defined as: (1) equal to the
return on investments in other business undertakings with
the same level of risks (the comparable earnings
standard); (2) sufficient to assure confidence in the
financial soundness of a utility (the financial integrity
standard); (3) adequate to permit a public utility to
maintain and support its credit, enabling the utility to
raise or attract additional capital necessary to provide
reliable service (the capital attraction standard). The
second case, Hope2, determined a fair rate of return to
be based upon guidelines found in Bluefield as well as
stating that: (1) allowed revenues must cover capital
costs including service on debt and dividends on stock;
and (2) the Commission was not bound to use any single
formula or combination of formulae in determining rates.
Utilities are not entitled to a guaranteed return.
However, the regulatory-determined price for service must
allow the utility a fair opportunity to recover all costs
associated with providing the service, including a fair
rate of return.
INVESTMENT RISK
Q.Previously, you referred to risk. Please
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define the term risk.
A.Risk is the uncertainty associated with a
particular action; the greater the uncertainty of a
particular outcome, the greater the risk. Investors who
invest in risky assets expose themselves to investment
risk particular to that investment. Investment risk is
the sum of business risk and financial risk. Business
risk is the
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1Bluefield Water Works & Improvement Company v. P.S.C. of West
Virginia, 262 U.S. 679 (1923).
2Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591
(1944).
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risk inherent in the operations of a business. Assuming
that a Company is financed with 100% common equity,
business risk includes all operating factors that affect
the probability of receiving expected future income such
as: sales volatility, management actions, availability of
product substitutes, technological obsolescence,
regulation, raw materials, labor, size and growth of the
market served, diversity of the customer base, economic
activity of the area served, and other similar factors.
Q.What is financial risk?
A.Financial risk reflects the manner in which an
enterprise is financed. Financial risk arises from the
use of fixed cost capital (leverage) such as debt and/or
preferred stock, because of the contractual obligations
associated with the use of such capital. Because the
fixed contractual obligations must be serviced before
earnings are available for common stockholders, the
introduction of leverage increases the potential
volatility of the earnings available for common
shareholders and therefore increases common shareholder
risks.
Although financial risk and business risk are
separate and distinct, they are interrelated. In order
for a company to maintain a given level of investment
risk, business risk and financial risk should complement
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one another to the extent possible. For example, two
firms may have similar investment risks while having
different levels of business risk, if the business risk
differences are compensated for by using more or less
leverage (financial risk) thereby resulting in similar
investment risk.
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DESCRIPTION OF VWID
Q.Please give a brief description of the Company.
A.VWID is a private or investor-owned company.
VWID is a regulated public utility that provides water
service to about 100,000 (12/31/21) customers located in
their franchise territories in Boise, parts of Eagle, and
unincorporated areas of Ada County, Idaho. The price of
service of VWID is regulated by the Idaho Public
Utilities Commission ("Commission" or "PUC").
VWID is a wholly-owned subsidiary of Veolia Utility
Resources LLC ("VUR"). VUR is the sole source of VWID's
external capital. VUR owns and provides services to
water and wastewater utility companies which are located
throughout the United States (e.g., VWID). VUR was
founded in 1869 and is based in Paramus, New Jersey. VUR
is a subsidiary of Veolia Utility Parent, Inc., which is
a subsidiary of Veolia North America, Inc.
Veolia North America, Inc. is a wholly-owned
subsidiary of Veolia Environnement S.A: Veolia
Environnement S.A. is a French transnational company with
activities in three main service and utility areas: water
management, waste management and energy services.
THE INDUSTRY
Q. Please give a brief overview of the industry in
which the Company operates.
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A.VWID operates in the water supply industry.
The water supply industry has a Standard Industrial
Classification ("SIC") code of 4941, has water utilities,
and includes establishments primarily engaged in
distributing water for sale for residential, commercial,
and industrial uses. Government controlled
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establishments such as municipalities, public service
districts and other local governmental entities dominate
the industry. Private companies or investor owned
utilities ("IOU") are active in the construction and
improvement of water supply facilities and
infrastructure. There are currently about 11,000 U.S.
Businesses with a SIC code of 4941.
A comparative industry to the water supply industry
is the wastewater supply industry. The wastewater
utility industry has a Standard Industrial Classification
("SIC") code of 4952 (Sewerage Systems), has sewer
utilities, and includes establishments primarily engaged
in the collection and disposal of wastes conducted
through a sewer system, including such treatment
processes as may be provided. There are currently about
2,200 U.S. Businesses with a SIC code of 4952.
The water supply industry is the most fragmented of
the major utility industries with more than 53,000
community water systems in the U.S. (83% of which serve
less than 3,300 customers). The nation's water systems
range in size from large municipally owned systems, such
as the New York City water system that serves
approximately 9 million people, to small systems, where a
few customers share a common well.
According to the U.S. Environmental Protection
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Agency's ("EPA") most recent survey of publicly-owned
wastewater treatment facilities in 2008, there are
approximately 15,000 such facilities in the nation,
serving approximately 74% of the U.S. population. Ninety
eight percent of domestic wastewater systems are
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government owned rather than IOUs. Currently, there are
no wastewater utility companies that have actively traded
stock.3
An estimated 16% of all water supplies are managed
or owned by IOUs. IOUs consist of companies with common
stock that is either actively traded or inactively
traded, as well as companies that are closely held, or
not publicly traded. Currently, there are only about
nine investor owned water utility companies with publicly
traded stock in the U.S.
The water utility industry's and wastewater utility
industry's increased compliance with state and federal
water purity levels and large infrastructure replacements
are driving consolidation of the wastewater utility and
water utility industries. Because many wastewater
utility and water utility operations do not have the
means to finance the significant capital expenditures
needed to comply with these requirements, many have been
selling their operations to larger, financially stronger
utilities.
The larger IOUs have been following an aggressive
acquisition program to expand their operations by
acquiring smaller wastewater and water systems.
Generally, they enter a new market by acquiring one or
several wastewater or water utilities. After their
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initial entry into a new market, the larger
investor-owned water utility companies continually seek
to expand their market share and services through the
acquisition of wastewater and water utility businesses
and operations that can be integrated with their existing
operations. Such acquisitions may allow a company to
expand market share and increase asset utilization by
eliminating
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3Many of the publicly traded water utility stocks also own some
wastewater utilities but there are no publicly traded utility stocks
which are comprised solely of wastewater utilities.
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duplicate management, administrative, and operational
functions. Acquisitions of small, independent utilities
can often add earning assets without necessarily
incurring the costs associated with the SDWA if such
acquisitions are contiguous to the potential purchaser.
In summary, the result of increased capital
spending, to meet the SDWA and CWA requirements4 and
replace the aging infrastructure of many systems, has
moved the wastewater and water industries toward
consolidation. Moreover, Federal and State regulations
and controls concerning water quality are still in the
process of being developed and it is not possible to
predict the scope or the enforceability of regulations or
standards which may be established in the future, or the
cost and effect of existing and potential regulations and
legislation upon VWID. However, as a medium size water
system, VWID faces the cost of compliance with less
financial resources when compared to larger IOU water
utilities.
COMPARABLE GROUP
Q.How do you estimate the cost of common equity
for VWID?
A.VWID's common stock is not publicly traded.
Accordingly, I employed a comparable group of utility
companies with actively traded stock, to determine a
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market-required cost rate of common equity capital for
VWID. Since no companies
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4The SDWA, or Safe Drinking Water Act, is the principal federal law
in the United States intended to ensure safe drinking water for the
public. Pursuant to the act, the EPA is required to set standards for
drinking water quality and oversee all states, localities, and water
suppliers who implement these standards. The CWA, or Clean Water
Act, is the primary federal law in the United States governing water
pollution. The CWA's objective is to restore and maintain the
chemical, physical, and biological integrity of the nation's waters
by preventing point and nonpoint pollution sources, providing
assistance to publicly owned treatment works for the improvement of
wastewater treatment, and maintaining the integrity of wetlands.
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are perfectly identical to VWID, it is reasonable to
determine the market-required cost rate for a comparable
group of utility companies and adjust, to the extent
necessary, for investment risk differences between VWID
and the comparable group.
Q.How did you select the comparable group used to
determine the cost of common equity for VWID?
A.I selected a comparable group of water
utilities to determine the cost of common equity for VWID
considering security analysts' coverage. Unlike the
other utility industries, only a portion of the IOU water
companies with publicly traded stock in the U.S. are
followed by security analysts. Coverage by security
analysts is important when determining a market required
cost of common equity. Accordingly, security analysts'
coverage was considered when selecting my comparable
group. I selected my water utility comparable group,
Water Group Followed by Analysts ("Water Group"), based
upon a general criteria that includes: (1) all U.S. water
utilities that are covered by security analysts as
measured by the existence of sources of published
projected five-year growth rates in earnings per share
("EPS"); (2) with a Standard Industrial Classification
(SIC) of 4941 (i.e., Water Supply Facilities and
Infrastructure); (3) with a North American Industry
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Classification System (NAICS) of 221310 (i.e., Water
Supply and Irrigation Systems); (4) are not the announced
subject of an acquisition; (5) currently pay a common
dividend and have not reduced their common dividend
within the past four years; (6) have market value of
common stock, the product of multiplying the closing
stock price by the number of common shares outstanding,
greater than
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$500.0 million; and (7) have a total enterprise, the sum
of market value, preferred stock and total debt, greater
than $700.0 million.
It should be noted that the Water Group is also
referred to as the Comparable Group and/or the Comparable
Companies.5 The names of the utilities that comprise the
Comparable Group and their bond or credit ratings are
listed in Table 1.
(Table in hard copy of transcript)
Q.Why did you include not being the subject of an
acquisition as a criteria for the Water Group?
A.To begin with, there are only about nine
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investor owned water utility companies with publicly
traded stock in the U.S., and some of these companies are
very small.
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5All of the Comparable Companies also provide some wastewater
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service.
As stated previously, the IOU water industry receives
only limited exposure on Wall Street.
Additionally, the merger activity in the water
industry can result in abnormal or "tainted" stock prices
in terms of a DCF analysis because premiums are typically
paid in corporate acquisitions. That is, when a tender
offer is made for the purchase of all the outstanding
stock of a company, the amount of that offer usually
exceeds the price at which the stock was previously
traded in the market. These large premiums are often
reflected in the prices of other water utilities that are
not currently the announced subject of an acquisition.6
CAPITAL STRUCTURE
Q.What is required to develop an overall rate of
return?
A.The first step in developing an overall rate of
return is the selection of capital structure ratios to be
employed. Next, the cost rate for each capital component
is determined. The overall rate of return is the product
of weighting each capital component by its respective
capital cost rate. This procedure results in VWID's
overall rate of return being weighted proportionately to
the amount of capital and cost of capital of each type of
capital.
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Q.Does VWID directly raise or issue its own debt
capital?
A.No, prospectively VWID does not raise its own
capital; rather VUR is the sole source of VWID's external
capital.
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6Multiple publications mention these impacts including Research
Magazine - April 2010, Barron's - March 2001, Utility Business - June
2002, and Value Line Investment Survey - April 2013.
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Q.What capital structure ratios are appropriate
to be used to develop VWID's overall rate of return?
A.Consistent with settled rate setting
principles, I believe it is necessary to evaluate VWID's
current cost of capital based on VUR's June 30, 2022
capital structure, which includes 44.43% debt and 55.57%
common equity as reflected in Schedule 1. These ratios
synchronize capitalization with rate base.
Q.Is there a set of regulatory and financial
principles used in deciding the appropriate capital
structure to use for cost of capital purposes?
A.Yes. There is a general set of regulatory and
financial principles used in deciding the capital
structure issue for cost of capital purposes that are
consistent with both regulatory and financial theories:
1)It is generally preferable to use a utility's
actual capital structure in developing its rate
of return. However, in deciding whether a
departure from this general preference is
warranted in a particular case, it is
appropriate to first look to the issue of
whether the utility is a financially
independent entity. In determining whether a
utility is a financially independent entity or
self-financing, it is important to look to
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whether the utility:
·has its own bond rating;
·provides its own debt financing; and
·debt financing is not guaranteed by a
parent company.
2)When a utility issues its own debt that is not
guaranteed by the public or private parent and
has its own bond rating, regulatory and
financial
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principles indicate to use a utility's own
capital structure, unless the utility's capital
structure is not representative of the
utility's risk profile or where use of the
actual capital structure would create atypical
results. Regulatory and financial principles
involve determining whether the actual capital
structure is atypical when compared with the
capital structures approved by the Commission
for other utilities that operate in the same
industry (i.e., water utility, gas distribution
utility, etc.), as well as those of the proxy
utility companies that operate in the same
industry.
3)For utility subsidiaries without publicly
traded stock, the manner in which the utility
obtains its debt financing determines whether
it does its own financing. Public Utility
Commissions generally determine if a subsidiary
has financial, operational, and managerial
relationships with its parent entity. However,
having such ties typically has not led to use
of a parent's capital structure for regulatory
purposes, unless the subsidiary utility issues
no long-term debt, issues long-term debt only
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to its parent, or issues long-term debt to
outside investors only with the guarantee of
its parent.
4)If a utility does not provide its own
financing, Public Utility Commissions often
look to another entity. Generally, Public
Utility Commissions use the actual capital
structure of the entity that does the financing
for the regulated utility as long as it results
in just and reasonable rates. This generally
means using a parent company.
5)If the parent's capital structure is used,
because it finances the operation of the
utility, regulatory and financial principles
require adjustments in the
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utility's allowed rate of return on equity to
adjust for risk differences, if any, between
the parent and the regulated subsidiary. If,
however, the financing entity's capital
structure is inconsistent relative to the
capital structures of the publicly-traded proxy
companies used in the cost of equity analysis
and capital structures approved for other
utilities that operate in the same industry
(i.e., water utility, gas distribution utility,
etc.), Public Utility Commissions employ a
hypothetical capital structure.
Once the cost of equity for the proxy companies is
determined, thereby establishing a range of reasonable
returns, Public Utility Commissions should determine
where to set the utility's return in that range based
upon how the utility's risk compares with that of other
utilities that operate in the same industry (i.e., water
utility, gas distribution utility, etc.). The risk
analysis begins with the assumption that the utility
generally falls within a broad range of average risk,
absent highly unusual circumstances that indicate an
inconsistently high or low risk as compared to other
utilities that operate in the same industry (i.e., water
utility, gas distribution utility, etc.). Generally,
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financial risk is a function of the amount of debt in an
entity's capital structure used for cost of capital
purposes. When there is more debt, there is more risk.
Q.How does your recommended capital structure
compare with ratios employed by other investor-owned
companies?
A.The capital structure I recommend for VWID
reflects a common equity ratio of 55.6% which is similar
to the range of the ratios employed by other
investor-owned water companies as shown on pages 1 and 2
of Schedule 2. A comparison of my
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recommendation for VWID's capital structure ratios to
those recently employed by the Comparison Group is shown
in Table 2.

(Table in hard copy of transcript)
VWID's rate making capital structure ratios are
reasonable based upon the above information.
EMBEDDED COST RATE
Q.What embedded cost rates do you recommend be
used to calculate VWID's overall rate of return?
A.Consistent with my recommended capital
structure ratios I recommend using VUR's embedded debt
cost rate of 3.99% for VWID as reflected in Schedule 1.
This embedded debt cost rate of 3.99% is detailed on the
Company's Exhibit No. 6. The determination of an
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embedded cost rate is a relatively simple arithmetic
exercise because a company has contracted for this
capital for a specific period of time and at a specific
cost, including issuance expenses and coupon rate.
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FINANCIAL ANALYSIS
Q.Have you reviewed historical financial
information of VWID as part of your analysis?
A.Yes. On page 1 of Schedule 3, I developed a
five-year analysis, ending in 2021, detailing various
financial ratios for VWID. On Schedule 4, I performed a
similar five-year analysis for the Water Group. Schedule
5 reveals the results of operations for a large
broad-based group of utilities known as the Standard &
Poor's ("S&P") Utilities for the five years ending 2021.
This information is useful in determining relative risk
differences between different types of utilities.
Comparing VWID, the Comparable Group and the S&P
Utilities' coverage of fixed charges and the various cash
flow coverage proves that the Comparable Group has
experienced a higher level of coverage than the S&P
Utilities. Reviewing VWID's various cash flow coverages
shows VWID has had similar but higher levels of coverage
than the Comparable Group.
Q.What do you conclude from the comparison of all
the information shown on Schedules 3 through 5?
A.Taken together, these comparisons show that
VWID is exposed to risk that is similar in nature but
greater in degree compared with the Comparable Groups.
This is evident in particular when one considers the size
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and diversification of VWID, or lack thereof, as compared
to the Comparable Companies. Moreover, the evidence from
the various financial ratios show VWID's risks as being
similar to the Comparable Companies' but less than the
larger S&P Utilities. Prospectively,
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VWID's future construction expenditures will place
downward pressure on VWID's financial ratios as measured
by interest coverage and cash generation.
Q.What information is shown on Schedule 6?
A.Schedule 6 lists the names, issuer credit
ratings, common stock rankings, betas and market values
of the companies contained in the Comparable Group and
the S&P Utilities. As is evident from the information
shown on Table 3, the Comparable Group and the S&P
Utilities are similar to each other in risk.
(Table in hard copy of transcript)
The Water Group's average issuer credit ratings and
common stock rankings are higher than the S&P Utilities.
The average beta of the Comparable Group, 0.77, is less
than the average beta of the S&P Utilities, 0.88. Beta
is a measure of volatility or market risk; the higher the
beta, the higher the market risk. The market values
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provide an indication of the relative size of each group.
As a generalization, the smaller the average sizes of a
group, the greater the risk.
Page 2 of Schedule 6 shows that VWID has generally
experienced the lowest return on equity ("ROE") when
compared to the Comparable Companies. Further, VWID's
dividend payout ratio is lower than the Comparable
Companies' dividend payout ratio.
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S&P, the predominant bond rating agency, considers
profit to be a fundamental determinant of credit
protection. S&P states that a firm's profit level:
Whether generated by the regulated or
deregulated side of the business, profitability
is critical for utilities because of the need
to fund investment-generating capacity,
maintain access to external debt and equity
capital, and make acquisitions. Profit
potential and stability is a critical
determinant of credit protection. A company
that generates higher operating margins and
returns on capital also has a greater ability
to fund growth internally, attract capital
externally, and withstand business adversity.
Earnings power ultimately attests to the value
of the company's assets, as well. In fact, a
company's profit performance offers a litmus
test of its fundamental health and competitive
position.
Accordingly, the conclusions about
profitability should confirm the assessment of
business risk, including the degree of
advantage provided by the regulatory
environment.7
Q.What information is shown on Schedule 7?
A.Schedule 7 reveals the capital intensity and
capital recovery for VWID, the Comparable Companies and
the S&P Utilities. Based upon the 2021 capital intensity
ratio of plant to revenues, VWID ($10.97) is more capital
intensive as compared to the Water Group ($6.60) and more
than the S&P Utilities ($4.78). From a purely financial
point of view, based on current accounting practices, the
rate of capital recovery or depreciation rate is an
indication of risk because it represents cash flow and
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the return of an investment. VWID's average rate of
capital recovery is higher than the Comparable Group's,
suggesting less risk.
The return on equity and depreciation expense
provides the margin for coverage of construction
expenditures. For a utility company, depreciation
expense
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__________________
7Standard & Poor's Ratings Services, Criteria, Utilities: Key Credit
Factors: Business And Financial Risks In The Investor-Owned Utilities
Industry, Nov. 26, 2008, pgs. 8-9.
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is the single largest generator of cash flow. From a
financial analyst's point of view, cash flow is the life
blood of a utility company. Without it, a utility cannot
access capital markets, it cannot construct plant, and
therefore, it cannot provide service to its customers.
RISK ANALYSIS
Q.Please explain the information shown on
Schedule 8.
A.Schedule 8 details the size difference between
VWID and the Comparable Group. Company size is an
indicator of business risk and is summarized in Table 4.

(Table in hard copy of transcript)
As shown in Table 4, VWID is much smaller than the Water
Group. The size of a company affects risk. A smaller
company requires the employment of proportionately less
financial leverage (i.e., debt and preferred capital)
than a larger company to balance out investment risk. If
investment risk is not balanced out, then a higher cost
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of capital is required.
Q.Why is size significant to your analysis?
A.The size of a company can be likened to ships
on the ocean, since a large ship has a much better chance
of weathering a storm than a small ship. The loss of a
large customer will impact a small company much more than
a large company because a
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large customer of a small company usually accounts for a
larger percentage of the small company's sales.
Moreover, a larger company is likely to have a more
diverse geographic operation than a smaller company,
which enables it to sustain earnings fluctuations caused
by abnormal weather in one portion of its service
territory. A larger company operating in more than one
regulatory jurisdiction enjoys "regulatory
diversification" which makes it less susceptible to
adverse regulatory developments or eminent domain claims
in any single jurisdiction. Further, a larger company
with a more diverse customer base is less susceptible to
downturns associated with regional economic conditions
than a small company. For example, on average, the
average company in the Water Group provides water/sewer
service in multiple states for about 968,000 customers.
The average population of the communities served by the
average company in the Water Group is about 3.5 million
people. These wide-ranging operations provide the Water
Group substantial geographic, economic, regulatory,
weather and customer diversification. VWID provides
regulated water service to about 100,000 customers
(2021). The concentration of VWID's business in
southwestern Idaho makes it very susceptible to any
adverse development in local regulatory, economic,
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demographic, competitive and weather conditions.
Further, S&P, a major credit rating agency,
recognizes the importance that diversification and size
play in credit ratings. S&P believes some of the
critical factors include: regional and cross-border
market diversification (mitigates
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economic, demographic, and political risk concentration);
customer diversification; and regulatory regime
diversification.8
The size of a company can be a barrier to fluid
access to capital markets (i.e., liquidity risk).
Investors require compensation for the lack of
marketability and liquidity of their investments. If no
compensation is provided, then investors, or at least
sophisticated investors, shy away.
Q.Is the impact of size commonly recognized?
A.Yes, the National Association of Regulatory
Utility Commissioners ("NARUC"), as well as most good
financial texts, recognizes that size affects relative
business risk. Liquidity risk and the existence of the
small firm effect relating to business risk of small
firms are well-documented in financial literature.9
Investors' expectations reflect the highly-publicized
existence of the small firm effect. For example, many
mutual funds classify their investment strategy as small
capitalization in an attempt to profit from the existence
of the small firm effect.
As previously discussed, S&P recognizes that size
plays a role in credit ratings.
Standard & Poor's has no minimum size criterion
for any given rating level. However, size
turns out to be significantly correlated to
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ratings. The reason: size often provides a
measure of diversification, and/or affects
competitive position. . . . Small companies
are, almost by definition, more concentrated in
terms of product, number of customers, or
geography. In effect, they lack some elements
of diversification that can benefit larger
companies. To the extent that markets and
regional economies change, a
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__________________
8Standard & Poor's, Corporate Ratings Criteria, Utilities: Key Credit
Factors: Business and Financial Risks in The Investor-Owned Utilities
Industry, Nov. 26, 2008.
9Banz, Rolf, W. "The Relationship Between Return and Market Value of
Common Stocks," Journal of Financial Economics, 9:3-18 1981. For
subsequent studies see Fama and French, etc.
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broader scope of business affords protection.
This consideration is balanced against the
performance and prospects of a given business.
. . . In addition, lack of financial
flexibility is usually an important negative
factor in the case of very small companies.
Adverse developments that would simply be a
setback for companies with greater resources
could spell the end for companies with limited
access to funds.10
As shown on Schedule 9, size plays a role in the
composition of investors, and hence liquidity. In 2021,
about 112% of the Water Group's shares traded while the
larger companies comprising the S&P Utilities had a much
higher trading volume of 149%. Insiders11 hold more than
eight times more, as a percent to total, of the Water
Group's shares than the S&P Utilities. Currently, only
about 71% of the Water Group shares are held by
institutions12 while the larger companies comprising the
S&P Utilities had much higher institutional holdings of
80%. Due to small size and less interest by financial
institutions, fewer security analysts follow the
Comparable Group and none follow VWID.
The lack of trading activity may affect the cost of
equity estimates for small entities such as VWID and the
Water Group. When stock prices do not change because of
inactive trading activity, estimates of dividend yield
for use in a dividend cash flow model and beta estimates
for use in the capital asset pricing model are affected.
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In a stock market that is generally up, the beta
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due to thin trading.
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__________________
10Standard & Poor's, Corporate Ratings Criteria 2006; pg. 22.
11An insider is a director or an officer who has a policy-making role
or a person who is directly or indirectly the beneficial owner of
more than 10% of a certain company's stock.
12Institutional holders are those investment managers having a fair
market value of equity assets under management of $100 million or
more. Certain banks, insurance companies, investment advisers,
investment companies, foundations and pension funds are included in
this category.
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Q.Do VWID and the Comparable Companies have
similar operating risks?
A.Yes. From an operations standpoint, VWID and
the Comparable Companies have similar risks and are
indistinguishable. Both are required to meet Clean Water
Act and Safe Drinking Water Act requirements and are also
required to provide safe and reliable services to their
customers and comply with Commission regulations.
Q.Is there any single measure that best shows
investment risk from a common stockholder's perspective?
A.No. However, from a creditor's viewpoint, the
best measure of investment risk is debt rating. The debt
rating process generally provides a good measure of
investment risk for common stockholders because the
factors considered in the debt rating process are usually
relevant factors that a common stock investor would
consider in assessing the risk of an investment. Credit
rating agencies, such as S&P, assess the risk of an
investment into two categories based on: fundamental
business analysis; and financial analysis.13 The business
risk analysis includes assessing: Country risk; industry
risk; competitive position; and profitability/peer group
comparisons. The financial risk analysis includes
assessing: accounting; financial governance and
policies/risk tolerance; cash flow adequacy; capital
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structure/asset protection; and liquidity/short-term
factors.
Q.What is the bond rating of VWID and the
Comparable Group?
A.Page 1 of Schedule 10 shows the average
bond/credit rating Comparable Group. The Comparable
Group has an A credit profile and VWID does not have
bonds
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__________________
13Standard & Poor's, Corporate Ratings Criteria 2006; General:
Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009 and Standard & Poor's, Criteria Corporates General:
Corporate Methodology, November 19, 2013.
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rated. VUR has an A credit profile. The major bond
rating/credit rating agencies append modifiers, such as
+, - for S&P and 1, 2, and 3 for Moody's Investors
Service ("Moody's") to each generic rating
classification. For example, an "A" credit profile is
comprised of three subsets such as A+, A, A- for S&P or
A1, A2 or A3 for Moody's. The modifier of either "+" or
"1" indicates that the obligation ranks in the higher end
of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier of "-" or
"3" indicates a ranking in the lower end of that generic
rating category.
S&P and Moody's publish financial benchmark criteria
necessary to obtain a bond rating for different types of
utilities. As a generalization, the higher the perceived
business risk, the more stringent the financial criteria
so the sum of the two, business risk and financial
criteria, remains the same.
Q.What are some financial benchmarks applied by
credit rating agencies for rating public utility debt?
A.S&P describes their range of financial
benchmarks as
Risk-adjusted ratio guidelines depict the role
that financial ratios play in Standard & Poor's
rating process, since financial ratios are
viewed in the context of a firm's business
risk. A company with a stronger competitive
position, more favorable business prospects,
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and more predictable cash flows can afford to
undertake added financial risk while
maintaining the same credit rating. The
guidelines displayed in the matrices make
explicit the linkage between financial ratios
and levels of business risk.14
Q.What other information is shown on Schedule 10?
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__________________
14Standard & Poor's Corporate Rating Criteria, 2000.
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A.Page 2 of Schedule 10 summarizes the
application of S&P's and Moody's measures of financial
risk for VWID and the Comparable Group. S&P's and
Moody's measures of financial risk are broader than the
traditional measure of financial risk (i.e., leverage).
Besides reviewing amounts of leverage employed, S&P and
Moody's also focus on earnings protection and cash flow
adequacy.
As is evident from the information shown on page 2
of Schedule 10, for the five years ending in 2021 and for
the year 2021, VWID's cash flow adequacy ratios were
generally higher than the Comparable Companies in most
instances. Comparing the VWID and the Water Group's
measures of cash flow adequacy shows that the Water Group
has experienced a lower level of cash flow adequacy than
VWID, indicating that VWID is a lower investment risk
than the Water Group. Prospectively, based upon the
Company's construction program, the Company's ratios are
likely to be strained. Based solely upon VWID's
historical ratios, it is my opinion that VWID's credit
profile is similar to the Comparable Companies.
Further, based solely upon VWID's size, it is my
opinion that VWID's credit profile is lower than the
Comparable Groups'. Based on VWID's small size, it is
highly likely that VWID's credit profile is below BBB
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(i.e., BB). An analysis of corporate credit ratings,
shown on page 4 of Schedule 10, indicates that there is
an 90% (100%-0%-1%-6%-3%=90%) chance that VWID's credit
profile falls below BBB based on their small size alone.
As S&P has stated, size is significantly correlated to
credit ratings.
An analysis of corporate credit ratings, summarized
on page 4 of Schedule 10, found The Berkshire Gas Company
("Berkshire") to be the smallest utility with
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a credit rating. Berkshire's credit rating is only A-
despite having a capitalization comprised of about $198
million and a common equity ratio of 70%. According to
this analysis of corporate credit ratings, the smallest
water utility is The York Water Company ("York"). York's
credit rating is only A- notwithstanding having a
capitalization of about $301 million and a common equity
ratio of 51%.
Q.Have you reviewed the Company's large
construction program?
A.Yes, the Company estimates their construction
program to total $260.8 million (net of advances and
contributions) from 2022 through 2026. At year end 2021
the Company's total capital outstanding was $255.8
million indicating the need for a 102% increase ($260.8
million ÷ $255.8 million) in capital through 2026.
Q.How does the magnitude of the Company's large
construction program compare to the Comparable Group's
construction program?
A.The Company is forecasted to require 102% of
additional capital to finance their construction program
while the Comparable Group is projected by Value Line to
require 58% of additional capital to finance their
construction programs. Accordingly, VWID's capital
requirements are about 75% greater than the Comparable
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Group's through 2026 indicating more risk for VWID.
In order to compete with the Comparable Group for
capital, in the future, it will be necessary for VWID to
achieve higher returns on equity, and increased cash flow
just to maintain a similar credit quality.
S&P has stated:
... low authorized returns may affect the
industry's ability to attract necessary capital
to develop new water supplies and upgrade the
quality of existing supplies . . . Traditional
ratemaking policy has not provided sufficient
credit support during the construction cycle of
the
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electric industry over the past 15 years.
To avoid a repeat in the water industry,
regulators must be aware of the increased
challenges the industry faces.15
Investors will not provide the equity capital necessary
for increasing the amount of common equity in a capital
structure unless the regulatory authority allows an
adequate rate of return on the equity.16
Q.What do you conclude from the various measures
of investment risk information you have testified to?
__________________
15Standard & Poor's CreditWeek, May 25, 1992 (emphasis added).
16National Association of Regulatory Utility Commissioners, loc. cit.
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A.A summary of my conclusions regarding the risk
analyses discussed previously is shown in Table 5.
Overall, the information summarized in Table 5 indicates
that VWID has similar investment risk as the Water Group.
(Table in hard copy of transcript)
CAPITAL COST RATES
Q.What information is shown on Schedule 11?
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A.Schedule 11 reviews long-term and short-term
interest rate trends. Long-term and short-term interest
rate trends are reviewed to ascertain the "sub-flooring"
or
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"basement" upon which the Comparable Companies' common
equity market capitalization rate is built. Based upon
the settled yields implied in the Treasury Bond future
contracts and the long-term and recent trends in spreads
between long-term government bonds and A-rated public
utility bonds available to me at the time Schedule 11 was
prepared, I conclude that the market believes that if the
Comparable Companies issued new long-term bonds near
term, they would be priced to yield about 4.7% based upon
a credit profile of "A." Further, it is reasonable to
conclude the market anticipates that long-term government
bonds will be priced to yield about 3.2%, near term.
Since October 2008, the Federal Reserve has been
monetizing US Treasury debt to artificially suppress
interest rates through expansionary money policies (i.e.,
quantitative easing). The Federal Reserve, with
effectively unlimited money at its disposal, intervenes
at any time it wishes, in whatever volume it wishes, to
make sure that Treasury bond and bill prices and yields
are exactly what the Federal Reserve wants them to be.
The US Treasury bond market, and mortgage market, has
become an artificial market with no connection to
objective risk and interest rates.
In August 2011, the Federal Reserve began "Operation
Twist." Under "Operation Twist," the Federal Reserve
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began buying $400 billion of long-dated or long-term US
Treasury debt, financed by selling short-term US Treasury
debt with three years to go or less. The goal of
"Operation Twist" was to try to drive long-term rates
lower, which the Federal Reserve thought would help the
mortgage market. This process has created an artificial
demand for the US Treasury debt
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themselves, and easily drives interest rates artificially
lower and deceives investors into believing US Treasury
debt is safe with wide demand. This has resulted in the
entire capital system being impacted by the Federal
Reserve's distortion of the price of risk.
In the real world of economics, the borrower
pays an interest rate to a lender, who makes
money (interest) by taking on the risk of
lending and deferring gratification. The lender
is willing to not spend his money now. In a
free market economy, interest rates are
essentially a price put on money, and they
reflect the time preference of people. Higher
interest rates reflect a high demand for
borrowing and lower savings. But the higher
rates automatically correct this situation by
encouraging savings and discouraging borrowing.
Lower interest rates will work the opposite
way. When the government/central bank tampers
with interest rates, savings and lending are
distorted, and resources are misallocated.
This is evident in looking back on the housing
bubble. The artificially low interest rates
signaled that there was a high amount of
savings. But it was a false signal. There was
also a signal for people to borrow more. Again,
it was a false signal. As these false signals
were revealed, the housing boom turned into a
bust.17

More recently, in response to COVID-19, the Federal
Reserve provided monetary and fiscal stimulus to increase
liquidity in the form of new fiscal stimulus programs and
rate cuts. "For context, new fiscal stimulus and total
fiscal deficits in the US are roughly double the levels
seen in 2008-2009, and the US fiscal deficit we project
for 2020 of 15%-18% is only matched by deficits seen at
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the height of WWII in 1942-1943."18 The combined result
of these actions by the Federal Reserve and investors'
flight to quality resulted in artificial and historically
low risk-free rates as measured by the 30-year treasury
bond yield.
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17Pike, Geoffrey "The Threat of Negative Interest Rates," Wealth
Daily, May 30, 2014,
http://www.wealthdaily.com/articles/the-threat-of-negative-interest-r
ates/5185, (6/03/2014)
18https://www.jpmorgan.com/jpmpdf/1320748588999.pdf, (5/29/20).
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Q.What are some of the results from the FED's
monetary and fiscal stimulus?
A.The FED's quantitative easing of expanding its
own balance sheet, by buying bonds, and therefore
injecting money into the economy, floods the economy with
additional cash, keeping interest rates low and impacts
equity markets. Additionally, the FED's uninterrupted and
aggressive monetary expansion policy necessarily puts
pressure on inflation. The FED's monetary and fiscal
stimulus, which included artificial and historically low
interest rates, have produced some of the highest
inflation rates in the last 40 years according to CNBC.
Inflation rose 9.1% in June, even more than
expected, as consumer pressures intensify.
Shoppers paid sharply higher prices for a
variety of goods in June as inflation kept its
hold on a slowing U.S. economy, the Bureau of
Labor Statistics reported Wednesday.
The consumer price index, a broad measure of
everyday goods and services related to the cost
of living, soared 9.1% from a year ago, above
the 8.8% Dow Jones estimate. That marked the
fastest pace for inflation going back to
November 1981.19

In response to the recent level of inflation rates,
the Federal Reserve announced its goal of increasing
interest rates as high as needed to get inflation back to
2%.
Americans are headed for a painful period of
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slow economic growth and possibly rising
joblessness as the Federal Reserve raises
interest rates to fight high inflation, U.S.
central bank chief Jerome Powell warned on
Friday in his bluntest language yet about what
is in store for the world's biggest economy.
In a speech kicking off the Jackson Hole
central banking conference in Wyoming, Powell
said the Fed will raise rates as high as needed
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19Cox, J. (2022, July 13). Inflation rose 9.1% in June, even more
than expected, as consumer pressures intensify. CNBC. Retrieved from
https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june
-even-more-than-expected-as-price-pressures-intensify.html,
(7/13/22).
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to restrict growth, and would keep
them there "for some time" to bring down
inflation that is running at more than three
times the Fed's 2% goal.
"Reducing inflation is likely to require a
sustained period of below-trend growth," Powell
said. "While higher interest rates, slower
growth, and softer labor market conditions will
bring down inflation, they will also bring some
pain to households and businesses. These are
the unfortunate costs of reducing inflation.
But a failure to restore price stability would
mean far greater pain."
As that pain increases, Powell said, people
should not expect the Fed to dial back its
monetary policy quickly until the inflation
problem is fixed.20
Prospectively the capital markets will be affected
by the upcoming unprecedented large Treasury financings
coupled with increased interest rates. Investors provide
capital based upon risk and return opportunities and
investors will not provide common equity capital when
higher risk-adjusted returns are available.
Q.Are there other indications that forecasters
believe capital costs rates may increase substantially
from their current levels?
A.Yes, consensus forecasts show that interest
rates are expected to increase substantially in the next
few years. Table 6 shows the forecasted increase in
interest rates published in the June 1, 2022 Blue Chip
Consensus Forecasts for the period 2023 to 2025. As shown
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in Table 6, consensus forecasts show interest rates are
expected to increase over 70 basis points from current
levels. If interest rates were to increase as predicted,
investors will not provide common equity capital when
higher risk-adjusted returns are available.
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20Schneider, H and Saphir, A (2022, August 26). Powell sees pain
ahead as Fed sticks to the fast lane to beat inflation. REUTERS.
Retrieved from https://www.reuters.com/markets/us/feds-powell-pain
-tight-policy-slow-growth-needed-for-some-time-beat-inflation
-2022-08-26/, (8/27/22).
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(Table in hard copy of transcript)
COMMON EQUITY COST RATE ESTIMATE
Q.What is the best method of estimating common
equity cost rates?
A.There is no single method (model) suitable for
estimating the cost rate for common equity. While a
single investor may rely solely upon one model in
evaluating investment opportunities, other investors rely
on different models. Most sophisticated investors who
use an equity valuation model rely on many models in
evaluating their common equity investment alternatives.
Therefore, the average price of an equity security
reflects the results of the application of many equity
models used by investors in determining their investment
decisions.
The application of any single model to estimate
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common equity cost rates is not appropriate because the
security price for which the equity cost rate is being
estimated reflects the application of many models used in
the valuation of the investment. That is, the price of
any security reflects the collective application of many
models. Accordingly, if only one model is used to
estimate common equity
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cost rates, that cost rate will most likely be different
from the collective market's cost rates because the
collective valuation in the market reflects more than one
method.
Noted financial texts, investor organizations and
professional societies all endorse the use of more than
one valuation method. "We endorse the dividend discount
model, particularly when used for establishing companies
with consistent earnings power and when used along with
other valuation models. It is our view that, in any
case, an investor should employ more than one model."21
The American Association of Individual Investors
state, "No one area of investment is suitable for all
investors and no single method of evaluating investment
opportunities has been proven successful all of the
time."22
In their study guide, the National Society of Rate
of Return Analysts state, "No cost of equity model or
other concept is recommended or emphasized, nor is any
procedure for employing any model recommended . . . it
remains important to recognize that alternative methods
exist and have merit in cost of capital estimation. To
this end, analysts should be knowledgeable of a broad
spectrum of cost of capital techniques and issues."23
Several different models should be employed to
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measure accurately the market-required cost of equity
reflected in the price of stock. Therefore, I used
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21Sidney Cottle, Roger F. Murray and Frank E. Block, Graham and
Dodd's Securities Analysis 5th Edition, McGraw-Hill, Inc., 1988, p.
568 (emphasis added).
22Editorial Policy, AAII Journal, American Association of Individual
Investors, Volume 18, No. 1, January 1996, p. 1.
23David C. Parcell, The Cost of Capital - A Practitioners Guide,
National Society of Rate of Return Analysts, 1995 Edition.
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three recognized methods: the DCF shown on Schedule 12,
the CAPM shown on Schedule 17, and the RP shown on
Schedule 18.
DISCOUNTED CASH FLOW
Q.Please explain the discounted cash flow model.
A.The DCF is based upon the assumption that the
price of a share of stock is equal to a future stream of
cash flows to which the holder is entitled. The stream
of cash flows is discounted at the investor-required cost
rate (cost of capital).
Although the traditional DCF assumes a stream of
cash flow into perpetuity, a termination, or sale price
can be calculated at any point in time. Therefore, the
return rate to the stockholder consists of cash flow
(earnings or dividends) received and the change in the
price of a share of stock. The cost of equity is defined
as:
...the minimum rate of return that must be
earned on equity finance and investments to
keep the value of existing common equity
unchanged. This return rate is the rate of
return that investors expect to receive on the
Company's common stock . . . the dividend yield
plus the capital gains yield . . .24
Q.Please explain how you calculated your dividend
yield in the DCF shown on Schedule 12.
A.As shown on page 1 of Schedule 12, I used the
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average dividend yield of 1.8% for the Water Group. The
individual dividend yields are shown on page 2 of
Schedule 12 and are based upon the most recent months'
yield, July 2022, and the twelve-month average yield,
ending July 2022. The second input to a market DCF
calculation is the determination of an appropriate share
price growth rate.
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24Fred Weston and Eugene F. Brigham, Essentials of Managerial
Finance, 3rd ed. (The Dryden Press), 1974, p. 504 (emphasis added).
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Q.What sources of growth rates did you review?
A.I reviewed both historical and projected growth
rates. Schedule 13 shows the array of projected growth
rates for the Comparable Companies that are published.
Specific historical growth rates are shown for
informational purposes because I believe the meaningful
historical growth rates are already considered when
analysts arrive at their projected growth rates.
Nonetheless, some investors may still rely on historical
growth rates.
Q.Please explain the sources of the projected
growth rates shown on Schedule 13.
A.I relied upon four sources for projected growth
rates, First Call, S&P, Zacks Investment Research and
Value Line.25
Q.Did you review any other growth rates besides
those shown on Schedule 13?
A.Yes. I reviewed EPS growth rates reflecting
changes in return rates on book common equity (ROE) over
time. I summarized recent ROEs on page 1 of Schedule 14,
and compared those to the Water Group's higher levels
projected to be achieved by Value Line, as shown on page
2 of Schedule 14. ROEs increase when EPS grows at much
higher/faster rates than book value.
I also reviewed industry specific average projected
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growth rates that are published by Zacks for the
industries in which the Comparable Companies operate.
According to Zacks, the Water Group's industry is
projected to have EPS growth rates that average 10.4%
over the next five years.
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25With the exception of Value Line, the earnings growth rate
projections are consensus estimates five-year EPS estimates. These
consensus estimates are compiled from more than 1,700 financial
analysts and brokerage firms nationwide. It should be noted that
none of the consensus forecasts provides projected DPS estimates.
Value Line publishes projected Cash flow, EPS and DPS five-year
growth projections as well.
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Q.What do you conclude from the growth rates you
have reviewed?
A.Table 7 summarizes some of the various growth
rates reviewed.
(Table in hard copy of transcript)
Academic studies suggest that growth rate conclusions
should be tested for reasonableness against long-term
interest rate levels. Further, the minimum growth rate
must at least exceed expected inflation levels.
Otherwise, investors would experience decreases in the
purchasing power of their investment. Finally, the
combined result of adding the growth rate to the market
value dividend yield must provide a sufficient margin
over yields of public utility debt.
Q.What method did you use to arrive at your
growth rate conclusion?
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A.No single method is necessarily the correct
method of estimating share value growth. It is
reasonable to assume that investors anticipate that the
Water Group's current ROE will expand to higher levels.
The published historical earnings growth rates for the
Water Group averages 6.2%. Because there is not
necessarily any single means of estimating share value
growth, I considered all of this information in
determining a growth rate conclusion for the Comparable
Companies.
Moreover, while some rate of return practitioners
would advocate that mathematical precision should be
followed when selecting a growth rate, the fact
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is that investors do not behave in the same manner when
establishing the market price for a stock. Rather,
investors consider both company-specific variables and
overall market sentiment such as inflation rates,
interest rates and economic conditions when formulating
their capital gains expectations. This is especially
true when one considers the relatively meaningless
negative growth rates. That is, use of a negative growth
rate in a DCF implies that investors invest with the
expectation of losing money.
The range of growth rates previously summarized
supports the reasonableness of an expected 6.6% growth
rate for the Water Group based primarily on the projected
five-year growth rates and considering the Water Group's
industry projected EPS growth rates of 10.4%. Like the
projected growth rates, this investor-expected growth
rate of 6.6% is based on a survey of projected and
historical growth rates published by established
entities, including First Call, S&P, Zacks Investment
Research and Value Line. Use of information from these
unbiased professional organizations provides an objective
estimation of investor's expectations of growth. Based
on the aforesaid, all growth rates for the Comparison
Companies have been considered and have been given weight
in determining a 6.6% growth rate for the Water Group.
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Q.What is your market value DCF estimate for the
Comparable Companies?
A.The market value DCF cost rate estimate for the
Water Group is 8.5%, as detailed on page 1 of Schedule
12.
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Q.Are there other considerations that should be
taken into account in reviewing a market value
capitalization DCF cost rate estimate?
A.Yes. It should be noted that although I
recommend specific dividend yields for the Comparable
Group, I recommend that less weight be given to the
resultant market value DCF cost rate due to the market's
current market capitalization ratios and the impact that
the market-to-book ratio has on the DCF results. The
Comparable Companies' current market-to-book ratios of
339% and low dividend yields are being affected by the
aforementioned policy of the Federal Reserve that has
resulted in the mispricing of capital due to artificial
interest rates, not DCF fundamentals.
Although the DCF cost for common equity appears to
be based upon mathematical precision, the derived result
does not reflect the reality of the marketplace since the
model proceeds from unconnected assumptions. The
traditional DCF derived cost rate for common equity will
continuously understate or overstate investors' return
requirements as long as stock prices continually sell
above or below book value. A traditional DCF model
implicitly assumes that stock price will be driven to
book value over time. However, such a proposition is not
rational when viewed in the context of an investor
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purchasing stock above book value. It is not rational to
assume that an investor would expect share price to
decrease 71% (100%÷339%=29%-100%=71%) in value to equal
book value.
Utility stocks do not trade in a vacuum. Utility
stock prices, whether they are above or below book value,
reflect worldwide market sentiment and are not reflective
of only one element.
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Q.What do you mean by your statement that utility
stocks are not traded in a vacuum?
A.Utility stocks cannot be viewed solely by
themselves. They must be viewed in the context of the
market environment. Table 8 summarizes recent
market-to-book ratios ("M/B") for well-known measures of
market value reported in the August 8, 2022 issue of
Barron's and the Water Group's average M/B as shown on
page 1 of Schedule 14.

(Table in hard copy in transcript)
Utility stock investors view their investment decisions
compared with other investment alternatives, including
those of the various market measures shown in Table 8.
Q.How does a traditional DCF implicitly assume
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that market price will equal book value?
A.Under traditional DCF theory, price will equal
book value (M/B=1.00) only when a company is earning its
cost of capital. Traditional DCF theory maintains that a
company is under-earning its cost of capital when the
market price is below book value (M/B<1.00), while a
company over-earning its cost of capital will have a
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market price above its book value (M/B>1.00). If this
were true, it would imply that the capitalistic
free-market is not efficient because the overwhelming
majority of stocks would currently be earning more than
their cost of capital. Table 8 shows that most stocks
sell at an M/B that is greater than 1.0.
Q.Please explain why such a phenomenon would show
that the capitalistic free-market is not efficient.
A.Historically, the S&P 500, which represented
the largest 500 companies listed on exchanges in the
United States, have not sold at an M/B of 1.0 during the
last 24-years, 1999-2022. Based upon the traditional DCF
assumption, which suggests that companies with M/Bs
greater than 1.0 earn more than their cost of capital,
this data would suggest that the S&P 500 companies have
earned more than their cost of capital while competing in
a competitive environment over the 24-year period. In a
competitive market, new companies would continually enter
the market up to the point that the earnings rate was at
least equal to their cost of capital.
During this period the S&P 500 sold at an average
M/B of 306% while experiencing a ROE of 18.0% over a
period in which interest rates averaged 3.9%. It is
important to note that during this period the S&P 500 M/B
ranged from 192% to 490%, all while competing in
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competitive markets.
Q.What is the significance of S&P 500 m/b and the
cost of capital for a water utility?
A.As stated previously, utility stocks do not
trade in a vacuum. They must compete for capital with
other firms including the S&P 500 stocks. Over time,
there has been a relationship between M/Bs of S&P 500
stocks and utility stocks. Although
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S&P 500 stocks have generally sold at a higher multiple
of book value than utility stocks, both have tracked in
similar directions. Because utility and S&P 500 stock
prices relative to book values move in similar
directions, it is irrational to conclude that stock
prices that are different from book value, either higher
or lower, suggests that a firm is over-or under-earning
its cost of capital when competitive, free-markets exist.
Q.Does the market value DCF provide a reasonable
estimate of the Water Group's common equity cost rate?
A.No, the DCF only provides a reasonable estimate
of the Comparable Group's common equity cost rate when
their market price and book value are similar
(M/B=100%).26 A DCF will overstate a common equity cost
rate when M/Bs are below 100% and understate when they
are above 100%. Since the Comparable Group's current
M/Bs average 339%, the DCF understates their common
equity cost rate. Schedule 15 provides a numerical
illustration of the impact of M/Bs on investors' market
returns and DCF returns. The reason that DCF understates
or overstates investors' return requirements depending
upon M/B levels is because a DCF-derived equity cost rate
is applied to a book value rate base while investors'
returns are measured relative to stock price levels.
Based upon this, I recommend that less weight be given to
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the market value DCF cost rate unless the increased
financial risk, resulting from applying a market value
cost rate to a book value, is accounted for.
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26Roger A Morin, Regulatory Finance - Utilities' Cost of Capital,
Public Utility Reports, Inc., 1994, pp. 236-237.
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Q.How do you resolve the financial risk
difference between market value cost rates and book value
cost rates?
A.The basic proposition of financial theory
regarding the economic value of a company is based on
market value. That is, a company's value is based on its
market value weighted average cost of capital.27 The
American Society of Appraisers, ASA Business Valuation
Standards, 2009, and the National Association of
Certified Valuation Analysts, Professional Standards,
2007, use the same definition:
Weighted Average Cost of Capital (WACC). The cost of
capital (discount rate) determined by the weighted
average, at market values, of the cost of all
financing sources in the business enterprise's
capital structure. (Emphasis added)
Accordingly, the market value derived cost rate reflects
the financial risk or leverage associated with
capitalization ratios based on market value, not book
value.
As shown on page 1 of Schedule 16, for the Water
Group there is a large difference in leverage as a result
of the average $5.188 billion difference in market value
common equity and book value common equity. This
difference in market values and book values results in
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debt/equity ratios based on market value of 26.0%/74.0%
(debt/equity) versus 52.0%/48.0% (debt/equity) based on
book value as shown on page 1 of Schedule 16. The larger
the difference between market
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27For other examples, see http://www.investinganswers.com/financial-
dictionary/financial-statement-analysis/weighted-average-cost-capital
-wacc-2905. Also see http://www.wallstreetmojo.com/weighted-average-
cost-capital-wacc/,or http://accountingexplained.com/misc/corporate-
finance/wacc.
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values and book values the less reliable the models'
results are because the models provide an estimate of the
cost of capital of market value, not book value.
Financial theory concludes that capital structure
and firm value are related. Since capital structure and
firm value are related, an adjustment is required when a
cost of common equity model is based on market value and
if its results are then applied to book value. As
explained previously, the market value derived cost rate
reflects the financial risk or leverage associated with
capitalization ratios based on market value, not book
value. The authors Brealey, Myers and Allen provide a
similar definition of the cost of capital being based on
market capitalization, not book value,
The values of debt and equity add up to overall firm
value (D + E = V) and firm value V equals asset
value. These figures are all market values, not book
(accounting) values. The market value of equity is
often much larger than the book value, so the market
debt ratio D/V is often much lower than a debt ratio
computed from the book balance sheet.28
The work of Modigliani and Miller concludes that the
market value of any firm is independent of its capital
structure and this is precisely the reason why an
adjustment is appropriate. The only way for the market
value of a firm to remain independent of its capital
structure is if the capital cost rates change to offset
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changes in the capital structure. If the capital cost
rates do not change to offset changes in the capital
structure, then the value of the firm will change.
Clearly an adjustment is required when a cost of common
equity model is based on market
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28Brealey, Myers and Allen, Principles of Corporate Finance, 10th
edition, page 216 (emphasis added).
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value and if its results are then applied to book value
because the capital structure is changed from market
value capitalization to book value capitalization.
Differences in the amount of leverage employed can
be quantified based upon the Comparable Group's leveraged
beta being "unleveraged" through the application of the
"Hamada Formula". The details of the model are shown on
page 2 of Schedule 16. For example, the inputs to the
formula for the Water Group market value capitalization
consist of their leveraged beta of 0.77, debt ratio of
25.5%, preferred stock ratio of 0.1%, common equity ratio
of 74.4% and combined tax rate of 25.74%. The group's
unleveraged beta is determined to be 0.61 through the use
of the following Hamada formula:
Bl = Bu (1 + (1 - t) D/E + P/E)
where:
Bl = observed, leveraged beta
Bu = calculated, unleveraged beta
t = income tax rate
D = debt ratio
P = preferred stock ratio
E = common equity ratio
Applying the unleveraged beta of 0.61 along with the
Water Group's book value capitalization ratios of 51.9%
long-term debt, 0.0% preferred stock and 48.1% common
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equity and combined tax rate of 25.74% results in a
leveraged beta of 1.10 applicable to the group's book
value capitalization. Based upon the Water Group's risk
premium of 5.5% and the difference between Water Group's
market value
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leveraged beta, their book value leveraged beta of 0.33
(1.10 - 0.77) indicates that the Water Group's common
equity cost rate must be increased by 1.82 (0.33 x 5.5 =
1.82) in recognition of their book value's exposure to
more financial risk.
Q.Is there another way to reflect the financial
risk difference that exists as a result of market
capitalization ratios being significantly different from
book value capitalization ratios?
A.Yes, generally speaking. Although it is
possible to know the direction of a financial risk
adjustment on common equity cost rate, a specific
quantification of financial risk differences is very
difficult. Although the end result of a financial risk
adjustment is very subjective and specific quantification
very difficult, the direction of the adjustment is
clearly known. However, hypothetically if the Comparable
Group's debt were rated based on market value debt ratios
they would command an Aaa rating. The Comparison Group
currently has bonds rated A based upon their book value
debt ratios. The yield spread on a bond rated Aaa versus
A rated bonds averages 45 basis points or 0.45% as shown
on page 3 of Schedule 16.
The end result of the application of the Hamada
Model and the bond yield spread indicates that the Water
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Group market value common equity cost rate equity cost
rate should be adjusted upward by at least 1.1% (1.8%
hamada est. + 0.4% yield spread = 2.2% ÷ 2 = 1.1%) since
it is going to be applied to a book value.
Accounting for the increased amount of leverage
between market value derived DCF cost rates and book
value cost rates indicates a book value DCF cost rate of
9.60% for the Water Group (8.5% + 1.1% = 9.60%).
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CAPITAL ASSET PRICING MODEL
Q.Please briefly describe the theory of the
capital asset pricing model.
A.The CAPM is based upon the assumption that
investors hold diversified portfolios and that the market
only recognizes or rewards non-diversifiable (or
systematic) risk when determining the price of a security
because company-specific risk (or non-systematic) is
removed through diversification. Further, investors are
assumed to require additional or higher returns for
assuming additional or higher risk. This assumption is
captured by using a beta that provides an incremental
cost of additional risk above the base risk-free rate
available to investors. The beta of a security reflects
the market risk or systematic risk of the security
relative to the market. The beta for the market is
always equal to 1.00; therefore, a company whose stock
has a beta greater than 1.00 is considered riskier than
the market, and a company with a beta less than 1.00 is
considered less risky than the market. The base
risk-free rate is assumed to be a U.S. Government
treasury security because they are assumed to be free of
default risk.
Q.What risk-free rate and beta have you used in
your CAPM calculation?
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A.The risk-free rate used in CAPM should have
approximately the same maturity as the life of the asset
for which the cost rate is being determined. Because
utility assets are long-lived, a long-term Treasury Bond
yield serves as an appropriate proxy. Previously, I
estimated an appropriate risk-free rate of 3.2% based
upon the recent and forward long-term Treasury yields. I
used the average beta of 0.77 for the Water Group as
shown on page 1 of Schedule 17. However, as stated
previously,
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the Comparable Group's betas are understated due to their
small size which affects their stock price changes.
Q.After developing an appropriate beta and
risk-free rate, what else is necessary to calculate a
CAPM derived cost rate?
A.A market premium is necessary to determine a
traditional CAPM derived cost rate. The market return
rate is the return expected for the entire market. The
market premium is then multiplied by the company specific
beta to capture the incremental cost of additional risk
(market premium) above the base risk-free rate (long-term
treasury securities) to develop a risk adjusted market
premium. For example, if you conclude that the expected
return on the market as a whole is 15% and further assume
that the risk-free rate is 8%, then the market premium is
shown to be 7% (15% - 8% = 7%).
Further, assume there are two companies, one of
which is considered less risky than the market, and
therefore has a beta of less than 1.00 or 0.80. The
second company has a beta that is greater than 1.00 or
1.20, and is therefore considered riskier than the
market. By multiplying the hypothetical 7.0% market
premium by the respective betas of 0.80 and 1.20, risk
adjusted market premiums of 5.6% (7.0% x 0.80) and 8.4%
(7.0% x 1.20) are shown for the company considered less
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risky than the market and for the company considered
riskier than the market, respectively.
Adding the assumed risk-free rate of 8% to the risk
adjusted market premiums results in the CAPM derived cost
rates of 13.6% (5.6% + 8.0%) for the less risky company
and 16.4% (8.4% + 8.0%) for the company considered of
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greater risk than the market. In fact, the result of
this hypothetical CAPM calculation shows that: (1) the
least risky company, with the beta of 0.80, has a cost
rate of 13.6%; (2) the market, with the beta of 1.00, has
a cost rate of 15.0%; and (3) that the higher risk
company, with a beta of 1.20, has a cost rate of 16.4%.
Q.How did you develop a market premium for your
CAPM?
A.The average projected market premium of 13.7%
is developed on page 2 of Schedule 17. It is based upon
Value Line's average projected total market return for
the next three to five years of 16.9% less the risk free
rate of 3.2%. I also reviewed market premiums derived
from Ibbotson Associates' most recent publication
concerning asset returns that show a market premium of
7.5%. The Ibbotson Associates' market premium may be on
the low side reflective of the higher interest rate
environment found during their study (i.e., 5.0%). The
Value Line market premium reflects the Federal Reserve's
current artificial interest rate levels while the
Ibbotson Associates' market premiums reflect a higher
interest rate environment.
Q.How did you adjust for the impact that size has
on the Comparable Group's beta?
A.The adjustment is reflected in the CAPM size
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premium. The CAPM size premium is developed on page 4 of
Schedule 17. The size premium reflects the risks
associated with the Comparable Group's small size and its
impact on the determination of their beta. This
adjustment is necessary because beta (systematic risk)
does not capture or reflect the Comparable Group's small
size. I reduced the
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size premium by the ratio of the Comparison Group's beta
to their respective market quartile's beta.
Q.What is the comparison group's market cost of
equity based upon your CAPM calculation?
A.The CAPM based on Ibbotson Associates'
historical market returns shows a market cost rate of
10.5% for the Water Group. The CAPM based on Value
Line's projected market returns shows an 15.2% for the
Water Group, as shown on page 1 of Schedule 17. The
Comparable Group's market value CAPM of 10.5% is based
100% on the results of the historical market returns and
0% on the projected market returns. Adjusting the market
value CAPM based upon the end result of the application
of the Hamada Model and the bond yield spread to account
for the difference in leverage between market value
capitalization ratios and book value ratios discussed
previously indicates a cost rate of 11.6% for the Water
Group applicable to book value (10.5% + 1.1% = 11.6%).
RISK PREMIUM
Q.What is a risk premium?
A.A risk premium is the common equity investors'
required premium over the long-term debt cost rate for
the same company, in recognition of the added risk to
which the common stockholder is exposed versus long-term
debtholders. Long-term debtholders have a stated
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contract concerning the receipt of dividend and principal
repayment whereas common stock investors do not.
Further, long-term debtholders have the first claim on
assets in case of bankruptcy. A risk premium recognizes
the higher risk to which a common stock investor is
exposed. The risk premium-
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derived cost rate for common equity is the simplest form
of deriving the cost rate for common equity because it is
nothing more than a premium above the prospective level
of long-term corporate debt.
Q.What is the appropriate estimated future
long-term borrowing rate for the Comparable Companies?
A.The estimated near term long-term borrowing
rate for the Comparable Companies is 4.7% based upon
their credit profile that supports an A bond rating.
Q.What is the appropriate risk premium to be
added to the future long-term borrowing rate?
A.To determine a common equity cost rate, it is
necessary to estimate a risk premium to be added to the
Comparable Group's prospective long-term debt rate.
Investors may rely upon published projected premiums;
they also rely upon their experiences of investing in
ultimately determining a probabilistic forecasted risk
premium.
Projections of total market returns are shown on
page 9 of Schedule 18. A projected risk premium for the
market can be derived by subtracting the debt cost rate
from the projected market return as shown on page 9 of
Schedule 18. However, the derived risk premium for the
market is not directly applicable to the Comparable
Companies because they are less risky than the market.
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The use of 85% of the market's risk is a conservative
estimation of their level of risk as compared to the
market.
The midpoint of the risk premium range is 10.4% and
the average for the most recent quarter is 10.5% as shown
on page 9 of Schedule 18. Based on this, a reasonable
estimate of a longer term projected risk premium is
10.5%.
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Q.How do investors' experiences affect their
determination of a risk premium?
A.Returns on various assets are studied to
determine a probabilistic risk premium. The most noted
asset return studies and resultant risk premium studies
are those performed by Ibbotson Associates. However,
Ibbotson Associates has not performed asset return
studies concerning public utility common stocks. Based
upon Ibbotson Associates' methodology of computing asset
returns, I calculated annual returns for the S&P
utilities and bonds for the period 1928-2021. The
resultant annual returns were then compared to determine
a recent risk premium from a recent 20-year period,
2002-2021 and subsequent periods that were each increased
by ten years until the entire study period was reviewed
(pages 2 and 3 of Schedule 18).
A long-term analysis of rates of return is necessary
because it assumes that investors' expectations are, on
average, equal to realized long-run rates of return and
resultant risk premium. Observing a single year's risk
premium, either high or low, may not be consistent with
investors' requirements. Further, studies show a mean
reversion in risk premiums. In other words, over time,
risk premiums revert to a longer-term average premium.
Moreover, since the expected rate of return is defined as
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"the rate of return expected to be realized from an
investment; the mean value of the probability
distribution of possible results,"29 a long-term
analysis of annual returns is appropriate.
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29Eugene F. Brigham, Fundamentals of Financial Management, Fifth
Edition, The Dryden Press, 1989, p. 106.
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Q.What do you conclude from the information shown
on pages 2 and 3 of Schedule 18?
A.The average of the absolute range of the S&P
Utilities' appropriate average risk premium (i.e., bonds
rated AAA to A) was 3.8% during the seven periods
studied, as calculated from page 2 of Schedule 18. The
credit adjusted longer term risk premiums (i.e., bonds
rated A), 1928-2021, averages 4.3%. The appropriate
average (i.e., bonds rated AAA to A) longer term risk
premiums, 1928-2021, have an absolute range of 4.3% to
5.2%, and averages 4.6%.
The aforementioned premiums are based on total
returns for bonds; and reflect their price risk. A
bond's price risk is not related to its credit quality
and is eliminated when a bond is held to maturity from
time of purchase. Using the income returns, page 4 of
Schedule 18, for bonds eliminates price risk and better
measures an investor's required return based on credit
quality. The appropriate average risk premium (i.e.,
bonds rated AAA to A) based on income returns was 5.5%
during the seven periods studied. The credit adjusted
longer term risk premiums (i.e., bonds rated A),
1928-2021, averages 4.9%. The appropriate average (i.e.,
bonds rated AAA to A) longer term risk premiums,
1928-2021, have an absolute range of 4.9% to 5.3%, and
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averages 5.1%.
Q.What information is shown on page 4 of Schedule
18?
A.Page 4 of Schedule 18 proves and measures the
negative relationship between interest rate levels and
the resulting risk premium. That is, risk premiums are
generally higher when interest rates are low and risk
premiums are generally lower when interest rates are
high. This was proven by sorting the 94-year period,
1928
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to 2021, annual returns based on interest rate level from
lowest interest rate to highest interest rate and
distributing the results into two equal groups, a 47-year
low interest rate environment group and a 47-year high
interest rate environment group.
During the period 1928-2021, the 47 years with the
lowest interest rates had an average interest rate of
2.9% and reflected a range of interest rates from 1.4% to
4.1%. This period resembles the current interest rate
environment of 3.2% discussed previously regarding the
CAPM's risk free rate. The risk premium based on total
returns during this low interest rate environment
produced the appropriate average (i.e., bonds rated AAA
to A) longer term risk premium of 6.4% and a credit
adjusted longer term risk premium (i.e., bonds rated A)
of 5.6%. The annual income return based risk premium
during this low interest rate environment produced the
appropriate average (i.e., bonds rated AAA to A) longer
term risk premium of 7.5% and a credit adjusted longer
term risk premium (i.e., bonds rated A) of 7.2%.
However, during the period 1928-2021, the 47 years
with the highest interest rates had an average interest
rate of 7.2% and reflected a range of interest rates from
4.1% to 13.5%. This period is far different from the
current interest rate environment of 3.2%. The risk
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premium based on total returns during the highest
interest rate environment produced an average longer term
risk premium of 3.0% over bonds rated AAA to A and a
credit adjusted longer term risk premium (i.e., bonds
rated A) of only 2.9%. The annual income return based
risk premium during the highest interest rate environment
produced an average longer term risk premium
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of 2.8% over bonds rated AAA to A and a credit adjusted
longer term risk premium (i.e., bonds rated A) of only
2.7%.
Over time, risk premiums are mean reverting. They
constantly move toward a long-term average reflecting a
long-term level of interest rates. That is, an
above-average risk premium will decrease toward a
long-term average while a below-average risk premium will
increase toward a long-term average. In any single year,
of course, investor-required rates of return may not be
realized and in certain instances, a single year's risk
premiums may be negative. Negative risk premiums are not
indicative of investors' expectations and violate the
basic premise of finance concerning risk and return.
Negative risk premiums usually occur only in the stock
market's down years (i.e., the years in which the stock
markets' return was negative).
When interest rate levels are not considered the
credit adjusted longer term risk premium (i.e., bonds
rated A), 1928-2021, averages 4.6%, discussed previously
regarding pages 2 and 3 of Schedule 18. However, the
annual income return based risk premium during the low
interest rate environment produced a credit adjusted
longer term risk premium (i.e., bonds rated A) of 7.2%.
Since this period resembles the current interest rate
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environment of 3.2%, a reasonable estimate of investors
risk premium based on historical returns is based on a
50% weighting on the results of the entire 1928-2021
historical market returns and a 50% weighting on the
results of the low interest rate environment to produce a
5.5% historical risk premium.
Adding the risk premium of 5.5% for the Comparable
Group to the prospective cost of newly-issued long-term
debt of 4.7% results in a market value
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risk premium derived cost rate for common equity of 10.2%
as reflected on page 1 of Schedule 18. Adjusting the
market value risk premium based upon the end result of
the application of the Hamada Model and the bond yield
spread to account for the difference in leverage between
market value capitalization and book value ratios
discussed previously indicates a cost rate of 11.3%
applicable to book value (10.2% + 1.1% = 11.3%).
SUMMARY OF COMMON EQUITY COST RATE
Q.What is your Comparable Group's common equity
cost rate?
A.Based upon the results of the models employed,
the Water Group's common equity cost rate is in the range
of 9.6% to 11.6% as reflected on Schedule 19. Based upon
this data, the common equity cost rate for the Water
Group is at least 10.80%. My recommendation is based
upon the Water Group's 10.80% common equity cost rate.
Q.Do you recommend a cost of common equity of
10.80% for VWID?
A.Yes. Based upon the financial analysis and
risk analysis, I conclude that VWID is exposed to overall
similar investment risk as the Comparable Group. This is
evidenced by the factors summarized in Table 5 discussed
previously.
The results of the three models employed for the Water
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Group show a current range of common equity cost
applicable to book value of VWID of 9.60% (DCF), 11.60%
(CAPM), and 11.30% (RP) as shown in Table 9.
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(Table in hard copy of transcript)
Q.What is your common equity cost rate
recommendation for VWID?
A.As discussed above and as shown in Schedule 19,
I recommend a 10.80% common equity cost rate for VWID.
Q.Have you checked the reasonableness of your
recommended common equity rate for VWID?
A.Yes. Page 2 of Schedule 14 reflects the average
projected earned return on average book common equity for
the companies in the Comparable Group for the period
2025-2027, which is shown to range from 10.6% to 10.8%.
Given the large degree to which regulatory lag and
attrition impacts water utilities earning, the range of
the comparable utilities' projected earned returns
suggests that my recommendation that VWID be permitted an
opportunity to earn 10.80% is reasonable, if not
conservative.
OVERALL RATE OF RETURN RECOMMENDATION
Q.What is your overall fair rate of return
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recommendation for the VWID?
A.Based upon the recommended capital structure
and my estimate of the VWID's common equity cost rate, I
recommend an overall fair rate of return of 7.77%. The
details of my recommendation are shown on Schedule 1.
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Q.Have you tested the reasonableness of your
overall fair rate of return recommendation?
A.Yes. If my recommended overall rate of return
is actually earned, it will give VWID ratios that will
allow VWID to present a financial profile that will
enable it to attract capital necessary to provide safe
and reliable water service, at reasonable terms.
Q.Does that conclude your direct testimony?
A.Yes, it does.
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INTRODUCTION
Q.Please state your name, occupation and business
address.
A.My name is Harold Walker, III. I am employed
by Gannett Fleming Valuation and Rate Consultants, LLC as
Manager, Financial Studies. My business address is 1010
Adams Avenue, Audubon, Pennsylvania 19403.
Q.Are you the same Harold Walker who previously
submitted Direct Testimony in this proceeding?
A.Yes.
SCOPE OF TESTIMONY
Q.What is the purpose of your Rebuttal Testimony?
A.Veolia Water Idaho, Inc. ("VWID" or the
"Company") asked me to respond to and comment on the
Direct Testimony submitted by Idaho Public Utilities
Commission ("Staff") witness Joseph Terry and the Direct
Testimony submitted by Micron Technology, Inc. ("Micron")
witness Michael P. Gorman. My rebuttal testimony is
supported by Exhibit No. 15, which is composed of 6
Schedules.
SUMMARY
Q.Please summarize your comments on Mr. Terry and
Mr. Gorman's Direct Testimonies.
A.I respectfully disagree with Mr. Terry's
proposed return on equity ("ROE") of 9.00% and Mr.
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Gorman's proposed ROE of 9.35% for VWID. I also disagree
with Mr. Terry's proposed overall rate of return ("ROR")
of 6.77% and Mr. Gorman's proposed ROR of 6.97% for VWID.
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I do not believe Idaho Public Utilities Commission
("Commission") should accept Mr. Terry's or Mr. Gorman's
proposals because:
·Mr. Terry's and Mr. Gorman's recommended returns
on equity and related overall rates of return do
not afford VWID the opportunity to earn a fair
rate of return.
·Capital cost rates are higher today than they have
been for several years. For example, the last
year that yields on long-term treasury bonds
exceeded the current rate was 2011, or 12 years
ago.
·The last year yields on A rated public utility
bonds exceeded the current rate was 2009, or 14
years ago.
·The current yield on A rated public utility bonds
are substantially higher than they have been over
the last three years. Therefore, the required
return on equity for a water utility should also
exceed returns authorized over the last three
years.
·The water comparison companies used by Mr. Terry
and Mr. Gorman earn significantly higher returns
of equity and are projected to earn considerably
higher returns on equity than Mr. Terry and Mr.
Gorman propose for VWID.
·If other water utilities are earning returns
noticeably higher than Mr. Terry and Mr. Gorman
advocate for VWID, adoption of either Mr. Terry's
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or Mr. Gorman's recommendations will place VWID at
a competitive disadvantage in the competition to
attract capital.
Based upon the results of my entire analysis
contained in my Direct and Rebuttal Testimonies, my
recommendation is that VWID be permitted an overall fair
rate of return of 7.77%, including a 10.80% cost of
common equity that reflects VWID's unique risk
characteristics. My recommended fair rate of return is
equal to the return of other similar risk water
utilities, will permit VWID access to capital on
reasonable terms and will assure confidence in VWID's
financial integrity.
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FAIR RATE OF RETURN
Q.Do the recommendations of Mr. Terry and Mr.
Gorman provide the Company a fair rate of return?
A.No. Under Bluefield1 , a fair rate of return
is defined as: (1) equal to the return on investments in
other business undertakings with the same level of risks
(the comparable earnings standard); (2) sufficient to
assure confidence in the financial soundness of a utility
(the financial integrity standard); and (3) adequate to
maintain and support its credit, enabling the utility to
raise or attract additional capital necessary to provide
reliable service (the capital attraction standard).
Mr. Terry and Mr. Gorman's rate of return
recommendations are flawed and do not produce a fair rate
of return for VWID. Throughout this Rebuttal Testimony I
highlight the numerous flaws contained in their Direct
Testimonies. Mr. Terry and Mr. Gorman's proposals show a
lack of understanding of the precepts of a fair rate of
return, including the comparable earnings standard, and
the capital attraction standard. Mr. Terry and Mr.
Gorman's Direct Testimonies are couched with innuendos
that Veolia Utility Resources LLC's ("VUR") ownership of
VWID reduces the risk of providing water service to
customers in parts of Ada County, Idaho. I do not
believe it is reasonable that VWID should be afforded
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something less than a fair rate of return because they
are owned by a larger company such as VUR.
Mr. Terry and Mr. Gorman's testimonies violates the
precepts of a fair rate of return, including the
comparable earnings standard, and the capital attraction
standard.
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__________________
1Bluefield Water Works & Improvement Company v. P.S.C. of West
Virginia, 262 U.S. 679 (1923).
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Their recommendations violate all two aforementioned fair
rate of return precepts as demonstrated by their own
testimonies. VWID is entitled to a return that will
enable it to attract additional capital, not only capital
provided by VUR. The credit that enables VUR bonds to be
issued is the issuing entity, VUR. A fair rate of return
for VWID is the credit that should enable the VWID to
attract capital regardless of VUR. The risk of VWID
providing service to customers is not mitigated simply
because the VUR provides capital or because VUR owns
other water utilities. Risk does not change with
ownership, and the price or cost of bearing risk is a
fair rate of return. Mr. Terry and Mr. Gorman's
recommendations offer no incentive to investors to invest
in VWID water assets when higher returns are available
from other less risky water assets or higher retuning
assets of similar risk. Investors will not provide
capital and should not be forced to provide capital when
higher risk-adjusted returns are available.
AREAS OF AGREEMENT
Q.Are there any areas of agreement in the fair
rate of return testimonies presented in these
proceedings?
A.Yes. Mr. Terry, Mr. Gorman, and I agree
regarding the appropriate capital structure and debt cost
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rate. We all recommend a capital structure which
includes 44.43% debt and 55.57% common equity, and an
embedded debt cost rate of 3.99%.
COMPARABLE GROUPS
Q.What companies did Mr. Terry and Mr. Gorman use
to estimate the cost of common equity for VWID?
A.Mr. Terry included the same seven water utility
comparison companies that I used. Additionally, Mr. Terry
added Veolia Environnement S.A, the ultimate parent
company
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of VWID, to his comparison2 group. I refer to Mr.
Terry's comparison group as "Terry's Proxy Group" in my
rebuttal testimony.
Mr. Gorman used six of the seven water utility
comparison companies that Mr. Terry and I used.3 In
addition, Mr. Gorman used a second comparison group, a
gas utility comparison group. I refer to Mr. Gorman's
water comparison group as "Water Proxy" and his gas
comparison group as "Gas Proxy" in my rebuttal testimony.
It should also be noted that I use the phrase "Proxy
Groups" in my rebuttal testimony to refer to all the
comparison groups used by Mr. Terry and Mr. Gorman.
Q.Do you agree with Mr. Terry and Mr. Gorman's
selection of companies used in their Proxy Groups?
A.No. I do not agree with Mr. Terry's inclusion
of Veolia Environnement S.A as part of Terry's Proxy
Group. Veolia Environnement S.A. is a French
transnational company with operations around the world,
providing different services than VWID provides. Veolia
Environnement S.A.'s financial records and financial
reporting requirements differ from US practice and
requirements. As such, I do not believe the use of
Veolia Environnement S.A. as a comparison company to VWID
is beneficial, meaningful or proper.
I do not agree with Mr. Gorman's use of his Gas
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Proxy as a comparison to VWID. Mr. Gorman's Gas Proxy
companies provide different services than VWID and
operate in a different industry. Mr. Gorman's Gas Proxy
companies primarily deliver a product
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__________________
2VWID is a wholly-owned subsidiary of VUR. VUR is a subsidiary of
Veolia Utility Parent, Inc., which is a subsidiary of Veolia North
America, Inc. Veolia North America, Inc. is a wholly-owned
subsidiary of Veolia Environnement S.A. Veolia Environnement S.A. is
a French transnational company with activities in three main service
and utility areas: water management, waste management and energy
services.
3Mr. Gorman did not include The York Water Company in his six company
water comparison group.
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(natural gas) that many do not own.4 Conversely, VWID
acquires a product (water), VWID owns a product (water),
treats and/or purifies a product, transports their
product, and then delivers their product. In a sense,
VWID is an integrated company while Mr. Gorman's Gas
Proxy companies are in the transportation and delivery
business. As such, I do not believe the use of Gas Proxy
as comparison companies to VWID is beneficial, meaningful
or proper.
Mr. Gorman's Gas Proxy group is better suited
for use in estimating the cost of capital for a natural
gas utility since it is comprised of only natural gas
utility companies. In financial literature, the terms
"barometer group", "comparable group", "peer group" and
"proxy group" are used interchangeably and they are
defined as:
In investment research, peer group analysis is
a vital part of establishing a valuation for a
particular stock. The emphasis here is on
comparing "apples to apples," which means that
the constituents of the peer group should be
fairly similar to the company being researched,
particularly in terms of their main areas of
business and market capitalization.5
Q.Do investors view Mr. Gorman's Water Proxy
group and Gas Proxy group substantially different from
one another?
A.Yes. As shown on Schedule 1, the market values
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water companies differently than natural gas companies
because each type of utility (water versus natural gas)
has a unique business and financial profile. Schedule 1
shows recent price-earnings multiples ("P-E Multiples"),
and market-to-book multiples ("Market/Book Multiples").
As shown, Mr. Gorman's Water Proxy group's P-E Multiples
is currently 34.0-times while Mr. Gorman's Gas Proxy
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4In states with gas deregulation, the utility company is responsible
for maintaining the pipes that deliver gas products to customers, but
customer can choose which gas supply company provides the commodity
supplied, or actual natural, that the local utility then delivers.
5(Emphasis added),
https://www.investopedia.com/terms/p/peer-group.asp.
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group's P-E Multiples is 18.8-times. The difference in
the P-E Multiples indicate the market values Mr. Gorman's
Water Proxy companies 80% more than their valuation of
Mr. Gorman's Gas Proxy companies. Similarly, the
Market/Book Multiples for Mr. Gorman's Water Proxy group
are 87% higher than Mr. Gorman's Gas Proxy group. The
difference between Mr. Gorman's Water Proxy group
Market/Book Multiples of 3.18-times indicates the market
values the Mr. Gorman's Water Proxy group at 318%
relative to their book value but only values the Mr.
Gorman's Gas Proxy group at 170% relative to their book
value, which proves that investors view Mr. Gorman's
Water Proxy group and his Gas Proxy group substantially
different from one another.
According to page 1 of Mr. Gorman's Exhibit No.
405 (Column 2), security analysts project Mr. Gorman's
Water Proxy group's earnings to grow 96-basis points
(6.69% - 5.73%) faster than they project for his Gas
Proxy group. On page 1 of Mr. Gorman's Exhibit No. 407
Mr. Gorman's Water Proxy group's projected return on
equity is shown to average 10.41% to 10.64% (columns 5
and 7), while his Gas Proxy group's projected return on
equity is shown to average 9.34% to 9.66%, a difference
of more than 100-basis points.6
These comparisons prove the difficulties in
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relying on Mr. Gorman's Gas Proxy group to estimate the
cost of capital for a water utility since the market
values water companies and natural gas companies
considerably different. The evidence is clear, the
market does not assess Mr. Gorman's Water Proxy and his
Gas Proxy group similarly. Mr. Gorman has not provided
evidence that natural gas utilities present risk
comparable to regulated water
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6A basis point is a common unit of measure for interest rates and
other percentages in finance. In percentage form, ten basis points
would appear as 0.10%. A measure of 100 basis points is equal to 1%.
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companies generally, or VWID specifically. Investors do
not evaluate water utilities by looking at natural gas
utilities and neither should Mr. Gorman or the
Commission.
Q.Do you have any other comments regarding Mr.
Terry and Mr. Gorman's proxy groups?
A.Yes. In addition to using a comparison group
(or proxy group) to estimate the cost of equity, proxy
groups are used as a benchmark to satisfy the
long-established guideline of providing a utility the
opportunity to earn a return equal to that of similar
risk enterprises. However, neither Mr. Terry nor Mr.
Gorman presented any evidence regarding the similarity,
or dissimilarity, of risk between their Proxy Groups and
VWID. A risk analysis of VWID and my comparison
companies was discussed in my Direct Testimony in the
sections titled "Financial Analysis" and "Risk Analysis."
A risk analysis of VWID and the Proxy Groups is essential
in determining a fair rate of return because risk and
return counterbalance one another. That is, the greater
the risk, the higher the required return and vice versa.
However, as stated, neither Mr. Terry or Mr. Gorman
provided any risk analyses of their Proxy Groups and
VWID. Additionally, neither Mr. Terry or Mr. Gorman
provided any risk analysis of VUR and VWID. In a sense,
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Mr. Terry's and Mr. Gorman's common equity cost rate
recommendation reflect a "one size fits all" approach
since no risk reconciliation was done between their Proxy
Groups and VWID. Accordingly, I do not believe the
Commission can or should rely upon either Mr. Terry's or
Mr. Gorman's recommendations.
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RISK FACTORS
Q.Besides the aforementioned required risk
comparison between VWID and the Proxy Groups, which
neither Mr. Terry nor Mr. Gorman presented, is there
other evidence concerning risk that they failed to
consider?
A.Yes, water utilities face increased risks,
which Mr. Terry and Mr. Gorman did not consider. For
example, the Federal Reserve's monetary and fiscal
stimulus, which included artificial and historically low
interest rates, have produced some of the highest
inflation rates in the last 40 years. Over the last 12
months, January 2022 through January 2023, inflation was
6.4% and was a cumulative 14.4% over the last 24 months,
January 2021 through January 2023.7 To put the latest
24 month price change (inflation) of 14.4% into
perspective, the entire change in prices (inflation) over
the prior 106 month period, March 2012 through January
2021, was only 14.0%. The current unusual and extremely
high inflation rate has results in higher capital cost
rates.
Q.What proof do you have that the current unusual
and extremely high inflation rate has results in higher
capital cost rates?
A.Mr. Gorman's Exhibit Nos. 414 and 415 show bond
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yields. According to Mr. Gorman, the current yield on
long-term treasury bonds is 3.81%.8 Looking at Mr.
Gorman's Exhibit No. 414, it is apparent that the last
time the yield on long-term treasury bonds exceeded 3.81%
was 2011, or 12 years ago. The current yield on
long-term treasury bonds is 69-basis points higher than
it was in 2022, 176-basis points higher than it was in
2021, and 225-basis points higher than it was in 2020.
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7Based on the consumer price index, or CPI for All Urban Consumers
(CPI-U) found at https://www.bls.gov/cpi/data.htm.
8Gorman, Di 62.
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Further, the current yield on A rated public utility
bonds is 5.47% according to Mr. Gorman.9 Mr. Gorman's
Exhibit No. 414 shows the last time that the yield on A
rated public utility bonds exceeded 5.47% was 2009, or 14
years ago. The current yield on A rated public utility
bonds is 75-basis points higher than it was in 2022,
237-basis points higher than it was in 2021, and
242-basis points higher than it was in 2020.
The increased capital cost rates for long-term
treasury bonds and A rated public utility bonds have
similarly resulted in higher common equity cost rates
today, than existed over the last several years.
Q.Does the information shown on Mr. Gorman's
Exhibits Nos. 414 and 415 provide any additional evidence
regarding risks which Mr. Terry and Mr. Gorman did not
consider?
A.Yes. Mr. Gorman's Exhibit No. 414 shows yield
spread between long-term treasury bonds and A rated
public utility bonds bond yields. This difference, or
spread in yield, measures the risk of default between
long-term treasury bonds and A rated public utility bonds
and provides direct measurement of risk. The current
yield spread between long-term treasury bonds and A rated
public utility bonds is 1.66% according to Mr. Gorman's
Exhibit No. 415.
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Mr. Gorman's Exhibit No. 414 shows the last time
that the yield spread between long-term treasury bonds
and A rated public utility bonds exceeded 1.66% was 2009,
or 14 years ago. The current yield spread between
long-term treasury bonds and A rated public
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9Gorman, Di 62.
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utility bonds is 40-basis points higher than it has
averaged over the last five years. The current widening
of the yield spread between long-term treasury bonds and
A rated public utility bonds proves VWID's investors face
increased risk from what they faced over the last five
years.
Q.Is there other evidence concerning risk which
Mr. Terry and Mr. Gorman did not consider?
A.Yes. The beta of a security is a measure of
volatility or market risk relative to the market. The
beta for the market is always equal to 1.00; therefore, a
company whose stock has a beta greater than 1.00 is
considered riskier than the market, and a company with a
beta less than 1.00 is considered less risky than the
market. Changes in beta provide a measure of the change
in risk. The Water Proxy currently has a beta which
averages 0.78.10 Over the last eight and half years, the
Water Proxy's beta has ranged from 0.65 to 0.78 as
depicted in Figure 1.11 As is evident from the
information shown in Figure 1, the Water Proxy's risk, as
measure by beta, has increased and should be incorporated
into VWID cost of equity.
__________________
10Mr. Gorman's Exhibit No. 416, page 1.
11Derived from Mr. Gorman's Exhibit No. 416, pages 1-3.
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(Chart in hard copy of transcript)
On a relative basis, the Water Proxy's current beta
indicates their current level of risk is 2% to 3% higher
than existed during 2020 to 2022. Further, the current
level of risk is 20% higher than 2019 and 11% higher than
2018. The increased level of risk should similarly be
reflected in VWID's cost of capital.
Q.Is VWID similar in size to Mr. Terry's or Mr.
Gorman's Proxy Groups?
A.No. My Direct Testimony detail the large size
difference between the VWID and my Comparable Group.
Company size is an indicator of business risk and was
discussed in my Direct Testimony (pages 23-29). The
finance literature supports the fact that, as the size of
a firm decreases, its risk and, hence, its required
return increases.
When scholars have tried to explain actual
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security returns, several anomalies (i.e.,
deviations from what is considered normal) have
become evident. One is a small-firm, or size,
effect. It has been found that common stocks of
firms with small market capitalizations (price
per share times the number of shares
outstanding) provide higher returns than
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common stocks of firms with high
capitalizations, holding other things
constant.12
Further, since size is a recognized and meaningful
element of risk, it is appropriate to reflect that risk
in a company's cost of equity.
Recent studies have provided strong evidence
that the degree of risk and corresponding cost
of capital increase with decreasing size of
company. The studies show that this addition
to the equity risk premium is over and above
the amount that would be warranted just as a
result from a company's systematic risk.13
Two independent sets of empirical studies
provide strong support for the proposition that
cost of capital tends to increase with
decreasing size. Users of cost of capital data
should make themselves aware of updates of
these and possibly other similar studies in
order to incorporate the latest current size
effect data in cost of capital estimates,
whether using build-up models, CAPM, or other
cost of capital models.14
Dr. Thomas Zepp presented research on water
utilities that supports a small firm effect in the
utility industry.15 Moreover, Professor Brigham has
indicated that smaller firms have higher capital costs
than otherwise similar but larger firms.16 Standard &
Poors, documents that relationship between size and
credit rating,
Company size and diversification often plays
[a] role. While we have no minimum size
criterion for any given rating level, company
size tends to be significantly correlated to
rating levels. This is because larger companies
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often benefit from economies of scale and/or
diversification, translating into a stronger
competitive position. Small companies are,
almost by definition, -more concentrated in
terms of product, number of customers, and
geography. To the extent that
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12James C. Van Horne, John M. Wachowicz. Fundamentals of Financial
Management, 13th ed. (Pearson Education Limited), 2008, at 114.
13Shannon P. Pratt. Cost of Capital: Estimation and Applications,
(Wiley), 1998, at 64.
14Id. at 95.
15See Zepp (2002), "Utility Stocks and the Size Effect: Revisited",
Economics and Finance Quarterly, 43, 578-582.
16See Fundamentals of Financial Management, 5th Edition, page 623.
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markets and regional economies change, a
broader scope of business affords protection.17
While we have no minimum size criterion for any
given rating level, size and ratings do end up
being correlated, given that size often
provides a measure of diversification, and/or
affects competitive positioning.18
Further, since size is a recognized and meaningful
element of risk, it is appropriate to reflect that risk
in a company's cost of equity. Credit rating agencies
recognize that size impacts credit rating. The authors
Brealey, Myers and Allen discuss the "firm size" and the
size premium.19 Additional support for the use of the
size premium for utilities is also found in a 1995
article by M. Annin.20 Because firm size plays a role in
the pricing of securities in the unregulated financial
markets, it is necessary to reflect this fact when
determining capital cost rates for utilities. Otherwise,
a smaller utility, such as VWID, is at a competitive
disadvantage in the money market when competing for
capital as compared to larger utilities, such as the
larger Proxy Groups' companies.
Q.On pages 16 to 17 of Mr. Gorman's Direct
Testimony he discusses authorized returns on equity for
electric and gas utilities during the period 2010 to
2022. Do you have any comments concerning Mr. Gorman's
discussion of authorized returns on equity for electric
and gas utilities?
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A.Yes. I believe Mr. Gorman discussed authorized
returns on equity for electric and gas utilities from
2010 to 2022 to support his opinion that investors'
expectation of returns is
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17Standard & Poor's, Corporate Ratings Criteria 2008; pg. 22
(emphasis added).
18Id. at 23 (emphasis added).
19Brealey, Myers and Allen, Principles of Corporate Finance, 10th
edition, page 198.
20See Annin (1995), "Equity and the Small Stock Effect", Public
Utilities Fortnightly, October 15, 1995, at 42-43.
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lower today.21 However, as mentioned previously, the
current yield on A rated public utility bonds is 5.47%.
The last time that the yield on A rated public utility
bonds exceeded 5.47% was 2009, or prior to the period
discussed by Mr. Gorman. Accordingly, the required
return on equity for electric and gas utilities today
exceeds the returns cited by Mr. Gorman since interest
rates are higher today than during the period discussed
by Mr. Gorman.
According to the source of information relied upon
by Mr. Gorman, Regulatory Research Associates (RRA), the
average authorized returns on equity for electric cases
was 9.52% in 2022 versus 9.39% in 2021, while average
authorized returns on equity for gas utilities was 9.53%
in 2022, slightly lower than the 9.56% average observed
in 2021.22 The average authorized returns on equity for
water utilities trended upward to 9.61% in 2022, an
increase over the 9.46% authorized in 2021.23 Since the
current yield on A rated public utility bonds is 75-basis
points higher than it was in 2022 and 237-basis points
higher than it was in 2021, the required return on equity
for water utilities today exceeds the returns authorized
in 2021 and 2022.
Q.On pages 7 and 8 of Mr. Terry's Testimony, he
claims VWID's small size is not an issue due to their
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ownership by Veolia North America. Is this opinion
relevant to this case and to a fair rate of return?
A.No. Mr. Terry claims that if you included the
totality of the Veolia North America's
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21The 2022 authorized returns on equity for electric and gas
utilities discussed by Mr. Gorman only include the period January
through September 2022. The 2022 authorized returns on equity for the
full year were higher than the returns cited by Mr. Gorman.
22S&P Global Market Intelligence, RRA Regulatory Focus, Average
Authorized ROE For Electric Nudges Up But Drops For Gas In 2022,
February 3, 2023.
23S&P Global Market Intelligence, RRA Regulatory Focus, Water ROEs
Trend Higher on Small Dataset, February 15, 2023.
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footprint, "the size and diversity issue" of VWID
"becomes moot." He further states, "if you look at the
next level up, Veolia Environnement S.A., where all the
stock is purchased and sold, the size and diversity risk
is eliminated." I believe these statements undercut Mr.
Terry's recommendation. The risk of providing service to
areas outside of VWID is irrelevant to the current
proceeding since the Commission only has jurisdiction
over the rates of service for VWID customers. Therefore,
the Commission should only be interested in the risk of
providing service to those customers for which it has
jurisdiction. In essence, Mr. Terry advocates for cross
subsidization by suggesting that VWID should be afforded
something less than a fair rate of return because their
customers' rates can be subsidized by non-jurisdictional
customers.
Additionally, the precepts of a fair rate of return,
including the comparable earnings standard, capital
attraction standard, and the financial integrity standard
relate to business enterprises, or VWID, not its
investors. The investment risk of VWID is not dependent
on who its investors are. The investment risk of a
business enterprise does not change based on the
geographic distribution of its investors, the wealth of
its investors, or the nationality of its investors.
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Likewise, a fair rate of return for a business enterprise
should not change based on the composition of its
investors either.
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Q.On page 34 of Mr. Gorman's Testimony he states,
"Veolia Utility Resources, LLC ("VUR") provides all the
external capital needed for VWID utility operations in
the state of Idaho. Therefore, the market assessment of
VWID's investment risk is described by credit rating
analysts' reports for VUR." Do you agree with Mr.
Gorman?
A.No. The credit rating analysts' reports for
VUR only assess the credit risk of VUR, not VWID. Mr.
Gorman's rationale is analogous to claiming the credit
rating of a child is described by the credit rating of
their parent.
Q.On page 88 of Mr. Gorman's Testimony he states,
"[t]his total investment risk assessment of VWID, in
comparison to a proxy group, is fully absorbed into the
market's perception of the Company's risk. The use of my
proxy group fully captures the investment risk of VWID."
Do you agree with Mr. Gorman?
A.No. Mr. Gorman did not provide a risk
assessment of VWID, nor did he provide a risk analysis
between VWID and his proxy groups. Therefore, I believe
his statement is incorrect, or at the very least has not
been proven by Mr. Gorman.
Q.On page 88 of Mr. Gorman's Testimony he states,
"[b]usiness risks, among others, include a company's
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size, competitive position, generation portfolio, and
capital expenditure programs, as well as consideration of
the regulatory environment, current state of the
industry, and the economy as whole." Do you agree with
Mr. Gorman?
A.Yes. In regard to VWID and my comparison
group, their competitive position, regulatory
environment, current state of the industry, and the
economy as whole are the same for VWID and my comparison
group. However, VWID's small size and their larger
capital
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expenditure program relative to the comparison companies
indicates higher risk relative to my comparison group.
These same observations apply to Mr. Gorman's Water Proxy
group since his group is a subset of my comparison group.
Q.On page 7 of Mr. Terry's Testimony he states,
"[i]n troubled economic times investors tend to move
their money to safer investment vehicles. This would be
things like treasuries, dividend producing stocks like
utilities, Exchange Traded Funds, and the like." Do you
agree with Mr. Terry?
A.No, not exactly. I agree investors tend to
move their money to safer investment vehicles, but I do
not agree that utilities and Exchange Traded Funds are
their preferred choice. Further down on page 7 Mr. Terry
justifies his statement and states,
While this will not have a direct impact on the
quantification of ROE, with more demand for
these types of investments it will tend to
support lower ROE recommendations. Some of
these effects are already being seen. Some of
the comparable utilities used in the analysis
are at or near their 52-week high. While the
Dow Jones and S&P 500 are not.24
Table 1 shows a comparison of the percentage difference
between the current stock price and the 52-week high for
Terry's Proxy Group, the Dow Jones, and the S&P 500.25 As
shown in Table 1, the Dow Jones' price is 6% below and
the S&P 500's price is 13% below their 52-week high. The
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price changes for Terry's Proxy Group's stocks have
decreased between 7% to 24%, with an average price drop
of 12%, and with a median decrease of 10% below their
52-week high. Accordingly, the price drop from their
52-week high for Terry's Proxy Group, the Dow Jones, and
the S&P 500 are similar, contrary to Mr. Terry's
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24TERRY J. (Di) 7.
25The date of the current stock price and the 52-week high, 1/30/23,
is the same date footnoted by Mr. Terry.
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contention. Therefore, a lower return on equity is not
justified based on Mr. Terry's rationale.
(Table in hard copy of transcript)
MR. TERRY'S AND MR. GORMAN'S RECOMMENDED COST OF EQUITY
Q.What methods or models did Mr. Terry and Mr.
Gorman use to determine their recommended cost of common
equity?
A.Mr. Terry used the comparative earnings method,
the DCF model and the CAPM model to determine his
recommended cost of common equity. Mr. Gorman used DCF
model, Risk Premium model and the CAPM model to determine
his recommended cost of common equity.
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Q.What were the results of Mr. Terry's
comparative earnings method?
A.Mr. Terry determined a cost of equity of 9.25%
to 10.26% using the comparative earnings method. In
reviewing his method, I found considerable difference
between the returns on equity Mr. Terry used and the
returns on common equity reported by Standard & Poor's
("S&P").26 Schedule 2 replicates Mr. Terry's comparative
earnings method but shows the returns on common equity
("ROE") reported by S&P for the same time period used by
Mr. Terry.
As shown on Schedule 2, the 2021 results average
10.50%. The 2020 results average 9.54% and the 2019
results average 9.84%. The average of all the results
together is a ROE of 9.96% with a median of 10.71%. When
Veolia Environnement S.A. is removed from Mr. Terry's
comparative earnings method, the 2021 results average
11.25%. The 2020 results average of 10.48% and the 2019
results average 9.49%. The average of all the results
together is a ROE of 10.41% with a median of 11.06% as
shown on Schedule 2.
Q.What market value DCF estimate do Mr. Terry and
Mr. Gorman recommend for the VWID?
A.Mr. Terry recommends a market value DCF of 7.91
to 9.04% and Mr. Gorman recommends a market value DCF of
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9.00%. I have numerous concerns relating to Mr. Terry's
and Mr. Gorman's DCF models.
Q.What concerns do you have regarding Mr. Terry's
DCF models?
A.My concerns regarding Mr. Terry's DCF models
relate to his incorrect application of the DCF model and
his use of historic growth rates. The DCF model is a
forward looking
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26Mr. Terry's source of information was Yahoo Finance while I used
S&P Capital IQ.
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model that calculates the present value (cost of equity)
of discounted future dividends (cash flow). The dividend
yield used in the model is based on next year's dividend,
or D1, that is determined by taking the current
annualized dividend, or D0, and multiplying it by the
assumed growth, "g", in dividends (cash flow), or D0 x
(1+g) = D1, which is then divided by the current price to
produce next year's dividend yield. However, Mr. Terry
did not account for next year's dividend in his DCF
calculation.
I believe Mr. Gorman would agree with me on this
point since Mr. Gorman's testimony explained his
determination of next year's dividend used in his DCF
calculation as,
I used the most recently paid quarterly
dividend as reported in Value Line. This
dividend was annualized (multiplied by 4) and
adjusted for next year's growth to produce the
D1 factor for use in Equation 2 above. In other
words, I calculate D1 by multiplying the
annualized dividend (D0) by (1+G).27
To be conservative, when I calculate next year's dividend
in my DCF I only use D1/2, not the full D1. I do so
because quarterly dividends are typically increased at
least one time per year, and therefore I use "one-half
the assumed growth in value" to estimate the timing of
the dividend increase. Use of "one-half the assumed
growth" assumes the dividend rate is increased at the
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midpoint of the next year because it (D1/2) falls midway
between the current dividend, D0, and the future
dividend, D1. On Schedule 3, I correct Mr. Terry's
oversight, and include next year's dividend yield in his
DCF model.
My second concern regarding Mr. Terry's DCF model is
his use of historic growth rates. Published projected
EPS growth rates are used primarily by investors.
Academic
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27Gorman, Di 42.
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studies28 verify the superiority of analysts' EPS growth
forecasts over derived growth rates in predicting stock
prices. The market required cost of equity represents
what the market will pay for a stock based on investors'
expectations of expected future growth. For this reason,
analysts' projections of future growth prospects for
water utilities are required because analysts' forecasts
are relied upon by investors when they price utility
stocks. I believe Mr. Gorman would also agree with me on
this point since Mr. Gorman's testimony explains
essentially the same viewpoint and even footnotes the
same published study that I have,
As predictors of future returns, securities
analysts' growth estimates have been shown to be
more accurate than growth rates derived from
historical data. That is, assuming the market
generally makes rational investment decisions,
analysts' growth projections are more likely to
influence investors' decisions, which are captured
in observable stock prices, than growth rates
derived only from historical data.29
Mr. Terry compounded his mistake of using historic
growth rates by removing those companies with negative
historical growth rates from his second DCF calculation
that was based on projected growth rates. On Schedule 3,
I correct Mr. Terry's removal of companies which have
negative historical growth rates and recalculate his DCF
model. The average of all the results is a DCF of 9.60%
with a median of 9.59%. After the highest and lowest DCF
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results were removed, average DCF is 9.57% with a median
of 9.59%, as shown on Schedule 3.30
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28Gordon, David, A., Gordon, Myron, J., and Gould, Lawrence, I.A
Choice Among Methods of Estimating Share Yield, The Journal of
Portfolio Management, 50-55, Spring 1989.
29Gorman, Di 42 and 43.
30Besides removing companies with negative historic growth rates, Mr.
Terry also removed Veolia Environnement S.A. because he thought its
growth was too high. See TERRY J. (Di) 15.
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Q.What DCF models did Mr. Gorman use to determine
his recommendation for the VWID?
A.Mr. Gorman used three DCF models: the Constant
Growth DCF Model, the Sustainable Growth DCF Model and a
Multi-Stage Growth DCF Model. Mr. Gorman's Constant
Growth DCF Model reflects analysts growth forecasts, and
is the same model I recommended using. I previously
discussed Mr. Terry's use of a constant growth model. My
concerns regarding Mr. Gorman's DCF models only relate
his use of the Sustainable Growth DCF Model and a
Multi-Stage Growth DCF Model.
Q.What concerns do you have regarding Mr.
Gorman's Sustainable Growth DCF Model?
A.My concerns regarding Mr. Gorman's Sustainable
Growth DCF Model relate to his unique method of
calculating the growth rate he used in his model.
Instead of using analysts' growth forecasts he improperly
relied upon growth rates that he calculated. That is, he
subjectively ignored the investor influencing published
growth rates of security analysts and instead, calculated
his own growth rates. Specifically, Mr. Gorman's
Sustainable Growth DCF Model relied upon internal growth
rates. Internal growth measures growth in book value,
not stock price. Growth in book value is meaningless
given today's relatively high Market/Book Multiples and
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therefore, internal growth is not a good proxy for
investors' growth expectations. Published projected EPS
growth rates are used primarily by investors. The market
required cost of equity represents what the market will
pay for a stock based on investors' expectations of
expected future growth. Investors' expectations of
expected future growth are not based upon Mr. Gorman's
unique internal growth rate, they are based on investors'
expectations of expected future growth.
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For this reason, analysts' projections of future
growth prospects for utilities are required. Analysts'
EPS growth projections are not required because they will
necessarily prove correct. Rather, analysts' EPS
projections of future growth prospects are required
because real investors rely on them more than any other
source. It is irrelevant whether analysts growth
projections are over or under optimistic or pessimistic.
The analysts' forecasts are relied upon by investors when
they price utility stocks.
Even if Mr. Gorman's judgments concerning future
growth were superior to the analysts' forecasts, there
still would be no justification for using Mr. Gorman's
unique growth rate in a DCF formula because investors
that price stocks are totally unaware of Mr. Gorman's
analysis (even if hypothetically it were better).
Instead, investors rely upon analysts' forecasts, which
are widely available and used by investors.
Mr. Gorman's calculation of his unique internal
growth rate is shown on page 1 of Exhibit No. 407. On
page 1 of Mr. Gorman's Exhibit No. 407 Mr. Gorman's Water
Proxy group's projected return on equity is shown to
average 10.41% to 10.64%, while his Gas Proxy group's
projected return on equity is shown to average 9.34% to
9.66%. However, Mr. Gorman's Sustainable Growth DCF
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Model, shown on Exhibit No. 408, only determined a return
on equity (cost of equity) of 7.45% to 7.50% for his
Water Proxy group and a 9.08% to 9.30% return on equity
(cost of equity) for his Gas Proxy group.
Comparing the results of Mr. Gorman's Sustainable
Growth DCF Model to its inputs highlights the problem
with Mr. Gorman's Sustainable Growth DCF Model.
Specifically, Mr. Gorman's Water Proxy group's projected
return on equity of 10.41% to 10.64% is between 291-basis
points higher to 319-basis points higher than Mr.
Gorman's Sustainable Growth DCF Model's results of 7.45%
to 7.50%, thus highlighting
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the inadequacy of Mr. Gorman's Sustainable Growth DCF
Model.31
Q.Is there a difference between earned returns,
or "Accounting ROEs," and the ROE to be determined in
this case?
A.No, not really. I agree there is a distinction
between a market return and an accounting return. The
ROE that the Commission will determine in this case will
become VWID's accounting ROE benchmark by which
under-earning and over-earning will be measured. If Mr.
Gorman's Water Proxy group is earning an accounting
return of 10.41% to 10.64% while VWID earns only 7.45% to
7.50%, it places VWID at a competitive disadvantage in
the competition to attract capital.
Q.What concerns do you have regarding Mr.
Gorman's Multi-Stage Growth DCF Model?
A.My concerns regarding Mr. Gorman's Multi-Stage
Growth DCF Model relate to his unique method of
calculating the growth rate that he used in his model.
The primary measure of growth used in Mr. Gorman's
Multi-Stage Growth DCF Model is based on the nominal
growth in the value of the economic output ("GDP") for
the overall national economy as measured by the nominal
GDP growth.32 To justify his unique selection of GDP
growth Mr. Gorman compared GDP growth and electric
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utility sales growth since 1988. He explained,
The U.S. Department of Energy, Energy Information
Administration ("EIA") has observed utility sales
growth tracks U.S. GDP growth, albeit at a lower
level, as shown in Exhibit No. 409. Utility sales
growth has lagged behind GDP growth for more than a
decade. As a result, nominal GDP growth is a very
conservative proxy for utility sales growth, rate
base
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31A similar comparison of the Gas Proxy group's results highlights
the same flaws in Mr. Gorman's Sustainable Growth DCF Model, but the
magnitude of the difference is smaller.
32Mr. Gorman explained, "[f]or the long-term growth period, I assumed
each company's growth would converge to the maximum sustainable
long-term growth rate, which is the projected long-term GDP growth
rate." Gorman, Di 48.
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growth, and earnings growth. Therefore, the U.S. GDP
nominal growth rate is a reasonable proxy for the
highest sustainable long-term growth rate of a
utility.33
However, contrary to Mr. Gorman's hypothesis, the
growth in the value of GDP for the overall national
economy does not provide a reasonable measure for the
growth of Mr. Gorman's Water Proxy group as evidence by
the information shown on Schedule 4. As shown, since
1988 nominal GDP increased by 345% while Mr. Gorman's
Water Proxy group's revenues increased 748%, or 117% more
than GDP. Similarly, over the past 30 years (1991-2021),
the Water Proxy group's revenues increased 172% more than
GDP, the Water Proxy group's revenues increased 110% more
than GDP over the past 20 years (2001-2021) and increased
61% more than GDP over the past 10 years (2011-2021). As
shown on Schedule 4, Mr. Gorman's Water Proxy group's
revenue growth has been about 2-times higher than GDP
growth.
A similar significant difference in growth between
GDP and the Water Proxy group's revenues will continue to
occur prospectively because of water utility industry
fundamentals. At a minimum, the investor owned water
industry will continue to grow faster than the overall
economy for the next several decades, if not for the next
century.
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The Water Proxy group's growth strategy focuses on
the acquisition of water and wastewater companies and
operations which expands their market share. Government
controlled establishments such as municipalities, public
service districts and other local governmental entities
dominate the water and wastewater industry. Currently,
government-controlled establishments manage or own about
86% of all water supplies and 80% of all domestic
wastewater systems. The percentage of all water supplies
that are
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33Gorman, Di 49.
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managed or owned by larger investor owned utilities
("IOU"), and the percentage of wastewater systems managed
or owned by larger IOUs, will increase over time as the
cost of infrastructure replacement and regulatory
compliance becomes prohibitive for Government-controlled
establishments and small IOUs. Clearly, there are ample
new growth opportunities available for IOUs to grow
faster than the national economy through acquisition of
Government controlled water/wastewater establishments and
small IOUs.
The water utility industry's and wastewater utility
industry's increased compliance with state and federal
water purity levels and large infrastructure replacements
are driving consolidation of the wastewater utility and
water utility industries. Because many wastewater
utility and water utility operations do not have the
means to finance the significant capital expenditures
needed to comply with these requirements, many have been
selling their operations to larger, financially stronger
IOU operations.
The larger IOUs have been following an aggressive
acquisition program to expand their operations by
acquiring smaller wastewater and water systems.
Generally, they enter a new market by acquiring one or
several wastewater or water utilities. After their
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initial entry into a new market, the larger
investor-owned water utility companies continually seek
to expand their market share and services through the
acquisition of wastewater and water utility businesses
and operations that can be integrated with their existing
operations. Such acquisitions may allow a company to
expand market share and increase asset utilization by
eliminating duplicate management, administrative, and
operational functions. Acquisitions of small,
independent utilities can often add earning assets
without necessarily
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incurring the costs associated with the SDWA or CWA if
such acquisitions are contiguous to the potential
purchaser.34
Q.Do you have any other comments regarding Mr.
Gorman's Multi-Stage Growth DCF Model?
A.Yes. I believe Mr. Gorman improperly relied
upon a GDP growth rate. GDP growth measures growth in
national economy, not water utility stock price. Mr.
Gorman's Multi-Stage Growth DCF Model produces an
unrealistically low result through the use of a low GDP
growth estimate. For example, Mr. Gorman's Water Proxy
group's projected return on equity is shown page 1 of Mr.
Gorman's Exhibit No. 407 to average 10.41% to 10.64%,
while Mr. Mr. Gorman's Multi-Stage Growth DCF Model,
shown on Exhibit No. 410, only determined a return on
equity (cost of equity) of 6.23% to 6.31% for his Water
Proxy group. Comparing the results of Mr. Gorman's
Multi-Stage Growth DCF Model to the Water Proxy group's
projected return on equity underscores the problem with
Mr. Gorman's Multi-Stage Growth DCF Model. Specifically,
Mr. Gorman's Water Proxy group's projected return on
equity of 10.41% to 10.64% is between 410-basis points
higher to 441-basis points higher than Mr. Gorman's
Multi-Stage Growth DCF Model's results of 6.23% to 6.31%,
thus proving the inadequacy of Mr. Gorman's Multi-Stage
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Growth DCF Model. Therefore, adopting Mr. Gorman's
recommended 6.23% to 6.31%
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34The SDWA, or Safe Drinking Water Act, is the principal federal law
in the United States intended to ensure safe drinking water for the
public. Pursuant to the act, the EPA is required to set standards for
drinking water quality and oversee all states, localities, and water
suppliers who implement these standards. The CWA, or Clean Water
Act, is the primary federal law in the United States governing water
pollution. The CWA's objective is to restore and maintain the
chemical, physical, and biological integrity of the nation's waters
by preventing point and nonpoint pollution sources, providing
assistance to publicly owned treatment works for the improvement of
wastewater treatment, and maintaining the integrity of wetlands.
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Multi-Stage Growth DCF Model's results would place VWID
at a competitive disadvantage in the competition to
attract capital.
Q.Do you have any other comments regarding Mr.
Gorman's market value DCF estimates?
A.Yes. Based upon my analyses discussed above
regarding Mr. Gorman's Sustainable Growth DCF Model and
Multi-Stage Growth DCF Model, I believe those models
should not be relied upon. If the Commission is going to
consider the results of any of Mr. Gorman's DCF models, I
believe Mr. Gorman's Constant Growth DCF Model is his
only meaningful DCF model.
Q.Do current market conditions impact Mr. Terry's
and Mr. Gorman's cost of equity methodologies more so
today than in previous periods?
A.Yes. The basic proposition of financial theory
regarding the economic value of a company is based on
market value. That is, a company's value is based on its
market value weighted average cost of capital.35 The
American Society of Appraisers, ASA Business Valuation
Standards, 2009, and the National Association of
Certified Valuation Analysts, Professional Standards,
2007, use the same definition:
Weighted Average Cost of Capital (WACC). The
cost of capital (discount rate) determined by
the weighted average, at market values, of the
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cost of all financing sources in the business
enterprise's capital structure. (Emphasis
added)
Accordingly, the market value derived cost rate reflects
the financial risk or leverage associated with
capitalization ratios based on market value, not book
value.
As shown in Schedule 5, there is a large difference
in Mr. Terry's and Mr. Gorman's
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35For other examples, see http://www.investinganswers.com/financial-
dictionary/financial-statement-analysis/weighted-average-cost-capital
-wacc-2905. Also see http://www.wallstreetmojo.com/weighted-average-
cost-capital-wacc/, or http://accountingexplained.com/misc/
corporate-finance/wacc.
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proxy groups market capitalization ratios and their
recommended book capitalization ratios. This difference
in market values and book values results in debt/equity
ratios based on market value of 25%/75% (debt/equity)
verses book value of 50%/50% (debt/equity) for Terry's
Proxy Group and market value of 27%/73% (debt/equity)
verses book value of 52%/48% (debt/equity) for the Water
Proxy group as shown on Schedule 5. The larger the
difference between market values and book values, the
less reliable the models' results are because the models
provide an estimate of the cost of capital of market
value, not book value.
Financial theory concludes capital structure and
firm value are related. Since capital structure and firm
value are related, a leverage adjustment (Hamada
adjustment) is required when a cost of common equity
model is based on market value and if its results are
then applied to book value. As explained previously, the
market value derived cost rate reflects the financial
risk or leverage associated with capitalization ratios
based on market value, not book value. The authors
Brealey, Myers and Allen provide a similar definition of
the cost of capital being based on market capitalization,
not book value,
The values of debt and equity add up to overall
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firm value (D + E = V) and firm value V equals
asset value. These figures are all market
values, not book (accounting) values. The
market value of equity is often much larger
than the book value, so the market debt ratio
D/V is often much lower than a debt ratio
computed from the book balance sheet.36
The work of Modigliani and Miller concludes that the
market value of any firm is independent of its capital
structure, and this is precisely the reason why the
leverage
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36Brealey, Myers and Allen, Principles of Corporate Finance, 10th
edition, at 216 (emphasis added).
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adjustment (Hamada adjustment) is appropriate.37 The only
way for the market value of a firm to remain independent
of its capital structure is if the capital cost rates
change to offset changes in the capital structure. If
the capital cost rates do not change to offset changes in
the capital structure, then the value of the firm will
change. Clearly a leverage adjustment (Hamada
adjustment) is required when a cost of common equity
model is based on market value and if its results are
then applied to book value because the capital structure
is changed from market value capitalization to book value
capitalization.
Referring to Schedule 5, Mr. Terry's and Mr.
Gorman's proxy groups' cost of capital is based on
debt/equity ratios based on market value of 25%/75%
(debt/equity) and 27%/73% (debt/equity), respectively.
Therefore, Mr. Terry's and Mr. Gorman's market value
equity cost rates reflect an equity ratio of between 73%
and 75%. That is not just my opinion, but it is a
cornerstone of financial theory.38 Mr. Terry's and Mr.
Gorman's market value DCF cost rates of 7.91% to 9.04%
and 9.00%, respectively, reflect a 73% to 75% equity
ratio and yet they recommend their 7.91% to 9.04% and
9.00% cost of equity be applied to VWID 56% equity ratio
based on book value. Even if Mr. Terry's 7.91% to 9.04%
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or Mr. Gorman's 9.00% cost of equity were appropriate for
a 73% to 75% equity ratio, it cannot simultaneously be
appropriate for VWID's 56% equity ratio without violation
of Modigliani and Miller's precept.
Q.What market value Risk Premium estimate does
Mr. Gorman recommend for the VWID?
A.Mr. Gorman recommends a market value Risk
Premium of 9.60% based on the midpoint
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37The Nobel Prize winning professors Franco Modigliani and Merton
Miller's proposition on firm value and capital
38Ibid.
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of a range of 9.41% to 9.73%. I have concerns relating
to Mr. Gorman's Risk Premium models.
Q.Please explain Mr. Gorman's Risk Premium
models.
A.Mr. Gorman's Risk Premium model is based on two
estimates of an equity risk premium. First, on Exhibit
No. 412 Mr. Gorman calculated the difference (i.e., risk
premium) between regulatory commission authorized returns
on equity and U.S. Treasury bond yields on an annual
basis from 1986 through September 2022. Second, on
Exhibit No. 413 Mr. Gorman calculated the difference, or
risk premium, between regulatory commission authorized
returns on equity and A rated public utility bond yields
on an annual basis from 1986 through September 2022.
Ultimately, Mr. Gorman selected the average of his 5-year
rolling average risk premium for both his Treasury bond
yield and his A rated public utility bond yield analyses
as being the appropriate measure.
Using information from Exhibit No. 412 Mr. Gorman
derived a 5.61% risk premium based on Treasury bond
yields. He added the 5.61% risk premium to his projected
30-year Treasury bond yield of 3.80% and generated a Risk
Premium result of 9.41% (5.61% + 3.80%). Utilizing
Exhibit No. 413 Mr. Gorman developed a 4.26% risk premium
based on A rated public utility bond yields. He added
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the 4.26% risk premium to his A rated public utility bond
yield of 5.47% and produced a Risk Premium result of
9.73% (4.26% + 5.47%).
Q.What concerns do you have regarding Mr.
Gorman's Risk Premium models?
A.My concern regarding Mr. Gorman's Risk Premium
models is based on the fact risk premiums are interest
rate sensitive and tend to increase with lower interest
rates and vice versa. Mathematically, Mr. Gorman's Risk
Premium model based on Treasury bond yield
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reflects a 5-year rolling average Treasury bond yield of
5.16%. However, he used a projected 3.81% Treasury bond
yield in his Risk Premium model, a difference of
135-basis points in yields (5.16% - 3.81%). Similarly,
Mr. Gorman's Risk Premium model based on A rated public
utility bond yield reflects a 5-year rolling average A
rated public utility bond yield of 6.51%. However, he
used a 5.47% A rated public utility bond yield in his
Risk Premium model, a difference of 104-basis points
(6.51% - 5.47%).
To measure the sensitivity and accuracy of Mr.
Gorman's risk premiums, I calculated two simple linear
regressions to determine the relationship between a
dependent variable and an independent variable. The
simple linear regression equation is:
Y = a + bX + e
Where:
Y - Dependent variable
X - Independent (explanatory) variable
a - Intercept
b - Slope
e - Residual (error)
I calculated two simple linear regressions separately for
each Treasury bond yields and for A rated public utility
bond yields.
Using the information from Exhibit No. 412 I
calculated a simple linear regression using Treasury bond
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yields as the independent variable and authorized return
on equity as the dependent variable. I also calculated a
second simple linear regression using Treasury bond
yields as the independent variable and risk premium as
the dependent variable. The results of these equations
are show in Table 2.
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(Table in hard copy of transcript)
As shown in Table 2, the correct risk premium is
6.30% using Mr. Gorman's data from Exhibit No. 412.
Adding the 6.30% risk premium to Mr. Gorman's projected
Treasure Bond yield of 3.81% produces a cost of equity of
10.11% based on Mr. Gorman's Risk Premium model's data.
I tested the results of the models shown in Table 2
compared to Mr. Gorman's recommended risk premium of
5.61% and found his model's simple prediction error
(actual result minus prediction) was almost 4-times
higher than produced by the models shown in Table 2.39
I also calculated a simple linear regression using A
Rated Public Utility bond yields as the independent
variable and authorized return on equity as the dependent
variable using the information from Exhibit No. 413.
Then, I calculated a second simple linear regression
using A Rated Public Utility bond yields as the
independent variable and risk premium as the dependent
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variable. The results of these equations are show in
Table 3.
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39The residual (error) of Mr. Gorman's method was 10-time greater
than that of the models shown in Table 2.
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(Table in hard copy of transcript)
As shown in Table 3, the correct risk premium is
4.81% using Mr. Gorman's data from Exhibit No. 413.
Adding the 4.81% risk premium to Mr. Gorman's A Rated
Public Utility bond yield of 5.47% shows a cost of equity
of 10.28% based on Mr. Gorman's Risk Premium model. I
tested the results of the model shown in Table 3 compared
to Mr. Gorman's recommended risk premium of 4.26% and
found his model's simple prediction error (actual result
minus prediction) was almost 4-times higher than produced
by the model shown in Table 3.40
Based on the results of the Risk Premium model
analysis described above, Mr. Gorman's recommended market
value Risk Premium should be 10.20% based on the midpoint
of a range of 10.11% to 10.28%.
Q.What market value CAPM estimate do Mr. Terry
and Mr. Gorman recommend for the VWID?
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A.Mr. Terry recommends a market value CAPM of
8.98% to 9.33% and Mr. Gorman recommends a market value
CAPM of 9.70%. I have several concerns relating to Mr.
Terry's and Mr. Gorman's CAPM models.
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40The residual (error) of Mr. Gorman's method was 11-time greater
than that of the models shown in Table 3.
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Q.What concerns do you have regarding Mr. Terry's
CAPM models?
A.I have three areas of concern regarding Mr.
Terry's CAPM; beta, risk-free rate, and his market risk
premium. First, the betas Mr. Terry used (Exhibit No.
119) are considerably lower than Mr. Gorman's current
betas (Exhibit No. 416) for the same companies. As shown
in Table 4, on average, Mr. Gorman's current betas are
35% higher than Mr. Terry's betas, and the median
difference is 40%.41 Substituting Mr. Gorman's current
betas in place of Mr. Terry's betas produces results from
Mr. Terry's CAPM that range from 8.76% to 13.11% with an
average of 10.82% and a median of 10.66% as shown on
Schedule 6.
(Table in hard copy of transcript)
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My concern with Mr. Terry's risk-free rate is his
use of a short-term 1-month Treasury bill. Financial
theory indicates the term matching of the risk-free rate
should be based on the life of the asset, not the time
horizon of the investor. In this case, water assets have
a much longer life than the 1-month that results from
using 1-month bills. Besides
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41Comparison excludes Veolia Envronnement because they are not part
of Mr. Gorman's proxy companies, nor are they covered by Value Line.
Comparison includes Value Line's 0.80 beta reported for York Water
Co.
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matching the life of the asset, another mistake of using
1-month Treasury bills is that they are more sensitive to
monetary policy activities taken by the Federal Open
Market Committee, whereas the 30-year Treasury bonds are
more of an indication of investor sentiment of their
required returns.
The last area of concern I have with Mr. Terry's
CAPM is he did not reflect the required CAPM size
premium. The size premium reflects the risks associated
with Mr. Terry's proxy group's small size and its impact
on the determination of their beta. This adjustment is
necessary because beta (systematic risk) does not capture
or reflect the proxy group's small size. According to
Brealey, Myers, and Allen, "the relationship among stock
returns and firm size and book-to-market ratio has been
well documented."42 Brealey, Myers, and Allen also state,
that "between 1926 and 2008 the difference between the
annual returns on small and large capitalization stocks
averaged 3.6%"43 which should be included in Mr. Terry's
CAPM and similarly be included in Mr. Gorman's CAPM.44
Investors prefer liquidity to lack of liquidity.
Accordingly, a share in a business is worth more if it is
easily marketable or, conversely, worth less if it is
not. Privately held water utilities such as VWID are
worth less than publicly traded water utilities.
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Further, publicly traded water utilities are not as
marketable as the large companies which comprise the S&P
500. The size premium used in the CAPM accounts for some
of these differences.
Q.What concerns do you have regarding Mr.
Gorman's CAPM models?
A.I have two areas of concern regarding Mr.
Gorman's CAPM, his beta and his market risk premium.
Regarding beta, Mr. Gorman's recommended CAPM is based on
"normalized"
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42Brealey, Myers and Allen, Principles of Corporate Finance, 10th
edition, page 198.
43Id. at 202.
44I used a small stock premium of 1.50% for the water companies
included in Mr. Terry's proxy group.
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betas, not actual current published betas. His
"normalized" betas are an average of older and lower
betas. Specifically, he averaged 33 calendar quarters of
older published betas, using betas dating back to 2013.
There is no academic or industry support for doing so.
Instead of using current published betas he improperly
relied upon his own individual preference and determined
what he deemed to be "normalized." That is, he
subjectively ignored the investor influencing published
betas and instead, calculated his own betas. Published
betas are used by investors. Under CAPM, the market
required cost of equity represents what the market will
pay for a stock based, in part, on investors' evaluation
of risk as measured by beta. Investors' expectations of
beta are not based upon Mr. Gorman's unique "normalized"
beta, they are influenced by current published betas.
For this reason, current published betas for
utilities are required. Current published betas are not
required because they will necessarily prove correct.
Rather, current published betas are required because real
investors rely on them. It is irrelevant whether current
published betas are over or under stated because they are
relied upon by investors at the time they price utility
stocks.
Even if Mr. Gorman's judgments concerning
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"normalized" betas were superior to current published
betas, there still would be no justification for using
Mr. Gorman's unique "normalized" betas in a CAPM formula
because investors that price stocks are unaware of Mr.
Gorman's "normalized" betas (even if hypothetically it
were better). Instead, investors rely upon current
published betas, which are widely available and used by
investors. By using his "normalized" betas, Mr. Gorman
reduced his calculated CAPM from 10.36% to 9.71% as shown
on Exhibit No. 417.
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The last area of concern I have with Mr. Gorman's
CAPM is he did not reflect the required CAPM size
premium, which I believe should be included in his CAPM
for the same reasons I articulated when I discussed Mr.
Terry's failure to reflect a CAPM size premium above.
Q.Do you have any other comments regarding the
market value CAPM estimates of Mr. Terry and Mr. Gorman?
A.Yes. As I previously explained regarding the
market value derived DCF cost rate, similarly the market
value derived CAPM cost rate reflects the financial risk
or leverage associated with capitalization ratios based
on market value, not book value. The larger the
difference between market values and book values the less
reliable the models' results are because the models
provide an estimate of the cost of capital of market
value, not book value.
Q.What common equity cost rates do Mr. Terry and
Mr. Gorman recommend for VWID?
A.Mr. Terry recommends a common equity cost rate
of 9.00% and Mr. Gorman recommends a common equity cost
rate of 9.35% for VWID.
Q.Do you have any additional comments regarding
either Witness Terry's recommended common equity cost
rate or Witness Gorman's recommended common equity cost
rate?
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A.Yes. As reference previously, page 1 of Mr.
Gorman's Exhibit No. 407 shows the Water Proxy group's
average projected return on equity is 10.41% to 10.64%.
The Water Proxy group's projected return on equity of
10.41% to 10.64% is between 141-basis points higher to
164-basis points higher than Mr. Terry's 9.00%
recommendation and is 106-
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basis points higher to 129-basis points higher than Mr.
Gorman's 9.35% recommendation. If other water utilities
are earning returns of 10.41% to 10.64% while VWID earns
only 9.00% or 9.35%, it places VWID at a competitive
disadvantage in the competition to attract capital.
RESPONSE TO MR. TERRY'S CRITIQUE OF MR. WALKER'S
TESTIMONY
Q.On pages 9 to 11 of his Direct Testimony, Mr.
Terry discusses the Hamada formula. Do you agree with
Mr. Terry's assessment?
A.No. The Hamada formula, the DCF and the CAPM
have simplifying assumptions, just as most financial
models have.45 Despite having simplifying assumptions,
financial practitioners still use these financial models
because the models are the best, and often the only ones
available to use. The default risk assumption mentioned
by Mr. Terry is a simplifying assumption. This
simplifying assumption can be revised in the Hamada
formula, but doing so requires betas for debt, which are
not widely available.46 Accordingly, most practitioners
accept the simplifying assumption.
It is an accepted financial premise that market
value derived cost rates reflect the financial risk or
leverage associated with capitalization ratios based on
market value, not book value. Consequently, Mr. Terry's
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market value derived cost rate reflects a market value
debt/equity ratio of 25%/75% (debt/equity). However, Mr.
Terry recommends applying his market value derived cost
rate to book value ratio of 44%/56% (debt/equity) for
VWID. In doing so, Mr. Terry did not account for the
risk difference between the 25%/75% (debt/equity) market
value ratios used to calculate the return which he
advocates
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__________________
45For example, the DCF assumes a constant dividend payout ratio, yet
dividend payout ratios change quarterly.
46In the Hamada formula, the debt beta is assumed to be zero.
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be applied to 44%/56% (debt/equity) book value ratios. I
recommend using the Hamada formula to solve Mr. Terry's
quandary. Mr. Terry has offered no solutions for his
predicament.
RESPONSE TO MR. GORMAN'S CRITIQUE OF MR. WALKER'S
TESTIMONY
Q.On pages 86 Mr. Gorman states, "Mr. Walker has
not shown that the Public Utility Index is an appropriate
risk proxy for VWID." Is Mr. Gorman correct?
A.Yes. However, I never testified that the
"Public Utility Index was an appropriate risk proxy for
VWID." Rather, I analyzed the Public Utility Index and
my comparison group on pages 20 to 26 of my Direct
Testimony in order to evaluate risk differences that may
exist between the Public Utility Index and my comparison
group.47 This analysis assisted me in evaluating the
appropriate size of the risk premium used in my Risk
Premium model.
Q.On pages 84 and 85 Mr. Gorman discusses your
size premium estimate. Is Mr. Gorman correct?
A.No. I estimated the size premium based on
Kroll's 2021 SBBI data and their related research. This
adjustment is necessary because beta (systematic risk)
does not capture or reflect the proxy group's small size.
Kroll advocates adding the entire size premium to the
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CAPM, regardless of beta. They do so because their size
premia are already "beta-adjusted".
A common characteristic of "size premia" is that
they are "beta-adjusted". In other words market risk
as measured by "beta" has been controlled for, or
removed, leaving only the size effect's contribution
to excess return.48
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__________________
47Also see my Direct Testimony supporting Exhibit Schedules 4, 5, 6,
7, and 9.
48Duff & Phelps, LLC, Risk Premium Report 2013; pg. 102.
https://www.kroll.com/-/media/assets/pdfs/publications/valuation/2013
-risk-premium-report-excerpt-dp.pdf
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However, instead of including the entire size premia, I
added only 60% of the size premia, a very conservative
approach. Additionally, Mr. Gorman criticisms of beta
differences is unfounded because the betas cited by Mr.
Gorman are from different sources, and were likely
computed at different intervals (e.g., weeks, months)
using different market indices (e.g., NYSE, S&P 500) so
the precision advocated by Mr. Gorman is not possible and
more important, not advocated for by Kroll. Accordingly,
Mr. Gorman criticisms are unfounded.
Q.On pages 78 through 81 Mr. Gorman claims your
leverage adjustment is a market-to-book ratio adjustment.
Is Mr. Gorman correct?
A.No. My comparison group's market-to-book ratio
was 339% when my Direct Testimony was prepared. I did
not, and I do not recommend adjusting the comparison
group's market value cost of equity by 339%. Mr.
Gorman's testimony is false and misleading because a
market-to-book ratio is a stock price metric and is not
part of the leverage adjustment contrary to Mr. Gorman's
testimony.
I previously explained the foundation for the
required leverage adjustment in responding to Mr. Terry's
critique and I will not repeat it here. However, Mr.
Gorman faces a similar quandary as Mr. Terry in that Mr.
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Gorman did not account for the risk difference between
the 27%/73% (debt/equity) market value ratios used to
calculate the return which he advocates be applied to
44%/56% (debt/equity) book value ratios of VWID.
On page 83, in reference to my recommended leverage
adjustment, Mr. Gorman states, "Mr. Walker has failed to
show that either of these adjustments is necessary to
produce a fair and reasonable return for VWID." I
recommend a 10.80% fair and reasonable return for VWID,
reflecting the required leverage adjustment. My
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recommended return for VWID is similar to the average
10.41% to 10.64% return on equity projected for Mr.
Gorman's Water Proxy group, and thus is fair and
reasonable. However, Mr. Gorman has not shown how his
recommended 9.35% return for VWID would be fair and
reasonable when his Water Proxy group companies are
earning 10.41% to 10.64%.
Q.Does that conclude your rebuttal testimony?
A.Yes, it does. However, I reserve the right to
supplement my rebuttal testimony as responses to
outstanding data requests become available or additional
issues arise during this proceeding.
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(The following proceedings were had in
open hearing.)
MR. CARTER: Okay, Mr. Walker is now
available for cross-examination and questions by the
Commission.
COMMISSIONER ANDERSON: Thank you.
Mr. Burdin?
MR. BURDIN: Thank you. We do not have
any questions for Mr. Walker. Thank you, Mr. Walker.
COMMISSIONER ANDERSON: Thank you.
Micron?
MR. RUESCHHOFF: We do not have any
questions either. Thank you.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: None here. Thank you.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions.
COMMISSIONER ANDERSON: Commissioners?
There's no redirect.
MR. CARTER: Let's note for the record my
prediction was wildly wrong. No questions.
COMMISSIONER ANDERSON: Without objection,
we will go ahead and excuse the witness. Thank you very
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much.
THE WITNESS: Thank you.
(The witness left the stand.)
COMMISSIONER ANDERSON: Call your next
witness.
MR. CARTER: Veolia Water Idaho will call
Ann Bui.
ANN BUI,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Ms. Bui, will you please state and spell
your name for the record?
A Yes, my name is Ann Bui. That's A-n-n
B-u-i and I gave you my business card as well.
Q And are you the same Ann Bui that filed
direct testimony and exhibits and rebuttal testimony and
exhibits on behalf of Veolia Water Idaho in this case?
A Yes, I am.
Q Okay, and if I asked you the same
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questions today, would your answers be the same?
A Yes, sir.
MR. CARTER: Commissioners, I'd ask that
Ms. Bui's direct testimony and exhibits and rebuttal
testimony and exhibits be spread upon the record as if
read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread the direct testimony
and exhibits and rebuttal testimony with exhibits across
the record as if read.
(Veolia Water Idaho Exhibit No. 14 was
admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Ms. Ann Bui is spread upon the
record.)
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INTRODUCTION
Q.Please state your name, occupation, and
business address.
A.My name is Ann Bui, and I am a Managing
Director with Black & Veatch Management Consulting LLC
("Black & Veatch"), responsible for the firm's Water
Advisory Practice. I am testifying on behalf of Veolia
Water Idaho, Inc. ("VWID" or the "Company") in this case.
Black & Veatch is headquartered at 11041 Lamar Avenue,
Overland Park, Kansas.
Q.Please summarize your educational background
and professional experience.
A.As detailed in my attached resume (Appendix A),
I am a Chemical Engineer by training at the University of
British Columbia, Canada, and the University of
California at Los Angeles. My Master of Business
Administration from the University of California at Davis
specializes in Finance and Organization Management.
My experience includes helping utilities with
organizational effectiveness studies, reducing carbon
footprints for energy-intensive activities, addressing
affordability and assistance program needs, quantifying
the financial impact of deferred asset maintenance, and
developing innovative approaches for structuring
alternative delivery projects using private and public
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financing instruments. During my 32-year career, I have
worked on more than 450 engagements, providing financial
and business planning services for public and
investor-owned utilities of all sizes. These services
have spanned all aspects of rate filings, from revenue
requirements to cost of service and rate design.
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Over the past two decades, I have provided expert
witness testimony in front of the California Public
Utilities Commission, the Indiana Utilities Regulatory
Commission, and the Kentucky Public Service Commission.
For long-standing clients such as the Philadelphia Water
Department and Washington Suburban Sanitary Commission, I
have testified before utility rate commissions in
numerous rate filings on cost-of-service matters. I have
also provided expert witness testimony supporting
litigation matters for the City of San Diego, CA, Greater
Cincinnati Water Works, the City of Baton Rouge, LA, the
City of Atlanta, GA, and the City of Holland, MI.
I am a long-standing member of several industry
associations that are key to developing and providing
guidance to the rate-making community. As an active
member of the American Water Works Association (AWWA),
the National Association of Water Agencies, and the Water
Environmental Federation (WEF), I have served in the
following leadership positions:
·Past Chair of AWWA's Finance, Accounting, and
Management Controls (FAMC) Committee (3 years)
·Vice-Chair of FAMC (3 years)
·Member of AWWA's Rates and Charges (R&C) and FAMC
committees
o Co-Chair of Publications Subcommittee (Joint
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R&C and FAMC)
o Vice-Chair of R&C Rate Design subcommittee
o Member of R&C Water Reuse subcommittee
o Member of R&C System Development Charges
subcommittee
o Member of R&C Executive Committee
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o Chair for current revision to AWWA's M29
Manual, Water Utility Capital Financing
In addition to serving on industry committees, I
have also contributed as an editor, author, and reviewer
for AWWA's M1-Principles of Water Rates, Fees and Charges
(6th and 7th editions, and the currently under
development, 8th edition); WEF's Manual of Practices 27-
Financing and Charges for Wastewater Systems (3rd and 4th
editions), and WEF's User-Fee-Funded Stormwater Program.
Q.What is the purpose of your testimony?
A.The purpose of my testimony is to provide a
cost-of-service overview and describe the methodology and
results of the Black & Veatch's Cost of Service Study
(COSS) prepared for this proceeding.
Q.Please identify the supporting schedules
provided with your testimony.
A.Black & Veatch is sponsoring Exhibit 14 with
the following schedules:
Exhibit 14-1 summarizes the COSS and compares the
cost of service, by customer class, with revenues
under existing and proposed rates. The schedule also
presents the COSS increase by customer class.
Exhibit 14-2 summarizes the distribution of test
year operation and maintenance (O&M) expenses,
depreciation expense, taxes, return, and rate base
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to the customer classes.
Exhibit 14-3 presents the distribution of O&M,
depreciation, taxes, return, and rate base to the
functional cost components.
Exhibit 14-4 illustrates the allocation of
demand-related fire service costs to private and
public fire customers.
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Exhibit 14-5 (a-c) presents the development of
charges for the 5/8" meter, billed consumption, and
private fire service.
Exhibit 14-F presents the allocation factors used in
the COSS.
COST OF SERVICE OVERVIEW
Q.What is the purpose of a Cost-of-Service Study?
A.The purpose of a cost-of-service study is to
analyze the assignment of cost responsibility to
customers serviced and to guide the development of rates
in rate cases. As it is neither economically practical
nor often possible to determine cost responsibility and
applicable rates for each individual customer, rate
practitioners conducting a cost-of-service analysis use
groups or classes of customers with similar water-use
characteristics for cost allocations. Ratemaking
endeavors to assign costs to classes of customers in a
non-discriminatory, cost-responsive manner so that rates
can be designed to meet the cost of providing services to
customer classes.
Q.Was the Cost-of-Service Study in this
proceeding consistent with Generally Accepted Industry
Guidelines?
A.Yes. The cost-of-service analysis conducted by
Black & Veatch utilizes a cost-causative approach
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endorsed by AWWA's Principles of Water Rates, Fees, and
Charges, Manual of Water Supply Practices M1 (M1 Manual).
The methodology produces cost of service allocations
recognizing the projected customer service requirements
for the Company. Proposed rates are designed according to
allocated service costs and local policy considerations.
Furthermore, the methodology used
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in the COSS is consistent with the approach agreed to by
the Company and the Idaho Public Utilities Commission
(PUC) in prior rate proceedings.
Q.Please describe the various components of a
COSS.
A.Essentially, a COSS consists of three parts
that can be summarized as follows:
·Revenue and Revenue Requirements. Rates and
charges should generate adequate revenues to meet
the operating and capital costs and provide for
the utility's financial stability. Under this
step, we project the Company's test year revenues
under existing rates and compare them to the
projected test year operational and capital needs.
·Cost of Service. The cost-of-service analysis
evaluates the existing utility and the relative
load placed on the utility by the different
customer classes to allocate costs based on
services received fairly. The cost-of-service
analyses consider the functional aspects of
utility operations and cost components such as
base, extra-capacity, meter, customer, and other
direct costs. This step provides a means of
apportioning costs and the overall return to each
customer class.
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·Rate Design. Under this step, we develop rates and
charges that reflect cost-of-service principles
and the Company's goals and objectives.
COST OF SERVICE AND RATE DESIGN
Q.Please summarize Black & Veatch's COSS.
A.Black & Veatch's cost-of-service analysis uses
the Base-Extra Capacity method and methodology accepted
by the PUC in past proceedings. The M1 Manual
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recognizes the Base-Extra Capacity approach as an
acceptable means of determining the costs of service.
Under the Base-Extra Capacity method, the identified
revenue requirements are allocated to functional cost
components. Simply put, functional cost components can be
considered activities that drive costs. For the COSS,
these functional cost components are Average Daily Use,
Maximum Day Use, Maximum Hour Use, Meters, Services,
Billing & Collection, and Fire Protection.
Next, we identify the billing determinants for each
customer class by functional cost component. After this
is completed, the functional costs are allocated to the
residential, commercial, public authority, and fire
protection customer classes based on the number of units
calculated in Step 2. Finally, we determine the revenue
gap between the cost of service and revenues under
existing rates for each class.
Q.Does the cost of service by customer class
presented in the COSS reflect the actual Test Year and
Test Period data presented in the filing?
A.Yes. Black & Veatch used the revenue
requirements in this proceeding and allocated them to the
functional cost components and customer classes using
factors and ratios that reflect current operations and
requirements. The System maximum day and hour ratios and
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those for the residential, commercial, and public
authority classes are based on Black & Veatch's Customer
Class Load Study (Load Study), which is included in
Appendix B.
Q.Please describe any major findings of the Load
Study.
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A.The Load Study results indicate that the System
maximum day ratios are consistent with the Company's
ratios based on correlating the highest annual maximum
water production day for the last ten years. Moreover,
the Load Study found that although each customer class
had distinct maximum day and maximum hour ratios, the
system-wide diversity factors are slightly below the
typical range cited in the M1 Manual of 1.10 to 1.40. In
other words, water conservation efforts, commercial
irrigation patterns, and storage management have produced
a system whereby all customer classes peak at close to
the same time (coincident peaking). Consequently, the
benefits of non-coincidental peaks provided by different
classes are substantially reduced. This observation
supports the Company's belief that having one general
service rate for all customers is appropriate.
Q.Does the Load Study identify new customer
classes, such as those with an alternative irrigation
source?
A.No. The Black & Veatch study examined over a
half billion data points gathered via Advanced
Infrastructure Metering (AMI) and non-AMI methods. None
of the data provided a means to determine which customer
accounts have an alternative irrigation source. Short of
separating metering the alternative source, there is no
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way of knowing when customers use the potable water
system versus the alternative source on any given day.
Moreover, the reviewed data showed no customer classes or
groups exhibiting significantly different usage patterns.
Q.Please discuss Exhibit 14-1, which summarizes
the results of the COSS.
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A.Exhibit 14-1 shows that for the test year
ending March 31, 2023, the total revenue requirement
reflects a 23.4% revenue increase. The COSS suggests that
the overall average revenue increase by customer class
would be:
·Residential - an increase of 27.5%
·Commercial - an increase of 21.8%
·Public Authority - an increase of 2.5%
·Private Fire - a decrease of 62.9%
Q.How do the proposed rates set forth in Company
witness Tim Michaelson's testimony differ from those
calculated in the COSS?
A.As noted earlier, the design of rates should
also reflect the Company's goals to propose rates that
fairly reflect the cost of providing service while
maintaining gradual shifts in rates that minimize the
impact on residential and others.
For example, the COSS indicates that private fire
protection charges should decrease because of a slight
change in required fire durations: The COSS based total
fire demand on 1 4-hour, 4,500 gallons per minute (gpm)
fire, 1 4-hour, 4,000 gpm fire, and 1 2-hour 1,500 gpm
fire. This is a change from a total system demand for a
10-hour, 10,000 gpm fire. The Company's proposed fire
sprinkler rates reflect a policy of gradualism and no
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change to the current fire rate schedule.
The Company's approach concerning General Service
rates is consistent with the "across the board"
methodology accepted in the 2011, 2015, and 2020 rate
proceedings. The proposed increase of 24.1% is comparable
across the customer classes, which is why the Company
proposes the same approach in this rate proceeding.
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Q.Please discuss why you believe the proposed
revenue increase allocation is fair.
A.The Company continues to make substantial
infrastructure and operational improvements to the water
system. The overall revenue increase reflects the
magnitude of these investments and is distributed to all
customers in the same, fair manner.
Q.Are any changes to the rate structure being
proposed in this filing?
A.No.
Q.Does this conclude your direct testimony?
A.Yes, it does.
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Q.Please state your name, occupation, business
address.
A.My name is Ann Bui, and I am a Senior Managing
Director with Black & Veatch Management Consulting LLC
("Black & Veatch"), headquartered at 11041 Lamar Avenue,
Overland Park, Kansas.
Q.Are you the same Ann Bui that filed direct
testimony in this proceeding?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.I am providing this rebuttal testimony to
address comments regarding the Cost-of-Service Study
("COSS") and Customer Class Load Study ("Load Study")
made by Public Utility Commission ("PUC") Staff
Witnesses, Mr. Travis Culbertson and Mr. Michael Eldred,
and Intervenor Witness, Ms. Jessica York of Micron
Technology, Inc. ("Micron").
CUSTOMER CLASS LOAD STUDY
Q.Does the Load Study identify how customer
classes use the system during peaking events?
A.Yes. As identified in the Load Study, customers
were grouped by typical water utility customer
classifications. The maximum day and maximum hour
analyses were incorporated into the COSS as customer
class-specific maximum day and maximum hour factors. The
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Advanced Metering Infrastructure (AMI) data also allowed
the Company to directly measure peaks which is more
useful and accurate than using the M1 Manual's Appendix A
approach, which would rely on assumptions and
interpolations of bi-monthly data. Therefore, the load
study was performed in a manner that makes it useful to
inform the COSS and brings forth new insights made
possible by using AMI data.
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Q.Do you agree with the statement that a robust
analysis was not conducted to verify the hypothetical
classes or any other potential classes?
A.No. The Load Study is robust and examined over
1,000,000 data points. A statistical analysis was
conducted to assess whether the data were sufficient
(statistically sufficient sample) to be representative of
customer class behaviors. The Company's customer classes
are consistent with what other water utilities use and
are reasonable.
Q.Please provide the rationale for the scope of
the Load Study and concerns voiced regarding the fact
that the Load Study did not identify potential classes
before data collection and that the study should have
included several other variables such as lot sizes,
different types of multi-family housing, and types of
processes and equipment used by commercial and industrial
customers, etc.
A. Mr. Eldred states that the "load study needed
to identify potential customer classes based on cost
causation principles before collecting data on these
potential classes." Using valuable insights from AMI
data, the Load Study identifies how typical water utility
customer classes use the system; therefore, if customers
are "grouped" incorrectly, their pattern of behavior will
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create outliers in the data. The results of the Load
Study indicate that the AMI data grouped by billing
classifications are appropriate and that these customers
exhibit similar usage patterns.
One of the reasons why load studies are conducted is
to evaluate whether new customer classes or existing ones
are indicated. As the M1 Manual states in its Chapter
III.2 overview, "…the cost of providing service can be
reasonably determined for groups or classes of customers
that have similar water-use characteristics…" The Load
Study examined usage characteristics based on customer
classifications rather than meter size.
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The Load Study did examine several different ways to
group findings and the study revealed that there was no
clear need for new customer classes.
Using additional factors, such as whether a property
uses Company-provided water to irrigate during summer
months, property characteristics, or process/equipment
information, is not practical nor feasible. Getting more
granular information on lot size for single-family or
different types of multi-family units (duplex, triplex,
etc.) requires much work to collect and maintain. Given
the current area of AMI coverage, it may not yield a
statistically valid sample size for these sub-categories.
With respect to process and equipment information
for commercial and industrial customers, it is possible
that different peaking profiles could result. However,
the cost and effort to obtain and maintain this
information make this consideration impractical. In our
experience, obtaining information of this nature is
useful if a utility has a large commercial/industrial
client basis that offers various services and for which
deduct meters may be necessary to address water used in
producing a product and not returned to the sewer system.
For the Company's study, considerations of this nature
for the commercial/industrial would come into play when
using the M1 Manual Appendix A approach to reflect
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Maximum Day and Maximum Hour adjustments. When using AMI
data, such adjustments are not needed.
Regarding the suggestion of some undefined process
to identify and bill customers that use non-Company water
for irrigation, it is our understanding that the Company
cannot identify those customers that may not use
Company-water for irrigation during the summer months.
Specifically, obtaining usage information for these
customers would require the Company to monitor and meter
such irrigation (from the non-Company
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provided source). The assumption is that if a customer is
connected to the system, the customer expects to have
water on-demand and will use the water as they wish. That
means the Company assumes that customers may or may not
use Company-provided water for irrigation during the
summer months. From a practical implementation
perspective, there appears to be no reasonable method of
billing such customers.
Finally, regarding the example provided regarding
residential customers with yards and lawns consuming much
more water in the summer than apartment dwellers, I would
urge the Commission to understand that rates are designed
such that apartment dwellers using less water do not pay
the same total bill because the bill is based on
consumption. Furthermore, with the Company's
summer/winter rate structure, residential customers with
yards and lawns pay a higher rate for usage over the base
usage amount. This type of rate structure promotes water
conservation and helps customers understand that they
have control over their discretionary water use.
Q.Do you agree with the statement that the
Company's AMI rollout could have been altered to collect
the necessary data?
A.How a utility rolls out its AMI program
reflects several business decisions, including how to
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optimize routes, the age of meters being replaced, cost,
and minimizing customer disruptions. Collecting the data
that PUC Staff is requesting would require detailed
information surveys and investigations including field
verifications of such information, which I understand
have not previously been deemed necessary and would
likely require significant costs. As Mr. Thompson, in his
testimony, discusses, the AMI rollout has been in
progress since 2016 and will continue until around 2035.
Specific considerations, such as making sure that a broad
range of customer types is included could be considered
in
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future rollouts, but the costs must also be considered.
The status of the AMI program and its progression is
address in Mr. Thompson's testimony.
Q.Do you agree with the statement by Mr. Eldred
that the load study was not performed in a manner that
makes it used and useful to inform the COSS?
A.No, I do not. Mr. Eldred acknowledges that
"ordinarily, load studies are structured around existing
customer classes." The AWWA M1 Manual states, "Formal
demand studies involve daily and hourly consumption
records of samples of customers from each class of
service." These statements are consistent with how the
Company approached the study, using the existing and
available customer class information that also reflects
typical water utility classifications.
Furthermore, AMI hourly data provides far greater
insights into hourly and daily peak demands than previous
estimations generated from bi-monthly billing data. Each
meter on AMI now gathers approximately 8,760 data points
per year, compared to 6 data points for non-AMI
bi-monthly billing records. The Load Study performed for
the Company leverages this information to advance
understanding of customer usage patterns and provide
useful insights to inform the COSS.
COST OF SERVICE
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Q.Does the COSS follow accepted industry
practices for these types of studies?
A.Absolutely. The model provided with our filing
shows on Exhibits 14-F1 and 14-F2 what factors are
applied to which functional cost elements and customer
classes. We acknowledge that following the presented
exhibits in numerical order may make it seem that the
COSS first allocated the revenue requirements to the
customer classes and then
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the functional cost components. However, this is not the
situation, and looking at how the allocations are derived
shows that we have followed cost-causation processes.
Black & Veatch agrees that cost-of-service analyses
should allocate costs to those customers that incur them.
In the provided example of meter costs and installation,
Mr. Eldred states, "instead of directly assigning the
costs of meters and meter installations, the Company
allocated these costs based on 5/8" meter equivalents."
In Exhibit 14-3, costs associated with meters are
allocated to one of three functional cost components:
Meters, Services, or Billing and Meters. The allocation
will depend on the nature of the cost. For example,
Meters and Meter Installations (Row 199) are allocated to
Meters. Maintenance of Meters-Labor (Row 125) is
allocated to Services. Once all the revenue requirements
have been apportioned to the functional cost components,
they are allocated to the customer classifications based
on each group's respective units of service (Exhibit
14-2). For the case of meter costs and installations, the
appropriate unit of service uses an equivalent meter
ratio, with the 5/8" meter serving at the "base" meter.
The meter ratios recognize higher flows associated with
larger meters and hence, a higher level of demand. For
meter costs, it is also a standard way to recognize that
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larger meters are more costly. Allocating meter costs
based on the number of meters rather than the number of
equivalent meters would not fairly recognize these
conditions.
Q.When conducting a cost-of-service analysis, do
you first allocate costs to customer classes?
A.No, we do not. Black & Veatch agrees that
revenue requirements should be allocated based on
cost-causation principles. We believe the difference in
what we understand Mr.
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Eldred states in his testimony versus what is done under
a cost-of-service analysis lies in when these revenue
requirements are allocated to the customer classes.
AWWA's M1 Manual and Black & Veatch's methodology
are consistent: First, allocate costs to the functional
cost components (what is causing the expense). Then,
allocate these cost elements based on the customer's
units of service (who is causing the expense). This
approach allows the derivation of unit costs for each
cost component that are the same, and the only difference
between customers (excluding special categories such as
fire protection and directly assigned) lies in how many
units they have under each cost component (e.g., the
number of bills, average volume, etc.). The cost
causation that Mr. Eldred is seeking occurs after we have
assigned the revenue requirements to the functional cost
elements. This allows for a fair and equitable way to
apportion costs to customer groups.
Q.Did the current COSS update the factors used in
the 2011 rate case?
A.Yes. Black & Veatch understands that the
Company and PUC Staff discussed the methodology and
factors during the 2011 rate case. We are not privy to
any written communications regarding these discussions.
Regardless, we reviewed the provided billing data and
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revenue requirements in conducting our COSS and performed
a COSS as we normally would for any client. The provided
Exhibits maintain the format the Company has used for
several past filings to help with the review process.
Black & Veatch notes that all the factors used and
presented in the COSS have been reviewed and updated as
appropriate. Just because a factor may not have changed
does not mean it was not reviewed. In our experience, a
utility's cost-of-service
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allocations may not change substantially if there are no
underlying changes in how a utility operates.
Q.Do you believe the change in fire demand
described in the COSS is appropriate and based on
reasonable assumptions?
A.Yes. As part of Black & Veatch's review of the
allocation factors, we looked at the system fire demand.
We could not find any documentation in the past rate case
designs supporting using a single fire lasting 10 hours
and requiring 10,000 gallons per minute (gpm) flow as the
"correct" system fire demand. Consequently, Black &
Veatch reviewed the Company's fire flow map for their
fire storage and flow requirements. We believe that using
a single fire instead of multiple simultaneous fires may
have been an oversight and have thus proposed using three
simultaneous fires with a total duration of 10 hours and
10,000 gpm. The Company's Facility Plan outlines the
system's fire flow requirements, and there is no
10,000-gpm requirement. Assuming 3 simultaneous fires is
a conservative approach and provides a reasonable level
of service.
Q.Please discuss the customer classification used
in the COSS?
A.Please also see our prior responses regarding
customer classification and the Load Study. The customer
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classifications in the COSS reflect classifications found
in the Company's billing system and used as part of the
Load Study. The COSS examines how different customer
classifications use the water system and groups customers
based on similar usage patterns. It is not a
comprehensive listing of available classifications but
includes those classes for which the Company currently
issues bills. The Load Study results show that the
system's diversity factor (range for coincident and
non-coincident demands) is less than 1.0, which is below
the typical range cited by AWWA's M1 Manual of 1.1 to
/
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1.4. This implies that the customer classes are generally
peaking at the same time. From that perspective, the
customer groups are behaving in the same manner;
therefore, the use of a single rate tariff for all
customers is reasonable.
Q.Do you agree with Ms. York's statement "the
Company's allocation of costs associated with
distribution mains…" do not reflect that some customers
do not take service from distribution mains?
A.No. In our revised Exhibit, Black & Veatch did
adjust for a split between distribution and transmission
mains. It is our understanding that the Company
essentially views all mains as distribution. For example,
there are residential accounts that are served from large
diameter mains (24") and some commercial accounts that
are served from small diameter lines (2"). Essentially,
customers are served from the nearest line so long as the
line can meet demand and fire flow requirements.
Q.What is your opinion regarding Ms. York's
suggestion regarding a special contract or economic
development rate?
A.See Mr. Thompson's testimony regarding this
matter. As he states, the Company would welcome
discussions of a special contract rate with Micron or
other interested parties. There is a significant amount
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of data and information needed to support developing such
a rate (see for example our response regarding the use of
distribution/transmission lines). The development of a
special contract rate would not be possible during this
proceeding.
Q.Does this conclude your rebuttal testimony?
A.Yes.
/
/
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(The following proceedings were had in
open hearing.)
MR. CARTER: Okay, Ms. Bui is available
for cross-examination and questions by the Commission.
COMMISSIONER ANDERSON: Mr. Burdin?
MR. BURDIN: Thank you. I do not have any
questions for Ms. Bui. Thank you.
THE WITNESS: Thank you.
COMMISSIONER ANDERSON: Micron?
MR. NELSON: Yes, thank you.
COMMISSIONER ANDERSON: Mr. Nelson.
MR. NELSON: With permission to approach
the witness, I'm going to provide her a copy of
Ms. York's testimony.
COMMISSIONER ANDERSON: Yes, can you
provide us what that is, also?
MR. NELSON: Yes, Ms. York's direct
testimony from Micron is the one that I will be asking
her to refer to.
COMMISSIONER ANDERSON: Okay.
(Mr. Nelson approached the witness.)
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CROSS-EXAMINATION
BY MR. NELSON:
Q Good morning, Ms. Bui.
A Good morning.
Q My name is Thor Nelson. I'm an attorney
for Micron. I do have a couple of questions for you.
I've provided you a copy there of Ms. York's direct
testimony. Do you see that, ma'am?
A Yes, I do.
Q And do you also have a copy of your
testimony up there and exhibits?
A Yes.
Q Great. In your testimony, you address,
amongst other things, the cost of service study that you
performed on behalf of the Company; is that correct?
A Yes.
Q Can I ask you, please, to refer to
Ms. York's testimony, and in particular, I'll ask you to
start on page 4 and let me know when you have page 4 of
Ms. York's testimony in front of you.
A I do.
Q Okay. Did you review this testimony?
A Yes, I did.
Q Okay. Starting on page 4, Ms. York raises
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a concern about what she describes as an error that was
made in the cost of service study with regards to the
allocation of T&D mains and accessories. Do you see
that?
A Yes, I do.
Q T&D, would you agree with me that stands
for transmission and distribution? I'm sorry?
A Oh, I'm sorry, yes.
Q Okay. On page 5 of Ms. York's testimony
and in particular, at lines 13 and 14, Ms. York testifies
that there was a discovery request that was submitted to
Veolia that raised questions about these allocations. Do
you see that, ma'am?
A I do.
Q Okay, and then starting on line 14,
Ms. York testifies, "In response to this request, the
Company acknowledged that its original proposed
allocations were in error." Do you see that?
A Yes.
Q Is Ms. York's testimony a correct
representation of the discovery response from the
Company?
A We provided a revised exhibit that showed
that correction, that is correct.
Q Okay, and Ms. York goes on to also explain
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that there was a correction that was then provided in
response to that discovery, which you just also referred
to; correct?
A Yes.
Q In your rebuttal testimony, however, you
do not correct or update the cost of service study that
was presented in your direct testimony to correct this
error; right?
A No, I did not.
Q Can I ask you to look at page 6 of
Ms. York's testimony?
A I'm there.
Q Do you see on page 6 at Table 1, Ms. York
has presented an analysis which shows the original
results of your cost of service study as compared to the
corrected results that you provided in response to
discovery? Do you see that, ma'am?
A I do.
Q Do you dispute the presentation that
Ms. York has in her testimony about the impacts of the
correction that the Company made in response to the
discovery request that Micron sent you?
A Without having the two exhibits directly
in front of me, it says here, and it's been footnoted by
Ms. York, that columns 2 and 3 as well as 4 and 6 all
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come from the two different exhibits that were submitted,
the original one and then the revised one in response to
discovery.
Q The reason I'm going through this is
because the discovery was not submitted in your rebuttal
as an exhibit. That's the whole point of this exercise
and so what I wanted to confirm with you is can you
confirm --
A Yes.
Q -- that if the Commission wanted to rely
on your corrected study, that the information presented
in columns 4 and 5 of Table 1 of Ms. York's testimony
correctly represents --
A Yes.
Q -- that correction?
A Understood.
Q Is that accurate?
A Yes.
Q Okay.
A My apologies.
Q Okay, so I want to talk about the impact
of your study, but I'm going to use this piece of
Ms. York's testimony, because that shows the correction,
but relative to the results of your study as corrected,
if you look at column 5 of the Table 1, that shows, for
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example, that on a cost of service basis, the residential
class should get a 28.9 percent rate increase under the
Company's filed revenue requirement as compared to the
system average 23.4 percent; is that correct?
A As presented in the table, yes.
Q Okay, and is that correct as to the
correction that you submitted in response to discovery?
A Yes.
Q Okay. What does that tell you about the
current rates that are paid by residential customers as
compared to the residential cost of service as you've
analyzed it?
A That that specific customer class for this
proposed test year has a cost of service that should be
slightly -- that is slightly higher than that of the
overall, the increase.
Q Okay. Looking down at the next class, the
next group is the commercial class and as corrected, your
analysis shows a cost of service for the commercial class
would warrant a 18.1 percent rate increase at the
Company's revenue requirement; is that correct?
A For that particular line item, yes.
Q Okay, what does the fact that the cost of
service study for the commercial class suggests an 18.1
percent increase as compared to the cost of service for
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the residential class which suggest a 28.9 percent
increase, what does that tell you about the relative
difference between the current rates paid by those
classes as compared to the current cost to serve those
classes?
A I'm sorry, could you repeat that?
Q Sure.
A The whole thing right from the
beginning.
Q Okay. I'm just trying to understand what
the impact is of the cost of service study.
A Understood.
Q And you have one class for the cost of
service study said should get a higher than average
increase and a second class that should get a lower than
average increase, and I'm just trying to understand, what
does that mean to you, then, in terms of the relative
cost to serve those two classes as compared to the
revenues created by current rates?
A So if I were to refer you back to my --
the first level Exhibit 14-1, okay, let's take a look at
that table first. What you see there in the first -- I'm
sorry, Commissioners, as you're flipping through
thousands of pages, let me know when you get there.
COMMISSIONER ANDERSON: Please carry on.
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THE WITNESS: Okay, so if you take a look
at that table, right, then you see under columns 2 and 3
that we have a cost of service allocation to the various
customer classes, okay. One is a dollar amount, column
2. Column 3 is a percentage of revenues, okay, and what
that shows there is in proportion, roughly, how much the
cost of service is allocated or borne by each of the
different assumed customer types there.
Then if you take a look at the revenue
under our present rates, the Company's present rates and
what they're recovering, you can see that it's
slightly -- they vary, but they're not too far off from
what that actual number is, so let's take, for example,
residential where the cost of service says 70.3 percent.
Revenues are right now 68 percent and the revenues under
the proposed rates -- now, understanding that this
particular exhibit is the prior to correction -- is also
approximately 68.3 percent; in other words, it's pretty
close to what that cost of service is, the revenues we
collected.
The Company does recognize that we would
like to get everybody up to their full cost of service
and so you just can't jump from, you know, as an example,
hypothetical 15 percent to 40 percent. That doesn't
work. That's enormous, so they do preach in terms of and
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do try to follow a gradualism-type methodology, so you
can also see that as you go down that there's also been a
shift, so your commercial class, for example, is trying
to get closer to what that overall cost is in totality,
their proportionate share in that sense. Does that help?
Q Let's take one last example and talk about
the private fire category.
A Yes.
Q So private fire, if you look at the
corrected version, the corrected version of the study
suggests that private fire should get a $774,918 rate
decrease notwithstanding the overall rate increase
proposed in this case; correct?
A Yes.
Q Okay, and what does that tell you about
the cost that the Company believes it incurs to serve
that class as compared to the current revenues that class
pays?
A The cost allocation and revenue recovery
mechanism for fire in general, we did make a change in
that process based upon how we had read the past cases as
well as what we saw and that the current version assumes
a single 10,000 gallon per minute fire that lasts 10
hours. When we examined the Company's fire service sort
of master plan and their storage requirements, that made
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no sense to us whatsoever, so we proposed three
simultaneous fires, the duration in total of 10 hours and
approximately the same 10,000 gallon per minute
requirement, that did create a shift between private and
public fire protection and that's the reason why.
Q All right, so as you consider all of those
different results that come from your corrected cost of
service study, as you sit here today, do you believe that
your cost of service study is accurate and reliable?
A Based on the information that we have
available to us, yes.
Q Do you believe that your cost of service
study is sufficiently accurate and reliable to be relied
on by the Commission in setting rates in this case?
A Yes, I do.
Q Do you agree generally that rates for
different customer classes should be set taking into
account the different costs the utility incurs to serve
each class?
A As a general principle, yes.
Q Why?
A Why?
Q Why?
A I think that if there is justification for
having different classes, then that would be appropriate.
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It is not a set rule that any community needs to have
separate rates for separate classes. If your customer
behavior is not distinct enough to make that delineation,
then it's perfectly viable to have a single -- to treat
everybody as one category, one general class.
Q What are the benefits to customers from
your perspective if the rates for each customer class
take into consideration the costs incurred to serve each
customer class?
A Benefits? Is that -- I'm sorry, is
that --
Q Well, let me give you an example, so
sometimes it is said, and I'm curious if you agree, that
it is promoted -- it promotes the efficient use of a
utility resource if customer rates are set equivalent to
customer costs. Would you agree with that?
A I would say that an entity such as the
Company should be recovering their full cost of service
period.
Q Okay, I'm not disputing that. Would you
agree with me that if, for example, a customer class is
highly subsidized that that might encourage that customer
class to use more of the utility's product than would be
reasonable if that customer class bore their full cost
that they caused the utility to incur as opposed to being
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subsidized?
A I think we need to be careful in speaking
in generalities of that nature, and I will give you a
very specific example, okay? As you know right now, the
issues of affordability face every community within the
nation, and there are areas where specifically we would
have low income assistance programs, okay, and there are
states that allow that cross-subsidization in recognition
of the fact that it is better to collect some revenues
and protect, so I have to be careful in answering
something like that, because I think it really depends on
what you're looking at.
Q Okay, so is there no role for efficiency
in the setting of utility prices? Is the only
consideration ability to pay or should we consider at all
the costs the Company incurs to serve a particular
class?
A There are always areas in which utilities
may be able to become more efficient, whether it's
through use of technologies or it's through their own
business processes; however, what I would say for that,
too, is the same thing as in ratemaking, there's a
mechanism involved which is what we have here of
inclining block rates and things to encourage
conservation on the part of the customer as well.
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Q Okay. If customer rates take into
consideration the costs incurred to serve those
customers, to the extent the costs are different for each
customer class, does that promote fairness between the
customers?
A Inasmuch as you can identify as far down
as you can the appropriate costs associated with each
cost function, so let me just go back here a step and
explain how cost of service then rolls into rate design.
Under cost of service, what you do first is determine
where those costs are incurred, right, so it's like a
cost center, right, or if you think of your household
budget, okay, I'm going to spend X number of dollars on
groceries and then I have fun stuff. Two different cost
centers and two different budgets or costs that are
occurring from that, right, or utilities would be another
one.
Once you determine what those are, then
it's really a matter from a customer class perspective or
customer type perspective is how many units do you have
in each of those different areas, right, so my daughter
might have more money allocated over to fun stuff than
food, but my husband will have more on food versus fun
stuff, right, so the cost to provide each one of those
particular categories is particular for it.
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It just depends as you as a consumer how
many of those units in each of those categories you
actually have, okay, so from that perspective, to the
extent that you can have efficiencies in those different
categories, that would get spread down and everybody will
benefit from that, so it's very difficult to be speaking
of the specific customer class doing this when you really
should be looking at in totality how those overall costs
are derived.
Q Okay, let's try it this way.
A Okay.
Q If you go back to Ms. York's testimony
with the corrected results of your cost of service study
at page 6.
A Uh-huh.
Q Okay, I want to talk about these two
issues, so your cost of service study, just to refresh
your recollection, showed for the residential class a
rate increase at the Company's revenue requirement of
28.9 percent; right?
A That's what it says, yes.
Q Okay, so if rates for the residential
class are only increased by 23.4 percent instead of 28.9
percent, would you agree with me that that customer class
based on your cost of service will not be paying its full
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cost of service?
A Yes.
Q Would you also agree with me that if the
customer rates increased by 23.4 percent, instead of 28.9
percent, that all things being equal because it would be
cheaper for the customers to use water, they would be
encouraged from an economic perspective to use slightly
more of that water?
A No.
Q You don't believe that if something is
cheaper people use more of it?
A Not necessarily. I mean, I think you need
to be careful. Again, you might be talking, without the
exact numbers, like dollar values in front of me, you
might be talking pennies and frankly speaking, let's
think about how you use water, you as a consumer
yourself. Do you use the exact amount, same amount, of
water every month?
Q I'm sorry, I'm not allowed to answer
questions.
A Oh, I'm sorry.
Q I'm not under oath. I didn't swear
anything to Mr. Hammond.
A My apologies, but the same kind of
concept. My family as an example is very consistent in
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its usage, so when I get my bill, I know who left the tap
running. You know, I can tell at that level almost.
They tend to be fairly consistent. Not everybody is nor
could you expect every customer to be of that
consistency, so whether it's -- I think you need to be
careful in saying that yes, they're going to spend more
money. I think in general the Company has done a very
good job on its outreach. I don't think that's going to
be the case.
Q Okay, so let me ask you a question. Maybe
the residential is too small. Let's look at private
fire.
A Uh-huh.
Q The Company's proposal for private fire
instead of a 57.6 percent rate decrease is no rate
change; correct?
A Yes.
Q Do you think that a difference of 774,
almost $775,000, the difference between a 50 percent plus
decrease versus zero, do you suspect that could have any
impact on the amount of water those folks consume?
A They're not charged on a consumptive
basis.
Q I'm sorry?
A They're not charged on a consumptive
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basis. It's a flat charge.
Q Okay.
A Sorry.
Q All right. Let me talk about the other
recommendations.
A Okay.
Q So the Company's approach to how you apply
the cost of service study is you recommended that the
Company charge an equal percentage increase for
residential, commercial, and public authority customers;
correct?
A For all the customer classes that were
listed, yes, categories examined.
Q Okay, you don't recommend a 23.4 percent
increase for private fire?
A Well, yes, excluding fire. I consider
fire as a totally separate entity.
Q Okay, so for the three classes,
residential, commercial, and public authority, you
recommend a 23.4 percent increase. For private fire, you
recommend no rate change; correct?
A Correct.
Q Okay. Would you agree with me that
relative to the residential, commercial, and public
authority classes by applying an across-the-board
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equivalent increase, you do not do anything in this case
to move any of those classes closer to their cost of
service, right, relative to each other, I should say?
A Yes.
Q Do you think it is unreasonable for the
Commission in this case to consider at least some
movement towards cost of service for the residential,
commercial, and public authority classes?
A I think that with the inclusion of the
change in private fire, which also impacts individual,
you know, account owners in residential, commercial
classes, too, that there has been some movement on the
part of the Company to recognize impacts. Whether the
Commission chooses to split that all apart and move more,
that's purely within the Commissioners' purview.
Q And I understand it's the Commission's
decision, but I'm saying in your expert opinion, relative
to the cost of service and pricing recommendations you
have made, would it be unreasonable for the Commission to
move the residential, commercial, and public authority
classes at least a little bit towards cost of service by
doing something other than a flat across-the-board
change?
A And I'm replying that with the inclusion
of fire, because of the fact that it does impact all
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three on an individual basis, different accounts in
there, that there has been some of that movement.
Q Let me try it this way, then: Is that the
only movement that would be reasonable or would it be
reasonable for the Commission to in addition to that also
consider having slightly different rate changes for the
residential, commercial, and public authority classes?
A Yes.
Q Okay, let's talk about page 16 of
Ms. York's testimony, please. Let me know when you're
there.
A I'm there.
Q Okay. On page 16 and continuing into 17,
do you see where Ms. York has a discussion about the
Company's inclining block rate structure?
A Yes, I see a question with regards to
that.
Q Okay, and did you read this testimony?
A Yes.
Q Okay. I want to call your attention to
line 12 first. Ms. York's testimony is that relative to
the Company's existing rate structure, she says, "The
first summer rate block captures the first three CCF or
about 2,200 gallons of usage. For the residential class,
only about 6 percent of summer usage falls into the first
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block with the remaining 94 percent in the second, more
expensive block." Do you see that?
A Yes, I do.
Q Do you disagree with that testimony?
A No.
Q Okay. Starting, then, on line 15,
Ms. York says, "For the commercial class, the first
summer block captures about 2 percent of the summer water
usage and 98 percent falls into the second block." Do
you see that?
A Yes, I do.
Q Do you disagree with that sentence?
A No.
Q Based on that data, Ms. York then
concludes that since -- and this is now on line 17,
"since the second block is essentially unavoidable, this
rate structure does little or nothing encourage customers
to use less water during the higher-priced summer
period." Do you see that?
A I see her statement, yes.
Q Do you disagree with that?
A Yes, I do.
Q How does the higher-priced first block if
that only reflects 6 percent or 2 percent of your summer
usage do anything other than a little amount to encourage
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lower water usage?
A Can you repeat that?
Q Sure.
A You said something about a higher, more
expensive first block and I'm trying to see where that
is.
Q Okay, let me try it this way: Why do
you -- let me just put it more generically. Why do you
disagree with Ms. York's conclusion that because the
second block is unavoidable the rate structure does
little or nothing to encourage customers to use less
water?
A You use more water, you're going to pay
more for it. That's the area for which you -- that
particular block there is room for limitations with
respect to discretionary irrigation or other such uses,
essential -- separate from essential uses.
Q So now I'm confused, though, because
earlier in my cross-examination, you testified that
customers, residential customers, are not rate sensitive.
A No, I did not say that.
Q Okay, so your testimony is if customer
rates are lower or higher, that will impact how much
water those customers use; is that your testimony?
A Not exactly. Let me clarify, okay --
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Q Okay.
A -- to help this discussion. In the summer
you pay more for your water. We know that water is in
short demand; right? So there's also conservation
messaging, which is what I talked to you about in terms
of using an inclining block structure. Yes, whether your
rate goes up a penny or $.10 may not make that much
impact; however, if overall your usage goes down even by
a half a CCF, 100 cubic feet, that makes an impact.
Q Okay.
A That's what I'm saying.
Q Fair enough. On page 17 of Ms. York's
testimony starting at line 12, following this discussion,
she says, "The Company should be directed by the
Commission to explore a new rate structure prior to its
next rate case or provide evidence explaining why its
proposal to maintain the existing volumetric rate
structure is just and reasonable." Do you see that?
A I do see that statement, yes.
Q Okay, I saw no testimony in your rebuttal
presentation objecting to that sentence; is that
accurate?
A That is accurate.
Q Okay. In the context -- moving on to a
different topic here, in the context of a water system,
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what is a transmission pipe?
A I am going to defer that type of
definition back to the Company's engineering group,
because different agencies have slightly different
definitions with respect to what they consider their
lines to be transmission or distribution, okay.
Generally anything, generally anything, about eight
inches and above can be considered transmission.
Now, I have worked in jurisdictions where
it's two inches. Don't ask me why, but they treat a
two-inch almost as a transmission line and I've worked in
other jurisdictions where it starts at 16 inches, so for
something specific to the Company, I would have to defer
back to the Company's witnesses.
Q Can you please turn to your rebuttal
testimony and I'll call your attention to page 9 and let
me know when you're there.
A Yes, I see that.
Q On page 9, on line 8, am I correct that
you testified, "It is our understanding that the Company
essentially views all mains as distribution."
A Uh-huh.
Q Is that correct?
A Yes, that is.
Q And who is the "our" in that sentence?
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A Mine.
Q Okay, can I ask you to go back to the
notebook I gave you with Ms. York's testimony and I want
to ask you to go to Exhibit 419, which is a separate tab.
A Yes, thank you for that.
Q And let me know when you have 419 in front
of you.
A I have 419 in front of me.
Q And I'll call your attention in particular
to page 31 of 38. You can find the page numbers at
bottom right-hand corner of the page.
A Okay.
Q This portion of Exhibit 419, do you
recognize this as a discovery request and response
No. 18?
A Yes.
Q And do you see in this response a table of
the sizes of pipe that the Company describes as
distribution mains? Do you see that?
A Yes.
Q I'm sorry?
A Yes, I'm sorry.
Q Okay, and if you flip one page back to
page 30 --
A Yes.
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Q -- do you see there a response, request
and response No. 17?
A Yes.
Q And would you agree with me that that
request and response indicates the size of pipe that the
Company describes as transmission?
A I would say that that is what Ms. Cooper
has provided, yes.
Q Okay, do you dispute the answers to either
discovery request No. 18 or No. 17?
A I do not dispute the numbers that have
been provided within this testimony, both 17 and 18.
Q Okay. Can we please now -- oops, sorry.
If you look to page 32 of Exhibit 419 --
A Yes.
Q -- do you see there a discovery request
and response which you sponsored?
A Uh-huh.
Q No. 7?
A Yes, sir.
Q Okay, and this discovery request and
response, the request is to identify water customers who
meet the following load characteristics: served on meter
size eight inches or larger, have ratios of extra
capacity volumes relative to base volumes that are lower
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than the system average, and are served directly from a
transmission main of eight inches or larger. Do you see
that?
A Yes I do.
Q Okay, and you describe there two
customers, one with a 24-inch diameter main and the other
with a 12-inch diameter main. Do you see that?
A No, I respond that there are two meters
that qualify for that. I didn't say two customers.
Q My apologies.
A Yeah, sorry, but yes, that's what I
reported.
Q Okay, so would you agree with me that for
those two meters, those services do not use any Veolia
distribution lines as distribution is defined in response
to request No. 18?
A Not exactly, I'm sorry, so I have to go
back to my rebuttal testimony in which I say on that
exact same question on page 9 of 9 of my rebuttal is that
the Company does use some distribution mains -- I mean
some transmission mains as distribution mains as well and
so I'm having a little bit of a difficult time here to
truly separate the usage of these lines from their
"definitions."
Q Okay.
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A Do you see what I'm saying? There's a
difference between its usage and what it's categorically
listed as.
Q I'm trying to be more specific than that.
A I know, I understand.
Q I'm referring specifically to just the two
meters that you referred to in response to the discovery
question No. 7. For those two meters, one is served by a
24-inch diameter main; correct?
A Yes.
Q And the other is served by a 12-inch
diameter main; correct?
A Yes.
Q If we look at the request No. 18,
distribution mains only go up to 10 inches; right?
A By definition, yes.
Q Okay, so those two meters, because we know
they take service off of these larger mains --
A Yes.
Q -- we also know, do we not, that they do
not have in their stream of pipes getting to them
anything which would qualify as distribution; right?
A I believe so, but I would have to
double-check to be very honest, okay, yes.
Q Because in order for that to be the case,
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you would have to have water going through a smaller pipe
and then going through a bigger pipe before it got to the
customer somehow; right?
A Uh-huh, a connection.
Q And would you agree that's generally not
how the system is designed?
A Yes.
Q It's designed from big pipes down
increasingly to smaller pipes; right?
A Uh-huh.
Q Okay. Can we go back to Ms. York's
testimony at page 20, please? Let me know when you're
there.
A Yes, sir, I'm there.
Q Ms. York testifies that starting on line
12, "I recommend that the Commission direct VWID, Veolia,
to identify a separate class in its next COSS, such as
the industrial class, for large water users connected
directly to the transmission system and establish a
separate rate that recovers that class's cost of
service"; correct?
A Correct.
Q Now, in your rebuttal testimony, you do
not challenge or object to that specific recommendation;
correct?
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A That is correct.
MR. NELSON: Thank you. I have no further
questions.
COMMISSIONER ANDERSON: Thank you,
Mr. Nelson. City of Boise?
MS. GRANT: Yes, thank you, Chair. I just
have a few, I think, should be relatively brief.
CROSS-EXAMINATION
BY MS. GRANT:
Q Ms. Bui, your testimony today was helpful
in explaining cost of service, but just reiterating that
you testified that you start with determining where costs
are incurred; is that correct?
A Where they're created, but yes.
Q Okay, and generally speaking, creation of
those incurred costs can be driven by demand, customer
demand, and peak usage?
A Yes. To some extent, yes.
Q And in your opinion, having testified in
several cost of service cases, does increased irrigation
use, is that an increase in demand that would reflect in
where a cost is incurred for the Company?
A It would generally show up in terms of
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peaking factors in terms of the capacity at limit there.
Q Do you recall in your testimony testifying
about "an across-the-board methodology"? It was on
page 9, line 20, if you need reference, but just
generally, do you recall testifying to that?
A Yes.
Q Can you briefly and just in a sentence or
two describe what you mean by the Company uses an
across-the-board methodology?
A In the sense that what the Company has
done is recognized -- treated all their customers in the
same fashion and that they all will receive the same
increases.
Q And I'm going to direct -- I'm going to
tie that question in, but direct you first to another
place in your testimony. Do you recall testifying, and
this is on page 8, lines 15 through 17, that none of the
data used in the cost of service was available to
determine whether there was an alternative irrigation
source for customers. Do you recall that?
A Yes, I do recall that.
Q Okay, and given your answer to the prior
question of this across-the-board methodology by the
Company, was the lack of that data in your opinion a
deficiency of the load study and the data provided? Was
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is it that the data just simply cannot be gathered or is
it a limitation of the methodology directed by the
Company?
A It's a limitation in that the data right
now is not gathered and I'm not sure how it would be
gathered, that information, to be honest with you.
Q But as you sit today, it was that the load
study was -- I don't want to put words in your mouth, but
maybe asking it slightly differently, that you're not --
you and your cost of service would not be able to
determine that because the load study data didn't include
it?
A The load study data didn't include it,
because it doesn't exist.
Q So it is your opinion that that data
cannot be gathered?
A It was not gathered, okay.
Q And from your understanding, it was not
gathered at the direction of the Company?
A I do not know, because we used the
available AMI data and that's it.
Q And you testified that you can set up
ratemaking with respect to different costs for different
customers, but that's not a rule, a rule that you have
to?
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A That is correct.
Q And you've testified in front of several
utilities commissions; is that correct?
A That is correct.
Q In any of those other circumstances or
just saying, for example, if it's possible, whether it's
Kentucky or California or Indiana, that there is a way to
gather that data, like irrigation usage or peak demand
data, as a way in ratemaking to set a different customer
class?
A If you were to go out, in general, if you
were to go out specifically and say I want to know what
this particular characteristic of residential class is,
for example, let's just hypothetically pick on a house
that's on five acres, how that category or that
subcategory behaves, then you can set up logs, metering
logs, demand metering logs, and monitor for that
specifically.
If you wanted to look at row homes, again,
specific things, you can do an explicit study for those
to get that kind of information. If you are referring to
alternative sources of water, such as a well, you could
also monitor that, because wells are permitted by the
state, right, so you would have that information, but
unless there is a mechanism to determine who has one and
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who doesn't from an alternative source, you know, if
you're talking here, it becomes very difficult to know
where to go monitor.
Q So would tax rolls, for example, for folks
that have irrigation assessments, would that be a source
of data that could be used in a cost of service?
A Potentially. I'd have to look at it,
because, again, it would have to be metered somehow,
right, because you would still have to know it's raining,
it's dry, it's not dry.
Q And are the purpose -- so for the purpose
of setting up some of those studies as you're talking
about, you gave examples of the five-acre lots or the row
houses or whatnot, could you just clarify whether that
is -- it's trying to categorize certain types of customer
behavior; is that a fair generalization?
A Yes.
Q Okay, and given characteristics of that,
those different customers, is there a potential that that
discretionary irrigation, so to speak, or discretionary
uses might be able to be separated from essential uses as
you testified to?
A Yes, but, again, it also depends upon what
exists within the system now, right? For example, many
commercial accounts have separate irrigation meters,
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right, so that's already taken care of and you would
track that separately, so you have to look at what you're
trying to accomplish and whether that even makes sense to
have that as a subcategory.
Q And the Company given discretion in its
approach to methodology could direct, if it wanted to
gather that information could direct, certain customers
to have that kind of metering or produce that kind of
information? I'm asking given what you just testified to
of saying the Company could require, you know, a separate
meter or something of that nature for a particular
customer class.
A I cannot speak on behalf of the Company of
that, because I don't know what the Company could require
of its customers. I would defer that to --
Q Have there been other utilities that have
been deliberate about gathering that kind of
information?
A The only time I have seen instances with
respect to that have been specifically for, like, maybe
multi-family to make sure that you have sub-metering in
place or that they have their irrigation accounts or an
HOA, for example, in terms of how they're doing usage to
help break out those things. In my experience, I have
never seen where a company has mandated separate metering
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for that.
Q No, I appreciate that and maybe just a
little bit of redirecting that there would be ways to
gather it, whether it's like an HOA on a pressurized
system or it's a multi-family with separate usage, there
are ways to differentiate the customer behavior, just in
general?
A There are ways in general, but I also
think you have to weigh that against administratively
what does that mean, like tactically, operationally, how
do you go about and do this. Is it just for a one-time
study or if you're going to be, you know, really looking
at setting a subclass. Are you going to be doing this
all the time. There's a lot of administrative work and
manpower that's required to do some of this stuff, so the
question we would have is does that make sense to spend
money on resources in that fashion.
Q But it was your testimony that that
increase in irrigation usage and attendant demand has an
effect on overall system capacity considerations?
A Yes.
Q Okay, thank you, and then if that -- I
understand I'm asking a hypothetical, but just asking
your opinion that if there were information that could
characterize that kind of peak in demand, that could be
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separated out in ratemaking; is that correct?
A Yes. I would caution that we also have to
look at, let's say, that you have 1,000 customers in
residential, okay, just for a hypothetical, and you're
talking about 10 customers that would fit into this
sub-category, I would question whether or not that is the
mechanism to go about doing something like that, because
frankly, if they have an alternative source, then they
use less water.
Q But there is a possibility, though,
however, right, to not necessarily set it up as a
different customer class, but in using that in ratemaking
of setting either a different base or a different premium
on irrigation usage; correct?
A If you start wanting to refine rates as a
rate design.
Q So it has to start with the desire to
refine rates?
A Yeah.
Q And if those kind of premiums or things
like that were set on irrigation usage, is it your
opinion that could impact whether the cost of service for
a residential should go up by 27.5 percent or I think
28.9 percent across the board or whether could that kind
of premium or refinement impact a lesser increase or
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percentage for residential?
A I would have to take a look at that. I
can't speak to that off the top of my head. There's a
potential. There's always a potential.
Q Well, maybe I'll ask it a different way.
If it could be determined that irrigation demand, and I'm
just speaking, was responsible for 30 percent of the
increase in demand during the summer and that were
separated out in a different type of rate charge, that
would overall reduce the general rate increase for all
residential for what I would say are the more essential
uses?
A Yeah, if you were to take every single
residential customer and have them sub-meter out for an
irrigation meter, yes, you could do that, but there is a
cost to that, too, and there is an additional cost to the
residential customer, because they would have another
meter.
Q Well, it doesn't -- not all rates are set
specifically on AMI; right? I mean, it's on a basis or
an average cost of usage; right?
A Right.
MS. GRANT: Okay, I have nothing further.
Thank you, Chair.
COMMISSIONER ANDERSON: Thank you. Ada
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County?
MS. WADDEL: Yes, just a couple of quick
questions.
THE WITNESS: You all saved all your
questions up for me, didn't you?
MR. CARTER: I was one witness off on my
prediction.
MS. WADDEL: Preston was right on this
one.
COMMISSIONER ANDERSON: Be held
accountable.
CROSS-EXAMINATION
BY MS. WADDEL:
Q So I believe you've answered this a couple
of times, Veolia is recommending the same increase for
each customer class minus fire; correct?
A That is correct.
Q But there is going to be different rate
increases for some specific customers within customer
classes?
A Yes. That's dependent upon their usage.
Q Okay, so I'm specifically talking about
previous customers of Eagle Water Company. Can you
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explain to us why they are going to be charged a
different percentage rate increase?
A My belief and I have to -- I would have to
refer back to the Company on that, but there have been
increases -- I mean an agreement in place with respect to
that. The other aspect of that is when you are faced
with particularly in acquisitions or acquiring new
service areas, for example, it takes a long time to get
that system incorporated into an overall district
approach, okay, because it is a very sudden type of
change in a number of different ways, that's why.
Q Okay, so just to clarify on that, it's my
understanding that Eagle Water Company's previous
customers are paying about 50 percent right now and there
is a schedule to increase up to 100, but I'm just
wondering why their percentage increase would be
different. I understand that there is a schedule
already, but if the rest of the customers are now charged
an additional 20 percent, how does that kick in for
Eagle?
A It's tied in to how their rates are.
They're capped to that schedule, so I'm kind of hands
tied.
MS. WADDEL: Thank you.
THE WITNESS: Uh-huh.
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COMMISSIONER ANDERSON: Thank you.
Ms. Ullman.
MS. ULLMAN: Thank you. I do have a
couple of questions.
CROSS-EXAMINATION
BY MS. ULLMAN:
Q Ms. Bui, are you aware that in the
Treasure Valley we have an extensive non-potable water
irrigation system for some water customers but not all?
A I'm aware of that.
Q Okay.
A I do not know the details of it, but I am
aware of it.
Q Okay, and in terms of an inclining block
rate structure and the types of customers, do you believe
that an inclining block rate structure has more of an
impact on one type of customer over another? For
example, is a residential customer who doesn't have a
non-potable irrigation water source to water a lawn in
the summer more likely to cut back on otherwise their
water usage compared to a commercial customer when they
see that the increased water use is going to cost them
more as they increase their water use with the inclining
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block rate structure?
A In general, yes.
MR. ULLMAN: Thank you.
MR. CARTER: I have just one question on
redirect, if that's all right.
THE WITNESS: You, too, Preston?
COMMISSIONER ANDERSON: Ms. Ullman was
complete in her testimony?
MS. ULLMAN: Yes, thank you.
COMMISSIONER ANDERSON: Are there any
questions from the Commission? Hearing none, you may
redirect.
REDIRECT EXAMINATION
BY MR. CARTER:
Q My only question is this: In your
opinion, does the approach recommended by the Veolia
Water Idaho in this case reflect an incremental move
towards cost of service?
A Overall, yes.
MR. CARTER: That's all.
COMMISSIONER ANDERSON: Thank you very
much. With no objection, we will excuse the witness.
THE WITNESS: Thank you.
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COMMISSIONER ANDERSON: Thank you.
THE WITNESS: Thank you very much,
Commissioners.
(The witness left the stand.)
COMMISSIONER ANDERSON: Since your
estimates were wrong, we'll go ahead and take a break
now, Mr. Carter. 10 minutes, please.
(Recess.)
COMMISSIONER ANDERSON: Let's call this
back to order. I will defer to the Company again.
Mr. Carter, you may call witnesses.
MR. CARTER: Thank you. Veolia Water
Idaho calls David Njuguna.
DAVID NJUGUNA,
produced as a witness at the instance of Veolia Water
Company Idaho, Inc., having been first duly sworn to tell
the truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q All right, Mr. Njuguna, will you check
your microphone? Mr. Njuguna, please state and spell
your name for the record.
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A David Njuguna. That's D-a-v-i-d
N-j-u-g-u-n-a.
Q And are you the same David Njuguna that
filed direct testimony and exhibits and rebuttal
testimony and exhibits on behalf of Veolia Water Idaho in
this case?
A Yes, I am.
Q And if I asked you the same questions
today, would your answers be the same?
A Yes, they would.
MR. CARTER: Commissioners, I would ask
that Mr. Njuguna's direct testimony and exhibits and
rebuttal testimony and exhibits be spread upon the record
as if read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread across the record
Mr. Njuguna's direct and rebuttal testimony, along with
exhibits.
COMMISSIONER HAMMOND: Chair Anderson, may
I? I just want to make sure that -- I feel like I may
have butchered your last name, so I just want to make
sure that I get it right, so could you pronounce your
last name for us?
THE WITNESS: The last name is Njuguna, so
it's a silent "N."
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COMMISSIONER HAMMOND: Thank you very much
and I apologize.
THE WITNESS: That's okay, you're
welcome.
(Veolia Water Idaho, Inc., Exhibit Nos. 6,
9, 10, 11, 19, 20, and 21 were admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Mr. David Njuguna is spread upon
the record.)
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Q.Please state your name and business address.
A.My name is David Njuguna, and my business
address is 461 From Rd, Suite 400, Paramus, New Jersey
07652.
Q.By whom are you employed and in what capacity?
A.I am employed by Veolia Water M&S (Paramus),
Inc. ("VWM&S") as Manager - Regulatory Business.
Q.Please summarize your educational background
and qualifications.
A.I graduated from Kenyatta University, Nairobi,
Kenya, with a Bachelor of Commerce Degree in Accounting
in 2000 and earned a Masters Degree in Business
Administration from Rutgers Business School in 2012.
Q.What experience did you have prior to joining
VWM&S?
A.From August 2001 to July 2006, I was employed
by the Union Fenosa Group, an integrated energy company
headquartered in Madrid, Spain, where I gained a broad
outlook of utility accounting. During my tenure at Union
Fenosa, I held various positions and my responsibilities
varied depending on the title I held. As a management
accountant, my responsibilities included preparing,
reviewing and analyzing monthly divisional and
consolidated financial statements and reports. As a
financial accountant, my responsibilities included
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financial analysis and preparation of consolidated
company budgets and financial reports.
Q.When did you join VWM&S and in what capacity?
A.I joined VWM&S in May 2007 as a Rate Analyst.
In August 2010, I was promoted to the position of Senior
Rate Analyst and later promoted to the position of
Manager Regulatory Business in January 2016.
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Q.What other roles have you held while employed
by VWM&S?
A.From December 2012 through December 2015, I
worked in the Accounting Department of VWM&S as an
Accounting Manager focusing on Regulatory Accounting and
Fixed Assets Accounting. My duties included, but were
not limited to, ensuring the proper accounting of
deferred regulatory assets and fixed assets of the
Company.
Q.Before what regulatory agencies have you
previously presented testimony?
A.I have previously filed testimony in rate case
filings before the Idaho Public Utility Commission, the
New York State Public Service Commission, the New Jersey
Board of Public Utilities, the Pennsylvania Public
Utility Commission, the Delaware Public Service
Commission and the Arkansas Public Service Commission.
Q.What is the purpose of your testimony in this
proceeding?
A.The purpose of my testimony is to describe and
present the calculation of the revenue deficiency and the
resulting request for rate relief for Veolia Water Idaho,
Inc. ("Veolia Water Idaho", "VWID" or the "Company").
Q.What Exhibits are you sponsoring?
A.I am sponsoring the following Exhibits:
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1.Exhibit No. 6-Capital Structure and Cost Of
Debt
2.Exhibit No. 9-Statement of Operating Income
3.Exhibit No. 10, Schedule 2-Adjustment to
Depreciation Expense
4.Exhibit No. 10, Schedule 4-Computation of
Revenue Requirement, State and Federal Income
Taxes.
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5.Exhibit No. 11, Schedule 1 through Schedule
9-Rate Base Adjustments
Q.What level of increase is the Company seeking
in this proceeding?
A.Veolia Water Idaho is seeking a revenue
increase of $12,107,227 or 23.4% over current rates for
the Test Year period ending March 31, 2023 ("Test Year").
The Test Year consists of a 12-month historic period
ending on June 30, 2022 ("Historic Test Year") and a
nine-month adjustment period ending on March 31, 2023.
Company Witness Thompson provides in his testimony more
detail about the drivers of this increase.
Q.What rate of return on rate base is this rate
increase based upon?
A.The increase is based on an overall rate of
return of 7.77% with a return on equity of 10.80%
requested in this proceeding, which is supported in the
Direct Testimony of Veolia witness Harold Walker, III.
Q.Have you prepared an Exhibit No. 6 that shows
the calculation of the Company's proposed overall Rate of
Return of 7.77%?
A.Yes. Exhibit No. 6, page 1, shows the capital
structure of Veolia Water Resources ("VWR"), the parent
company of VWID, along with the cost of debt and the
return on equity. VWR's capitalization percentages for
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debt and equity are 44.43% and 55.57%, respectively. The
exhibit utilizes a 10.80% rate of return on common equity
and a 3.99% cost of debt. The weighted average of these
components is the 7.77% overall requested rate of return.
Q.Has the Commission previously approved the
Company's use of Veolia Water Resources capital structure
and cost of debt in its rate case filings?
A.In Commission Order No. 28505, in Case No.
UWI-W-00-1, the Commission
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found the use of the capital structure and cost of debt
for VWID's then parent company United Waterworks Inc. to
be reasonable for ratemaking purposes. United Waterworks
Inc. has since been incorporated into SUEZ Water
Resources Inc. which has been rebranded to Veolia Utility
Resources, Inc.. The Company is utilizing the capital
structure of Veolia Utility Resources, Inc.
Q.Have you prepared an exhibit that indicates the
Test Year operating income for the Company at existing
and proposed rates?
A.Yes. I have prepared Exhibit No. 9, titled
"Statement of Operating Income Per Books and Pro Forma
under Present and Proposed Rates For The Twelve Months
Ending March 31, 2023".
Column 1 references the Exhibit Numbers (5, 6, 10
and 11) that detail the adjustments to the Historic Test
Year results indicated on Exhibit No. 9. Column 2
indicates the elements of operating income: operations
and maintenance expense, depreciation and amortization
expense, taxes other than income and income taxes. The
amounts therein are per books, as shown on Exhibit No.
10, Schedules No. 1, 2 and 3 respectively. Column 3 of
Exhibit No. 9 shows a summary of Test Year adjustments
made to revenues and expenses. The adjustment to
operating revenue shown on line 1 is detailed on Exhibit
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No. 5, Schedule No.2 and will be explained by Company
witness Michaelson. The adjustments to operation and
maintenance expenses, summarized on line 2, are detailed
on Exhibit No. 10, Schedule 1 and are supported in the
testimony of Company Witnesses Cary, Wilson and Zerhouni.
The adjustments to depreciation expense and amortization
of utility plant acquisition adjustments, summarized on
lines 3 and 4, are detailed in Exhibit No. 10, Schedule
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2 and are further explained in my testimony and the
testimony of Company witness Zerhouni. The adjustments to
operating taxes summarized on lines 6 and 7 are detailed
in Exhibit No. 10, Schedule 3, and are explained by
Company witness Cary. Column 4 of Exhibit No. 9 shows the
adjusted operating income at existing rates for the Test
Year. Column 4 also indicates that based on the Test
Year adjustments made, the Company will earn a 4.59%
overall rate of return on its rate base investment as of
March 31, 2023. Column 5 of Exhibit No. 9 shows the
adjustments to operating revenue, operation and
maintenance expenses, and income taxes under the
increased rates proposed by the Company herein. The
adjustment to operating revenues of $12,107,227 was
computed using a 7.77% rate of return on rate base as
described above. Column 6 of Exhibit No. 9 calculates
the adjusted operating income necessary to produce the
requested rate of return, 7.77%. The income taxes shown
on lines 11 and 12 were computed as indicated on Exhibit
No. 10, Schedule 4, and will be explained later in my
testimony.
Q.Please explain the adjustments to operating
expenses as shown on Exhibit No. 9.
A.Operation and maintenance expenses have
increased by $4,731,018 (Exhibit No. 9, line 2). These
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costs are supported by the testimony of Company witnesses
Cary, Wilson and Zerhouni. Depreciation and amortization
expenses have increased by $1,212,502 (Exhibit No. 9,
line 5). Property Taxes have increased by $375,507
(Exhibit No. 9, line 6). Payroll taxes have increased by
$124,797 (Exhibit No. 9, line 7). Federal and State
income taxes are calculated based upon the revenue
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requirement. Federal income taxes have decreased by
$2,205,760 and State income taxes have increased by
$1,692,696 (Exhibit No. 9, lines 11 & 12).
The detailed support for adjustments to the
operating expenses is shown on Exhibit No. 10, Schedule 1
through 4 . Schedule 1 provides details for adjustments
made to operation and maintenance expenses that are
explained by Company Witnesses Cary, Wilson and Zerhouni.
Schedule 2 provides details for adjustments to
depreciation and amortization expense and Schedule 3
provides details for adjustments to property and payroll
taxes, which are further discussed by Company Witness
Wilson. Exhibit No. 10, Schedule 4, provides details for
adjustments to State and Federal income tax expenses.
Exhibit No. 10, Schedule 4, shows the method I employed
to compute the "Net to Gross Multiplier" utilized in this
case to gross up the Net Operating Income deficiency to
reflect the needed revenue increase.
Q.Please explain Exhibit No. 10, Schedule 4.
A.Exhibit No. 10, Schedule 4, Page 1 of 2, shows
the calculation of State and Federal income taxes at both
existing and proposed rates. The amounts shown on line 1
of columns 1 and 2 are the same as the amounts shown on
line 10 of columns 4 and 6 on Exhibit No. 9. These
figures represent operating income before income taxes.
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From these figures, the applicable statutory deductions
were included when computing the State and Federal income
taxes.
The first deduction is interest expense and it is
deductible in the computation of both State and Federal
taxable income. The calculation for the
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interest deduction is shown in Note A on lines 11 through
15. The deduction of interest expense is included in the
total tax deductions amount on Line 4.
The second deduction is the excess of pro forma tax
depreciation over pro forma book depreciation. The
excess tax depreciation is deducted from State taxable
income only since State income taxes are calculated on
the basis of flow-through accounting, while Federal
income taxes are calculated on the basis of normalization
accounting. Lines 23, 24 and 25 indicate the amounts
used in determining excess tax depreciation.
Q.Please explain the adjustment shown on line 2,
Column 5 of Exhibit No. 9.
A.The adjustment shown on line 2, Column 5 of
Exhibit No. 9 represents additional uncollectible expense
and IPUC assessment as a result of the pro forma
adjustment to operating revenue shown on line 1, Column 5
of Exhibit No. 9 as further detailed out on Exhibit No.
10, Schedule 4.
Q.Why is an end of the Historical Test Year rate
base method or a 13-month average rate base calculation
not the most appropriate method of calculating rate base?
A.When determining a Test Year for ratemaking
purposes, it is appropriate to develop normalized results
of financial and operational results that best reflect
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the infrastructure costs which will be in place during
the time rates will be in effect as a result of a rate
case filing. Adjustments to O&M expenses, taxes, other
than income taxes, depreciation expense etc. are
calculated with the same objective. In this case,
utilizing an end of period rate base calculation, the
rate base, depreciation expense, income taxes, interest
costs etc. provide for a matching of those costs to
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the rates then in effect. The Company has therefore
included in its filing a test year ended March 31, 2023,
which will coincide with rates will be effective in this
case. Utilize an end of historic period rate base or
13-month average rate base does not provide for such
matching and creates significant regulatory lag.
Q.What is the level of rate base the Company is
requesting in this proceeding?
A. The Company's rate base for the test year
ending March 31, 2023 is $280,756,025.
Q. Please explain Exhibit No. 11, Schedule 1.
A. Exhibit No. 11, Schedule 1, Page 1 of 1, Rate
Base Summary, shows the elements of the Company's rate
base as of March 31, 2023, using an End of Test Year
methodology. The elements of rate base are as follows:
Utility Plant in Service; Accumulated Depreciation;
Customer Advances for Construction; Contributions In Aid
of Construction; Net Utility Plant Acquisition
Adjustments; Accumulated Deferred Income Taxes; Deferred
Charges; Working Capital and a Regulatory Liability as a
result of the Tax Cuts and Jobs Act.
Q.Please explain Exhibit No. 11, Schedule 2.
A. Exhibit No. 11, Schedule 2, Page 1 of 1, End of
Test Year Worksheet, shows the monthly balances, actual
and forecasted, from March 31, 2022 to March 31, 2023 for
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each the rate base component. Monthly balances are
carried forward to this schedule from the supporting
schedules, Utility Plant In Service with Forecast
Additions and Retirements for (Schedule 3), Accumulated
Depreciation and Accumulated Contribution in Aid of
Capital ("CIAC") Amortization (Schedule 4), Developer
Advances for Construction subject to Refund (Schedule 5),
Contributions in Aid of Construction (Schedule 6),
Summary of Net Utility Plant
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Acquisition Adjustments (Schedule 7). The balances at
March 31, 2023 are included in Exhibit 11, Schedule 1.
Q. Please explain Exhibit No. 11, Schedule 3,
Pages 1 through 3.
A. Exhibit No. 11, Schedule 3, Pages 1 through 3,
shows the Company's Utility Plant balance as of June 30,
2022 by plant account. Schedule 3 then summarizes the
forecasted plant additions and retirements by plant
account from July 2022 through March 2023. Exhibit No. 3,
sponsored by the Company witness Cooper, forms the basis
for the plant activity shown on this schedule.
Q. Please explain Exhibit No. 11, Schedule 4, Page
1 of 1.
A. Exhibit No.11, Schedule 4, Page 1 of 1, shows
the Company's Accumulated Depreciation and CIAC
Amortization. The schedule shows the recorded amounts for
these rate base components for the months of March 2022
through June 2022. For the months beginning with July
2022, the amounts for both accumulated depreciation and
amortization of CIAC were estimated based on the
historical test year, adjusted for forecasted retirements
and changes to cost of removal and salvage balances based
on the information provided by the Company witness
Cooper. The End of Test Year accumulated depreciation is
$140,442,405 and amortization of CIAC is $50,825,136, for
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a combined total of $191,267,542.
Q. Please explain Exhibit No. 11, Schedule 5, Page
1 of 1.
A. Exhibit No. 11, Schedule 5, Page 1 of 1,
summarizes change to advances for construction for the
test year. Since the issuance of Order No. 28505 in case
UWI-W-00-1, the Company does not depreciate advanced
property. This requires the Company to accurately track,
by associated plant account, all additions and refunds
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impacting the advance account. The End of Test Year
balance of advances for construction is $3,797,814.
Q. Please explain Exhibit No. 11, Schedule 6, Page
1 of 1.
A. Exhibit No. 11, Schedule 6, Page 1 of 1,
indicates activity in CIAC during the Test Year. Like
advances for construction, CIAC funded assets are not
depreciated for rate-making purposes. The End of Test
Year balance of net CIAC is $112,913,720.
Q. Please explain Exhibit No. 11, Schedule 7, Page
1 of 1.
A. Exhibit No. 11, Schedule 7, Page 1 of 1,
indicates the net change to the balance of Utility Plant
Acquisition Adjustment (UPAA). The UPAA gross balance is
comprised of both debit and credit balances. As shown on
Schedule 7, lines 1 through 6, the gross value of the six
individual UPAA items, all approved by the Commission in
various proceedings, is a positive $600,762. As a result
of the Eagle Water Company Acquisition, approved by the
Idaho Commission in Docket No. SUZ-W-18-02, the Company
was entitled to an acquisition adjustment of $10,475,000
to be included for ratemaking treatment in its next rate
case, to be amortized over 40 years. As of March 31, 2023
the net balance will be $10,771,089.
Q. Please explain Exhibit No. 11, Schedule 8, Page
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1 of 1.
A. Exhibit No. 11, Schedule 8, Page 1 of 1,
indicates the composition of Accumulated Deferred Income
Taxes (ADIT) at the end of the Test Year. The tax
depreciation portion of this account was adjusted for
assets in service as of March 31, 2023. The balance of
ADIT reduces the rate base for rate-making purposes by
$5,307,577.
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Q. Please explain Exhibit No. 11, Schedule 9, Page
1 of 1.
A. Exhibit No. 11, Schedule 9, Page 1 of 1,
identifies the deferred items the Company has included in
the rate base. The projected balance at March 31, 2023 is
$4,933,851. Of this balance, $3,747,454 is the net
unamortized balance of deferred items approved in the
Company's six previous rate cases. The $1,186,397 of new
deferred charges, requested for inclusion in the rate
base in this proceeding, is comprised of six line items.
The Company is requesting a twenty-year amortization for
tank painting expenditures, in line with the amortization
of tank painting granted in case UWI-W-04-04 as well as
in the stipulations to the 2006, 2009, 2011, 2015 and
2020 rate cases. The Company is also requesting a 2-year
amortization period for $343,620 of the rate case
expenses associated with this filing in addition to the
unamortized balance of $62,221 from the 2020 rate case.
Also included in the Company's request are deferred
power costs of $ 658,130, which the Company proposes to
amortize over 2 years, along with unamortized deferred
power costs balance of $411,427 from the 2020 Rate Case.
The Company is reflecting a $456,680 decrease to its
deferred debit account to be amortized over 30 years at
($15,223) annually. The treatment of AFUDC Equity is
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further discussed in the testimony of Company witness
Khan. The deferred debit balance at March 31, 2023 is
projected to be $4,933,851.
Q. Please explain Exhibit No. 11, Schedule 10,
Page 1 of 1.
A. Exhibit No. 11, Schedule 10, Page 1 of 1,
indicates the calculation of the allowance for working
capital prepared by the Company using the 1/8 of
Operating Expenses method. The working capital allowance
included in the rate base is $3,552,571.
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Q. Please explain Exhibit No. 11, Schedule 11,
Page 1 of 1.
A. Exhibit No. 11, Schedule 11, Page 1 of 1,
reflects the regulatory liability balance projected at
March 31, 2023 in the amount of ($4,075,931) and is the
result of the Tax Cuts and Job Act, which reduced
corporate income tax rate from 35% to 21%. This is
further explained in Company Witness Kahn's testimony and
included in Exhibit No. 12, Schedule 1.
Q.Does this conclude your direct testimony?
A.Yes.
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Q.Please state your name, occupation and business
address.
A.My name is David Njuguna, and my business
address is 461 From Rd, Suite 400, Paramus, New Jersey
07652. I am employed by Veolia Water M&S (Paramus), Inc.
("VWM&S") as Manager - Regulatory Business.
Q.Are you the same David Njuguna that filed
direct testimony in this proceeding?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A. The purpose of my testimony is to respond to
Staff witness English recommendation to allow only plant
in services to December 31, 2022 and the use of the
Average of Monthly Averages to determine the Rate Base
amount. In addition, I will address the reduction in the
allowed depreciation expense amount and the treatment of
deferred debits in Rate Base.
Q.What Exhibits are you sponsoring along with
your rebuttal testimony?
A.Yes. I will be sponsoring Exhibits:
1.Exhibit No. 19-Revenue Deficiency.
2.Exhibit No. 20-Schedule 2 Depreciation
Expense
3.Exhibit No. 20 Schedule 4-State and Federal
Income Taxes & Gross Multiplier
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4.Exhibit No. 21 Schedule 1-Rate Base Summary
5.Exhibit No. 21 Schedule 2-Summary Rate Base
Calculation
6.Exhibit No. 21 Schedule 3-Forecasted Plant In
Service
7.Exhibit No. 21 Schedule 4-Accumulated
Depreciation and CIAC Amortization
8.Exhibit No. 21 Schedule 5-Construction Advances
9.Exhibit No. 21 Schedule 6-Contributions in Aid
of Construction (CIAC)
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10.Exhibit No. 21 Schedule 8- Accumulated Deferred
Income Taxes
11.Exhibit No. 21-Schedule 9-Deferred Debits
12.Exhibit No. 21-Schedule 10-Working Capital
Allowance
Exhibit No. 19 indicates the Company Rebuttal
Revenue Deficiency. Even though our supporting testimony
shows a higher revenue requirement, the Company is not
proposing to change rates or revenues greater than those
originally filed.
Exhibit No, 20 Schedule No. 2 represents
depreciation expense based on updates to the Company's
Rate Base as shown in Exhibit No. 21. Exhibit No. 20
Schedule 4 reflects an update to the State Income tax
rate from 6% to 5.58%.
Exhibit No. 21 represents the Company's Test Year
Rate Base with actual Plant in Service to February 28,
2023 and one month estimated capital investments for the
month of March 2023.
Rate Base
Q.Do you agree with Staff's methodology of
calculating Rate Base?
A.No. Staff calculated the Company's rate base
using the Average of Monthly Averages Method for the
year-ended December 31, 2022. In Staff's testimony, they
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claim the Company's proposed rate base includes 530-post
test year which they claim that, due to supply chain
uncertainties, it is not reasonable to assume these
projects will be completed on time and what the final
cost will be. In addition, Staff does not include the
full value of capital additions in 2022 nor consider any
plant additions in 2023 in its calculation of Rate Base.
Q.Do you agree with Staff's position as to the
uncertainty in the completion of forecasted projects?
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A.No. The Company is able to demonstrate a good
track record in the completion of projects it plans to
put in service by certain dates. In response to Staff
data request No. 150, the Company was able to demonstrate
the completion of projects up to December 2022 for a
total plant in Service Balance of $ 571,591,827 as at
December 31, 2022. In Exhibit No 21, Schedule 2, the
Company provides the Plant In Service balance which
includes actuals to February 28, 2023 and one month's
forecast. As demonstrated in this Exhibit and per Witness
Cooper's rebuttal testimony, the Company has been
completing planned projects as proposed in the Rate Case.
Thus, the Company should be allowed to earn a return on
these investments as they will be in use and providing
services to customers at the point in time that rates are
set.
Q.Do you agree with Staff's methodology of
valuing Rate Base?
A.No. Staff acknowledges the Test Year end method
of valuing Rate Base, but asserts that including capital
additions that occurred throughout the year in rate base
at their year-end value creates an expense/revenue
mismatch and that this would allow the Company to earn a
return on its rate base as if the plant has been in
service for the whole year.
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Q.Do you agree with Staff position that capital
additions that occurred throughout the year are included
in rate base at their year-end value?
A.No. When the Company places plant into service,
depreciation commences in the following month. Thus,
projects placed into service earlier would begin
depreciation earlier and the value net of depreciation
would be lower than those projects placed into service
later.
Q.Why is the averaging of historical rate base
method not the most applicable way to calculate Rate Base
for Veolia Water Idaho?
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A.When determining a test period, the primary
objective is to develop normalized results of operations
that best reflect the operating conditions during the
time the new rates will be in effect. Veolia Water Idaho
uses a historical test period adjusted for known and
measurable changes to coincide with when rates will be in
effect and this is consistent with prior rate cases that
the Company has filed before the Commission.
In an environment where the Company is making large
capital investments, using the averaging of historical
rate base method omits capital additions in-service when
new rates will be in effect, which signifies the Company
is not adequately capturing the conditions it will
experience in future when new rates are set.
When a utility is making significant capital
investments, a historical test period does not allow the
utility to recover the true cost of service in a timely
manner, as the Company will continue to place assets into
service during the test period and begin to incur
depreciation expense as soon as the assets are in
service.
Q.Why does the Company propose to use the End of
Test Year methodology to value Rate Base?
A.Rate base calculated using an end of period
basis is more appropriate as it better aligns the level
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of investment that will be used when customer rates are
set since a significant driver of the Company's rate case
is the capital investment the Company has incurred.
Veolia continues to make substantial levels of
capital investments in its water infrastructure to
address customer growth, replacement and maintenance of
Veolia's water infrastructure and to sustain reliability
and safety. As soon as new plant is placed in service,
the Company starts depreciating the new plant and incur
other costs related to the investment.
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Unless this new investment is reflected in rates in
a timely manner, it has a negative impact on the
Company's earnings, especially because the new plant is
typically far more costly to install than the cost of
similar plant embedded in rates. As plant is completed
and is providing service to customers, it is appropriate
for the Company to receive timely recovery of the costs
associated with that plant.
Q.In preparing rebuttal schedules, did you notice
any computation errors?
A.Yes. In preparing my rebuttal schedules, I
noted an inadvertent mathematical error in the addition
of monthly Rate Base elements. This related to Exhibit
No. 11, Schedule 2 -Summary of Projected Rate Base. The
mathematical error carries through from columns
03/31/2022 through 01/31/2023 and resulted in the
Omission of Regulatory Liability-New Federal Tax Law
(TCJA) in the computation of the total Rate Base as shown
on line 15. This error carries on in subsequent updates
to this schedule provided during discovery. The Company
has corrected for this error in Rebuttal Exhibit No. 21,
Schedule No. 2.
Q.How does this affect the Company Position?
A.This change has no impact on the Company's
filing position nor rebuttal position but many impact
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Staff's position because Staff's testimony appears to
have repeated this computational error.
Depreciation Expense
Q.Do you agree with Staff's proposed depreciation
expense adjustment of $546,459?
A.No. In calculating the depreciation expense,
Staff removed all 2023 plant additions forecasted to be
in service by March 31, 2023 from rate base on the
assertion that it is unknown if the Company will be able
to complete these projects on time. As outlined in
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the rebuttal testimony of Company witness Cooper, the
Company is able to demonstrate a track record in the
completion of projections. As of the end of February
2023, the Company's actual Plant in Service balance is
$575,098,483, which is $2,581,520 higher than the
projected amount when the Company filed its rate case in
September 2022. This demonstrates that the Company is
committed to completing projects as planned and should be
allowed to include these projects in its rate base and
depreciation expense calculated based on the plant
projected to be in service as at the end of March 31,
2023.
Deferred Expense Treatment in Rate Base
Q.Are there any other adjustments to Rate Base
that you disagree with?
A.Yes. Staff proposes to remove from rate base
the unamortized balance of deferred power costs, the
unamortized balance of deferred rate case expenses and
the unamortized balance of deferred convenience fees
stating these are short term regulatory assets and that
the opportunity to recover expenses is sufficient and
including this in rate base is unnecessary.
Q.Why do you disagree with Staffs adjustment?
A.Though Staff states these deferral are of a
short-term nature and the opportunity to recover expenses
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is sufficient, they go ahead to recommend a four-year
amortization period which is contrary to treatment of
assets short-term in nature. Thus, Staff's elimination of
the unamortized expense from the rate base on the basis
of its short term nature is contrary to its
recommendation of a longer amortization period and should
be included in rate base.
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Q.What does the Company recommend?
A.The Company recommends the inclusion of the
unamortized balance of the deferred power costs, deferred
rate case expense and deferred convenience fees in rate
base similar to the rate base treatment that has been
allowed for deferred Tank Painting Expenses and an
amortization period of 2 years as recommended by Company
witness Jacob.
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in
open hearing.)
COMMISSIONER ANDERSON: Mr. Carter.
MR. CARTER: Mr. Njuguna is now available
for cross-examination and questions by the Commission.
COMMISSIONER ANDERSON: Thank you. Staff,
Mr. Burdin?
MR. BURDIN: Thank you.
CROSS-EXAMINATION
BY MR. BURDIN:
Q Mr. Njuguna, good morning.
A Good morning.
Q I have a few questions regarding the Tax
Cuts and Jobs Act as it relates to rate base. On page 5
of your testimony, your rebuttal testimony, you discuss
the inadvertent computational error in rate base by
omitting the regulatory liability associated with the Tax
Cuts and Jobs Act; is that correct?
A Yes, I do.
Q And would you agree that the Tax Cuts and
Jobs Act regulatory liability is an offset to rate base,
that is, it lowers rate base?
A Yes, it does.
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Q And would you agree, subject to check,
that if Staff included the regulatory liability in its
average rate base calculation, Staff's proposed rate base
would be decreased by 4,348,987?
A It decreased, but I'm not very sure about
the exact amount.
Q Yes, and would you also agree, subject to
check, that the balance of this regulatory liability as
of December 31st, 2022, was 4,132,682?
A Yes, it's clearly indicated in one of my
exhibits in my rebuttal testimony.
MR. BURDIN: All right, thank you. That
is all the questions I have. Thank you.
COMMISSIONER ANDERSON: Thank you,
Mr. Burdin. Micron.
MR. RUESCHHOFF: Yes, I have questions.
CROSS-EXAMINATIONs
BY MR. RUESCHHOFF:
Q Mr. Njuguna, I have a copy of Staff
witness Donn English's direct testimony I would like you
to refer to and I'll bring that up if that's okay with
you.
A Sure.
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(Mr. Rueschhoff approached the witness.)
Q BY MR. RUESCHHOFF: And I would like to
ask a few questions of you about Veolia's position
regarding proposed test year adjustments and method of
calculating rate base, and I'd like to start with the
test year. Veolia has proposed to use a historical test
year in this case ending June 30th, 2022; is that
correct?
A Correct.
Q And Veolia also proposes nine months of
post historic test year adjustments through March 31st,
2023; is that correct?
A That is correct.
Q Okay, and I referred you to Mr. English's
testimony, Staff witness Mr. English, and Staff has taken
the position that post year adjustments should only be
included through December 31st, 2022; is that correct?
A I believe that's what's in Staff English's
testimony.
Q Okay, and if you could please turn to
page 6 of Mr. English's testimony that I provided to you
and let me know when you're there.
A I'm there.
Q Okay, thank you. If we could look to
line 16 on page 6 and Mr. English cited to a prior United
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Water case, Case No. UWI-W-04-04 and specifically Order
No. 29838. Do you see that on line 16?
A Yes, I do.
Q Okay, and Mr. English quoted from that
Order on line 17 stating, "It simply is not possible to
carefully review investment cost figures and information
that are provided close to or at the time of hearing."
Did you see that line?
A Yes, I do.
Q Okay, and to clarify, again, Veolia
proposes adjustments nine months past the end of the
historical test year; correct?
A Correct.
Q Okay. Just below where we were looking,
Mr. English cited in his testimony, I'll call it, a block
quote and I'd like you to flip to the next page where
that quote continues on to page 7, and I want to refer to
a portion of that quote that begins towards the end of
line 2 on that testimony and the quote of the Order says,
"Using recent actual data for the hearing will reduce if
not eliminate the need to argue over forecasts. To this
end, the Commission suggests rate cases be filed with no
more than six months of forecast data. Not only will the
data be known and measurable by the time other parties
prefile testimony and for the hearing, it will be more
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convenient and administratively easier for all parties."
Do you see that text there?
A Yes, I do.
Q Okay, thank you. I'd like to look at --
ask you a few questions about Veolia's proposed method to
calculate rate base. The Company proposes to calculate
its rate base using plant values at the end of its
adjusted test year, so the end of March 31st, 2023; is
that correct?
A Correct, to include plant additions all
the way to March 31st, 2023.
Q Right.
A To that extent, the Company in my rebuttal
testimony was able to provide the actual plant in service
all the way to February 28, 2023, with only one month of
projections, which is March 2023.
Q Right, okay, and to calculate the rate
base, the Company uses that value as of March 31st,
2023?
A Yes, it does.
Q Okay, and, again, referring to Staff's
position in that case, Staff proposes a different way of
calculating rate base, which is using an average
methodology; is that your understanding?
A Yes, Staff uses an average methodology.
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Q Okay, and again referring to Mr. English's
testimony, pages 11 -- beginning on page 11, but on pages
11 through 13 now -- I'll give you a moment to get there,
so on those pages, Mr. English again cites to a couple
previous Commission decisions, one being from an Idaho
Power general rate case there on line 13 of page 11,
Order No. 29505, and then Mr. English also cites to Order
29838 from United Water's last litigated rate case. Do
you generally see those citations in this portion of the
testimony?
A Yes, I do.
Q And Mr. English stated in his testimony
here that those Commission decisions, that Commission
precedent supports Staff's position of using an average
methodology to calculate rate base. Is that your
understanding of the testimony?
A That's my understanding, but those Orders
referred close to 20 years back.
Q Sure.
A Currently Veolia is in an environment
where we are making large increases in investment in a
high inflationary period; therefore, using more updated
plant in service creates a better match of the
infrastructure that would be in place when rates are
being set.
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Q Thank you. You mentioned that -- well,
specifically, we can look to Order No. 29838, which was
from a 2004 United Water case, so you're correct that
those are approximately 20 years or so old, that
decision. Would you agree with me that the Commission
hasn't had an opportunity to enter an Order on a
litigated United or Suez or Veolia Water rate case since
that 2004 case?
A I believe we haven't had another litigated
rate case.
Q Thank you. Did you cite in your testimony
any Commission decisions or any Commission precedent
supporting Veolia's proposed methods of calculating rate
base?
A I have not cited that in my rebuttal
testimony, but what I indicate in my rebuttal testimony
is that the Company is in an environment where it is
making large capital investments, and using the averaging
of historical rate base method would omit capital
additions in-service when rates would be in effect, which
would signify the Company is not adequately capturing the
conditions it will experience in future when rates are
set.
Q Right, and just to clarify, that's the
Company's position. That's not necessarily a position
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that the Commission has supported in prior decisions; is
that right?
A That is the Company's recommended
position.
MR. RUESCHHOFF: Thank you. Those are all
my questions.
COMMISSIONER ANDERSON: Thank you,
Mr. Rueschhoff.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: No questions, Chair.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions. Thank you.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions. Thank you.
COMMISSIONER ANDERSON: Thank you. Any
questions from the Commissioners? Hearing none, redirect
from Mr. Carter?
MR. CARTER: None from the Company, no.
COMMISSIONER ANDERSON: Thank you very
much. Without objection, I will excuse the witness.
Thank you very much for your testimony.
THE WITNESS: Thank you very much.
(The witness left the stand.)
COMMISSIONER ANDERSON: You may call your
next witness, Mr. Carter.
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MR. CARTER: Thank you. Veolia Water
Idaho will call Anupa Jacob.
ANUPA JACOB,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Ms. Jacob, please state and spell your
name for the record.
A Anupa Jacob, A-n-u-p-a J-a-c-o-b.
Q And are you the same Anupa Jacob that
filed direct testimony and exhibits, supplemental direct
testimony and exhibits, and rebuttal testimony and
exhibits in this proceeding?
A Yes.
Q And if I asked you the same questions
today, would your answers be the same?
A Yes.
MR. CARTER: Commissioners, I'd ask that
Ms. Jacob's direct testimony and exhibits, and
supplemental direct testimony and exhibits, and rebuttal
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testimony and exhibits be spread across the record as if
read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread Ms. Jacob's testimony,
direct testimony, supplemental direct testimony, rebuttal
testimony, and exhibits across the record as if read.
(Veolia Water Idaho, Inc., Exhibit Nos. 7,
8, 10, and 20 were admitted into evidence.)
(The following prefiled direct,
supplemental, and rebuttal testimony of Ms. Anupa Jacob
is spread upon the record.)
CSB REPORTING 573 JACOB (Di)
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Q.Please state your name, position,
responsibility and business address.
A.My name is Anupa Jacob. Since November 2022, I
have been the VP/Controller & Chief Accounting Officer at
Veolia Water M&S (Paramus), Inc. ("M&S") (formerly SUEZ
Water Management & Services Inc.) with the overall
responsibility of the company's financial accounting
records of the regulated companies. I am authorized to
testify on behalf of Veolia Water Idaho, Inc. ("VWID" or
"Company") in this case. My business address is Veolia
Water M&S (Paramus), Inc., 461 From Road, Suite 400,
Paramus, NJ 07652.
Q.Please summarize your educational background
and professional experience.
A.I received a Bachelor Degree in Electronics and
Communication Engineering from Cochin University of
Science and Technology, India and a Master of Business
Administration with a concentration in Accounting from
Baruch College, City University of New York. I am a
Certified Public Accountant and have over fifteen years
of experience in accounting and auditing regulated
utilities, publicly traded companies, and private
companies. Previous to my current role, I was the
Director of Utility Accounting for M&S, Manager of
Technical Accounting and Derivatives Accounting at
CSB REPORTING 574 JACOB, DI 1
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National Grid, Plc., and held various roles within the
Assurance practice at PwC. I have not testified
previously before this Commission on accounting matters.
Q.What is the purpose of your testimony?
A.The purpose of my testimony is to discuss the
following adjustments related to Exhibit 10, Schedule 1 -
Adjustments to Operating and Maintenance Expenses:
Adjustment No. 19 - Management & Service Fees
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CSB REPORTING 575 JACOB, DI 1a
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Adjustment No. 23 - Amortization Expense - Deferred
Rate Case
Adjustment No. 24 - Amortization Expense - Pension
Expense
Adjustment No. 25 - Amortization Expense - Deferred
Tank Painting
Adjustment No. 27 - Amortization Expense - Deferred
Power
and Exhibit 10, Schedule 2:
Adjustment No. 2 - Amortization of Utility Plant
Acquisition Adjustments
Q.Please explain how the shared services
allocation methodology has changed as a result of the
merger with Veolia?
A.The shared services allocation methodology did
not change as a result of the merger with Veolia. The
Company continues to use the same cost allocation
methodology reflected in the affiliate agreement between
Veolia Water M&S (Paramus), Inc. (formerly SUEZ Water
Management & Services Inc.) and described in the Cost
Allocation Manual ("CAM"), which has been previously
reviewed by Idaho Public Utilities Commission Staff in
prior rate case proceedings.
Q.Please explain the Company's process of
updating the allocation percentages for shared services
CSB REPORTING 576 JACOB, DI 2
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as a result of organizational changes that occur
mid-year?
A.When significant organizational changes or
other significant events occur during the year that may
affect the allocation of shared costs between affiliated
entities, the Company reviews the nature of the changes
and determines the necessary updates (if any) to the
allocation factors in accordance with the CAM.
Q.Were there any changes to shared services as a
result of the merger with Veolia that affected the
allocation percentages?
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CSB REPORTING 577 JACOB, DI 2a
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A.As a result of the merger with Veolia in the
first quarter of 2022, there were announcements made
regarding the scope and responsibilities of certain
employees within the shared services. We reviewed these
changes with each department, and we recalculated the new
allocation percentages using the three-factor formula
depending on the scope of responsibilities for each
employee within a department.
Q.How were these changes reflected in the
Company's filing?
A.These changes are reflected in Exhibit 10,
Schedule 1, Adjustment No. 19, Management & Services
Fees. An accounting adjustment was recorded in June 2022
which appropriately reflected the changes in scope and
responsibilities as mentioned above for the six months
ended June 30, 2022. The normalized amount included on
line 6 annualizes the six months ended June 2022 thereby
fully reflecting the changes. The amount shown also is
reduced for recorded shared asset depreciation, which is
addressed in the shared asset adjustment on line 9.
Q.Please explain the shared asset adjustment
shown on Adjustment No. 19.
A.The M&S company makes capital expenditures,
generally related to investments in information
technology hardware and software, as well as other assets
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to benefit VWID and its affiliates. In the absence of the
M&S company investments in these assets, VWID would have
needed to make these investments on a standalone basis in
order to support its operations and the delivery of
reliable service to its customers.
The adjustment reflects a calculation of the cost of
shared assets whereby the balance of the assets, less
accumulated depreciation and deferred income taxes, are
calculated and the appropriate portion, based upon the
three-factor formula, is
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CSB REPORTING 579 JACOB, DI 3a
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projected as of March 31, 2023 reflecting the costs in
effect in the period when the rates are to be effective
in this case.
Q.Please describe the various normalizing and
annualizing adjustments, as well as known and measurable
adjustments, made to operating expense in Exhibit 10,
Schedule 1.
A.Adjustment No. 23, Amortization Expense -
Deferred Rate Case, increases historical test year
expense by $173,055 for deferred rate case expense
amortization. The Company seeks recovery of the current
rate case costs, estimated to be $360,980, as well as the
remaining balance of the deferred rate case expense in
the amount of $62,225, approved in Case No. SUZ-W-20-02,
with an annual amortization of $29,868. As a result of
the Commission's Order No. 35265, which approved
intervenor funding of $29,640 related to the acquisition
of Eagle Water (SUZ-W-18-02), the Company is also seeking
to recover those costs in this case. Finally, as further
described in the testimony of Matthew Kahn in this case,
the Company proposes to refund the deferred Idaho State
tax credit and federal employee retention credit of
$47,000 through a reduction to rate case expenses in
order to return those amounts expeditiously to customers.
The Company seeks a two-year recovery of the net amount
CSB REPORTING 580 JACOB, DI 4
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of this expense.
Adjustment No. 24, Amortization Expense - Pension
Expense, decreases historical test year expense of
$477,384 by $454,166 for the amortization of Deferred
Pension. In Case No. SUZ-W-20-2, Order No. 35030, the
Commission approved a pension plan contribution amount of
$1,312,595 as the benchmark from which future cash
contributions would be compared. Payments over or under
the
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CSB REPORTING 581 JACOB, DI 4a
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$1,312,595 benchmark were authorized to be deferred for
future consideration. Actual cash contributions were
$1,348,611 in 2021, $292,898 for the first six months of
2022 and are estimated to be $439,347 from July 2022
through March 2023. Therefore, the Company estimates a
deferral of $948,113 to be refunded to the customers
offset by the remaining balance of deferred pension
expenses to be amortized as of March 31, 2023 related to
Case No. SUZ-W-20-2 of $994,550, which nets to $46,437.
The Company seeks to amortize the net amount of $46,437
over a two-year period. Please see testimony of Company
Witness Cary for an explanation of Adjustment No. 3
Employee Pension Cash Contribution Costs.
Adjustment No. 25, Amortization Expense - Deferred
Tanking Painting, increases historical test year tank
painting expense of $145,217 by $32,066. Since its 2020
rate case, the Company has painted the Broken Horn Tank
for $65,239, Columbia Tank for $126,088, and Hidden
Hollow interior for $450,000. The Company is requesting a
twenty-year amortization period for these costs,
consistent with recent commission orders and stipulation
agreements. Amortization expense has been adjusted to
reflect the addition of the new amortization amounts.
Adjustment No. 27, Amortization Expense - Deferred
Power, increases historical test year expense of $197,484
CSB REPORTING 582 JACOB, DI 5
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by $337,294 for deferred power amortization. The Company
seeks recovery of the deferred Power Cost Adjustment
(annual adjustment mechanism), approved in Case
UWI-W-01-02, for cost incurred since the last rate case
through June 2022 of $295,583 including accumulated
interest, the estimated deferred power costs and interest
from July 2022 through March 2023 of $362,548 as well as
the remaining balance of deferred
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CSB REPORTING 583 JACOB, DI 5a
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power expenses to be amortized as of March 31, 2023
related to Case no. SUZ-W-20-2 of $411,425 for a total
test year deferred balance of $1,069,555 to be amortized
over two years. Please see testimony of Company Witness
Cary for an explanation of Adjustment No. 10 Energy -
Purchased Power and Other Utilities.
Q.Please describe the various normalizing and
annualizing adjustments, as well as known and measurable
adjustments, made to amortization expense in Exhibit 10,
Schedule 2
A.Adjustment No. 2 Amortization of Utility Plant
Acquisition Adjustment (UPAA) increases historical test
year expense of $20,712 by $261,873 for amortization of
UPAA. Commission Order No. 35247 approved the
amortization of $10,475,000 of UPAA related to the
acquisition of Eagle Water (SUZ-W-18-02) over 40 years,
which results in an additional annual amortization of
$261,873.
Q.Does this conclude your direct testimony?
A.Yes, it does.
CSB REPORTING 584 JACOB, DI 6
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Q.Please state your name, position,
responsibility and business address.
A.My name is Anupa Jacob. Since November 2022, I
have been the VP/Controller & Chief Accounting Officer at
Veolia Water M&S (Paramus), Inc. ("M&S") (formerly SUEZ
Water Management & Services Inc.) with the overall
responsibility of the company's financial accounting
records of the regulated companies. I am authorized to
testify on behalf of Veolia Water Idaho, Inc. ("VWID" or
"Company") in this case. My business address is Veolia
Water M&S (Paramus), Inc., 461 From Road, Suite 400,
Paramus, NJ 07652.
Q.Why are you providing this Supplemental Direct
Testimony?
A.On or around March 24, 2023, I learned that
Matthew Kahn, who had previously submitted direct
testimony on behalf of the Company, had taken a position
with another company and would be unable to serve as a
witness in this proceeding. In my position with the
Company, I am familiar with the contents of Mr. Kahn's
testimony and, through this Supplemental Direct
Testimony, will adopt that testimony as my own.
Q.What is the subject matter of your Supplemental
Direct Testimony?
A.The purpose of my testimony is to present
CSB REPORTING 585 JACOB, DI - Supp. 1
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ratemaking considerations in regard to various tax topics
including the reversal of protected excess deferred
income taxes that resulted from the 2017 Tax Cuts and
Jobs Acts ("TCJA"), Idaho's state income tax rate changes
that have occurred since the Company's last rate filing,
along with the refund of Employee Retention Credits that
the Company derived from the Federal government during
the COVID-19 pandemic. Additionally, my testimony
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CSB REPORTING 586 JACOB, DI - Supp. 1a
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will discuss an update in the income tax accounting for
Allowance for Funds Used During Construction ("AFUDC").
Q.Have you prepared or had prepared under your
direction any exhibits to your testimony?
A.Yes, I am sponsoring Exhibit No. 12, which
provides support for the balance of the Company's TCJA
regulatory liability and the related deferred income
taxes at the historic test year ended June 30, 2022
("Historic Test Year") and projected through March 31,
2023 ("Test Year"). The recommended annual amortization
amount of the TCJA regulatory liability, to maintain
compliance with the Internal Revenue Service's
normalization rules, is included on Exhibit No. 10,
Adjustments to Operating and Maintenance Expenses at
Present Rates.
Q.Please describe the TCJA and its effects on the
Company's books and records.
A.In the Company's 2020 general rate case, the
Commission reviewed and approved the regulatory liability
for the refund of excess deferred income taxes that
resulted from the federal income tax ("FIT") rate
reduction. This regulatory liability amount is also
commonly referred to as excess accumulated deferred
income taxes ("EADIT") and was addressed by the
Commission in Order No. 34074, Case No. GNR-U-18-01.
CSB REPORTING 587 JACOB, DI - Supp. 2
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Q.Has the IPUC addressed the treatment of the
EADIT regulatory liability?
A.Yes. The Commission, in Order No. 34074,
reduced the Company's rates to reflect the reduction in
the FIT rate and ordered the Company to file an update
to its deferred income tax records and to work with Staff
on determining the amount and
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CSB REPORTING 588 JACOB, DI - Supp. 2a
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manner in which to return to customers the remaining
benefits from the TCJA. The Company's base rates were
changed effective June 1, 2018, as ordered.
Q.What are the current annual amortization and
remaining balances of the EADIT regulatory liability?
A.The remaining balance of $4.2 million
represents the balance of protected EADIT credit to be
refunded to customers over the remaining lives of the
Company's investment in plant assets. The annual
amortization of the balance, as required in the previous
rate filing, is $227,000 and reflected on Exhibit No. 12.
Q.Please describe the Company's understanding of
"protected" and "unprotected" EADIT.
A.Per the normalization rules in the Internal
Revenue Code, Section 168(i)(9), the amortization period
for regulatory liability, which arose from temporary
differences between book and tax methods used for
plant-related "protected" amounts, may not be shorter
than the period in which ADIT would have otherwise
reversed over the remaining book lives of its' assets.
The Average Rate Assumption Method ("ARAM") of
amortization must be utilized for as much of the
regulatory liability as possible, if the requisite data
is available to the utility. ARAM calculates a specific
amount by year, rather than a period, of amortization
CSB REPORTING 589 JACOB, DI - Supp. 3
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and, if amortized faster, could result in a normalization
violation which would prohibit the Company from utilizing
accelerated depreciation for income tax purposes. The
updated projected results of the Company's ARAM
calculations for tax years 2022 through 2025 are as
follows:
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CSB REPORTING 590 JACOB, DI - Supp. 3a
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ARAM
2022 221,000
2023 228,000
2024 218,000
2025 204,000
The amortization period for the amount of the regulatory
liability which arose from amounts not considered
normalized are "unprotected" and may be amortized by the
utility over a period different from the protected
amount. The unprotected EADIT have been fully refunded to
customers as of April, 2022 and no longer require
consideration in the Company's rates.
Q.What amount is the Company utilizing for the
ARAM amortization in this case?
A.As shown above, the amount of ARAM reversals
can vary year to year. The current approved annual
amortization is $227,000. It can be noted that for 2022
the current projected calculation indicates that the
actual ARAM reversals will be less than the annual
amortization.
Q.Does the Company have a proposal to change the
amount of amortization of the EADIT regulatory liability
balance?
A.Yes. As previously described, the Company is
required to use the ARAM for returning the remaining
CSB REPORTING 591 JACOB, DI - Supp. 4
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protected portion of the EADIT balance. As a result, the
Company continues to track and monitor the amount of
EADIT reversing over ARAM in comparison to the approved
amortization amounts provided in its rate agreements. As
a result of the projected ARAM calculation results and
because the
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CSB REPORTING 592 JACOB, DI - Supp. 4a
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ARAM amount is updated annually and could change either
up or down because of the retirement of fixed assets, an
amortization amount of $200,000 for this case is prudent
in order to allow for potential changes in the ARAM
amount for 2022 and following once the recalculation is
performed. As this case will likely set rates for more
than one year, if the amount of the amortization of the
protected portion of the EADIT set in this case is
greater than the ARAM amount in a future period, the
Company would need to file for a change in tariff rates
to reduce the amortization to the amount allowed in that
future period. The ARAM amount is a maximum amount or
"speed limit" if you will. Therefore, an amortization
amount of $200,000 for the protected EADIT is included on
Exhibit No. 10, Schedule 1, line 26.
Q.Does the Company have additional tax benefits
that it is proposing to refund to customers in this rate
proceeding?
A.Yes. In addition to the benefits being
amortized to customers for the remaining EADIT, the
Company has deferred certain tax benefits that it has
derived for the benefit of its customers from its Federal
and State jurisdictions since the last rate filing. These
benefits are the result of Idaho's state income tax rate
reduction, as well as the Federal Employee Retention
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Credit.
Q.Please provide the amounts of benefits to be
refunded as a result of these changes?
A.As a result of the reduction to Idaho's state
income tax, the Company has deferred approximately
$35,000 in state income taxes, and the Federal Employee
Retention Credit resulted in an additional deferral of
approximately $12,000. The Company proposes to refund
these amounts as a reduction to the amortization of rate
case
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CSB REPORTING 594 JACOB, DI - Supp. 5a
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expenses as shown on Exhibit No. 10, Schedule 1,
Adjustment No. 23.
Q.Has the Company made any changes to its method
of accounting for AFUDC?
A.No. The Company continues to account for the
timing difference between financial accounting and its
accounting for income tax purposes and record deferred
income tax purposes as required under GAAP and specified
under ASC 780. However, in its annual review of the
Company's cumulative timing differences as part of the
Tax Basis Balance Sheet ("TBBS") Study, the Company's Tax
Department determined that a true-up adjustment was
required to the regulatory balance attributable to the
cumulative flow through timing difference associated with
the equity component of its AFUDC timing difference.
Q.What are TBBS adjustments and why are they
necessary?
A.TBBS adjustments reflect a review of overall
timing differences which support the accumulated deferred
income tax balances for any specific item giving rise to
differences between financial accounting and the
accounting for income tax purposes. As those timing
differences reverse, the accumulated deferred tax
obligations will reverse and become currently payable to
the Company.
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A timing difference that is flowed through in
the calculation of income tax expenses results in a
change to the per book effective rate that will either
increase or decrease total tax expense. Any increase to
income tax expense that is caused by a flow through
timing difference will result in a regulatory asset
balance for consideration of recovery in future rates.
Conversely, any reduction to income tax expense that is
caused by a flow through timing difference will result in
a regulatory
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liability balance for similar consideration to be
refunded to customers in future rates.
Q.When accumulating the regulatory balance in the
future, will such considerations be made in the
accounting for the balances?
A.Yes, the Company performs the TBBS study
annually to support the tax return filing and
incorporates any flow through impacts to the regulatory
balances. The regulatory balances are trued-up in
conjunction with the deferred tax balances.
Q.How will this change the calculation of the
amounts for the AFUDC Equity Gross-up going forward?
A.The AFUDC Equity Gross-Up calculation is based
on the AFUDC Equity balance. The actual calculation of
the Gross-Up does not change.
Q.Did the adjustment result in a change in rate
base?
A.There is no change to rate base, as the
deferred tax balances agree with the remaining timing
difference in support of the cumulative timing difference
and the adjusted regulatory balance for future recovery.
As a result, there is no adjustment required to the
deferred taxes that reduce rate base.
Q.What adjustments were required to the
regulatory balances associated with the timing difference
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for AFUDC?
A.The Company's TBBS study resulted in a
reduction to the regulatory asset balance as of
12/31/2020. As a result, the per book balance of
approximately $1.3 million was reduced to about $800,000,
in order to reflect the remaining timing difference.
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CSB REPORTING 598 JACOB, DI - Supp. 7a
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Q.What impact does the reduction have on the
current amortization of AFUDC in rates?
A.The amortization of the regulatory balances
attributable to AFUDC will not change. The current
amortization provides a 30-year amortization of the
balance, such that the benefits associated with AFUDC are
provided to customers over the lives of the underlying
investment from which they were derived. The reduction to
the regulatory balance will be reflected in the ongoing
amortization as an overall reduction to the balance being
recovered over the 30-year amortization schedule. By
doing so, the Company is reducing the regulatory asset
balance by approximately $500,000, which will reduce the
overall amortization amount.
Q.Does this conclude your Supplemental Direct
Testimony at this time?
A.Yes.
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Q.Please state your name, occupation and business
address.
A.My name is Anupa Jacob. I am the VP/Controller
& Chief Accounting Officer at Veolia Water M&S (Paramus),
Inc. ("M&S"). I am authorized to testify on behalf of
Veolia Water Idaho, Inc. ("VWID" or "Company") in this
case. My business address is Veolia Water M&S (Paramus),
Inc., 461 From Road, Suite 400, Paramus, NJ 07652.
Q.Are you the same Anupa Jacob that filed direct
testimony in this proceeding, which adopted the direct
testimony of Mohammed Zerhouni?
A.Yes.
Q.What is the purpose of your testimony?
A.The purpose of my testimony is to address
Staff's recommendations related to:
·Amortization of deferred power expense
·Amortization of tank painting expense
·Amortization of rate case expense
Q.Have you prepared any exhibits to support your
rebuttal testimony?
A.Yes. Please to Rebuttal Exhibit 20, Schedule 25
and Schedule 27.
Q.Please summarize staff's recommendations
related to amortization of deferred power expense.
A.Staff Witness Terry's testimony states that the
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deferral should not be used for expenses that have not
yet been incurred and, as such, Staff proposed using
actual deferrals including interest through December
2022. Additionally, Staff recommends a four-year
amortization instead of the two-year amortization
proposed by the Company.
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Q.Do you agree with Staff's recommendation on
power deferral using actual expenses and a change to the
amortization period?
A.No. The Company's original proposal included
the actual deferred power expenses through June 30, 2022,
including the related interest and a projected amount for
the expected deferral of power expenses and accrued
interest through March 31, 2023. In response to Staff's
recommendation, the Company proposes using the actual
deferred power expenses and accrued interest through
February 28, 2023 of $695,112 in its calculation of the
test year deferred power amortization expense.
Q.Describe how the deferred power deferral works
in simple summary terms.
A.The Company follows Commission Accounting Order
No. 28800 in Case No. UWI-W-01-02, which allowed the
Company to defer Idaho Power Company's Power Cost
Adjustment (PCA) and Fixed Cost Adjustment (FCA) charges
and present the accumulated deferral for amortization
recovery in subsequent rate filings. This allows the
Company to recover increases in power costs invoiced to
it by Idaho Power Company in order to provide safe and
reliable service to its customers, since the Company
cannot limit its energy use in an effort to control
higher power costs without impacting the level of service
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it provides to its customers.
On the matter of the amortization period, even
though the Company agrees that the average period between
rate cases has averaged between three and four years in
the past, it is highly likely given the inflationary
economic environment and additional level of capital
improvements that the Company will file for a rate case
similar to the time period between the previous rate case
and the current rate case. Therefore, the Company
believes that using a two-year amortization period will
ensure that the costs are recovered
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without adding the burden of unamortized expenses on the
rates in the following rate case.
As such, when combining the actual deferred power
expenses through February 28, 2023 with the remaining
unamortized amount of $411,425, and using a two-year
amortization, the Company proposes test year deferred
power amortization expense of $553,269, which is an
increase of $18,491 from the Company's original proposal.
Q.Are there any changes to the schedule of tanks
included in the amortization of tank painting expenses?
A.As outlined in the rebuttal testimony of
Company witness Cooper, the Company will complete the
painting of the interior of the Ustick tank prior to the
end of March 31, 2023 and proposes adding $430,100 of
tank painting costs as part of rate base and therefore
within the proposed amortization expense. The Company is
removing the costs related to the painting of Hidden
Hollow tank interior. Considering these changes, the
Company proposes test year amortization of tank painting
costs of $176,288 which is a decrease of $995 from the
Company's original proposal of $177,283.
Q.Please summarize Staff's recommendation related
to amortization of deferred rate case expense.
A.Staff recommends removal of the estimated
intervenor funding of $40,000 that is currently included
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in the schedule of estimated rate case expenses.
However, Staff's concern is that the amount is only an
estimate and has not yet been incurred and that the
intervenors in this case are unlikely to qualify for the
funding. Additionally, Staff also recommends a four-year
amortization instead of the two-year amortization
proposed by the Company.
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Q.Do you agree with Staff's recommendation
related to the amortization of deferred rate case
expense?
A.In part. The Company agrees with Staff's
proposal to exclude estimated intervenor funding of
$40,000 under the assumption that the Company will be
allowed to request recovery of actual intervenor costs
ordered by the Commission, if any. On the matter of the
amortization period, as mentioned above, the average
period between rate cases has averaged between three and
four years in the past. However, it is highly likely
given the inflationary economic environment and
additional level of capital improvements, that the
Company will file for a rate case within two to three
years, similar to the time period between the previous
rate case and the current rate case. Therefore, the
Company believes that using a two-year amortization
period will ensure that the costs are recovered without
adding the burden of unamortized expenses on the rates in
the following rate case.
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in
open hearing.)
MR. CARTER: Okay, and Ms. Jacob is now
available for cross-examination and questions by the
Commission.
COMMISSIONER ANDERSON: Thank you.
Mr. Burdin?
MR. BURDIN: Thank you. I do not have any
questions for Ms. Jacob. Thank you.
COMMISSIONER ANDERSON: Micron?
MR. NELSON: No questions. Thank you.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: None from the City.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions. Thank you.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions. Thank you.
COMMISSIONER ANDERSON: Commissioners?
Without objection, I would -- Mr. Carter, you had your
light on?
MR. CARTER: Sorry, I was just going to
say that I do not have questions.
COMMISSIONER ANDERSON: It would be hard
to redirect when there were no questions. Thank you very
much. Without objection, we will excuse you. Thank you
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very much for your testimony.
THE WITNESS: Thank you.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Carter, you
may call your next witness.
MR. CARTER: Veolia Water Idaho calls
Timothy Michaelson.
TIMOTHY MICHAELSON,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Mr. Michaelson, will you state and spell
your name for the record?
A Timothy Michaelson, T-i-m-o-t-h-y
M-i-c-h-a-e-l-s-o-n.
Q And are you the same Timothy Michaelson
that filed direct testimony and exhibits and rebuttal
testimony and exhibits on behalf of Veolia Water Idaho in
this case?
A I am.
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Q If I asked you the same questions today,
would your answers be the same?
A They would.
MR. CARTER: Commissioners, I'd ask that
Mr. Michaelson's direct testimony and exhibits and
rebuttal testimony and exhibits be spread upon the record
as if read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread Mr. Michaelson's direct
and rebuttal and exhibits across the record as if read.
(Veolia Water Idaho, Inc., Exhibit Nos. 5
& 17 were admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Mr. Timothy Michaelson is spread
upon the record.)
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Q.Please state your name and business address.
A.My name is Timothy Michaelson, and my business
address is 461 From Rd, Suite 400, Paramus, New Jersey
07652.
Q.By whom are you employed and in what capacity?
A.I am employed by Veolia Water M&S (Paramus),
Inc. (formerly SUEZ Water Management & Services) which I
joined in November of 1994. During my employment, I have
worked in the Corporate Accounting and Corporate Planning
Departments as an Accountant, Planning Analyst, Planning
Manager and Planning Director. I also worked as the
Director of Finance for SUEZ Water's New Jersey Division
and as the Director of Finance for SUEZ Water's Regulated
Segment. In May of 2009, I joined the Regulatory
Business Department where I currently work as Director.
Q.Please summarize your educational background
and qualifications.
A. I graduated from St. Thomas Aquinas College
with a Bachelor of Science degree in Accounting in 1990
and Iona College with an MBA in Finance in 2000. I am
currently the Treasurer of the New York Chapter of the
National Association of Water Companies.
Q.Before what regulatory agencies have you
previously presented testimony?
A.I have testified in several cases before the
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New York State Public Service Commission, the Connecticut
Public Utilities Regulatory Authority, the State of Rhode
Island and Providence Plantations Public Utilities
Commission and before the Idaho Public Utilities
Commission in the Company's last rate case, SUZ-W-20-02.
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Q.What is the purpose of your testimony in this
proceeding?
A.My testimony supports the proof of revenue
under present and proposed rates and the development of
Test Year revenues.
Q.What Exhibits are you sponsoring?
A.I am sponsoring Exhibit No. 5, which presents
the proof of revenue including the application of present
and proposed rates to consumption analysis for the 12
months ended June 30, 2022 ("Historic Test Year") plus
nine months adjustment period ending March 31, 2023
("Test Year"), and Test Year revenue under present and
proposed rates, including adjustments to revenue.
Q.Have you prepared proof of revenue schedules
under present and proposed rates?
A.Yes. Schedules 1 through 9 in Exhibit 5
provide the proof of revenues from the application of
present and proposed rates to the customer consumption
analysis as well as support for normalizing adjustments.
The Schedules include Veolia Water Idaho, Inc. ("Company"
or "VWID") (formerly SUEZ Water Idaho, Inc.) designated
as "VWID System" as well as former Eagle Water Company
customers which became part of Veolia Water Idaho, Inc.
in late December 2021. Separate revenues and rates are
provided for former Eagle Water Company customers
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(designated as "Eagle - Exist" on the Schedules) and new
Eagle Water Company customers within Eagle Water
Company's former service territory (designated as "Eagle
- New" on the Schedules). Order No. 35247 in Case Nos.
SUZ-W-18-02 and EAG-W-18-01 - IN THE MATTER OF THE JOINT
PROPOSAL OF SUEZ WATER IDAHO, INC. TO ACQUIRE EAGLE WATER
COMPANY,
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established phased-in rates for former Eagle Water
customers. Any new customers starting service or
connecting in the present Eagle Water service territory
will pay VWID rates when beginning service. All Eagle
customers are billed monthly, while VWID customers are
billed bi-monthly.
Q.Please describe Schedule 1.
A.Schedule 1 summarizes the application of
proposed rates to the consumption analysis for the Test
Year and the Test Year revenues under proposed rates for
that same time period. Column 2 presents the Test Year
revenues at present rates from column 11 of Schedule 2.
Column 3 presents the Test Year revenues at proposed
rates by applying the proposed rates to the detailed
consumption analysis by customer class provided in
Schedule 3 - VWID System, Schedule 3 - Eagle Exist and
Schedule 3 - Eagle New. Columns 4, 5, 6 and 7 show the
impact at proposed rates of the VWID System, Eagle New
and Eagle Existing adjustments presented in Schedules 4A,
4B, 4C and 4D. Column 8 calculates the Test Year revenue
at proposed rates, column 9 shows the proposed increase
by customer class and column 10 provides the percentage
increases by customer class.
Q.Please describe Schedule 2.
A.Schedule 2 summarizes the application of
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present rates to the consumption analysis and the Test
Year revenues under present rates for the Test Year ended
March 31, 2023. Column 2 presents the Historic Test Year
revenues per books by customer class. Column 3 removes
surcharge revenue, the balance of unbilled revenue
accrued at the end of the Historic Test Year and other
miscellaneous adjustments. Column 5 shows the revenues
from the application of present rates to the detailed
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consumption analysis for the Historic Test Year from
Schedule 3 VWID, Schedule 3 Eagle Exist and Schedule 3
Eagle New. Columns 6, 7, 8 and 9 show the impact at
current rates of the adjustments presented in Schedules
4A, 4B, 4C and 4D. Column 10 adjusts for the
normalization of Phase I rates. Phase I of the Company's
current rate plan began in May 2021 and Phase II of the
Company's current rate plan began in May 2022. Since the
Historic Test Year contains fixed and volumetric amounts
and rates from Phase I and II, an adjustment is needed to
update Phase I rates to Phase II rates and then apply
Phase II rates (current rates) to the overall Test Year
billing determinants for the VWID System and new Eagle
customers. Existing Eagle customers are priced out at
the rates that will be effective in January 2023. The 4G
Schedules calculate the Phase II rate adjustments found
in Column 10. Finally, Column 11 presents Test Year
revenue at current rates.
Q.Please describe Schedule 3.
A.Schedule 3 VWID, Eagle Exist and Eagle New
provides the application of present and proposed rates to
the detailed consumption analysis and billing
determinants by customer class for the Historic Test Year
and Test Year.
Q.Please describe the Schedules 4 through 4D.
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A.Schedule 4 summarizes the impact on billing
determinants associated with the four revenue adjustments
shown on Schedules 4A, 4B, 4C and 4D.
Adjustment R1, detailed on the 4A Schedules, adjusts
revenues at present and proposed rates by annualizing for
the gain or loss of customers during the Historic Test
Year. Adjustment R2, shown on the 4B Schedules, adjusts
revenues at current and proposed rates for the projected
increase in the average number of customers
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through the Test Year. Adjustment R3, shown on the 4C
Schedules, adjusts revenues at present and proposed rates
due to the projected decline in customer usage for
residential and commercial customers. Adjustment R4,
shown on Schedule 4D Eagle Exist, normalizes the number
of bills and volumes for existing Eagle customers in the
Historic Test Year. The Company acquired these customers
at the end of December 2021, so only 6 months of activity
are included in the Historic Test Year.
Q.How did you determine the projected decline in
customer usage for residential customers shown in
Adjustment R3?
A.For the residential customer usage adjustment,
I performed a 30-year regression analysis of per-capita
usage utilizing actual residential usage, calendar year
and Palmer Z index as inputs. The Palmer Z index is a
measure of short-term drought on a monthly scale. For
the calculation of the customer usage projection, the
Palmer Z index amounts were taken from NOAA National
Centers for Environmental information, Climate at a
glance: Divisional Time Series, published August 2022
from https://www.ncdc.noaa.gov/cag/. A "Predicted
residential" usage amount was calculated (96.88 thousand
gallons per customer) and compared to the actual (105.48
thousand gallons per customer) usage. The difference,
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(8.59 thousand gallons) was converted to CCFs to arrive
at the (11.49) CCF adjustment per residential customer.
Exhibit 5 Schedule 4E provides the calculation. This
methodology is the same I utilized in the Company's prior
rate case and which the Company believes was used by
Staff in the case prior.
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Q.How did you determine the projected decline in
customer usage for commercial customers shown in
Adjustment R3?
A.For the commercial customer usage adjustment, I
performed the same regression analysis I did for the
residential customers using the same inputs. A
"Predicted commercial" usage amount was calculated
(491.26 thousand gallons per customer) and compared to
the actual (520.41 thousand gallons per customer) usage.
The difference, (29.15 thousand gallons) was converted to
CCFs to arrive at the (38.97) CCF adjustment per
commercial customer. Exhibit 5 Schedule 4F provides the
calculation.
Q.Please describe Schedules 5 and 6.
A.Schedule 5 provides the average actual annual
usage by residential customer in gallons as well as the
predicted average annual usage. Schedule 6 plots the
actual annual usage, predicted annual usage and includes
a linear trend line of actual usage demonstrating the
decline in average consumption. The table at the bottom
of the graph compares actual total gallons and CCFs at
the Historic Test Year compared to the Test Year ended
March 31, 2023.
Q.Please describe Schedules 7 and 8.
A.Schedule 7 provides the average actual annual
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usage by commercial customer in gallons as well as the
predicted average annual usage. Schedule 8 plots the
actual annual usage, predicted annual usage and includes
a linear trend line of actual usage demonstrating the
decline in average consumption. The table at the bottom
of the graph compares actual total gallons and CCFs at
the Historic Test Year compared to the Test Year ended
March 31, 2023.
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Q.How did you develop proposed volumetric and
fixed rates?
A.The proposed volumetric and fixed rates shown
on Schedule 9A, 9B and 9C were developed by applying a
uniform percentage increase across all customer classes,
except for private fire rates for which there is no
increase. Please refer to the testimony of Company
witness Bui which describes the Cost of Service Study
results and rationale for revenue allocation to the
different customer classes.
Q.Does this conclude your testimony?
A.Yes.
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Q.Please state your name, occupation and business
address.
A.My name is Timothy Michaelson, Sr. Director -
Regulatory Business, and my business address is 461 From
Rd, Suite 400, Paramus, New Jersey 07652.
Q.Are you the same Timothy Michaelson that filed
direct testimony in this proceeding?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.The purpose of my rebuttal testimony is to
address adjustments related to revenue projections,
particularly those related to weather normalization
proposed by Staff Witness Eldred and Micron Witness
Gorman.
Q.Please summarize Staff's revenue normalization
adjustments
A.Staff Witness Eldred started with the Company's
updated Exhibit 5, Schedule 2 which was provided in the
Company's response to Staff's Production Request No. 163.
The Exhibit was updated for actual revenue and
consumption data through December 31, 2022 (Staff's
updated Historic Test Year). Per books, revenue totaled
$52,379,219. After removing Unbilled, Surcharges and
Miscellaneous revenues, and accounting for the billing
error amounting to $48,606, described in the Company's
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response to Production Request No. 163, Mr. Eldred's
Adjusted Historic Test Year Book Revenue totaled
$53,022,368. From that point Staff Witness Eldred
applies 3 adjustments: (1) Historic Test Year growth of
$278,681, which matches the Company's adjustment; (2)
normalization of Phase I rates of $819,334 which matches
the Company's adjustment; and (3) a weather usage
adjustment of ($1,664,176), which is different than the
Company's Rebuttal amount of ($2,812,978).
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Q.What is your understanding of how Staff Witness
Eldred calculate his weather normalization adjustment?
A.Mr. Eldred used the same methodology as the
Company with two exceptions. First, he used 31 years of
data instead of 30 utilized by the Company. Second, he
summed the results of 12-monthly models to determine the
normalized annual use per customer.
Q.Please explain the source of the methodology
and how it was applied.
A.As indicated in my Direct Testimony, I
replicated the methodology I used in Veolia Water Idaho,
Inc's. (F/K/A/ SUEZ Water Idaho, Inc. ("Company")) prior
rate case (SUZ-W-20-02) which, in turn, was based upon
the methodology communicated to us by Staff from the
previous rate case filing. That methodology ultimately
resulted in billing determinants that were adopted in the
March 17, 2021 Stipulation and Settlement (item #8, page
3) and approved in the April 30, 2021 Order No. 35030. I
believe that the same methodology used in the prior case
should be used in this case.
In my Direct Testimony, the normalization was
performed based upon 29 calendar years plus the Historic
Test Year ending June 30, 2022. In the update requested
by Staff and provided in response to PR No. 163,
information for the 12 months ended 12/31/2022 was
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available, and the calculations were changed to reflect
that additional 6-month period. In both the initial
filing and the last rate case, the normalizing amount
utilized an average of the 30 year Palmer Z factors. The
updated calculation provided in response to PR No. 163
followed that same method.
Q.Did Staff Witness Eldred make any
recommendations regarding the calculation of weather
normalization to be used for future cases?
/
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A.Yes. He recommended that the Company, Staff,
and other interested parties meet prior to the next
general rate case to discuss the importance and methods
of making changes to the Company's regression analysis.
Q.What are the Company's thoughts on this
recommendation?
A.The Company has continually demonstrated its
willingness to meet with Staff and other interested
stakeholders to discuss such complex technical issues in
the past and is certainly willing to do so in the future
to attempt to arrive at an agreeable weather
normalization approach based upon relevant information.
However, to change methodologies at this point,
especially since the Company, Staff and other parties
have not had the chance to discuss this very technical
and complex issue, is unwarranted in my opinion.
Q. Did Staff Witness Eldred make any other
observations on the Company's calculation of weather
normalization?
A. Yes. On page 14 of his Revised Direct
Testimony, he indicates that in its Updated Response to
PR No. 163 the Company predicted normal consumption for
the year 2023.
Q.Do you agree with his observation?
A.No. The Company's calculation utilizes the
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30-year average Palmer Z amount (0.18) to arrive at a
2022 predicted consumption of 94.02. This predicted
amount is subtracted from the actual 2022 residential
consumption of 103.13 to arrive at the (9.12 thousand
gallon adjustment), which is the basis for the Company's
weather normalization adjustment of ($2,812,978)
mentioned above.
/
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Q.Please summarize Micron's revenue normalization
adjustments
A.Micron's Witness Michael Gorman calculates his
weather normalization using a 15-year historic period.
He calculates a simple average decline in residential
usage over that period to be (1.7%). He then applies the
(1.7%) to the Company's actual usage per customer at the
Historic Test Year of 105,479 gallons to arrive at his
projected usage per customer of 103,686 gallons. He also
speculates that it is reasonable to expect that the
declining use per customer trend will moderate going
forward compared to the 30-year trend as the population
of residential customers' water appliances and
conservation practices are updated to reflect more
efficient water appliances and customer consumption
behavior.
Q.Do you agree with Mr. Gorman's use of a 15-year
period as a factor in determining a normalized level of
consumption?
A. No. Utilizing additional periods generally
reduces the amount of error in regression estimates (as
Staff Witness Eldred points out in his Testimony). As
mentioned earlier, 30 years was the period used and
adopted in the Company's last case and I believe it
should remain consistent for this case.
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Q.Do you agree with Mr. Gorman's forecasting
methodology?
A.No. Regression forecasts are generally
considered superior to simple average trends because
averaging does not minimize prediction error while
regression analysis is considered a more efficient and
unbiased predictor of outcome especially if there is a
high correlation to a relevant measure like Palmer-Z.
Q.Do you agree with Mr. Gorman's contention that
the declining use per customer will moderate moving
forward compared to the 30-year trend?
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A.Mr. Gorman offers no statistical evidence that
customers' use of water efficient appliances and
conservation practices has reached a saturation point at
this time, nor does he acknowledge that technology
affecting the efficiency of water using appliances
continues to improve resulting in even greater savings.
Finally, the Company believes that there are still many
gains to make regarding conservation as the public
becomes even more aware and engaged in these efforts.
Q.Are you providing any Rebuttal Exhibits?
A.Yes. I am providing updates to the following
Schedules that accompanied the Company's response to
Staff Production Request #163:
·Exhibit No. 17 - Schedule 2 - Summary of
Historic Test Year and Test Year Revenues at
Present Rates
·Exhibit No 17 - Schedule 4 - VWID System -
Summary of Billing Determinants for customer
growth through March 2023
·Exhibit No 17 - Schedule 4 - Eagle - Summary of
Billing Determinants for customer growth through
March 2023
·Exhibit No 17 - Schedule 4B - VWID System -
Application of Present Rates for customer growth
through March 2023
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·Exhibit No 17 - Schedule 4B - Eagle New -
Application of Present Rates for customer growth
through March 2023.
With the exception of the adjustments calculated in the
Exhibits listed above, the Company's Rebuttal matches
Staff's Test Year Revenues at present rates.
Q.Does this conclude your Rebuttal Testimony at
this time?
A.Yes.
/
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(The following proceedings were had in
open hearing.)
MR. CARTER: Mr. Michaelson is available
for cross-examination and questions by the Commission.
COMMISSIONER ANDERSON: Thank you.
Mr. Burdin.
MR. BURDIN: Thank you.
CROSS-EXAMINATION
BY MR. BURDIN:
Q Mr. Michaelson, I have a couple of
questions on weather normalization. If I could direct
you to your rebuttal testimony, on page 3, you respond to
Staff witness Eldred's calculation of weather
normalization. You testified that the Company used the
30-year average Palmer Z amount, 0.18, to arrive at a
2022 predicted consumption of 94.02, which you then used
to arrive at the Company's weather normalization
adjustment of 2,812,978; is that correct?
A That's correct.
MR. BURDIN: Mr. Chair, at this point I
have an exhibit I would like to distribute, if I may. It
has been marked as Exhibit No. 142.
/
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(Staff Exhibit No. 142 was marked for
identification.)
COMMISSIONER ANDERSON: Without objection,
we will enter exhibit -- excuse me?
MR. HAMMOND: Sorry, Commission Chair, I
just wondered if that exhibit has been provided to --
MR. BURDIN: It will be provided right
now.
COMMISSIONER HAMMOND: Can we take a
moment so the parties can look at it? I just don't want
there to be an objection. I'm not saying there will be,
but yeah.
COMMISSIONER ANDERSON: Thank you, we will
review first. Thank you very much for that correction.
(Mr. Burdin distributing documents.)
MR. CARTER: And just for the record on
behalf of Veolia Water Idaho, I don't have an objection
with including this in the record. I do just want to
note, which I'm doing now, that this is newly introduced
and so we don't object to it being used for
cross-examination, but to the extent we haven't had a
chance to verify the accuracy of the numbers and that's
the basis of my non-objection, as long we're just clear
that the purpose of the exhibit is solely for
cross-examination.
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COMMISSIONER ANDERSON: Any other
discussion on this?
MR. BURDIN: Yeah, it is being introduced
and it is subject to review. It is being used for
cross-examination based on his rebuttal testimony.
COMMISSIONER ANDERSON: Without objection,
we will enter Exhibit 142 and give it the proper weight
that it deserves.
MR. BURDIN: Thank you.
(Staff Exhibit No. 142 was admitted into
evidence.)
Q BY MR. BURDIN: Mr. Michaelson, without
having the original in front of you, does this appear to
be an accurate representation of the workpaper that was
submitted by the Company in its updated response to Staff
Production Request No. 163 with the modification of
having a formula presented at the bottom of the page?
A It appears that way, yes.
Q And does that formula appear to accurately
represent how the Company calculated its 2022 predicted
residential consumption amount of 94.02?
A I don't want to say without looking at my
actual workpaper and seeing the formula that's in the
cell that created this.
Q Fair enough. Looking at this, what does
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the first column represent?
A Year.
Q And what does the third column
represent?
A The number of years from the beginning of
the analysis.
Q All right, in row 36, there are three
numbers represented. Would you please describe what
those numbers are?
A So in the third column, it's the 30th
year. The fourth column, it's the average Palmer Z over
that time period, and the last column is the predicted
residential based on the regression analysis using those
inputs.
Q All right, and then looking at the
formula, which I will represent is the formula that was
used but is subject to review, of course, when you look
at the number that was entered into representing the
target year, what number was entered?
A I don't know what you mean by target
year.
Q I'm sorry, you were trying to get the
predicted residential consumption on a specific year and
to do that you enter in a number into the formula. In
this case which number was entered?
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A Thirty.
Q And so having reviewed this workpaper now,
would you agree that 30 in fact represents the year 2023
and not 2022?
A No.
Q So in row 35, it's the year of 2022 which
we were trying to get the predicted amount, but has a
corresponding number of 29?
A But the schedule starts at zero.
Q Yes.
A There's 30 years -- through row 35,
there's 30 years of information there.
Q Correct, and you were trying to get the 30
years with a predicted year of 2022?
A Correct. You just said 2023 before,
though.
Q Yes, 2023 would be represented by 30.
A From 1993 to 2022, that's 30 years.
Q All right, that's all I have for this one.
We'll go ahead and move on, then. On page 1 of your
rebuttal testimony, you summarize Staff's review of
revenue adjustments. One of those adjustments is 48,606
added to revenue at present rates that is attributed to
billing errors; is that correct?
A That's correct, yes.
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Q Does that number correspond to the 1,019
known re-bills as provided in the Company's response to
Staff Production Request No. 163?
A Off the top of my head, I don't know the
number of re-bills.
Q That's fair. Did the Company accept
Staff's adjustments in the Company's rebuttal
calculations and testimony?
A Not all of them.
Q I'm sorry, the inclusion of the 48,606?
A That's reflected on the bottom of rebuttal
exhibit -- I'm sorry, Exhibit No. 17, Schedule 2.
Q I believe so.
A It is. My Exhibit No. 17, Schedule 2,
includes that $48,606.
Q Okay, and are you aware if the number of
re-bills has increased since the Company's last
response?
A I'm unaware.
Q Okay. Would you agree that the Commission
when it makes its final determination should use the most
up-to-date information on the billing errors and the
associated adjustment to the calculation of revenue at
present rate?
A Yes.
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MR. BURDIN: Thank you. That is all the
questions I have.
COMMISSIONER ANDERSON: Thank you,
Mr. Burdin. Micron, questions?
MR. NELSON: Yes, thank you. May I
approach the witness?
COMMISSIONER ANDERSON: You may.
(Mr. Nelson approached the witness.)
MR. NELSON: I'm providing a copy of the
of the testimony of Mr. Gorman in this proceeding.
CROSS-EXAMINATION
BY MR. NELSON:
Q Good morning, Mr. Michaelson.
A Good morning.
Q I want to ask you a couple of questions
about the residential sales forecast which you've talked
a little bit about with Staff's counsel already.
Mr. Michaelson, you have, I think, in front of you in
addition to Mr. Gorman's testimony that I provided your
own testimony and exhibits; is that correct?
A Correct.
Q Okay, the first thing I want to start with
is can I please ask you to refer to your direct testimony
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and in particular, can I call your attention to page 6?
A I'm there.
Q All right, on page 6, starting at line 16,
you testified a calculation of a predicted residential
usage amount was 96.88 thousand gallons per customer;
correct?
A Yes.
Q Okay. Now, I just want to make sure I'm
tracking, because I would ask you to now turn to your
rebuttal testimony and I'll call your attention to
page 3.
A Okay.
Q There you say in response to a discussion
about Staff witness Eldred that you've calculated a
2022 -- I'm looking at line 18 -- a 2022 predicted
consumption of 94.02.
A Correct.
Q Okay, can you just -- and I apologize if
I'm missing something key here, but which number is the
right number?
A So the 96.88 was the original direct
testimony and then in the Company's response to DPS-163,
we used the Staff's updated test year through the end of
2022 and recalculated these amounts, so that represents,
the 94.02 represents, the new calculation at the end of
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2022 --
Q Okay, so --
A -- and that also ties into the rebuttal
schedule.
Q The direct testimony, 96.88, that's for
essentially a partial '21, partial '22, and the 94.02 is
for the calendar '22; is that accurate?
A The 96.88 is using the original historical
test year, which ended June 2022, and the 94.02 is using
the full calendar 2022 year.
Q Okay, that's helpful, thank you.
COMMISSIONER ANDERSON: Does that conclude
your questions?
MR. NELSON: No, no, sorry, I did not mean
to sound like I was done.
Q BY MR. NELSON: Mr. Gorman's testimony, if
I could ask you to take a look at, if you look at page 9
of his testimony --
A I'm there.
Q -- Mr. Gorman recommends using a
normalized residential sales and this is in the context
of the Company's test year, just so we're getting apples
and apples, not the Staff's test year.
A I understand.
Q Okay. In the Company's test year,
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Mr. Gorman suggests or recommends using a level of
normalized residential sales of 103,686 gallons per
customer; correct?
A I'm sorry, could you say that number
again?
Q Sure. I'll call your attention again to,
I believe it's, page 9, lines 13 through 15 --
A I see it, I'm sorry, yes.
Q -- his recommendation is 103,686 gallons;
right?
A Correct.
Q Okay. Now, bearing in mind the Company's
proposal in your direct case test year, because I want to
get apples and apples here, of 96,885 and Mr. Gorman's
suggested level of 103,686, I'd like to now call your
attention to your Exhibit 5, page 28 of 34, and let me
know when you're there.
A Twenty-eight you said?
Q Yes, sir.
A Okay, I'm here.
Q All right, so on this table, you present
as part of your test year calculation actual annual usage
from 1992 through the test year 2022 of the 12 months
ending June for residential customers; correct?
A Yes.
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Q Okay, and then in the far right column,
you show under your -- with your methodology what the
predicted level of residential usage would be for each of
those years; correct?
A Correct.
Q And then you conclude at the very end in
year 2022, again, test year '22, with the predicted level
of usage of 96,885 gallons; right?
A Yes.
Q All right, would you agree with me,
setting aside the predictions, that the lowest level of
actual consumption in any time period in this 30 years
give or take that is presented was in 2019 with an actual
level of consumption of 103,460 gallons per customer?
A I would agree with that, yes.
Q Would you also agree with me that in 2019,
2020, and 2021, the Company's predicted level of water
usage was below the actual level of water usage in each
of those years?
A But you also have to consider what the
Palmer Z in each of those years were, so in 2019, the
Palmer Z was 1.14, which indicates a very wet period of
weather, and then the opposite is true for the other, so
yeah, that's why the Palmer Z is used in the regression
analysis --
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Q Sure.
A -- in an attempt to predict a normal
revenue and consumption year.
Q Understood. Would you agree with me that
it has never been the case in the 30 years that you
presented here that actual residential usage was less
than 103,460 gallons per customer; right?
A No, that was the lowest year on this
table, yes.
Q And it's never been the case, obviously,
that the residential usage has even been below 100,000
gallons per customer; right?
A Correct.
Q Now, I want to talk about the impact of
this change. Would you agree with me that if actual
sales are greater than the assumed level of normalized
sales in the rate case that that will create additional
revenues to the Company?
A Actual sales are greater than the amount
allowed, then, yeah, mathematically, that would be true,
just so the opposite would be true as well.
Q Understood, but the way the math works, if
you assume a lower level of sales than actually occurs
when you designed the rates, if sales actually turn out
to be higher, the Company benefits from that in terms of
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higher revenues; right?
A And the opposite is true as well, yes.
Q Okay. When you went and adjusted the
volumes to reflect the entire 2022 time period, that's
where, as I understand it, your calculation went from a
96,000 to the 94,000 that you discussed with Staff. Do
you recall that?
A I'm sorry, let me double-check the number
before I say yes.
Q All right.
A Sorry, could you ask that question one
more time?
Q Sure. I guess let me try it this way
because maybe this will be easier: If the Commission
accepts the Company's proposed test year, do you continue
to recommend using the 96,885 figure or do you recommend
now even with your test year using the 94,000 figure?
A I would use the rebuttal testimony. It's
more current, the rebuttal exhibit and our response to
DPS-163. That's more updated and it's in line with what
Staff had recommended, and with the exception of two
adjustments, you know, the Company matches Staff, so
that's what the rebuttal position is.
Q And in that instance, if the usage is
assumed to be 2,800 some odd gallons less, again, that
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means that if actual usage -- well, let me put it this
way: In 2022 actual usage was what?
A 103.13, which incidentally is lower than
the adjusted amount of Micron's testimony.
Q Sure, but which is closer, Micron's
recommended 103,686 gallons per customer as compared to
the actual 103,013 or your projected 94,000?
A It's not taking into consideration the
Palmer Z.
Q I got that, but which one was closer to
what actually happened?
A Micron's was closer.
MR. NELSON: All right, no further
questions.
COMMISSIONER ANDERSON: Thank you. City
of Boise?
MS. GRANT: No questions. Thank you,
Chair.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions. Thank you.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions. Thank you.
COMMISSIONER ANDERSON: Thank you.
Commissioners? Mr. Carter?
MR. CARTER: No redirect.
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COMMISSIONER ANDERSON: No redirect. With
that and no objections, I will excuse the witness. Thank
you, Mr. Michaelson.
(The witness left the stand.)
COMMISSIONER ANDERSON: Call your next
witness, Mr. Carter.
MR. CARTER: Veolia Water Idaho calls
James Cagle.
JAMES CAGLE,
produced as a witness at the instance of Veolia Water
Idaho, Inc., having been first duly sworn to tell the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. CARTER:
Q Mr. Cagle, please state and spell your
name for the record.
A My name is James Cagle, J-a-m-e-s, last
name C-a-g-l-e.
Q And are you the same James Cagle that
filed direct testimony and exhibits and rebuttal
testimony and exhibits on behalf of Veolia Water Idaho in
this case?
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A I am.
Q Now, Mr. Cagle, do you have some
corrections to your rebuttal testimony?
A I do, yes. On my rebuttal testimony, page
1, line 11 should be struck in its entirety. On page --
Q Okay, just hold one, if you would, so that
everyone can get on the same page.
A Oh, my apologies.
COMMISSIONER ANDERSON: Line 11 strike?
MR. CARTER: Page 1, line 11, strike.
Q BY MR. CARTER: Okay, go ahead to the next
one, Mr. Cagle.
A Page 6, line 4, refers to 24 states,
that's actually 23 states.
Q Okay, next and final?
A On page 17, line 6, and also on page 10 --
sorry, on page 17, line 10, my apologies, both those
lines refer to legal department. That should be HR
department.
Q Other than those corrections, if I were to
ask you the questions, the same questions, today, would
your answers be the same?
A Yes.
MR. CARTER: Okay, Commissioners, I'd ask
that Mr. Cagle's direct testimony and exhibits and
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rebuttal testimony and exhibits be spread upon the record
as if read.
COMMISSIONER ANDERSON: Thank you.
Without objection, we will spread Mr. Cagle's testimony,
direct and rebuttal, with those corrections and the
exhibits on the record as if read.
(Veolia Water Idaho, Inc., Exhibit Nos. 13
& 18 were admitted into evidence.)
(The following prefiled direct and
rebuttal testimony of Mr. James Cagle is spread upon the
record.)
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Q. Please state your name and business address.
A.I am James C. Cagle. My business address is
461 From Road, Paramus, NJ 07652.
Q. By whom and in what capacity are you employed?
A.I am the Vice President, Rates and Regulatory
Affairs for Veolia Water M&S (Paramus), Inc. ("VWM&S" and
formerly SUEZ Water Management & Services Inc.).
Q.What are your job responsibilities?
A.I am primarily responsible for the management
and direction of rate case filings for the regulated
affiliates of VWM&S. I am also responsible for oversight
of certain rate related compliance and reporting
requirements as prescribed by the various regulatory
commissions having jurisdiction over the Veolia
utilities.
Q.Please outline your educational and
professional qualifications.
A.I received a Bachelor of Accountancy degree
from the University of Oklahoma in 1987 and am a
Certified Public Accountant licensed in the State of
Texas. I was initially employed by United Water
Management & Services Inc., the predecessor of SUEZ Water
Management & Services Inc. as Director, Regulatory
Business in October of 2007 and have held my current
position since March 2010. Previous to that, I was
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employed by Atmos Energy Corporation, a natural gas
utility operating in twelve states, as Manager, Rates and
Revenue Requirements.
Q.Have you previously testified before the Idaho
Public Utilities Commission?
A.Yes. I provided in the Company's last rate
case filing (Case No. SUZ-W-20-02). I have also provided
testimony in rate case and other filings before several
other state commissions on various regulatory issues.
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Q.What is the purpose of your testimony in this
proceeding?
A.The purpose of my testimony is to support the
request of Veolia Water Idaho, Inc. ("VWID" or "Company")
for an increase in its base rates for water service.
Specifically, I am supporting the Company's request to
establish a Distribution System Improvement Charge
("DSIC") related to the replacement and/or rehabilitation
of distribution system transmission and distribution
("T&D") mains, services, hydrants, valves, meters, and
other infrastructure.
Q.Are you sponsoring any exhibits which support
the Company's request?
A.Yes. I am sponsoring: 1) Exhibit 13-1 which
summarizes DSIC programs for water infrastructure around
the country; 2) Exhibit 13-2 which includes two National
Association of Regulatory Utility Commissioners ("NARUC")
resolutions; and 3) Exhibit 13-3 which is a sample DSIC
calculation.
Q.In addition to the proposed DSIC, are there
other changes to the Company's tariff included in this
filing?
A.Yes. Tariff changes include the Company's
proposed change to the Brian Water Surcharge currently
under review by the Commission in Case No. VEO-W-22-03
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and reflect the Company's name change to VWID (Case No.
VEO-22-01). Additionally, certain other changes are
proposed to certain pages as described in the testimony
of Company witness Thompson.
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Q.What is a DSIC?
A.A DSIC is a surcharge mechanism which allows
for rate increases between general rate case proceedings
which specifically relate to non-revenue producing
investments to replace aging utility infrastructure.
Q.Please explain why the Company is requesting a
DSIC.
A.It is widely known that water infrastructure in
the United States is aging and in need of repair. The
United States Environmental Protection Agency estimates
that the 20-year national water infrastructure need is
approximately $472.6 billion, and of that, $312.6 billion
is needed for distribution and transmission projects.
Traditionally, companies would invest in these types of
improvements as their budgets would allow, absent
emergencies, and would be required to wait for cost
recovery till their next base rate case.
Some VWID mains date from the early 1900's. The
Company's records indicate approximately 4.2 miles of
main over 100 years old, 6.7 miles between 90 and 100
years old, and another 9.7 miles between 80 and 100 years
old. Based upon standard replacement, i.e. rate cases
and available funds, it could take 150 to 200 years or
more to replace the whole system. The replacement cycle
of aging mains of the system should be closer to 100
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years which is more consistent with the expected life of
mains.
Q.Can you give an example of SWID's replacement
timetable?
A.Yes. At the end of 2021, VWID had 1,454 miles
of mains. Over the past few years, the Company has
averaged approximately a 0.4% replacement rate. Based
solely on
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these two years of activity it would take approximately
250 years to replace the entire system. In 2020 and 2021
the average replacement cost was $140 per foot or
$739,000 per mile for various vintages of mains. The
Company anticipates a cost going forward of around $200
per foot ($1,056,000 per mile) which reflects the impacts
of inflation as well the availability of contractors.
Establishing a DSIC would allow the Company to pursue a
more aggressive infrastructure replacement program.
Q.When was a DSIC first implemented?
A.The first DSIC program was implemented in
Pennsylvania in 1997. Since that time, 18 other states
have implemented DSICs for water companies. Exhibit 13-1
summarizes the 18 states that have implemented a DSIC or
some type of mechanism that functions like a DSIC. While
different states may call the program something other
than DSIC, when examining the details, the general
philosophy and most of the components are the same.
Q.Has NARUC formed an opinion on this type of
program?
A.Yes. NARUC has by Resolution twice endorsed
the mechanism: first in its 1999 "Resolution Endorsing
and Co-Sponsoring the Distribution System Improvement
Charge", and again in 2005 in its "Resolution Supporting
Consideration of Regulatory Policies Deemed as Best
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Practices". These resolutions are provided in Exhibit
13-2.
Q.Why have NARUC and so many regulatory agencies
endorsed this regulatory mechanism?
A.The benefits of this type of mechanism are well
recognized. At page 8 of the 1996 Order of the
Pennsylvania Public Utility Commission (Docket No.
P-00961036), the
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Commission noted the significant capital requirements
facing the water industry and stated: "We agree with the
Company that the establishment of a DSIC would enable the
Company to address, in an orderly and comprehensive
manner, the problems presented by its aging water
distribution system, and would have a direct and positive
impact on water quality, water pressure and service
reliability. For these reasons, we endorse the concept
of using an automatic adjustment clause to address this
regulatory problem for the water industry in
Pennsylvania..." Similarly at page 41 of the 2006
Order of the New York Public Service Commission (Case No.
06-W-0131), the Commission noted that such capital
surcharge mechanisms "...provide for reasonably prompt
recovery of capital costs and depreciation expense
associated with actual reasonable incremental investment,
help avoid abrupt bill changes of the kind that upset
some customers in these cases, provide for an expedited
process for the review of actual investments prior to the
initiation or update of any surcharge, ... and are
subject to reconciliation so there will ultimately be no
over-or under-collection."
Overall, the major benefits of these types of
capital surcharges can be summarized as follows:
·enhanced service quality,
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·accelerated pace of system improvements,
·high level of customer acceptance,
·smoothing of revenue increases to customers,
·reduction of water lost in the distribution system
through leaks,
·long term viability of the water system, and
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·support of economic development through increased
investment and employment activity.
Q.How do customers benefit from such a mechanism?
A.The customer benefits in several ways. First,
the Company has a greater incentive to invest more in its
infrastructure which results in faster replacement of
aging infrastructure, decreasing the potential for main
breaks and outages as well as maintaining or increasing
fire flows and pressure which all benefit the customer in
the form of quality of service. Additionally,
accelerating such investments would ultimately have a
positive impact on lost water which, in turn, will
ultimately reduce costs of labor, repairs and the cost of
water. The use of such a mechanism benefits the Customer
by the implementation of smaller increases over time
rather than a single larger increase at one time reducing
"rate shock." When all is considered, the states that
have enacted DSIC type mechanisms seem to find
infrastructure surcharge programs working well to
maintain water quality and reliability for the customer,
contribute to the difficult infrastructure financing
solution and to efficiently assure the review and control
of rates within those states.
Q.Are there customer protections?
A.Yes. Commissions have the ability to review the
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projects to ensure they are appropriate and there is, in
most instances, a cap on the amount of increase that can
happen between rate cases. DSICs in other states also
require that an earnings analysis be performed to
determine if a company is over earning; if a company is
"over earning," then the surcharge would stop until such
time as the company is in an "under earning" position.
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Some states also perform an annual audit of the program
to review the actual projects implemented by the Company.
Q.How do you propose to structure this DSIC
mechanism?
A.As the DSIC mechanism established in
Pennsylvania has been in place and proved both fair and
effective for well over 20 years, I am proposing to use
it as a general guide which provides a simple, easily
administered and audited mechanism. In summary, the
types of eligible plant are established and a specific
formula for calculating the DSIC amount is utilized. This
is achieved by referencing the eligible plant to the
plant accounts used for accounting purposes as reflected
by the eligibility criteria. Provisions for audit and
review are outlined and an earnings test calculation
method is established.
Since the proposed DSIC mechanism only includes
investments made by the Company and placed into service
after its last base rate case, it is mathematically
impossible for the DSIC, in and of itself, to be the
cause of any temporary or permanent over earnings.
However, it is appropriate to include a periodic earnings
test calculation to show that the Company will not be
overearning on a regulatory basis before any DISC amounts
are included for the period in which the surcharge will
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be in effect. Additionally, because retirements are
included in the calculation, no depreciation expense can
inadvertently be included on retired assets.
Q.What types of infrastructure investments would
be included?
A.The Company is proposing the following
activities be included in the DSIC:
·Replace or renew water mains, valves (including
short mains and valves), services, meters, and
hydrants serving existing customers that have
reached their useful
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service life, are worn out, are in deteriorated
condition, or which negatively impact the quality
and reliability of service to the customer if not
replaced or renewed.
·Extend mains to eliminate dead ends which
negatively impact the quality and reliability of
service to the customer.
·Relocate or replace existing facilities as a
result of governmental actions that are not
reimbursed, including but not limited to
relocations of mains located in highway rights of
way as required by the Ada County Highway District
or other agencies.
·The replacement of infrastructure that is needed
to maintain or improve water quality and system
pressures and new or additional water treatment
facilities, plant or equipment required to meet
changes in state or federal water quality
standards, rules or regulations.
·The replacement or improvement of infrastructure
required to maintain adequate fire flows.
Q.Please describe the proposed DSIC formula.
A.The proposed DSIC formula is as follows:
DSIC Recovery Amount = ((NRB x Pre-Tax ROR)+ D)x
RCF)+E
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The abbreviations included in the formula are defined as
follows:
NRB or "Net Rate Base as applicable to the DSIC
projects" is the cost of the eligible plant in service,
net of associated retirements, associated accumulated
deferred income taxes and accumulated depreciation
specifically applicable to the costs of eligible plant
included. In the event the replacement is the result of
a relocation, the
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associated contribution in aid of construction (CIAC)
impacts are also includible such that any net
unreimbursed amounts are accounted for.
Pre-tax ROR is the overall rate of return as
authorized by the Commission for application in the DSIC
mechanism and includes the impact of income taxes.
D is the annualized depreciation on the plant
additions included in NRB as calculated by asset class
utilizing the depreciation rates last approved by the
Commission.
RCF is the gross-up factor which includes an
allowance to account for the Idaho Public Utility
Commission (IPUC) Assessment Rate (0.0019950 in this
filing) and Uncollectible Accounts Expense (0.0058986 in
this filing). Based upon the above factors, the
calculation results in the following:
1/(1-0.0019950-0.0058986) = 1.0079560.
E is residual amount calculated (+/-) under the
semi-annual reconciliation or required by Commission
audit.
The plant in service and other components of the
surcharge will be included in the Company's next base
rate case filing and, at the implementation of rates from
that case, the DSIC surcharge would be zeroed out and the
surcharge mechanism restarted.
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Q.Are there any DSIC recovery projects or amounts
reflected in the current rate proceeding?
A.No. This would be a new program starting at
the conclusion of this proceeding. None of the projects
included in the rate base as proposed by the Company
through March 31, 2023, would be included in any future
DSIC filing. However, there should not be
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any "Gap Period" as a result of base rate case. The Gap
Period represents the time period between when qualified
additions are reflected in base rates and the Company's
subsequent DSIC filing. For example, if increased rates
become effective in April and that increase only includes
qualified DSIC additions through the prior January, the
next DSIC surcharge after the rate increase would include
qualified additions from January through September (i.e.,
six months after the April effective date).
Q.How would the Company recover the DSIC Recovery
Amount?
A.A surcharge would be applied to all metered
customer's bills where the DSIC recovery amount is
divided by the Company's number of bills reflected as
equivalent 5/8 inch meters and surcharge amounts
developed and charged based upon the customers meter size
utilizing the meter capacity ratios approved in the most
recent base rate case filing. The surcharge will be
applied on a bills rendered basis.
On the next semi-annual submittal, a reconciliation
on the over (under) recovery of DSIC surcharge would be
included. An earnings test, as previously discussed,
will be provided with the first DSIC filing and annually
thereafter.
Q.Do you recommend a cap on the DISC surcharge?
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A.Yes. As proposed, the DSIC Rate applied between
base rate filings would be limited to 7.5% of the total
revenue requirement established in the last base rate
case, with a provision to reset to zero as of the
effective date of new base rates that provide for the
prospective recovery of the annual costs previously
recovered under the DSIC surcharge. Additionally, the
mechanism establishes a provision for the DSIC to not be
increased or reset to zero if, in any semi-annual filing,
the earnings test previously
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discussed indicates the Company will earn a rate of
return that exceeds the rate of return established in the
last general rate filing.
The DSIC percentage would be updated on a
semi-annual basis after the initial implementation.
Eligible plant additions placed in service during the six
month period would be utilized in the calculation and,
allowing for a period for calculation and review and
approval period of 45 days. Any request for a change in
the DSIC rate would be filed, together with full
supporting data.
Q.Have you prepared an example of the DSIC
calculation?
A.Yes. Please see page 5 of the Exhibit 13-3.
The amounts included therein are for illustration
purposes only and do not reflect any actual amounts.
Q.Does this conclude your testimony at this time?
A. Yes.
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Q.Please state your name, occupation and business
address.
A.I am James C. Cagle, Vice President, Rates and
Regulatory Affairs for Veolia Water MS (Paramus), Inc.
("VWM&S"). My business address is 461 From Road,
Paramus, NJ 07652.
Q.Are you the same James Cagle that filed direct
testimony in this proceeding?
A.Yes.
Q.What is the purpose of your rebuttal testimony?
A.The purpose of my rebuttal testimony is to
discuss:
Staff's proposed ratebase calculation as it relates
to average vs. end of period
Staff's and micron's comments regarding the
Company's proposed DSIC mechanism.
Staff's proposal regarding working capital
Staff's proposed adjustments to VWM&S costs
Q.Please describe Staff's proposed rate base
treatment.
A.As described in Mr. English's testimony on page
8, lines 19, Staff calculated rate base using the Average
of Monthly Averages.
Q.What is the difference between Staff's proposed
rate base and the test year end rate base as of December
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31, 2022?
A. Per Staff's work paper included as Exhibit 102
attached to Mr. English's testimony, Staff's proposed
rate base is $261,118,238. Per that same work paper, the
rate base as of December 31, 2022 would be $275,069,384.
So Staff's proposed rate base, using the Average of
Monthly Averages approach, is $13,951,146 less than rate
base ending December 31, 2022.
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The rate base proposed by the Company, projected to
March 31, 2023 and updated through the rebuttal testimony
of Mr. Njuguna, is $280,685,480. Staff's use of the
Average of Monthly Averages approach results in a
proposed rate base that is substantially lower than the
Company's proposal. If Staff were to use rate base as of
December 31, 2022, it would still be lower than the
Company's proposal, but the difference is much less. .
Q. When are rates anticipated to become effective
in this case?
A.Currently the Company would anticipate the
Commission would render a decision in mid-April for rates
effective around May 1, 2023.
Q.If the Commission were to adopt Staff's average
rate base methodology, would the costs associated with
that rate base match the period of recovery?
A.No. Utilizing the amounts provided in Staff's
rate base referenced above, no recovery would be allowed
approximately $14 Million of rate base in service as of
December 31, 2022, creating significant regulatory lag.
Stated another way, if the Commission adopts Staff's
rate-base methodology, the Company will be unable to
recover approximately $1.4 Million in revenue requirement
during this rate case. This creates a lag in recovery
that, in turn, can result in under-recovery and more
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frequent rate cases.
Q.How quickly is the company's ratebase
increasing?
A.The Company's last rate case was settled and no
rate base amount was stated in the Order. However,
comparing the projected rate base as of March 31, 2021 as
filed in the Company's last rate case filing of
approximately $229.6 Million to the projected rate base
as of March 31, 2023 of approximately $280.7 Million,
rate base has increased
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approximately $51M or approximately 11% per year. If
adjusting for the Eagle water acquisition adjustment and
reduction in the TCJA regulatory liability, rate base is
increasing approximately 8.5% per year.
Q.What is the current inflation rate?
A.The inflation rate, measured by the percent
change in the consumer price index, over the past two
years has averaged 6.35%. (4.7% in 2021, and 8.0 in
2022). The latest information for 2023 indicates a 6.4%
rate of inflation. While this is not as great as the
double-digit inflation seen in the late 1970s and early
1980s, the inflation rate is substantially higher than in
most years since then.
Q.Does utilizing an average rate base allow the
company an adequate opportunity to earn a reasonable rate
of return?
A.Considering the increases in rate base, and
inflation, no. If the Company's recovery is based on
backward-looking averages of ratebase in prior months, in
an environment of high inflation and large increases in
rate base, the Company's recovery will always be
substantially lower than current ratebase would allow.
When the four-month lag between investment and recovery
is added to this, the Company's rate of return can be
substantially below what it is entitled to."
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Q.Staff references previous commission Orders
that discuss revenue increases and cost savings resulting
from capital expenditures. Please discuss.
A.As related to revenues, the Company's revenue
normalization includes annualized customer growth both to
the end of December (in its response to Production
Request No. 163) as well as additional customer growth
through March 2023 in order to match revenues to the test
year end.As related to cost savings, there might be some
small
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CSB REPORTING 676 CAGLE, Di-Reb 3a
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savings in maintenance costs. However, these small
savings would pale in comparison to the inflation and
additional capital expenditures that will occur during
the period between the midpoint of Staff's average test
year and the date on which rates will go in effect.
Stated another way, the period of time between the
midpoint of Staff's proposed average test year and the
date on which new rates will go into effect is
approximately 10 months. In this environment of inflation
and large investments, the Company's rate base will
increase substantially during that 10 months, and any
small savings can be expected to be immaterial. Staff's
approach would decrease or deny the opportunity to
recover on the value of investments made during this
period.
Q.What is your recommendation?
A.It is difficult to adopt recommendations that
address such issues when the result is the matching of
rates to recover the costs in which rates will go into
effect increase rates to customers. However, our
recommendation is that the Commission reconsider the old
Orders relied on by Staff and consider the regulatory lag
created, the mismatch in revenues to rate base, ratebase
growth, inflation, from a holistic standpoint and utilize
a test year end rate base in this case.
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Working Capital
Q.Is Staff's elimination of the Company's
proposed Working capital allowance appropriate?
A.No. As Staff states, utilizing a 1/8th method
is one of the generally accepted methods of calculating
working capital.
Q.Is the Company's proposed working capital
allowance calculated as Staff stated?
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A.Not exactly. While generally correct, the
Company's calculation utilized O&M expense and removed
amortization expense amounts which could be considered
non-cash. The Company then applied the 1/8th method to
the remaining amount to arrive at the Cash Working
Capital Allowance. The balance of materials and supplies
and prepayments were then added to arrive at the total
Cash Working Capital Allowance.
Q.What is your recommendation?
A.As an acceptable methodology, I believe the
proposed Working Capital Allowance is appropriate
($3,997,317 at December 31, 2022 or $4,282,288 as
projected at March 31, 2023) as adjusted for the O&M
expense per this rebuttal. However, if the Commission
agrees with Staff regarding Cash Working Capital, the
balance of Materials and Supplies and Prepayments
$1,583,204 at December 31, 2023 or $1,555,760 as
projected at March 31, 2023) should be included in rate
base. Were the Company to have performed a lead/lag
study to calculate working capital, these items would
have been included as separate line items in rate base.
Distribution System Improvement Charge ("DSIC")
Q.Does Staff support implementation of a DSIC?
A.No. While supporting the company's work to
replace or upgrade aging infrastructure, staff's position
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is that recovery through traditional ratemaking is
appropriate as described in Mr. Culbertson's testimony
(page 18 beginning on line 7). Staff also points out that
other Idaho utilities have been denied such mechanisms.
Q.Have States that have DSIC or similar
infrastructure mechanisms also allowed similar mechanisms
for electric and gas utilities?
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A.No. While other interim cost recovery
mechanisms for electric and gas utilities may exist, many
states have allowed DSIC or DSIC like mechanisms only for
water companies recognizing the need for such mechanisms
to provide for the replacement of aging infrastructure.
Per the National Association of Water Companies, of the
23 States allowing DSIC, only two (Pennsylvania and West
Virginia) allow DSIC for other utility sectors.
Q.Would Staff have an opportunity to review the
projects included in the DSIC?
A.Yes, this is a component of the DSIC mechanism
as described in my previous testimony.
Q.Would the implementation of a DSIC mechanism
address a portion of the regulatory lag issues when
utilizing an average historic test year?
A.Yes, in part. Because recovery of DSIC
infrastructure would begin between full rate case
filings, it would partially assist in reducing regulatory
lag. However, it would not address the regulatory lag
created at the time of implementation of rates in a rate
case.
Q.How are DSIC mechanism viewed by rating
agencies?
A.DSIC mechanisms are viewed favorably by rating
agencies. S&P Global in its research update dated
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September 5, 2019, (Included as Exhibit No. 18) describes
this view.
"Our assessment of SWR's1 and SWNJ's2 business
risk profiles are based on both entities' lower-risk and
rate-regulated water and wastewater utility businesses.
SWR serves about 2.1 million customers across New Jersey,
New York, Delaware, Rhode Island, Pennsylvania, and
Idaho, whereas SWNJ serves about 1.2 million customers in
New Jersey and New York. We view both companies'
management of regulatory risk as above
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____________________
1Now Veolia Utility Resources LLC.
2Now Veolia Water New Jersey, Inc.
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average, partially reflecting the extensive use of
constructive regulatory mechanisms, including
distribution system improvement charge (DSIC) riders, a
revenue decoupling mechanism, and multiyear rate plans in
certain jurisdictions. Under our base-case scenario, we
expect that the companies will continue to effectively
manage regulatory risk, in part due to the frequency of
rate case filings, and will continue to use riders that
we collectively view as favorable for both companies'
credit quality."
Q.Does Staff discuss the benefits Idaho customers
receive from the S&P Global rating?
A.Staff witness Terry discusses the benefits
customers receive by being a subsidiary of VNA being
lower debt rates as well as benefit from gaining
economies of scale with purchasing inventory. Idaho
ratepayers are certainly benefiting from constructive
mechanisms in the other five Veolia utility states that
have revenue decoupling, partially and fully forecasted
test years, as well as DSIC mechanisms.
Q.Did Micron's witness York make any suggestions
regarding the DSIC Mechanism?
A.Yes. Ms. York suggested including a reduction
for the depreciation expense associated with the value of
the retired assets. The DSIC mechanism approved for
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Veolia Water Delaware, Inc. includes such a provision
which could easily be included in a DSIC mechanism for
Veolia Water Idaho. Ms. York expresses a concern that
appears to result from something regarding
synchronization, though the entirety of the concern is
not clear to me. If the concern is regarding a base
spending3 amount similar to the DSIC provisions for
Veolia Water New Jersey, Inc., such a provision could be
added. Including a base
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____________________
3"Base spending" means the level of investment equal to the water
utility's depreciation expense for utility plant accounts: 343
(Transmission & Distribution Mains), 345 (Services), and 348
(Hydrants), as reported in the water utility's most recent annual
report."
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spending amount would mean that the DSIC surcharge
calculation would include a reduction in the overall
level of capital expenditures to be recovered through the
mechanism be reduced for depreciation expense related to
the historic level of depreciation expense in the related
NARUC plant accounts addressing both issues.
Shared Assets
Q.Please address Staff's adjustments to the costs
related to shared assets.
A.As stated in the testimony of Ms. Jacobs, the
M&S Company makes capital expenditures, generally related
to investments in information technology hardware and
software, as well as other assets to benefit VWID and its
affiliates. In the absence of the M&S company investments
in these assets, VWID would have needed to make these
investments on a standalone basis in order to support its
operations and the delivery of reliable service to its
customers.
The calculation of the costs attributed to Idaho,
based upon the Modified Massachusetts Allocation
Methodology ("MAM"), was included in the Company's
filing.
Staff had a few concerns regarding the allocation:
·The allocations being at cost,
·Adding a return for Shared Assets including a
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return for the parent company
·Concerns around depreciation expense
·The wage adjustment factor
·The insurance premium adjustment.
Q.What costs related to shared assets are
allocated from VWM&S?
A.As described in the Company's cost allocation
manual, only the book cost, i.e. the departmental costs
and depreciation expense of the shared assets, is
recorded. No return
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is included in the booked costs. For ratemaking
purposes, the Company is requesting that a return be
allowed on the overall investment made to serve its
utilities customers including Idaho. This component
compensates the Company as a whole for the investment in
shared assets but is retained by VWID on its books and
records and does not enrich its affiliate VWM&S.
Previous to the adoption of the cost allocation
manual in 2015, capital expenditures generally related to
investments in Information Technology hardware and
software, as well as other assets related to the
corporate office, would have been allocated on a one-time
basis to each operating company and reflected as assets
on the operating company's balance sheet. As such, the
allocated cost of the assets increased the operating
company's rate base and was recovered in rates through
depreciation expense and return. However, it was
determined that the recording of partial assets on the
books of subsidiary companies was incorrect as the
ownership responsibility for those assets lies with
VWM&S. Additionally, if the allocation of such assets
needed to be changed due to changes in the level of
services (for example additional utility customers
needing to share in those costs through an acquisition),
the reallocation of such "baby assets" would be required
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at least annually. In order to come to the appropriate
result, the current methodology was adopted.
With the current methodology, capital expenditures,
generally related to information technology such as the
PeopleSoft accounting software upgrade and Powerplan
asset accounting software etc., are now recorded on the
VWM&S balance sheet and the depreciation expense on these
assets is allocated to the operating companies based upon
the three-factor formula as a part of VWM&S charges. The
carrying costs
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associated with assets are calculated and recovered from
the utility customers who receive the benefit of the
assets as a part of rate case filings. The carrying costs
are calculated utilizing the capital structure, debt and
equity rates included in the rate case filing.
The intention is that the revenue requirement
be the same for these assets under either the updated
method or the previous method.
Q.What are shared assets important to VWID and
its customers?
A.Utilizing shared assets for general ledger
accounting, customer billing, budgeting, and other common
application provides VWID with systems for which it is
only paying an allocated portion. As stated in the
adopted testimony of Ms. Jacobs, "the M&S company makes
capital expenditures, generally related to investments in
information technology hardware and software, as well as
other assets to benefit VWID and its affiliates. In the
absence of the M&S company investments in these assets,
VWID would have needed to make these investments on a
standalone basis in order to support its operations and
the delivery of reliable service to its customers."
Allowing carrying costs at the allowed rate of return
provides a reasonable incentive for VWID to avoid paying
for standalone systems to meet its and its customer's
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needs.
Q. Is there are recent Commission decision from
which analogies can be drawn?
A.Yes. In the Matter of Idaho Power Company's
Application for an Accounting Order for Costs Associated
with Cloud Computing Arrangements (IPC-E-20-11), Idaho
Power stated that the current accounting treatment
provides a financial disincentive for it to invest in
certain cloud computing arrangements. Idaho Power
proposed to capitalize all costs associated with
cost-effective cloud computing because the cloud
computing
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investments are "equivalent to that of a traditional
on-premise [information technology] solution."
While not exactly the same, I believe the proposal
and subsequent Order, addressed such disincentives.
Q.Please comment on Staff's concern about the
proposed return.
A.The intention is that the return be consistent
with that ultimately allowed by the Commission in this
proceeding. If the Commission allows a return different
than that proposed by the Company, an adjustment should
be made to the return amount consistent with that
decision.
Q.How are the depreciation or amortization rates
determined for shared assets?
A.As mentioned above, shared assets are generally
comprised of Information Technology hardware and
software, as well as other assets related to the
corporate office. Approximately 20% of the overall asset
value is the implementation costs of cloud computing
arrangements, which are amortized over the lives of the
arrangements. Otherwise, IT assets are depreciated over
their expected lives or, if leased, over the term of the
lease as is appropriate for GAAP purposes. The benefits
provided by shared assets, as described above, apply to
all entities which utilize those shared assets. As a
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result, the Company does its best to match the
depreciable rates of the assets with the actual expected
lives of the assets. As the these depreciation costs are
governed by GAAP, they are depreciated on an individual
basis rather than a group basis like most utility assets.
Additionally, the amount allocated to Idaho is a
relatively small portion (approximately 8.5%) of the
total VWM&S depreciation expense.
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Q.What is your recommendation?
A.I recommend that the commission reject Staff's
adjustment reducing depreciation expense, and include the
carrying cost component adjusted to reflect the decision
of the commission in this case.
VWM&S Department Costs
Q.Please address Staff's adjustments to VWM&S
departments.
A.Staff has suggested that certain legal and HR
department costs be removed from the revenue requirement
as well as the cost related to the Chief Operating
Officer.
Q. What are the responsibilities of the VWM&S
Legal department?
A. Per the Company's cost allocation manual, the
responsibilities of the VWM&S Legal department are as
follows:
Handle all matters related to general litigation
involving the corporation;
·Perform legal services for securities and
corporate financial transactions, financial
reporting and disclosures, business organizations,
mergers, acquisitions and business development,
corporate governance, internal controls and risk
management, insurance, executive compensation;
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·Manage legal services for commercial and contract
law matters for the corporation, including real
estate matters and land use permits;
·Serve as board secretary and support corporate
governance functions, board of directors meetings,
legal opinion letters, assists audit and
compliance functions, performs and attests
internal controls, and ensures compliance with
corporate registration and regulation;
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·Retain and manage external counsel to provide
legal representation in specialized areas of law
and to manage variable legal work;
·Legal work supporting the negotiation of water
purchase agreements and other procurement
contracts as well as legal work related to
franchise renewals, water rights;
·Provide legal advice and representation with
regard to intellectual property matters;
·Perform legal services for matters involving
environmental law for the corporation including
environmental permitting activities, due
diligence, defense in enforcement actions,
compliance advice, representation in environmental
cleanup and environmental litigation costs;
·Provide legal advice, representation and
counseling in matters arising under federal and
state water regulatory laws, regulations and
policies as they relate to the Company's utility
related assets for water and waste water;
·Provide risk management services including
management of the insurance and surety bond
programs; and,
·Manage and administers corporate legal and
regulatory compliance programs, other than Ethics
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Compliance.
Q.Is it reasonable to assume such services can be
provided by outside counsel?
A.No. Such services are not reasonably assignable
to outside counsel. Neither would it be reasonable to
assume such services could be acquired for the amount
allocated from VWM&S for such services of approximately
$160k. Outside counsel is retained to handle specialized
issues related to Idaho law, and are not a substitute for
in-house legal counsel.
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Q.How many employees are in the VWM&S legal
department providing services to VWID?
A.There are 10 VWM&S employees in the legal
department that provide services that benefit Idaho.
Three provide services to the utilities while 7 provide
services to the utilities as well as other Veolia
business units.
Q.How are the costs of the legal department
allocated?
A.As described in the Cost Allocation Manual, the
costs of VWM&S employees are allocated based upon a
Modified Massachusetts Allocation Methodology. Employees
providing services to utilities are allocated only to the
utilities. Employees also providing services to other
SWM&S business units are based upon a the same
methodology however the allocation factors utilized
includes allocations to the other Veolia business units
which are receiving services from a given department.
Consequently, approximately 9.5% of the costs of the
"utility only" employees are allocated to Idaho while
approximately 7.7% of the employee costs that provide
services to all business units to which VWM&S provides
services, including the utilities, are allocated to
Idaho. The costs of employees which do not provide
services to the regulated utilities, including Idaho, are
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not allocated to the regulated utilities, including
Idaho.
Q.Why is this reasonable?
A.Sharing the costs of the legal department
provides a significant breadth of expertise for the legal
services needed for Idaho is appropriate. Costs for
corporate governance, intellectual property, internal
controls, privacy, environmental law, litigation, to name
a few of the functions are best provided from a corporate
perspective rather than an
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individual operating division perspective and only a
portion of such costs are allocated to Idaho.
Q.Is there a specific example of this you can
provide?
A.Yes. As previously mentioned, Staff witness
Terry discusses the benefits customers receive by being a
subsidiary of VNA being lower debt rates as well as
benefit from gaining economies of scale with purchasing
inventory. Debt funding is raised at VWID's immediate
parent (VUR) and a portion of the costs of achieving such
borrowings is one part of the Legal department costs,
through its responsibilities surrounding corporate
financial transactions, benefiting Idaho directly as well
as other utility business units. Similarly, achieving the
benefits from gaining economies of scale is also a part
of legal costs through contract negotiation and review,
which benefits not only Idaho but the other businesses as
well. In both instances, only a portion of the overall
cost is allocated to Idaho.
Q. What are the responsibilities of the VWM&S
Human Resources ("HR") department?
A. Per the Company's cost allocation manual, the
responsibilities of the VWM&S HR department are as
follows:
·The recruitment, screening, and selection of
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internal and external candidates;
·Establishing relocation programs and management of
employee relocations, including all administration
and execution costs of the relocation program;
·Design and administer compensation processes
including job evaluations, annual salary planning,
incentive programs, executive compensation,
deferred compensation, long term incentive
programs;
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·Design, management and implementation of health,
prescription, life insurance, pension and
retirement, reimbursement accounts, employee
assistance programs, and other benefits for all
employees;
·Manage strategy, negotiations, and contract
interpretation. This includes arbitration
resolution, mutual gains bargaining, local
management support on grievances, discipline,
adherence to the contract and training;
·Identification, development, and delivery of
training programs to enhance the skills and
capabilities of the workforce;
·Provide support on Human Resources technology and
processes, technology strategy and solutions,
portfolio management, corporate and ad hoc
reporting, data analysis, data integrity and
oversight, and system testing; and, process and
release management;
·Succession planning, performance management,
career development, mentoring, executive coaching,
career planning & development, and
employee/organizational assessments;
·Management and administration of all short and
long term disability programs and FMLA, whether
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done internally or by a third party; disability
insurance premiums, if any, and the cost of claims
for self- insured programs and insured programs
with a deductible; medical services required by
the Company for disability cases, such as second
opinions, consultations, etc.; disability case
management and return to work programs;
investigations of short term disability claims;
legal services, whether internal or external,
related to disability cases;
/
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·Provide safety training requirements and
communication tools, needs assessments and
training program development, and compliance
reporting, including investigation leadership and
support; and,
·Labor Relations including contract negotiations
and grievance management.
Q.How many employees in the VWM&S HR department
provide services to VWID?
A.There are 12 VWM&S employees in the HR
department that provide services benefitting VWID. Two
provide services to the utilities while 10 provide
services to the utilities as well as other VWM&S business
units.
Q.How are the costs of the HR department
allocated?
A.The process is the same as described above for
HR department costs. Where, approximately 9.5% of the
costs of the "utility only" employs are allocated to
Idaho while approximately 7.7% of the employees costs
that provide services to all business units to which
VWM&S provides services, including the utilities are
allocated to Idaho. Again, the costs of employees which
do not provide services to the regulated utilities
including Idaho are not allocated to the regulated
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utilities including Idaho.
Q.Why is this reasonable?
A.Like legal department, the shared costs of the
HR department provides a significant breadth of expertise
for the H.R. services needed for Idaho. As an example,
one of HR's responsibilities is the design, management
and implementation of health, prescription, life
insurance, pension and retirement, reimbursement
accounts, employee assistance programs, and other
benefits for all employees. HR administers these plans
for all eligible employees and the costs of such
administration is allocated to each company (whether
regulated or unregulated) to which the plans apply.
/
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Q.What has Staff recommended regarding costs
associated with the VWM&S Legal department and HR
department costs?
A.Staff has recommended a reduction in Legal and
HR costs allocated from VWM&S of $33,890 and $35,356
respectively with the belief that there are costs being
allocated to Idaho that are not related to Idaho.
Q.What is your recommendation?
A.As described above, the allocation is designed
so that the costs of employees which do not provide
services to the regulated utilities, including Idaho, are
not allocated to the regulated utilities including Idaho.
The cost of employees that provide no service to the
regulated utilities are not allocated to the regulated
utilities.
Therefore, I recommend that the Commission deny
Staff's adjustments to VWM&S costs for Legal department
and HR department costs.
Q.Staff states that the main responsibility of
corporate executives is to increase profits for
shareholders. Is that the case?
A.No. The main responsibilities of an executive
at a utilities company is to ensure that the utilities
operates efficiently and effectively, meets its strategic
objectives, and provides high-quality services to its
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customers while complying with applicable regulations.
This includes managing and overseeing operations,
employees, resources and assets, ensuring the utility
operates efficiently and effectively. Executives are also
responsible for ensuring compliance with regulations and
managing the company's financial resources, including
budgeting, forecasting and financial reporting. A part of
managing the company's financial resources are to request
changes in prices through the rate case process in order
to ensure the financial viability of the utilities.
/
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Q.What is the function of the Office of the Chief
Operating Officer ("COO")?
A.The COO is responsible overseeing all business
activities of the Veolia utilities including management
of the general managers, approval of capital commitments
and capital projects, setting and defining priorities
etc., as well as supporting the operations before the
Board of Directors. The COO role manages the leadership
team including all operational matters such as water
quality, EH&S, technical services, capital planning and
delivery, people and leadership management etc. Counter
to Staff's claim, the COO clearly benefits Idaho
ratepayers as well as the customers of Veolia's other
regulated utilities.
Q.What has Staff recommended regarding costs
associated with the COO?
A.Staff has recommended excluding related
allocated costs of $61,237 on the basis that it does not
benefit Idaho ratepayers but supports the board of
directors and helps the parent company earn a profit for
shareholders.
Q.What is your recommendation?
A.As Staff's contention is incorrect, I recommend
that the Commission deny Staff's adjustments to VWM&S
costs for the COO of $61,237 as well as the adjustment to
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remove the allocation portion of training and travel for
corporate executives of $1,286.
Q.What is the actual 2023 merit increase
percentage?
A. The actual weighted average merit increase
granted is 3.62% and will be effective April 1, 2023.
/
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Q.What is your recommendation?
A.We recommend that the Commission include the
proposed salary increase percentage with the expectation
that it desire is to better match the costs to be
incurred to the period in which rates will be in effect.
Q.Does this conclude your rebuttal testimony?
A.Yes.
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(The following proceedings were had in
open hearing.)
MR. CARTER: Mr. Cagle is now available
for cross-examination and questions by the Commission.
COMMISSIONER ANDERSON: Thank you.
Mr. Burdin.
MR. BURDIN: Thank you.
CROSS-EXAMINATION
BY MR. BURDIN:
Q Mr. Cagle, you have worked on general rate
cases in several different states; is that correct?
A That's correct, yes.
Q And would you agree that the statutory
time frame for processing a rate case in Idaho is shorter
than most of the time allowed in other states?
A Various states, you know, differ. Idaho,
I believe, is one of the shorter, yes.
Q And in Idaho is it up to the Company to
determine when it files a general rate case?
A Yes, generally. Yeah, I mean, the Company
would file at its option.
MR. BURDIN: All right, thank you. That
is all the questions I have.
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COMMISSIONER ANDERSON: Thank you,
Mr. Burdin. Micron.
MR. NELSON: Yes, thank you.
CROSS-EXAMINATION
BY MR. NELSON:
Q Mr. Cagle, I want to start with one of the
corrections you made. On page 6, you noted a correction
changing the number of states who had adopted a DSIC
mechanism changing from 24 to 23. Did I understand your
correction correctly?
A That's correct, yes.
Q Just so the record is clear, can you
please define what DSIC stands for?
A It specifically stands for distribution
system improvement charge.
Q And I'm curious, did the correction, is
that a result of you miscounting the number of states
when you filed the testimony or subsequent to the
testimony has one of those states changed its position
and no longer has the mechanism?
A Very specifically, I counted Connecticut
twice.
Q It's a very small state. Okay, got it.
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Now, back to the regularly scheduled questions, I want to
talk a little about the DSIC, so first of all, just to
level set the impacts, would you agree with me that under
the Company's proposal, the mechanism if improved -- if
approved, excuse me, could increase customer rates up to
an additional 7.5 percent; correct?
A Over the course of the DSIC program, yes,
the 7.5 percent is the proposed maximum.
Q And that's on top of the rate increase
that the Company has sought in this case; correct?
A Yes, the DSIC mechanism is a continuing
mechanism and then would be reset to zero, if you will,
at the next rate case filing.
Q Sure. If the mechanism is not approved,
will the Company nevertheless continue to make
investments as may be necessary to maintain a reasonably
reliable system?
A Yes. The purpose of the DSIC, of course,
is to encourage the Company to do that more quickly, to
incorporate that recovery into its planning and to
utilize the DSIC in all of those processes.
Q But up to now has the Company failed to
make investments that are necessary to maintain a
reasonably reliable system?
A No.
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Q If the mechanism is not approved, will the
Company nevertheless continue to make such investments as
may be necessary to reasonably address leakage?
A Yes, the Company will make investments and
replace pipe in the manner that it has previously.
Q Now, did you have a chance to review
Ms. York's testimony in this case?
A Yes, I did.
Q Setting aside Ms. York's initial
recommendation that the DSIC be rejected, do you recall
that she had an alternative recommendation to the
Commission?
A I believe she had a couple of points and
unfortunately, I don't remember specifically what those
were.
Q All right, well, let's go to your
testimony on this subject. Can you please look at your
rebuttal testimony at page 7?
Are you there, sir?
A Yes.
Q All right, and there do you see a
discussion, a Q&A, that you ask yourself regarding
Ms. York's alternative recommendation to the Commission
in the event the Commission approves the DSIC?
A Yes.
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Q Okay. My question, I was trying to parse
through this, but my understanding from your testimony is
that ultimately, the Company does not object to
Ms. York's alternative recommendation if the Company --
if the Commission, excuse me, elects to approve the DSIC;
is that accurate?
A So as I recall, the portions, there, I
believe, were only two recommendations with that. One
had to do with reducing depreciation expense associated
with the retired assets. There's a portion of that that
is already included in the DSIC as proposed. There is
another portion which is actually done in Delaware where
you include cost of removal into the computation of
accumulated depreciation within the calculation. That
could easily be incorporated in here, also, so yes, I
would say that that is something that could very well be
done if the Commission so chose.
MR. NELSON: Okay, thank you. That's all
the questions I have.
COMMISSIONER ANDERSON: Thank you very
much. City of Boise?
MS. GRANT: Nothing, Chair. Thank you.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions. Thank you.
COMMISSIONER ANDERSON: Ms. Ullman?
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MS. ULLMAN: No questions. Thank you.
COMMISSIONER ANDERSON: Commissioners,
questions? Commissioner Hammond.
EXAMINATION
BY COMMISSIONER HAMMOND:
Q Is it the Company's responsibility to
provide safe and reliable service under the law or is it
the Commission's responsibility?
A The Company is responsible for providing
the service.
Q And when we say encourage, the Company is
required to provide safe and reliable service. Are you
aware of any authority that requires that someone
encourage the Company to do something to meet that end?
A No.
COMMISSIONER HAMMOND: No further
questions.
COMMISSIONER ANDERSON: Thank you.
Mr. Carter, redirect?
MR. CARTER: No redirect.
COMMISSIONER ANDERSON: Thank you very
much. Without objection, we will excuse the witness.
Thank you very much for your testimony.
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(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Carter, you
may call your next witness.
MR. CARTER: That is all the witnesses we
have.
COMMISSIONER ANDERSON: That's very good.
Thank you. It looks like without objection, let's go
ahead and take a break for lunch. Can we try to be back
by 1:00? It gives us an hour-and-nine minutes. If
you're a few minutes late, that's fine, but let's try
1:00. At that, we're at recess.
(Lunch Recess.)
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