20230404Customer Hearing Transcript Vol III.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 III - Pages 717 - 1218
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 718 APPEARANCES
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I N D E X
WITNESS EXAMINATION BY PAGE
Ty Johnson Mr. Burdin (Direct) 725
(Staff) Direct Testimony 728
Travis Culbertson Mr. Burdin (Direct) 764
(Staff) Direct Testimony 766
Joseph Terry Mr. Burdin (Direct) 795
(Staff) Direct Testimony 797
Mr. Carter (Cross) 823
Ms. Ullman (Cross) 840
Commissioner Hammond 841
Mr. Burdin (Redirect) 843
Michael Eldred Mr. Burdin (Direct) 846
(Staff) Revised Direct Testimony 849
Mr. Carter (Cross) 878
Mr. Nelson (Cross) 895
Ms. Grant (Cross) 903
Ms. Ullman (Cross) 910
Commissioner Hammond 912
Mr. Burdin (Redirect) 914
Donn English Mr. Burdin (Direct) 920
(Staff) Direct Testimony 922
Mr. Carter (Cross) 942
Mr. Burdin (Redirect) 953
Terri Carlock Mr. Burdin (Direct) 954
(Staff) Direct Testimony 957
Ms. Grant (Cross) 969

Michael P. Gorman Direct Testimony 974
(Micron)
Jessica A. York Direct Testimony 1148
(Micron) Rebuttal Testimony 1202
CSB REPORTING 719 INDEX
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E X H I B I T S

NUMBER DESCRIPTION PAGE
FOR THE STAFF:
101.Professional Qualifications Premarked
of Donn English Admitted 921
102.Adjustment No. 5, 2022 Premarked
Average Net Rate Base Admitted 921
103.Adjustment No. 6, Calculation Premarked
of Depreciation Expense Admitted 921
December 31, 2022
104.Payroll Expense Premarked
Admitted 727
105.Workers' Compensation Premarked
Admitted 727
106.Post-retirement Benefits Premarked
Other than Pension (PBOP) Admitted 727
107.Healthcare Insurance Premarked
Admitted 727
108.Employee 401k Premarked
Admitted 727
109.Other Employee Benefits - Premarked
Tuition Admitted 727
110.Payroll Overheads (Fringe Premarked
Benefits Allocation) Admitted 727
111.Payroll Tax - Summary Premarked
Admitted 727
112.Customer Billing Expenses Premarked
Admitted 727
113.Vehicle Allocation Premarked
Admitted 727
CSB REPORTING 720 EXHIBITS
208.890.5198
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E X H I B I T S (Continued)

NUMBER DESCRIPTION PAGE
FOR THE STAFF:
114.Office Expenses Premarked
Admitted 727
115.Advertising Premarked
Admitted 727
116.Safety Premarked
Admitted 727
117.Misc. Expenses Premarked
Admitted 727
118.Joseph Terry, Relevant Premarked
Experience & Education Admitted 796
119.Comparable Earnings Method Premarked
Admitted 796
120.Amortization Expense - Premarked
Deferred Power Admitted 796
121.Amortization Expense - Premarked
Rate Case Expenses Admitted 796
122.Professional Qualifications Premarked
of Michael Eldred Admitted 848
123.Summary of Historic Test Year Premarked
Revenues, etc., for the Test Admitted 848
Year Ended March 31, 2023
124.(No exhibit marked for this number)
125.First Production Request of Premarked
the Commission Staff Admitted 848
126.Summary of Billing Premarked
Determinant for Revenue Admitted 848
Adjustments - VWID System
CSB REPORTING 721 EXHIBITS
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E X H I B I T S (Continued)

NUMBER DESCRIPTION PAGE
FOR THE STAFF: (Continued)
127.Emerging Trends in Water Premarked
Rate-Making, Page 95 Admitted 848
128.Fifth Production Request of Premarked
the Commission Staff Admitted 848
129.Professional Qualifications Premarked
of Travis Culbertson Admitted 765
130.Summary of Staff's Adjustments Premarked
(Revised) Admitted 765
131.Statement of Operating Income Premarked
per Books and Pro forma, etc. Admitted 765
(Revised)

132.Staff Proposed Gross Revenue Premarked
Conversion Factor Admitted 765
133.Staff Proposed Shared Premarked
Management & Service Fees Admitted 765
134.Staff Proposed General Premarked
Insurance Admitted 765
135.Staff Proposed Rates Compared Premarked
to Company Proposed Rates Admitted 765
(Revised)
136.Professional Qualifications Premarked
of Jolene Bossard Admitted 956
137.Complaint & Inquiry Totals Premarked
Admitted 956
138.Veolia's Average Speed of Premarked
Answer (ASA) Admitted 956
139.Call Center Calls/Emails Premarked
Admitted 956
CSB REPORTING 722 EXHIBITS
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E X H I B I T S (Continued)

NUMBER DESCRIPTION PAGE
FOR THE STAFF: (Continued)
140.Customer who got Veolia Cares Premarked
2020 - 2021 & Total Admitted 956
141.Flushing Credit Based on Premarked
Date Credit Applied Admitted 956
FOR VEOLIA WATER IDAHO INC.:
25.Excerpt from Universal Identified 832
Registration Document 2021, Admitted 832
Annual Financial Report for
Veolia
FOR MICRON TECHNOLOGY, INC:
401.Rate of Return Premarked
Admitted 973
402.Valuation Matrix Premarked
Admitted 973
403.Proxy Groups Premarked
Admitted 973
404.Consensus Analysts' Growth Premarked
Rates Admitted 973
405.Constant Growth DCF Model Premarked
(Consensus Analysts' Growth Admitted 973
Rates)

406.Payout Ratios Premarked
Admitted 973
407.Sustainable Growth Rate Premarked
Admitted 973
CSB REPORTING 723 EXHIBITS
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E X H I B I T S (Continued)

NUMBER DESCRIPTION PAGE
FOR MICRON TECHNOLOGY, INC: (Continued)
408.Constant Growth DCF Model Premarked
(Sustainable Growth Rate) Admitted 973
409.Electricity Sales are Linked Premarked
to U.S. Economic Growth Admitted 973
410.Multi-Stage Growth DCF Model Premarked
Admitted 973
411.Common Stock Market/Book Ratio Premarked
Admitted 973
412.Equity Risk Premium - Treasury Premarked
Bond Admitted 973
413.Equity Risk Premium - Utility Premarked
Bond Admitted 973
414.Bond Yield Spreads Premarked
Admitted 973
415.Treasury and Utility Bond Premarked
Yields Admitted 973
416.CAPM Return Premarked
Admitted 973
417.Value Line Beta Premarked
Admitted 973
418 Standard & Poor's Credit Premarked
Metrics Admitted 973
419.Micron’s Second Set of Premarked
Discovery Requests to Veolia Admitted 1147
Water Idaho, Inc.

420.Tariff Sheet No. 36 Premarked
Admitted 1147
CSB REPORTING 724 EXHIBITS
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BOISE, IDAHO, TUESDAY, APRIL 4, 2023, 1:00 P. M.
COMMISSIONER ANDERSON: Good afternoon. We will
come back to order and we have completed the Company's
direct testimony and we are moving on to the Public
Utilities Commission Staff comments.
Mr. Burdin, please.
MR. BURDIN: Thank you, Chair. Staff calls Ty
Johnson to the stand.
TY JOHNSON,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, was
examined and testified as follows:
DIRECT EXAMINATION
BY MR. BURDIN:
Q.Ty, would you please state your name and spell
your last name for the record?
A.Ty Johnson, T-y J-o-h-n-s-o-n.
Q.Are you the same Ty Johnson that filed testimony
in this case and exhibits?
A.I am.
CSB REPORTING 725 JOHNSON (Di)
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Q.Do you have any corrections or modifications to
your filed testimony?
A.I do not have any changes to make to my
testimony; however, I would like to make a note that in
Company witness' Cary's rebuttal testimony, an error was
pointed out in Exhibit No. 110, payroll overheads, of my
testimony. I agree with the correction, but I'm not
making any modifications to my testimony as payroll
overhead contains flow-through payroll expenses that will
be corrected when the Commission issues a decision on
this case.
Q.Thank you, Mr. Johnson. If I were to ask you
the same questions today included in your filed
testimony, would your answers be the same?
A.Yes, they would.
MR. BURDIN: Mr. Chair, I now move to spread the
testimony of Ty Johnson on the record as if read with
exhibits.
COMMISSIONER ANDERSON: Without objection, we
will spread the testimony, direct and rebuttal, and
exhibits across the record. Do I need to identify the
changes in Exhibit 110?
MR. BURDIN: The changes are on the record, so
it should be fine. Thank you.
/
CSB REPORTING 726 JOHNSON (Di)
208.890.5198 Staff
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(Staff Exhibit Nos. 104-117 were admitted into
evidence.)
(The following prefiled direct testimony of
Mr. Ty Johnson is spread upon the record.)
CSB REPORTING 727 JOHNSON (Di)
208.890.5198 Staff
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Q.Please state your name and business address for
the record.
A.My name is Ty Johnson. My business address is
11331 W. Chinden Blvd., Building 8, Suite 201-A, Boise,
Idaho 83714.
Q.By whom are you employed and in what capacity?
A.I am employed by the Idaho Public Utilities
Commission ("Commission") as an Auditor.
Q.What is your educational and professional
background?
A.I graduated from Western Governors University
with a Bachelor of Science in Accounting in October of
2022. Prior to graduation I was hired as an Accounting
Intern for the Commission. In November of 2022, I
accepted a full-time position with the Commission.
Q.What is the purpose of your testimony in this
proceeding?
A.The purpose of my testimony is to present
several adjustments to Veolia Water Idaho, Inc. ("Veolia"
or "Company") Operating Expenses. These adjustments were
provided to Staff witness Culbertson to incorporate into
his calculation of Staff's proposed revenue requirement.
Q.Are you sponsoring any exhibits in this
proceeding?
A. Yes. I am sponsoring Exhibit Nos. 104-117.
CSB REPORTING 728 JOHNSON, T. (Di) 1
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Payroll and Related Operating Expense Adjustments
Q.What Operating Expense adjustments are you
proposing to the Company's payroll?
A.I am proposing adjustments to the Company's
Payroll Expense for the following payroll-related items:
·Payroll - Exhibit No. 104;
·Workers' Compensation - Exhibit No. 105;
·Post-retirement Benefits Other than Pension
("PBOP") - Exhibit No. 106;
·Employee Healthcare Insurance - Exhibit No.
107;
·Employee 401(k) Matching - Exhibit No. 108;
·Other Employee Benefits - Tuition - Exhibit No.
109;
·Payroll Overheads (Fringe Benefits Transferred
to Capital Allocation) - Exhibit No. 110; and
·Payroll Taxes - combined Federal Insurance
Contributions Act ("FICA"), Federal
Unemployment Insurance Tax ("FUI"), and State
Unemployment Insurance Tax ("SUI") - Exhibit
No. 111.
Q.Please explain your Exhibit No. 104 for the
Company's Payroll Expense.
A.Exhibit No. 104 reflects all the adjustments I
am recommending to the Company's proposed Payroll
CSB REPORTING 729 JOHNSON, T. (Di) 2
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Expense. It starts with the calculation of the pro forma
payroll amount the Company requested for recovery in
rates and follows
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the same format as Company Exhibit No. 10, Schedule 1,
Page 1.
Q.Please explain the components of your
adjustment
to payroll.
A.I have adjusted the Company's Pro Forma Payroll
Expense as follows:
·Removed the unfilled positions to reflect the
actual Payroll Expense for employee levels as
of December 31, 2022.
·Removed the 2023 pay increases.
·Removed the 2023 pay increases for Stand-by
Pay.
·Removed Incentive Pay.
·Removed the 2023 Overtime Pay.
Q.Please explain your adjustment to the Company's
Wages and Salaries Expense for unfilled positions?
A.The Company included 15 pro forma positions to
its Wages and Salaries Expense. During its
investigation, Staff discovered that four of the 15
positions had not been filled by Staff's established
cut-off date of December 31, 2022. These positions
include Operator 1, Cross Conn Control Specialist,
Utility Person, and Environmental Health & Safety
Specialist. The Company provided the estimated wage and
CSB REPORTING 731 JOHNSON, T. (Di) 3
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salary amounts for these four unfilled positions, which I
used to adjust the Company's pro forma Payroll Expense.
Line 12 reflects the removal of $304,854 for these
positions.
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CSB REPORTING 732 JOHNSON, T. (Di) 3a
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I am not proposing to remove any of the payroll
expense related to the 11 new employees hired prior to
December 31, 2022. However, it should be noted that the
Company has maintained its water quality without the
addition of the new employees. Staff has concerns with
increasing the Company's workforce because outside
metrics indicate the Company has fewer employees per
customer than its industry peers. See Thompson Direct.
Q.Please explain the Company's adjustment to
increase its payroll expense for 2023 wage increases.
A.In its payroll adjustment, the Company adjusted
its historical test year payroll to include a 4% wage
increase for non-bargaining unit employees and a 2.75%
wage increase for bargaining unit employees expected to
occur on April 1, 2023.
Q.Please explain why you have proposed removing
the pay increases for 2023.
A. In keeping with a December 31, 2022, cut-off
date, I have removed the Company's pro forma 2023 pay
increases on Line 13. It would be difficult to determine
future payroll expenses given employee turnover, and
therefore the precise amount is not known and measurable,
but rather estimated. Additionally, as the Company
experiences employee turnover, there could be savings
because new employees might be paid less than the
employees they are replacing.
CSB REPORTING 733 JOHNSON, T. (Di) 4
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Q.Please explain why Staff has removed the
proposed pay increase included for the Stand-By Pay.
A.In keeping with a December 31, 2022, cut-off
date, on Line 15, I have removed the proposed pro forma
2023 increase in the Company's calculation of Stand-By
Pay. This adjustment decreases the expenses by $1,176.
Q. Please explain your adjustment to the
Company's Incentive Pay on Line 18.
A.I propose to remove the Incentive Pay in
customer rates for four reasons:
1.Veolia compensates its employees with a
base salary and additional benefits. These benefits
include 401K matching contributions, medical,
dental, vision, life insurance, paid vacation time
and holidays. This is the amount that should be
included in the revenue requirement to be recovered
from customers.
2.Short-term incentive plans ("STIP") vary
from year to year and may not be paid if objectives
are not met. It is impossible to predict with
accuracy which employees will meet their individual
objectives. The STIP rewards employees for doing a
job they are already being compensated for.
3.Incentive plans are self-funding. The
incentive plan only makes sense if the savings
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achieved are greater than the amount of incentive
payments made.
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CSB REPORTING 735 JOHNSON, T. (Di) 5a
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Any additional savings would self-fund the incentive
plan.
4.The STIP contains targets that are based
on metrics that benefit the Company's shareholders
rather than customers.
Q. Why do you believe that the base compensation
level for Veolia employees is the appropriate amount to
include in the revenue requirement to be recovered from
customers?
A.The U.S. Bureau of Labor Statistics website
provides wage information for job positions of which I
believe to be representative of Veolia Water Idaho. The
chart below represents different positions within the
water utility industry in Idaho and their average hourly
wages.1
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OCC_CODE OCC_TITLE Average Hourly
Wage
______________________________________________ _________
19-2043 Hydrologists $ 34.62
19-4044 Hydrologic Technicians $ 28.17
47-2151 Pipelayers $ 21.37
47-2152 Plumbers, Pipefitters, and Steamfitters $ 23.55
47-3015 Helpers--Pipelayers, Plumbers, Pipefitters,
and Steamfitters $ 15.36
49-9012 Control and Valve Installers and Repairers,
Except Mechanical Door $ 27.19
51-1011 First-Line Supervisors of Production and
Operating Workers $ 30.02
51-8031 Water and Wastewater Treatment Plant and
System Operators $ 23.62
Overall Average $ 25.49
_________________________________________________________
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______________________
1 https://www.bls.gov/oes/current/oes_id.htm
CSB REPORTING 737 JOHNSON, T. (Di) 6a
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The average hourly base wage received by Veolia
employees for 2022 was $29.39, before any included
benefits. Because Veolia employees, on average, earn 15%
more than the average of the positions listed above, it
is not appropriate that customers pay additional amounts
through rates to provide bonuses to Veolia employees
based on targets that may or may not be met, and may or
may not actually benefit customers.
Q.How does the Company's STIP benefit
shareholders?
A.The Company's STIP is based on two different
measures of performance, financial and performance. If
incentive payouts are made when financial performance is
met, the STIP should be self-funding. It would not be
prudent for incentive payouts to be greater than the
financial benefit received by the Company. Furthermore,
if there is a financial benefit to the Company, it
benefits the Company's shareholders, and the incentive
payout should be booked below the line.
Q.Please explain your adjustment to Overtime Pay
on Line 19?
A.The Company adjusted the historic test year
level of overtime pay by 2.75% to coincide with the
bargaining unit employees' 2023 pay increase. The
Company's pro forma adjustment results in an increase in
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overtime pay of $14,514. I propose to remove the
Company's increase in
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CSB REPORTING 739 JOHNSON, T. (Di) 7a
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overtime pay for two main reasons:
1.The adjustment is an estimate and is not
known and measurable. The Company cannot predict
with any level of certainty the amount of overtime
pay that will be incurred during any year.
2.The proposed addition of 15 new employees
should decrease the amount of overtime hours
incurred during the year and thus decrease total
overtime expense.
In Order No. 29838, the Commission agreed with Staff's
recommendation and stated: "actual test year expenses
should be used for overtime pay, as pro forma adjustments
to test year data are only proper where the numbers and
known and measurable. The projected amount is not known
and measurable and thus overtime pay will be included at
the actual test year level." Order No. 29838 at 17.
Q.What did the Company propose for its Workers'
Compensation adjustment, and how is it calculated?
A.Workers' Compensation is based on a percentage
of payroll. As its payroll increases, so does workers'
compensation insurance. The Company's pro forma amount
is based upon the three-year average of workers'
compensation 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 workers' compensation
to gross payroll.
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The Company applied this ratio to its pro forma level of
gross payroll to calculate its pro forma Workers'
Compensation Expense of $116,207.
Q.Please explain your adjustment to Workers'
Compensation in Exhibit No. 105.
A.I believe the ratio of 1.004% calculated by the
Company is reasonable and I have applied it to the Gross
Payroll of $9,674,378 that I am recommending for a
Workers' Compensation Expense of $97,097. My adjustment
decreases the expense by $19,110.
Q.What did the Company propose to recover for its
PBOP?
A.The Company decreased the historic test year
PBOP by $42,509 to bring the expense to the pro forma
PBOP level based on the Towers Watson actuarial valuation
for 2022, which consisted of the Service Cost of $163,925
and PBOP expense - all other PBOP Costs of $(687,681).
The Company's original pro forma PBOP expense level is
$(523,756). Company witness Cary notes that the
adjustment is subject to change for actuarial valuations
anticipated in October 2022.
Q.Did the Company update its pro forma PBOP
expense amount after receiving the new actuarial
valuations that were anticipated in October?
A.Yes. In response to Staff Production Request
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Nos. 63 and 74, the Company updated its pro forma PBOP
expense to
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(577,900), with the PBOP Service Cost of $180,883 and the
PBOP Expense - all other PBOP costs of $(758,783). The
Company updated the adjustment to $96,653 to bring the
PBOP expense to $(577,900).
Q.What level of PBOP expense do you propose to
include for recovery in this case?
A.After reviewing the Company's responses to
Staff Production Requests, I agree that the appropriate
amount to include in expense is $(577,900). Therefore, in
Exhibit No. 106, I have decreased the Company's PBOP
Expense by $54,144 to get to the actual 2022 expense.
Q.What did the Company propose for its Employee
Healthcare pro forma amount and how is it calculated?
A.The Company based its calculation on its test
year expense and previous employee elections, then
adjusted the amount to the pro forma employee count of
137. The Company's proposed pro forma expense is
$2,103,710.
Q.Please explain your adjustment to Employee
Healthcare.
A.I calculated the benefits based on 133
employees as of the end of 2022 instead of the 137
employees included in the Company's case. The Company
updated its projected benefit costs to the actual rates
for 2023 in its response to Production Request No. 63.
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The Company further updated its response with the
information from the insurance broker
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and actuary supporting the increase in rates. I have
recalculated the Employee Healthcare costs with the
latest information available at the time of my testimony.
I recommend the Company recover $2,414,650 based on the
updated insurance rates and the actual employee count as
of December 31, 2022. This adjustment increases the
Company's expense by $240,439 as shown in Exhibit No.
107.
Q.What did the Company propose for its Employee
401(k) Match amount, and how is it calculated?
A.The Company calculated the average contribution
rate of its 401(k) Match expense for all employees based
on its gross payroll for the 12 months ended June 30,
2022. The contribution rate of 4.16% is then applied to
the Company's pro forma gross payroll for a 401(k) Match
expense of $456,431.
Q.Is the Company's proposal reasonable?
A.No. The Company takes an estimated amount and
multiplies it by another estimated amount, and claims the
result is known and measurable. The 401(k) matching
contributions amount is neither known nor measurable.
The 401(k) Plan allows employees to cease their
salary deferrals at any time, thus ending the
responsibility of the Company to contribute a matching
contribution. Furthermore, the 401(k) Plan allows all
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eligible employees who are not currently contributing to
commence payroll
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deductions for the 401(k) at any time. With vacant
positions and employee turnover, it is not possible to
determine a precise amount for the Company's 401(k)
Matching Contribution expense. I propose the Company
recover its actual 401(k) Match expense incurred in 2022,
which is $411,540. This adjustment in Exhibit No. 108
reduces the Company's expense by $44,890.
Q.Has the Commission previously issued an Order
on pro forma 401(k) matching contributions?
A.Yes. In Case No. UWI-W-04-04, United Water
Idaho proposed the same methodology to calculate its pro
forma 401(k) matching contributions. In Order No. 29838,
the Commission affirmed Staff's position in that case
stating:
We find that the actual test year contributions
should be used for the Thrift Plan expense.
United Water's 401(k) plan allows employees to
cease or commence payroll deductions at any
time, either ending or creating the Company's
responsibility to make a matching contribution.
With vacant positions, employee turnover, and
the unknown elections of each employee to
commence or cease deductions, pro forma
adjustments to test year data are not known and
measurable. Consequently, we include the test
year expense in the actual test year amount.
Order No. 29838 at 17.
Q.Please explain your adjustment to Tuition
Benefits in Exhibit No. 109.
A.I remove $5,361 from the Company's Other
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Employee Benefit-Tuition Account. In its Application,
the Company
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included $14,634 in tuitions benefits by taking the
average amount of tuition benefits paid per employee
during the test year, $106.82, and multiplying it by the
Company's pro forma employee count of 137 employees.
Similar to the 401(k) matching contributions, this amount
is neither known nor measurable. The Company cannot
predict with any certainty the actual amount of tuition
benefits it will pay during a year and simply relies on a
method to produce an estimate. During 2022, the Company's
actual employee tuition benefit was $9,274. My
adjustment establishes the Company's recovery at the 2022
actual levels.
Q.Please explain the Company's Fringe Benefits
Allocation adjustment, the components that are used in
the calculation, and Staff's Adjustment to the Fringe
Benefits Allocation.
A.The Company uses a fringe benefit allocation
method to ensure employee benefits follow labor charges.
These fringe benefits are allocated to Operation and
Maintenance expenses and to Capital Expenses. When these
benefit components change, the amount transferred to
capital projects will also change. The Fringe Benefits
allocation incorporates payroll taxes, workers'
compensation, pension service cost, PBOP service cost,
Group Health & Life, 401k, and Other Employee benefits to
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calculate the percentage of labor charged to capital
projects. Because some of these
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amounts have decreased with my adjustments, the Fringe
Allocation adjustment needs to increase expenses by
$203,700. My calculations are shown in Exhibit No. 110.
Q.Please explain the Company's adjustment to
payroll taxes, FICA, FUI, and SUI.
A.The Company calculates these payroll taxes
based on its pro forma payroll for FICA, and by the
number of employees for federal and state unemployment
insurance. The Company's pro forma amount for payroll
taxes is $898,783, based on Company Test Year Payroll of
$11,578,450 and 137 employees.
Q.Are these amounts still reasonable, given your
adjustments to the Company's payroll amount and employee
count?
A.These amounts need to be updated to reflect my
proposed payroll and employee count.
Q.Please explain your adjustment to Payroll Taxes
in Exhibit No. 111.
A.My adjustment calculates the level of the
payroll taxes based on my proposed level payroll of
$10,257,680 and the number of employees of 133 as of
December 31, 2022. This adjustment decreases FICA by
$101,039 (Schedule 2), FUI by $168 (Schedule 3), and SUI
by $699 (Schedule 4) for a total payroll tax adjustment
$101,906.
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Other Operating Expense Adjustments
Q.Please explain the Company's Customer Billing
Expenses Adjustment.
A.The Company's adjustment to Customer Billing
Expenses considers customer growth, postage increases,
and bill generation cost increases. The Company
escalated its 2021 expenses by including a 1% customer
growth factor for all customer classes. The Company
annualized the 7.55% postage increase that took place on
July 10, 2022. Finally, the Company annualized the
increase in costs for its bill-generation vendor.
Q.Do you agree with the Company's adjustment?
A.I agree with the annualization of cost
increases for the postage and the bill-generation vendor,
but I do not support the 1% customer growth amount. I
have included the actual Customer Billing Expenses for
2022 because the amount is now available. This
adjustment in Exhibit No. 112, increases the Company's
expense by $611.
Q.Please explain your adjustments to the
Company's pro forma vehicle expense in Exhibit No. 113.
A. I have decreased the Company's Vehicle
Allocation by $166,799. The first adjustment is
reflected on Line 2 and removes the 2023 pay increase for
the Company's mechanic, consistent with my payroll
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adjustment.
The next adjustment is reflected on Line 3
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CSB REPORTING 753 JOHNSON, T. (Di) 15a
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and removes the pro forma lease expense of $198,000
associated with the 22 new vehicles included in the
Company's case.
In the Company's Adjustment No. 16 for Vehicle
Allocation, the Company reported a Lease Expense of
$736,412, which included 22 pro forma vehicles. During
the onsite audit in January of 2023, Staff discovered
that none of the 22 vehicles had been delivered to the
Company because of supply chain issues. Because the
vehicles have yet to be delivered and are not currently
used and useful, I have removed these pro forma leases
from the Company's Lease Expense.
Q.Why does Staff object to the Company's method
for calculating fuel cost?
A.The Company calculated its fuel cost by
multiplying the estimated gallons of fuel to be used by
the average AAA prices for regular and diesel fuel on
September 1, 2022. Because fuel prices peaked in August
and September of 2022, the Company's fuel cost estimates
may be overstated and not reflective of the entire test
year. I have updated the Company's proposed fuel costs
using the average AAA prices for regular and diesel fuel
on January 30, 2023. This adjustment reduces the
Company's fuel expense by $68,328.
Q.Please explain the adjustment made to the
Company's pro forma gallons of fuel consumed.
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A.In its Application, the Company projected that
fuel consumption would increase from the historical test
year amount of 69,756 gallons to 73,593 gallons, an
estimated 5.5% increase in fuel consumption. The Company
provided little supporting evidence as to the reason
behind the increase in fuel consumption. The projected
fuel consumption is not a known and measurable, as fuel
consumption can vary from year to year, and it would be
impossible to predict the number of gallons of fuel
consumed in any given year. Therefore, I have removed
the additional estimated 5.5% increase in fuel
consumption and adjusted fuel expense by an additional
$18,324.
Q.What is the total of these two adjustments?
A.As shown in Exhibit No. 113, Line 4, the total
reduction is $86,652.
Q.Please explain your adjustment to the inflation
estimate the Company included in its vehicle materials
and maintenance costs.
A.In its Vehicle Allocation adjustment, the
Company escalated its historical test year materials and
maintenance costs for vehicles by 3% to account for
inflation. The Commission and Staff have historically
opposed inflation adjustments because they are not known
and measurable; therefore, I have removed the inflation
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estimate. If inflation adjustments were allowed to be
included in rate
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cases, utilities could simply escalate all the expense
accounts by an arbitrary percentage, and the escalated
amounts would be passed through to customers without any
review of actual expenses. I removed $6,293 from the
Company's Materials and Maintenance Expense for vehicles.
Q.What adjustments did the Company make to Office
Expenses?
A.Company witness Cary increased office expenses
based on an increase in licensing cost per the contract
with Cityworks, as well as the cost of additional
licenses needed for new employees. The Company included
an adjustment of $20,000 for expected postage costs for
mailing the Customer Confidence Report. Also included in
the adjustment is an increase in the first-class postage
cost of 3.45% effective July 10, 2022. The final
adjustment proposed by the Company is the addition of
support fees for the Company's UPS costs.
Q.What adjustment to Office Expenses are you
proposing?
A.My adjustment removes the Cityworks License
costs for the 4 vacant positions that were not filled by
December 31, 2022. This adjustment decreases the
Cityworks license expenses by $7,544 for the vacant
positions as of December 31, 2022. Additionally, this
adjustment removes the expected postage costs for mailing
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the Consumer Confidence Report. This report is required
by the Department of
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Environmental Quality ("DEQ"); however, the DEQ does not
require that the report be mailed, only that it be made
available to customers. DEQ on its website, states,
"Idaho now allows all sizes of community public water
systems the option to deliver Consumer Confidence Reports
electronically . . . ." The Environmental Protection
Agency ("EPA") interprets the requirement to "mail or
otherwise directly deliver" to include electronic
delivery."2 Therefore, I have removed the cost of
postage. In addition, the pro forma postage costs that
the Company includes in its filing pertains to the 2022
CCR that will be sent in 2023, outside of Staff's test
year ended December 31, 2022. In total, I have decreased
the Company's Office Expense by $27,544 as shown in
Exhibit No. 114.
Q.What adjustments did the Company make to
Advertising Expenses?
A.The Company adjusted advertising expenses to
eliminate historic test year costs that were duplicated
due to the timing of the various outreach campaigns and
added in the pro forma cost to print the Consumer
Confidence Report.
Q.What adjustment to Advertising Expenses do you
propose?
A.I propose removing the $30,000 Company pro
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forma printing cost of the Consumer Confidence Report.
As stated
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2 The EPA's interpretation is based on 40 CFR § 141.155(a).
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above, the Consumer Confidence Report is not required to
be printed or mailed, only made available. This
adjustment, reflected in Exhibit No. 115, removes these
projected costs, and decreases expenses by $30,000.
Q.Please explain your adjustments in Exhibit No.
116 made to the Safety Expense Account.
A.In its Application, the Company included
several pro forma safety expense adjustments. During the
onsite audit, Staff discovered that two of these safety
trainings will no longer take place and one training has
not happened as of the filing of this testimony but is
expected to take place in the spring of 2023. The two
courses included are an OSHA 10-Hr Construction Safety
course and classroom training for Air Purifying &
Respirator Fit Test. Together these courses account for
$9,000 in pro forma safety expense. The safety training
expected to take place in the spring of 2023 is for
Industrial Hygienist Training & Exposure Monitoring.
This adjustment accounts for $20,250 in pro forma Safety
Expenses. Safety training is necessary for providing
safe and reliable service and the Company should be
commended for its efforts to provide a safe working
environment. However, I propose removing the Safety
Expense for these three items for two reasons:
1.Two of the safety training events are no
longer planned and therefore the associated expenses
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should be removed from the Company's revenue
requirement.
2.The third safety event has not yet
happened as of the writing of this testimony and is
not expected to happen until spring of 2023, with no
specific date planned. Additionally, the amount the
Company included for this training is nearly twice
what the Company paid in prior years.
Q.Please explain the Miscellaneous Expense adjustments
in Exhibit No. 117.
A.The Company's Miscellaneous Account includes a
list of credit card transactions made by the Company
during 2022. Staff removed several expenses related to
advertising which are not typically recoverable expenses.
Staff also removed expenses related to chamber of
commerce and support for political candidates. Together
the removal of these Expenses results in a reduction to
the Company's Miscellaneous Account of $4,585.
Q.Does this conclude your direct testimony in
this proceeding?
A.Yes, it does.
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(The following proceedings were had in
open hearing.)
MR. BURDIN: With that, the witness is now
available for cross-examination.
COMMISSIONER ANDERSON: Thank you. Mr. Carter?
MR. CARTER: The Company does not have any
questions.
COMMISSIONER ANDERSON: Micron?
MR. NELSON: No questions.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: No questions.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions.
MS. ULLMAN: No questions. Thank you.
COMMISSIONER ANDERSON: Thank you. Without
objection, you are excused.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Burdin, call your
next witness.
MR. BURDIN: Staff calls Travis Culbertson, please.
CSB REPORTING 763 JOHNSON
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TRAVIS CULBERTSON,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, was
examined and testified as follows:
DIRECT EXAMINATION
BY MR. BURDIN:
Q.Will you please state your name and spell your
last name for the record?
A.Yeah, Travis Culbertson, T-r-a-v-i-s
C-u-l-b-e-r-t-s-o-n.
Q.Are you the same Travis Culbertson that filed
testimony and exhibits in this case?
A.I am.
Q.Do you have any corrections or modifications to
your filed testimony?
A.I do not.
Q.If I were to ask you the same questions today
included in your filed testimony, would your answers be
the same?
A.Yes, they would.
MR. BURDIN: Mr. Chair, I now move to spread the
filed testimony of Travis Culbertson on the record as if
read with exhibits.
CSB REPORTING 764 CULBERTSON (Di)
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COMMISSIONER ANDERSON: Thank you. Without
objection, we will spread the testimony of
Mr. Culbertson, direct, and are there exhibits, also, in
that grouping?
MR. BURDIN: Yes.
COMMISSIONER ANDERSON: And the exhibits, also,
across the record. Thank you very much.
(Staff Exhibit Nos. 129-135 were admitted into
evidence.)
(The following prefiled direct testimony of
Mr. Travis Culbertson is spread upon the record.)
CSB REPORTING 765 CULBERTSON (Di)
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Q.Please state your name and business address for
the record.
A.My name is Travis Culbertson. My business
address is 11331 W. Chinden Blvd., Ste. 201-A, Boise, ID
83714.
Q.By whom are you employed and in what capacity?
A.I am employed by the Idaho Public Utilities
Commission ("Commission") as an Auditor III.
Q.What is the purpose of your testimony in this
proceeding?
A.My testimony outlines Commission Staff's
("Staff") proposed adjustments to Veolia Water Idaho,
Inc.'s ("Company" or "Veolia") revenue requirement as
filed. I will present Staff's summary adjustments to the
Company's proposed revenue requirement, outline an
adjustment to the Gross Revenue Conversion Factor
("GRCF"), adjustments to Operating and Maintenance
("O&M") expenses, my proposed rate design, and my
recommendation regarding the proposed Distribution System
Improvement Charge ("DSIC") mechanism.
Q.Are you sponsoring any exhibits with your
testimony?
A.Yes. I am sponsoring Exhibit Nos. 129, 130,
131, 132, 133, 134, and 135.
Q.How is your testimony organized?
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A.My testimony is organized by the following
topics:
Revenue Requirement Pg. 2
O&M Expense Adjustments Pg. 7
Rate Design Pg. 15
DSIC Pg. 17
Q.What is your educational and experience
background?
A.My education and experience are provided in
Exhibit No. 129.
Revenue Requirement
Q.Please provide a summary of Staff's proposed
revenue requirement in this case.
A.Staff recommends a total revenue requirement of
5,854,138, an increase in the Company's annual revenues
of $3,397,931, or 6.48%. Staff's revenue requirement is
based on a 9.0% Return on Equity ("ROE") and a capital
structure consisting of 44.43% debt and 55.57% equity for
a Weighted Average Cost of Capital ("WACC") of 6.77%
applied to net rate base of $261,118,238.
Q.Please outline Staff's adjustments to the
Company's proposed revenue requirement components.
A.Staff is recommending twenty-eight (28)
adjustments to the Company's requested revenue
requirement. Exhibit No. 130 provides a brief summary of
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Staff's adjustments, the impact of each adjustment on the
Company's revenue requirement, and the Staff witness
sponsoring testimony supporting the adjustment. Below is
a brief summary of each adjustment:
Adjustment No. 1 updates the Company's
previously unadjusted expense accounts through
December 31, 2022, consistent with Staffs proposed
updated test year.
Adjustment No. 2 updates the Company's GRCF to
include the current Idaho state income tax rate. I
will provide additional detail later in my
testimony.
Adjustment No. 3 updates the Company's WACC to
incorporate Staff witness Terry's recommendation for
a 9.0% ROE.
Adjustment No. 4 will update the revenue
requirement based on revenue normalization
adjustments proposed in Staff witness Eldred's
testimony. Staff may provide an updated Exhibit to
incorporate the quantification of this adjustment
after information is received from the Company.
Adjustment No. 5 adjusts the Company's net rate
base, as discussed in Staff witness English's
testimony.
Adjustment No. 6 removes the annual
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depreciation expense associated with plant placed in
service after
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December 31, 2022. Staff witness English provides
testimony supporting this adjustment.
Adjustment Nos. 7 - 14 are supported in Staff
witness Johnson's testimony and adjusts various
payroll related expenses, including worker's
compensation expense, post-retirement benefits other
than pension, healthcare insurance, employee 401(k)
matching contributions, employee tuition benefits,
fringe benefits, payroll taxes, and the 2023 wage
increases.
Adjustment No. 15 reduces costs associated with
customer billing. Staff witness Johnson's testimony
outlines support for this adjustment.
Adjustment No. 16 adjusts vehicle expenses that
include adjustments for inflation percentages and an
overstatement of fuel and lease costs. Staff
witness Johnson provides testimony supporting the
adjustment.
Adjustment No. 17 adjusts Office expenses
associated with the four employees that the Company
did not hire as of December 31, 2022, and other
expenses not required by the Commission. Staff
witness Johnson provides testimony supporting the
adjustment.
Adjustment No. 18 removes advertising expenses
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not required by the Commission. Staff witness
Johnson
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provides testimony supporting this adjustment.
Adjustment No. 19 adjusts Shared Management and
Services ("M&S") fees and excludes parent company
employees' wages and executive travel and training.
I will provide additional detail later in my
testimony.
Adjustment Nos. 20 and 21 adjusts General
Insurance expense to update Company's average
expense and remove Company caused Injury and
Damages. I will provide additional detail later in
my testimony.
Adjustment No. 22 removes specific safety
expenses for trainings no longer offered or have yet
to be scheduled. Staff witness Johnson provides
testimony supporting this adjustment.
Adjustment Nos. 23 and 24 adjust the Company's
rate case expenses. Staff witness Terry and Staff
witness Eldred provide testimony supporting these
two adjustments.
Adjustment No. 25 adjusts the Company's
amortization expense for deferred tank painting.
Staff witness Terry provides testimony that outlines
removing 2023 expense.
Adjustment No. 26 adjusts the Company's
amortization expense for deferred power costs.
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Staff witness Terry provides testimony that outlines
two
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adjustments.
Adjustment No. 27 removes nine miscellaneous
expenses from the Company's unadjusted O&M -
Miscellaneous Expense account. Staff witness
Johnson provides testimony supporting this
adjustment.
Adjustment No. 28 reduces the cost of power and
chemical expense due to the reduction in weather
normalized test year consumption using Staff's 2022
Test Year, as outlined in Staff witness Eldred's
testimony.
Q.Please briefly explain the GRCF.
A.The GRCF is based on revenue-sensitive items
that change as revenue changes, including uncollectibles,
Commission regulatory fees, Idaho state income taxes, and
federal income taxes. The GRCF converts the Company's
net operating deficiency into the additional revenues
necessary to collect from customers to earn its
authorized rate of return after accounting for all the
revenue-sensitive items previously mentioned.
Q.What GRCF did the Company use?
A.In its Application, the Company calculated a
GRCF of 1.3573%. In calculating the GRCF, the Company
used an Idaho State Income tax rate of 6.0%.
Q.Do you agree with the Company's GRCF?
A.No. The Company calculated its GRCF using an
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outdated Idaho state income tax rate of 6.0%. On
September 1, 2022, House Bill 1 reduced the corporate tax
rate to 5.8%; therefore, I recommend an adjustment to
Company's GRCF to account for the correct Idaho state
income tax rate. I have calculated the appropriate GRCF
to be 1.3545% as shown in Exhibit No. 132. This
adjustment will impact the revenue requirement associated
with all other adjustments proposed by Staff.
O&M EXPENSE ADJUSTMENTS
Q.Please briefly explain how the Company
calculated its adjustment to shared M&S fees.
A.The Company's proposed revenue requirement
includes an allocation of shared assets and costs from
its parent company for corporate office support,
services, management functions and Information Technology
("IT") assets. Shared costs are allocated based on a
three-factor approach. The M&S fee expense is based on
six months of actual costs through June 30, 2022, and
then is annualized to support a full year. An adjustment
of 3.5% is included as a wage adjustment factor for the
parent company's employees in New Jersey. Finally, an
insurance premium adjustment is made as a projection that
may change from year to year.
Shared assets are allocated to the Company as
operating expenses, rather than capitalizing portions of
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shared assets individually, which has been prior
practice. The pro forma expense is adjusted to include
shared asset expenses, including IT depreciation expense
and a rate of return.
In the Application, the Company proposed an
adjustment to increase M&S Fees by $499,821 for an annual
total of $4,566,635.
Q.Please explain Staff's adjustment to the M&S
fees.
A.As shown in my Exhibit No. 133, I recommend
reducing the Company's proposed M&S expense by $455,782,
for a total recovery of $4,110,853.
Q.Please explain your first adjustment to shared
IT assets.
A.Embedded in the Company's calculation of shared
IT assets is a return on shared IT assets. Because the
Company is including a return on the shared M&S IT assets
at the Company's requested pre-tax rate of return of
9.85%, I was concerned that the parent company was
attempting to include additional profits. Without
additional scrutiny, the opportunity exists for the
parent company to profit from its allocated charges to
its subsidiary. Idaho customers should not be paying
additional returns to the Company's parent. The Idaho
State Supreme Court has stated that affiliated
transactions must be at the lower of cost
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or market.1 If there are efficiencies by having a
parent company perform certain functions that would
otherwise be paid for by individual subsidiaries,
those functions must cost less than the market rate
for each individual subsidiary. Thus, the allocation
from the parent company to the Company must be at
cost. Adding a return for shared IT asset cost
effectively includes a return for the parent company.
To eliminate the collection of additional profit, I have
removed the return, which is a decrease to shared M&S
fees of $147,890.
Q.Please explain your adjustment to the shared
M&S fee depreciation expense?
A.The shared M&S IT assets use depreciation rates
that are not approved by the Commission, and the Company
adds a pro forma adjustment to the depreciation expenses
out to March 2023. I adjusted the depreciation expense
by removing all depreciation expense associate with 2023
IT assets, and I also adjusted the depreciation rates to
align with rates approved by this Commission. The
depreciation rates that I adjusted include computer
hardware, computer software, and office furniture. The
adjustment to depreciation expense is a total of $25,252.
In total, my two adjustments to shared M&S IT assets,
including the
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_____________________
1 Boise Water Corp. v. IPUC, 97 Idaho 832, 555 P. 2d 163 (1976).
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adjustment to shared M&S IT assets return and
depreciation expense, is $173,142.
Q.Please explain the Company's calculation of
other M&S fees.
A.When reviewing the cost allocation manual, only
IT wages are directly assigned when possible, and the
other salaries and expenses are allocated using the
Massachusetts Allocation Method ("MAM"). The MAM is a
reasonable method to allocate the shared expenses, when
necessary, but Staff continues to support direct
assignment of costs and encourages utilities to implement
processes that will directly assign costs. By not
directly assigning costs, Staff is concerned that
cost-savings from various shared M&S departments are not
being allocated fairly to Idaho ratepayers.
The Cost Allocation Manual, provided by the
Company in response to Staff Production Request No. 43,
outlines each department at the corporate office and the
employees that work on regulated business units and the
support they provide. With the distinction that there
are employees that do not work on regulated business
units at the corporate office, there are costs that are
being allocated to Idaho that are not related to working
regulated business items. See Cost Allocation Manual.
Thus, I recommend a disallowance of the salary expenses
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that are part of non-regulated business units.
Q.Are there departments at the parent company, in
New Jersey, that allocated inappropriate expenses?
A.Yes. There are three departments that I
recommend removing out of M&S fees. The parent company
allocated expenses of employees that are not working in
direct relation to the regulated business units.
Therefore, I have adjusted expenses from the following
departments: legal, Human Resources ("HR"), and office of
the Chief Operating Officer ("COO").
The corporate legal department allocated
$160,977 to the Company, even though the Company uses
local counsel, Givens Pursley. The Cost Allocation
Manual provides descriptions that 19 corporate attorneys
work at the parent company, but only 15 of them work on
items directly related to Idaho jurisdiction. I propose
removing legal costs that are allocated by the Company
that provide no benefit to Idaho jurisdiction. The
Company's test year include costs for nineteen attorneys
that work at the corporate level. I removed the four
attorneys that do not work on Idaho jurisdiction items,
which is a decrease to shared M&S fees of $33,890.
At the parent company, there are twenty-three
HR employees. Of those, nineteen work directly with the
regulated side of the business. The Company's proposed
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revenue requirement includes $204,329 in HR expenses
allocated from the parent company. As mentioned
previously, my concern is that the parent company is not
directly assigning costs and relying on allocation
factors to push the costs of each HR employee to Idaho
customers. Thus, I propose removing the corporate HR
costs allocated to the Company that are not associated
with doing any work for the Company. I recommend
decreasing M&S fees by an additional $35,536 to account
for the four HR employees that are not doing work on the
regulated side of the parent company.
The Office of the COO allocated $61,237 to the
Company. The COO does not benefit Idaho ratepayers but
supports the board of directors and helps the parent
company earn a profit for shareholders. Thus, I am
proposing removing the entire $61,237.
Q.Do you propose any other adjustments to M&S
fees?
A.Yes. I propose two adjustments related to the
salary increase factor and the change in insurance
premiums. First, I am concerned that Idaho ratepayers
are paying higher wages for the employees located in New
Jersey, than the wages for employees in Idaho. Idaho
customers should not be burdened by the higher wages
required to employ people in New Jersey.
I have also removed the 2023 proposed salary
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increase percentage for corporate employees to be
consistent with the other payroll adjustments supported
in Staff witness Johnson's testimony. This adjustment
decreases shared M&S fees by an additional $118,754.
As mentioned in Staff witness Johnson's
testimony regarding insurance premiums, Staff recommends
using 2022 actual expenses. As of the filing of my
testimony, the Company has not provided supplemental
workpapers for the 2022 insurance premiums. Thus, I
recommend removing the pro forma insurance premium
included in the allocated shared M&S fees, which is a
decrease of $29,873.
Q.Please explain the adjustment made to remove
the Company's allocated portion of training and travel
for corporate executives.
A.I propose removing the costs of executive
travel and training that were allocated to the Company,
which reduces the M&S Fees by $1,286. The main
responsibility of corporate executives is to increase
profits for shareholders, which is a function that does
not directly benefit Idaho ratepayers.
Q.Please explain the adjustment made to remove
the allocated portion of board of directors' compensation
for the Company.
A.The Company included $2,064 for board of
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director's compensation. The main responsibility of the
corporate board of directors is to earn a profit for
shareholders, which is a function that does not directly
benefit Idaho customers.
Q.Please summarize your adjustment to shared M&S
fees.
A.I propose that the Company recover $4,110,853
in shared M&S fees, which is the amount I have included
in Staff's revenue requirement.
Q.What adjustments did the Company make to
General Insurance?
A.The Company proposed to increase expenses for
business insurance, including liability and property
coverage. The Company calculated the average of the
insurance expense without reserves and with claim
payments for the years 2020 and 2021, and increased its
general insurance expense from its historic test year
ending June 30, 2022, to the average of 2021 and 2020.
Q.Please explain your adjustment to General
Insurance Expense in Exhibit No. 134.
A.The 2022 actual general insurance expense was
$133,309. Rather than proposing to use the actual 2022
amount, I am proposing the three-year average of
$206,119, shown on Line 6, compared to the Company's
two-year average of $242,524. This adjustment provides
the Company an
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additional $72,810 over the actual amounts incurred
during 2022 to account for year-to-year volatility. This
adjustment reduces the Company's expense by $36,405.
Q.Please explain your next adjustment to General
Insurance.
A.I reviewed the Company's Injuries and Damages
payments provided in Response to Staff Production Request
No. 11. The Company paid $97,685 in insurance claims in
2022. I removed $28,947 from Injuries and Damages caused
by employees errantly leaving valves open and vehicle
crashes where the employee was at fault. Customers
should not pay for injuries and damages that are due to
negligence of the Company employees. By disallowing
recovery of claim payments for damages caused by
employees, I recommend decreasing recovery of Injuries
and Damages by $28,947 as shown on Line 8. After removal
of the employee-fault damages, the Company will still
recover $85,824 to account for other damages.
Rate Design
Q.Please provide Company's proposed rate design.
A.The Company proposed a uniform percentage
increase to all rate components. The Company's approach
is consistent with the across the board methodology
accepted in the 2011, 2015, and 2020 rate proceedings.
Q.Are any changes to the rate structure being
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proposed in Company's Application?
A.Yes. Although the Company is requesting an
across the board, uniform percentage rate increase to all
customer classes, they are requesting no rate increase to
the Private Fire Protection customer class. As such, the
increases to other classes absorb additional revenues
that are not going to be collected from the Private Fire
Protection customer class.
Q.Does Staff support the Company's rate design
proposal?
A.Not entirely. I do recommend spreading Staff's
increase uniformly across all rate components within
Schedule No. 1 similar to what the Company proposed in
its Application; however, I do not support the Company's
proposal to not increase rates for the Private Fire
Protection customer class for reasons explained in Staff
witness Eldred's testimony. Instead, Staff is
recommending the increase be spread across all rate
components for all classes including Private Fire
Protection. Exhibit No. 135 provides the rate design
associated with Staff's recommended 6.48% increase to
each customer class, and the Existing Eagle Water Company
customers.
Q.Do you believe the current rate design
structure is fair, just, and reasonable?
A.Yes. Without a valid load and Cost of Service
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Study, a uniform across the board percentage increase is
consistent with prior rate case filings. However, I
would like to see further analysis of other rate design
options that supports Staff's goals of developing new
rate designs that still encourages conservation while
providing revenue stability. Staff witness Eldred is
requesting a new load study that may show the need for
different customer classes from what the Company's
tariffs currently reflect. However, without a proper
comprehensive load study and Cost of Service Study, I am
not recommending adjusting the current rate design.
DSIC Mechanism
Q.Please explain the Company's proposed DSIC
mechanism?
A.The Company proposed a DSIC mechanism that
bi-annually adjusts rates to recover costs related to the
replacement and/or rehabilitation of the Transmission and
Distribution ("T&D") system. Recovery of costs would
include replacements of mains, services, hydrants,
valves, meters, and other infrastructure. The DSIC is a
surcharge mechanism that would allow for rate increases
between general rate case proceedings which specifically
relate to non-revenue producing investments.
Under the Company's proposal, rates would
change twice each year. The Company bills customers
every other
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month, or six times a year. With the Company's DSIC
mechanism, rates would change after every third bill.
Staff would be required to perform an audit and prudence
analysis of the Company's distribution system
improvements twice each year to ensure customers are only
paying for prudent capital improvements.
Q.Do you support the DSIC mechanism?
A.No. I analyzed the Company's request for a
mechanism and recommend the Commission deny the Company's
DSIC mechanism. While I support the Company's work to
maintain safe and reliable service by replacing or
upgrading aging infrastructure, I believe that these
costs are more appropriately reviewed and recovered
through traditional ratemaking in general rate cases
rather than through a bi-annual cost recovery mechanism
as proposed by the Company. Further, the costs that the
Company proposes to fund through the DSIC are different
from costs the Commission has approved for recovery in
other annual cost adjustment mechanisms, such as the cost
of natural gas or electricity. Those annual cost
adjustment mechanisms were justified based on costs that
are highly unpredictable and/or volatile, not within the
Company's ability to plan and control, and are
sufficiently large risking the "potential" for the
Company to earn an adequate return. However, the types
of expenses the Company wishes to
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recover through the DISC are known and predictable
capital expenditures that can be planned well in advance
and can be included for recovery in a general rate case.
Further, the Company has the financial ability and access
to capital to fund these projects between rate cases.
Q.Have similar mechanisms been proposed by other
Idaho utilities?
A.Yes. Intermountain Gas requested a capital
cost adjustment tracker for replacing pipes and other
distribution-related capital expenditures.
Q.What was the result?
A.The Commission denied Intermountain's request
in Order No. 34090. The Commission stated:
[W]e find that a general rate case provides the
best comprehensive venue for review of the
Company's costs, revenues, and rate base in
terms of known, routine, planned-for
expenditures.
***
We also find that the costs the Company seeks
to recover are predictable and not necessarily
volatile. While, as the Company argued, part
of these costs may be unpredictable (e.g.,
destruction of Company property by the public;
inflation of pipe costs), they are not the
types of costs that significantly vary from the
revenue requirement embedded in base rates.
We are unaware of any emergency or factual
showing that would necessitate approval of a
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special mechanism for the recovery of these
expenditures. The Company should manage these
costs through prudent business planning. The
Company has not shown it cannot make what it
considers exceptionally important
infrastructure improvements and investments
while earning fair returns on its investments.
[…]
[…] Recovery of costs related to the
replacement of aging infrastructure, whether
accelerated or otherwise, is best accomplished
in a general rate case that allows analysis of
all expenses, rate base, and impact on the
Company's return on equity.
Order No. 34090 at 9-10.
Q.Please discuss why the expenses the Company
proposes to recover through the DISC are appropriately
recovered through a general rate case.
A.Adjustment mechanisms are not the proper
recovery method for large infrastructure projects. The
prudence and recovery of infrastructure costs are best
addressed through traditional ratemaking in a general
rate case where all expenses, rate base, and impacts on
the Company's return on equity can be examined. In
addition, annual adjustment mechanisms lessen the
incentive for utilities to control costs.
Other utilities in Idaho have successfully used
rate cases to seek recovery for infrastructure
replacements similar to the projects the Company
discusses in this case. Avista has been replacing aging
infrastructure for several
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years (Case Nos. AVU-E-19-04, AVU-E-21-01) and has not
proposed an annual adjustment mechanism to recover those
costs. Instead, utilities file regular rate cases to
fund ongoing projects. Staff supports the recovery of
these types of capital investments through general rate
cases recovery and does not believe it has harmed the
utilities financial viability.
Q.What types of expenses are appropriate for an
annual cost adjustment mechanism?
A.One of the main reasons for implementing a cost
adjustment mechanism is that expenses may be volatile and
highly unpredictable. Staff reviewed the types of
project expenses that the Company proposed to recover
through the DSIC and does not believe that any of these
costs are significantly unpredictable, or variable, and
can be planned well in advance.
Unpredictable and volatile costs create an
issue in traditional ratemaking when actual costs vary
significantly from the revenue requirement embedded in
base rates. Power and gas supply costs are a good
example. Idaho Power requested the implementation of its
Power Cost Adjustment ("PCA") after Idaho Power had
previously been granted approval for two emergency
surcharges to meet volatile and unpredictable power
supply costs in drought years. The Commission agreed
that the circumstances
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warranted an annual adjustment:
We find that the current system of normalizing
power supply costs and granting Idaho Power a
surcharge during drought years is defective
because it is unpredictable. Presently, Idaho
Power must take the initiative to seek a
drought related surcharge when it believes its
financial condition has deteriorated to the
point where additional rate relief is critical.
Order No. 24806 at 5. The Commission emphasized "that
our decision [to adopt a PCA] is limited to the unique
circumstances of Idaho Power's highly variable power
supply costs." Id. Thus, a driver for the Commission's
adoption of Idaho Power's mechanism was due to highly
unpredictable and volatile nature of power supply costs
and the resulting financial impact on Idaho Power
impeding the utility's opportunity to earn a fair return.
Another reason for implementing a mechanism is
that the Company's financial position is harmed by
pursuing cost-effective energy efficiency. Because large
scale, company-sponsored energy efficiency can reduce the
volumetric sales needed to recover the fixed costs of
providing service, the Commission adopted the Fixed Cost
Adjustment ("FCA") for Idaho Power and Avista to ensure
that acquiring cost-effective energy efficiency does not
financially harm those utilities.
The FCA is only used to recover costs that were
established in a rate case (the fixed cost per customer).
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It provides a true-up of the actual collection of fixed
costs per customer compared to what was assumed in base
rates. Order No. 33527 at 2. It is not used for
infrastructure replacement and upgrade costs.
Q.Do you believe the Company could plan for the
proposed DSIC expenses through its planning process?
A.Yes. I considered whether the type of costs
proposed for recovery in the DSIC can be managed through
its planning process. I reviewed the projects and types
of expenses the Company plans to implement in the next
five years and believe the Company has a significant
amount of control over the timing of these expenses. I
believe the DSIC is unnecessary because most of these
expenses are project costs which the Company can manage
through its planning process.
The costs proposed for recovery in the DSIC can
be planned and managed by the Company throughout the
course of the project. Within the next five years, the
Company plans to replace aging infrastructure items as
part of its budget of replacement costs. The Company can
decide when to incur project expenses and cost of the
projects through its budgeting processes. This gives the
Company a significant amount of flexibility to adjust its
project plans and to incur costs as its budget for each
year allows.
A predictable capital expense that the Company
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can manage over time is ideal for recovery through
traditional ratemaking in a general rate case. Rates
established in general rate cases have a long history of
successfully providing utilities adequate recovery of
these types of infrastructure costs.
Q.Does this conclude your testimony in this
proceeding?
A.Yes, it does.
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(The following proceedings were had in
open hearing.)
MR. BURDIN: The witness is now available for
cross-examination.
COMMISSIONER ANDERSON: Thank you. Mr. Carter?
MR. CARTER: No questions.
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. Thank you.
COMMISSIONER ANDERSON: Thank you very much.
Without objection, you are excused, Mr. Culbertson.
THE WITNESS: Thank you.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Burdin, you may call
your next witness.
MR. BURDIN: Staff calls Joseph Terry to the
stand.
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JOSEPH TERRY,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, was
examined and testified as follows:
DIRECT EXAMINATION
BY MR. BURDIN:
Q.Would you please state your name and spell your
last name for the record?
A.My name is Joseph Terry, J-o-s-e-p-h T-e-r-r-y.
Q.Are you the same Joseph Terry that filed
testimony and exhibits in this case?
A.Yes.
Q.Do you have any corrections or modifications to
your filed testimony?
A.No.
Q.If I were to ask you the same questions today
included in your filed testimony, would your answers be
the same?
A.Yes.
MR. BURDIN: Mr. Chair, I now move to spread the
filed testimony of Joseph Terry on the record as if read
with his exhibits.
COMMISSIONER ANDERSON: Thank you. We will now
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spread the testimony of Mr. Terry across the record,
direct and rebuttal, and exhibits on the record.
(Staff Exhibit Nos. 118-121 were admitted into
evidence.)
(The following prefiled testimony of
Mr. Joseph Terry is spread upon the record.)
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Q.Please state your name and business address for
the record.
A.My name is Joseph Terry. My business address
is 11331 W. Chinden Blvd., BLDG 8, STE 201-A, Boise,
Idaho 83714.
Q.By whom are you employed and in what capacity?
A.I am employed by the Idaho Public Utilities
Commission ("Commission") as an Auditor 3.
Q.What is your educational and professional
background?
A.I have included my educational and professional
background as Exhibit No. 118.
Q.What is the purpose of your testimony?
A.The purpose of my testimony is to present my
adjustments to Veolia Water Idaho's ("Company" or
"Veolia"): (1) Return on Equity ("ROE"), recommending a
9.0% ROE; (2) The Company's power cost deferral recovery;
(3) The Company's rate case expense recovery; (4) the
Company's rate base for the removal of deferred
convenience fees; and (5) the Company's tank panting
deferral.
Q.Are you sponsoring any exhibits with your
testimony?
A.Yes, I am sponsoring Exhibit Nos. 118, 119,
120, and 121.
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Rate of Return
Q.Please explain the basis for the Rate of Return
for the Company.
A.In capital intensive industries like water
utilities, companies must have access to the capital
markets in order to meet its capital requirements. The
Company must have enough money in the revenue requirement
to pay all its bills, including servicing its capital
obligations. Rate of Return is a significant part of a
utility's revenue requirement.
Q.What sources of capital does the Company have?
A.The Company has two forms of capital financing,
debt and equity.
Q.Please explain the calculation of the cost of
debt financing?
A. All debt has a contract that dictates the
interest rate for that debt. Therefore, the weighted
average of the interest rates of all the debt the Company
has is the weighted average cost of debt.
Q.Please explain the calculation of the cost of
equity financing?
A.Because there is no contract explicitly stating
what investors require, various different methods are
used to determine the appropriate return to attract
investors.
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Q.What legal standards have been established for
determining a fair and reasonable rate of return?
A. The legal test of a fair rate of return for a
utility company was established in the Bluefield Water
Works decision of the United States Supreme Court and
repeated specifically in Hope Natural Gas.
In Bluefield Water Work and Improvement Co. V.
West Virginia Public Service Commission, 262 U.S. 679,
692, 43 S.Ct 675, 67 L.Ed. 1176 (1923), the Supreme Court
Stated:
A public utility is entitled to such rates as will
permit it to earn a return on the value of the
property which it employs for the convenience of the
public equal to that generally being made at the
same time and in the same general part of the
country on investments in other business
undertakings which are attended by corresponding
risks and uncertainties; but it has no
constitutional right to profits such as are realized
or anticipated in highly profitable enterprises or
speculative ventures. The return should be
reasonably sufficient to assure confidence in the
financial soundness of the utility and should be
adequate, under efficient and economical management,
to maintain and support its credit and enable it to
raise the money necessary for the proper discharge
of its public duties. A rate of return may be
reasonable at one time and become too high or too
low by changes affecting opportunities for
investment, the money market and business conditions
generally.
In FPC v. Hope Natural Gas Company, 320 U.S. 591, 603, 64
S.Ct 281, 88 L.Ed. 333 (1944), the Court stated:
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"From the investor or company point of view it is
important that there be enough revenue not only for
operating expenses but also for the capital costs
for the business. These include service on the debt
and dividends on the stock." (Citation omitted)
By that standard the return to the equity owner
should be commensurate with returns on investments
in other enterprises having corresponding risks.
That return, moreover, should be sufficient to
assure confidence in the financial integrity of the
enterprise, so as to maintain its credit and to
attract capital.
The Supreme Court decisions in Bluefield Water
Works and Hope Natural Gas have been affirmed in Re
Permian Basin Area Rate Case, 390 U.S. 747, 88 S. Ct
1344, 20 L.Ed 2d 315 (1968), and Duquesne Light Co. v.
Barasch, 288 U.C. 299 109 S. Ct. 609 L.Ed.2d. 646 (1989).
The Idaho Supreme Court has also adopted the principles
established in Bluefield Water Works and Hope Natural
Gas. See In Re Mountain States Tel. & Tel. Co. 76 Idaho
474, 284 P.2d 681 (1955); General Telephone Co. v. IPUC,
109 Idaho 942, 712 P.2d 643 (1986); Hayden Pines Water
Company v. IPUC, 122 Idaho 356, 834 P.2d 873 (1992).
As a result of these United States and Idaho Supreme
Court decisions, three standards have evolved for
determining a fair and reasonable rate of return: (1) The
Financial Integrity or Credit Maintenance Standard; (2)
The Capital Attraction Standard; and (3) The Comparable
Earnings Standard.
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In addition, these Supreme Court decisions have
established that the return on equity can change with
market conditions, and that the reasonableness of the end
result is more important than how you got there.
Q.What methods are used to establish an ROE?
A.Models are used to estimate what ROE is
required for the Company to maintain the standards
mentioned previously. I have picked three different
models that I believe are useful to create a range of the
cost of equity, and from that range I establish a
recommendation. The models I selected are the Comparable
Earnings Model, Discounted Cash Flows ("DCF"), and the
Capital Asset Pricing Method ("CAPM").
Q.Are there any outside factors to consider
before discussing your specific analysis?
A.Yes. I would like to discuss issues dealing
with the state of the economy, the Company being a
wholly-owned subsidiary, the Hamada Formula, and the
proxy group I use for my analysis.
Q.What are the issues with the state of the
economy.
A. The economy is in a period of significant
inflation. The Federal Reserve has been increasing
interest rates in attempts to curb this inflation.
Rising interest rates can have other effects than trying
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to curb inflation, and this can affect my analysis
determining an appropriate ROE.
Q.What is the first of those effect?
A.Many methods to estimate a proper ROE use
interest rates as a base line. As these rates increase
it will also increase the ROE range recommended.
Q.What is the second effect?
A.When the Federal Reserve uses interest rates to
curb inflation, it can have the unintended consequence of
causing a recession.
Q.Has the Federal Reserve effectively avoided
this unintended consequence in the past?
A.Not exactly. Since 1961 the Federal Reserve
has increased interest rates to curb inflation nine
times. Eight of those times the country has gone into a
recession afterwards.1
Q.Is there evidence that this cycle may be
beginning?
A.Yes. Many large corporations are announcing
layoffs. One example is that Google has announced the
largest layoffs in its existence.2 In addition, since
August 2022, the treasury yield curve has been inverted.3
____________________
1 https://www.politico.com/news/2022/03/29/federal-reserve-
recession-inflation-rates-00021119
2 https://gizmodo.com/google-layoffs-12000-workers-largest-cuts-
history-1850010658
3 https://home.treasury.gov/
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Q.What is an inverted yield curve and what does
it mean?
A.An inverted yield curve is when short term
treasury rates (in this case 1 year treasury rates) are
higher than the long-term treasury rates (in this case I
am using the 10-year treasury rates). Every recession
since the 1960's has been preceded by an inverted yield
curve.
Q.How does this effect investor viewpoints.
A.In 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.
Q.How does this impact ROE?
A.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.4
Q.What are the effects of the Company being a
wholly-owned subsidiary of Veolia North America ("VNA")?
_____________________
4 Yahoo Finance pulled on January 30, 2023
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A.The Company does not have publicly traded stock
as a wholly-owned subsidiary. Therefore, only the parent
company and comparable utilities should be used when
evaluating the required cost of equity. Also, the
Company's debt acquisition is all handled by VNA. Due to
size and better geographic diversity, VNA would have
better ratings than the Company would have on its own.
This provides an overall benefit to the Company and
ratepayers.
Q.What benefits do customers receive by the
Company being a subsidiary of VNA?
A.The first is lower debt rates. This has
already been incorporated in the Company's debt rate
calculation for the overall rate of return. The second
benefit is that the Company may be able gain economies of
scale with purchasing inventory needed for capital
projects and maintenance. These have already been
captured in the maintenance expense and plant in service.
The last benefit is the greater ability to attract equity
investors. Witness Walker's analysis on page 20 of his
testimony states that the Company's risk is higher than
the comparable group's because of its size. However, if
you included the totality of the VNA's footprint, the
size and diversity issue becomes moot. And if you look
at the next level up, Veolia Environnement S.A., where
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all the stock is purchased and sold, the size and
diversity risk is eliminated. To include any adjustment
or bias due to the small size of the Company denies these
benefits of the larger entity to the ratepayers.
Q.Your next factor is the Hamada formula. Please
explain.
A. Mr. Walker proposed to include an adder based
on the Hamada Formula that would increase the Company's
ROE by 110 basis points or 1.1%.
Q. What is the Hamada Formula?
A. The Hamada Formula is a method used to de-lever
the beta or adjust the ROE to compensate for a less than
ideal or unequal capital structure.
Q. Do you agree with Mr. Walker's use of the
Hamada Formula?
A. No.
Q. Please explain your disagreement with the
Hamada Formula.
A. The Hamada formula is used to de-lever the beta
in order to calculate an ROE for an ideal capital
structure. This formula has a number of conditions
attached to it that do not make it applicable to this
situation. The first is that the Hamada formula is not
designed for a company that follows a constant leverage
policy.
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Q. What is a constant leverage policy?
A. A constant leverage policy is when a company
rebalances its structure so that debt to equity ratios
remain fairly constant.
Q.Has VNA used a constant leverage policy?
A.It appears so. In the last five rate cases the
Company has proposed near 50% debt to 50% equity capital
structure. The farthest away from the 50%/50% capital
structure VNA has been, is in this rate case where the
Company proposed a 44% debt to 56% equity capital
structure. Whether or not VNA has an official constant
leverage policy or not does not matter as the effect is
still the same.
Q.Are there any other critiques of the Hamada
formula?
A.Yes. The Hamada formula is usually recommended
for a company that has a high level of debt. A level
that is far above optimal. Optimal is generally assumed
to be anything below a 2:1 debt to equity ratio. In the
last five rate cases the Company was only over a 1:1 debt
to equity ratio once. In Case No. UWI-W-06-02, the
Company proposed a 51.46% debt and 48.54% equity. In
this Application, the Company's capital structure has
more equity than debt. This is not a highly leveraged
company, and therefore the Hamada formula is
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inappropriate.
Q.Do you have any other reasons to oppose the
Hamada formula?
A.Yes, there is one last issue with using the
Hamada formula for the Company. The Hamada formula does
not take into account default risk. This is the risk
that a company may default on its loans. Even with the
unsettled financial markets recently, VNA has maintained
its Baa1 credit rating. This shows that the default risk
is quite low for VNA and by extension the Company.
Q. Has the Commission ever accepted the Hamada
Formula?
A.I could not find a case where the Hamada
Formula has been accepted by this Commission.
Q.What is the effect on the Company's
recommendation without the Hamada Formula?
A.Witness Walker's Hamada adjustment was a 110
basis points or 1.1% increase to the recommended ROE. If
you removed this adjustment from Witness Walker's
recommendation, the resulting ROE would be 9.7%.
Q.Your last point has to do with the proxy group
you used. Please explain.
A.For the most part I agree with the proxy group
Witness Walker used for his analysis. However, I feel it
is always appropriate to include Veolia Water Idaho's
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parent company in the proxy group, should the data be
available and be somewhat comparable to the proxy group.
Q.Was the data available?
A.It was. However, because it is traded in
France and not the U.S., there may be some differences
from the rest of the proxy group.
Q.Is it somewhat comparable to the proxy group?
A.Yes. Veolia Environnement S.A. is a
water/wastewater company and falls in line with the other
companies in the proxy group. However, because of the
foreign stock exchange, I do not believe it should hold
any more influence than any other company in the proxy
group.
Q.Let's move on to the Comparable Earnings
Method. What is the theoretical basis for this method of
analysis?
A.The Comparable Earnings Method is directly from
the comparable earnings requirement in the Hope and
Bluefield cases, which is the third standard mentioned
above. The earnings of the proxy group are compared to
establish an appropriate level of earnings for the
Company.
Assuming that the proxy group is made of
companies that maintain their financial integrity and
attract capital, the Comparable Earnings Standard will
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also fulfill the first and second standard as well. The
proxy group consists of established companies that are
financially sound and able to attract capital. Thus,
this method complies most cleanly with all three
principles established by the court decisions mentioned
above. (The Financial Integrity or Credit Maintenance
Standard, The Capital Attraction Standard, and The
Comparable Earnings Standard.)
Q.How does this method work?
A.The ROE from each company in the proxy group is
used to create a range. For my analysis, I used the last
three years ROE as a comparison. The 2021 results ranged
from 3.51% to 17.31% ROE with an average of 9.78%. The
2020 results ranged from 1.23% to 13.42% ROE with an
average of 8.94%. The 2019 results ranged from 2.63% to
13.99% ROE with an average of 9.02%. The average of all
the results together is a ROE of 9.25% with a median of
10.26%. That analysis is found in Exhibit No. 119,
Schedule 1.
Q. Let's turn our attention to the discounted cash
flow methodology. Please explain the basis for the DCF
method.
A. The DCF method is based upon the theory that
(1) stocks are bought for the income they provide (i.e.,
both dividends and gains from the sale of the stock), and
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(2) the market price of stocks equals the discounted
value of all future incomes. The discount rate, or cost
of equity, equates the present value of the stream of
income to the current market price of the stock.
Q.How does this method comply with the standards
presented above?
A.This relates to the Capital Attraction
Standard, as this method attempts to establish what ROE
investors could be looking for in the proxy group of
stocks. However, all these standards are very
interrelated. Therefore, for the Company to be able to
attract capital it must also be able to maintain its
financial integrity, and it must be able have comparable
earnings to other similar investments.
Q.What were the results of the DCF model?
A.As is shown in Exhibit No. 119, Schedule 2, the
results ranged from 3.50% to 11.39% with an average of
7.91% and median of 9.04%.
Q.How was it calculated?
A.The formula for this method is:
ROE = Do + g
Po
Where:
D0 = Currently announced dividends
P0 = Current stock price
g = Growth rate
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Q.What did you use for the currently announced
dividends?
A.I used the dividend declared for 2022 as the
current dividends.
Q.What did you use for the current stock price?
A.I used the January 30, 2023, stock price.
Q.What did you use for the growth rate?
A.I used the five-year expected future growth
rate and the five-year historical growth rate as pulled
from Yahoo Finance on January 30, 2023. However, I
removed three companies from the proxy group.
Q.Which companies did you remove?
A.California Water Services Group, SJW Corp and
Veolia Environnement S.A.
Q. Why did you remove those three companies?
A.Both California Water Service Group and SJW
Corp had a historical growth rate that was negative.
Veolia Environnement S.A. had extremely high growth rates
(11.7% going forward and 15.07% historical). All of
these were extreme outliers from the rest of the proxy
group and therefore, I do not believe it would be proper
to skew the results due to these outliers.
Q.Let's turn our attention to the Capital Asset
Pricing Model("CAPM"). Please explain the basis for the
CAPM method.
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A. The CAPM is based on the theory that investors
hold diversified portfolios and require more return from
more risky assets in their portfolio than less risky
assets in their portfolio. A company with a higher risk
profile will require higher returns to attract capital
and maintain financial integrity, while a company with a
lower risk profile will require less return.
Q.How does this method comply with the standards
presented above?
A.This relates to the Capital Attraction
Standard, as this method attempts to establish what ROE
investors could be looking for in the proxy group of
stocks based on the riskiness of each proxy company.
This method attempts to estimate what ROE investors are
expecting from the proxy group. However, all of these
standards are very interrelated. Therefore, for the
Company to be able to attract capital it must also be
able to maintain its financial integrity and, therefore,
it must be able have comparable earnings to other similar
investments.
Q.How does the model calculate risk?
A.This model uses beta, which is a measure that
shows the Company's returns in relation to the market. A
beta of one means the company moves with the market on a
one for one basis. A beta below one means that when the
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market drops the company's stock price does not drop as
much and is therefore less of a risk to invest in. A
beta above one means that the company's stock price drops
faster than the market and is therefore more of a risk.
As a whole, utilities tend to be relatively safe
investments when compared with the market.
Q. What are your results from the CAPM?
A. My results from the CAPM range from 6.32% to
13.11% with an average of 9.33% and a median of 8.98%, as
shown in Exhibit No. 119, Schedule 3.
Q.How does this analysis work?
A.The formula is:
ROE = Rf + ß(Rm - Rf)
Where:
Rf = Risk Free Rate
ß = Beta
Rm = Market return
Q.What did you use for the Risk-Free Rate?
A.I used both the 1-month and 30-year treasury
rates as a risk-free rate. In addition, I used the
average rates from January 1, 2022, to January 27, 2023,
as well as the January 27, 2023, treasury rates alone.
The 1-month treasury rates are generally accepted as the
least risky assets an investor could own, while the
30-year rate tends to have the future expectation of
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inflation included. Because we have been in a time of
quickly rising interest rates, I included the average of
the previous year as well as the latest rates. This
compounds the amount of data to parse but provides better
overall results to draw a conclusion from.
Q.What did you use for the Market Return?
A.I used the average returns of the S&P 500
including dividends since 1922. This gives a long-term
perspective on what the market returns are for companies.
Q.What did you use for Beta?
A.I used each individual companies' 5 year
rolling beta as provided in Yahoo Finance on January 30,
2023.
Q.What is your overall recommendation?
A.Using the average and the median of all these
factors I get a range from 7.70% to 10.26% as shown in my
Exhibit No. 119, Schedule 4. I recommend a 9.0% ROE,
which is the middle of the range. With the economic
factors mentioned above, it provides the Company a
sufficient return to accomplish all three standards.
Q.How does this impact the overall rate of return
you are proposing?
A.This lowers the overall rate of return from
7.77% to 6.77% as shown in Exhibit No. 119, Schedule 5.
Q.How is that calculated?
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A.The overall rate of return is the weighted
average cost of capital. I accept the Company's proposal
for the capital structure and the debt rate. Therefore,
the only change is the ROE. This lowers the weighted
average of equity from 6% to 5% and therefore, the
overall weighted average cost of capital or rate of
return to 6.77%
POWER COST DEFERRAL AND AMORTIZATION
Q.Do you have any adjustments with the Company's
power cost deferral recovery?
A.Yes.
Q.Please describe the Power Cost Deferral
Mechanism.
A.The mechanism was initially approved by the
Commission in Order No. 28800, Case No. UWI-W-01-02,
which allowed the Company to defer the impacts of Idaho
Power's Power Cost Adjustment ("PCA") on the Company and
for recovery in future rate case proceedings. It was
later adapted to include Idaho Power's Fixed Cost
Adjustment ("FCA") mechanism.
Q.Did the Company propose a deferral amount?
A.Yes. The Company proposed to defer $1,069,555,
consisting of $411,425 of unamortized costs from Case No.
SUZ-W-20-02 and $658,130 in new power costs.
Q.Do you agree with that amount?
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A.No. The Company included estimated pro forma
power expenses from January 2023 to March 2023, along
with accrued interest for that time period.
Q.Why do you disagree with this?
A.This deferral is not to be used for expenses
the Company has not yet experienced.
Q.What do you recommend instead?
A.I recommend using the actual expenses the
Company has incurred through the year ended December 31,
2022, along with interest at the customer deposit rate.
This is consistent with Staff's position on the Company's
test year and cut-off date as described in Staff witness
English's testimony. The actual 2022 power cost deferral
with accrued interest is $644,867, and when combined with
the remaining unamortized amount of $411,425, is $13,264
less than the Company's request. Exhibit No. 120.
Q.What amortization period is the Company
recommending to recover its power cost deferral?
A.The Company proposes a two-year amortization of
its power cost deferral.
Q.Do you agree with that amortization period?
A.No. The average time frame between rate cases
since 2011 has been 3.667 years, or approximately 4
years. Therefore, I recommend a four-year amortization.
This is consistent with the settlement in the Company's
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last rate case.
Q.What is the effect of lengthening the
amortization period?
A.This will reduce amortization expense by
$270,705 which is a revenue requirement impact of
$288,746.
Q.Are there any other concerns with the power
deferral?
A.Yes. The Company proposed to include the power
cost deferral in rate base to earn an additional return.
This is a relatively short-term regulatory asset, and
historically, the Commission has stated that the
opportunity to recover expenses is sufficient that
including this in rate base is unnecessary. In addition,
the Company has already accrued interest at the customer
deposit rate. It is not appropriate for the Company to
accrue interest on a deferral and then include the amount
in rate base to earn an additional return.
Q.What is the impact of the rate base adjustment?
A.In isolation, this adjustment would reduce rate
base by $990,780. However, this amount was removed in
Staff witness English's calculation of the Company's 2022
average rate base.
RATE CASE EXPENSE ADJUSTMENT
Q.Please explain the Company's Rate Case
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deferral?
A.The Company included the unamortized amount of
$62,225 from the previous rate case, Case No.
SUZ-W-20-02, and the current estimated expenses of
$343,620 for a total of $405,845.
Q.Please explain your adjustment to the Company's
rate case expenses.
A.My adjustment is a three-part adjustment: (1)
remove the current case intervenor funding; (2) change
the amortization timeframe from two years to four years;
and (3) remove the Company's deferred rate case expenses
from rate base. The details of these adjustment are
included in my Exhibit No. 121.
Q.Please explain the costs you wish to remove
from the rate base deferral?
A.The Company included $40,000 in estimated
intervenor funding for this rate case.
Q.Is that inappropriate?
A.Not normally. Idaho Code §61-617A allows for
the Commission to order a utility with intrastate annual
revenues exceeding $3.5 million up to $40,000 in
intervenor funding to offset the costs for intervenors to
participate in the case.
Q.Why are you proposing to remove the intervenor
funding for this case?
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A.This case has four intervenors: Ada County,
City of Boise, Micron, and Sharon Ullman. I believe it
is premature to estimate intervenor funding, if any, that
may be ordered.
Q.Why do you think that intervenor funding may
not be ordered?
A.These intervenors are unlikely to qualify on
the consideration that the costs of intervention need to
be a significant financial hardship for the intervenor.
Q.What is the impact of this adjustment?
A.This will reduce the rate case expenses by
$40,000. It will also reduce the rate case amortization
by $20,000 before my adjustment to extend the
amortization period that is discussed later.
Q. Why do you propose a four-year amortization for
the rate case expense deferral?
A. Similar to the Power Cost Deferral amortization
above, the average time frame between rate cases since
2011 has been approximately four years. Therefore, I
recommend a four-year amortization. Again, this is
consistent with the settlement in the Company's last rate
case.
Q.What is the effect of this adjustment?
A.The four-year amortization reduces amortization
expense by $96,461, which when combined with the removal
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of the intervenor funding is a reduction of $111,461 to
amortization expense. The total revenue requirement
reduction of these two adjustments is $102,269.
Q.Are there any other concerns with the deferred
rate case expenses?
A.Yes. The Company proposed including the
deferred rate case expenses in rate base to earn a
return. The Commission has never authorized the Company
to earn a return on deferred rate case expenses.
Historically, the Commission has stated that the
opportunity to recover expenses is sufficient and that a
return is unnecessary. Order No. 33304
Q.What is the impact of removing deferred rate
case expense from rate base?
A.This adjustment would reduce rate base by
$405,841; however, it has already been incorporated in
Staff witness English's calculation of the 2022 average
rate base.
CONVENIENCE FEES
Q.Please explain the Convenience Fees Deferral.
A.The Company was authorized in Order No. 34405,
Case No. SUZ-W-19-01, to defer three years of costs
incurred to process payment transactions (Convenience
Fees). There was no amortization period provided in that
order, nor was authority granted for a carrying charge or
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for the Company to include the convenience fees in rate
base to earn a return.
Q.Do you agree with including this deferral in
rate base?
A.No. This is a relatively short-term regulatory
asset, and historically, the Commission has stated that
the opportunity to recover expenses is sufficient that a
return is unnecessary. Order No. 33304
Q.What is the impact of the rate base adjustment?
A.This adjustment would reduce rate base by
$81,138, however it has already been incorporated in
Staff witness English's calculation of the 2022 average
rate base.
Q.Please explain the Tank Painting deferral and
amortization.
A.In past cases (Case Nos. UWI-W-04-04,
UWI-W-06-02, UWI-W-09-01, UWI-W-11-02, UWI-W-15-01, and
SUZ-W-20-02) the Company has included tank painting as a
deferred asset to be amortized over 20 years and included
it in rate base. This has been accepted by Staff and the
Commission in the past (Case No. UWI-W-04-04).
Q.Do you have any adjustments to the Company's
tank Painting Deferral and amortization?
A.Yes. The Hidden Hollow tank will be painted in
March of 2023. As stated in Staff witness English's
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testimony, Staff is proposing a cut-off date on December
31, 2022. Because this tank painting will happen after
the cut off, I propose removing the deferral and
resulting amortization.
Q.What are the effects of this adjustment?
A.This would affect both the amortization expense
and rate base.
Q.What is the effect on amortization expense?
A.This adjustment reduces the Company's
amortization expense by $22,500, and reduces the revenue
requirement by $22,679
Q.What is the impact of the rate base adjustment?
A.This adjustment would reduce rate base by
$450,000, however it has already been incorporated in
Staff witness English's calculation of the 2022 average
rate base.
Q. Does that conclude your testimony in this
proceeding?
A. Yes, it does.
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(The following proceedings were had in open
hearing.)
MR. BURDIN: The witness is now available for
cross-examination.
COMMISSIONER ANDERSON: Thank you. Mr. Carter?
MR. CARTER: I do have some questions for
Mr. Terry.
CROSS-EXAMINATION
BY MR. CARTER:
Q.Mr. Terry, you testified regarding the return on
equity; correct?
A.Yes.
Q.And Mr. Terry, investor-owned utilities depend
upon private capital to operate; is that correct?
A.Yes.
Q.So unlike municipalities, investor-owned
utilities do not have the power to tax; correct?
A.Yes.
Q.And the Commission cannot force investors to
provide capital to a utility; correct?
A.Yes.
Q.So Veolia Water Idaho must attract private
capital to operate; correct?
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A.Yes.
Q.And attracting capital is one of the standards
used to determine an appropriate return on equity;
correct?
A.Yes.
Q.So Mr. Terry, you recommend the Commission
authorize a return on equity for Veolia Water Idaho of
9.0 percent; correct?
A.Correct.
Q.Mr. Terry, if the Commission were to accept your
recommended 9.0 percent return on equity, Veolia Water
Idaho would have the lowest authorized return on equity
of any utility that operates in Idaho; correct?
A.I believe so, but I would subject that to check.
Q.So you aren't aware of any other utility in
Idaho that has an authorized return on equity of 9.0
percent or lower; correct?
A.That is correct.
Q.Mr. Terry, if the Commission were to accept your
recommended 9.0 percent return on equity, Veolia Water
Idaho would have the lowest authorized return on equity
of any utility in the Pacific Northwest; is that correct?
A.I don't know. I don't have that information.
Q.But you're not aware of any authorized return on
equity for any utility in the Pacific Northwest that's
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9.0 percent or lower?
A.I'm not aware, but I also have not researched
all of the utilities, so I don't know.
Q.Mr. Terry, setting aside a few states that have
significantly different rate structures, if the
Commission were to accept your recommended 9.0 percent
return on equity, Veolia Water would have the lowest
authorized return on equity of any utility in the entire
country; is that correct?
A.No.
Q.Mr. Terry, can you identify any utility in the
country that has an authorized return on equity lower
than 9.0 percent?
A.I don't know if it has been restated, but a few
years ago there was a utility in Arizona that was awarded
an 8.0.
Q.So Mr. Terry, I said setting aside a few states
that have significantly different rate structures, the
two states I had in mind were Arizona and New York. It's
my understanding or is it your understanding that Arizona
authorizes a return based on a fair value of the
company's rate base versus the rate base methodology the
Commission uses in Idaho?
A.As far as I know, I don't believe they use fair
value, but I do not know. I didn't -- I was notified by
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an acquaintance about the 8.0 that was awarded by the
Arizona Public Service Commission.
Q.Mr. Terry, are you aware of what happened to the
utility's stock price after -- I believe it was 8.7, but
after the return on equity that's the lowest in the
country that you can name was awarded? Do you know what
happened to the stock price?
A.It decreased.
Q.By what percentage?
A.I don't know off the top of my head.
Q.Does 25 percent sound right?
A.That's a believable number.
Q.So apart from the 8.0 range of the authorized
return on equity that was authorized in Arizona that
caused a decrease in stock price, are you aware of any
other authorized return on equity in the country at 9.0
percent or lower?
A.I have not reviewed all of them, but I do not at
this time.
Q.Mr. Terry, in your testimony you discuss current
economic conditions; correct?
A.Yes.
Q.And you testified that the economy is in a
period of significant inflation; correct?
A.Yes.
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Q.And you testify that "many methods to estimate a
proper ROE use interest rates as a base line. As these
rates increase, it will also increase the ROE range
recommended"; is that correct?
A.That is correct.
Q.All right. Now, let's talk about the ranges of
ROE, so Mr. Terry, you used several different methods to
come up with your recommended return on equity; correct?
A.Correct.
Q.And those methods resulted in a range of return
on equities; correct?
A.Yes.
Q.And your range of return on equity was from --
excuse me, the ends of the range were from 7.7 percent to
10.25 percent; correct?
A.No, it was 7.91 percent to 10.26 percent.
Q.Got it, so low end of 7.9, high end of 10.2?
A.Yes.
Q.Okay, and Mr. Walker, that's the Company's
witness, also came up with a range of return on equities;
correct?
A.Right.
Q.And that range was 9.6 percent on the low end to
11.3 percent on the high end; correct?
A.I believe so.
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Q.So a return on equity of between 9.6 percent and
10.25 percent would fall within the ranges of both your
and Mr. Walker's testimony; correct?
A.Yes.
Q.Mr. Terry, can we turn to page or Exhibit 119,
Schedule 1, to your testimony?
A.I have it in front of me.
Q.And this is a schedule used to illustrate the
comparable earnings method; correct?
A.Correct.
Q.And this schedule identifies what we call the
proxy group for purposes of the comparable earnings
method; correct?
A.Correct.
Q.And there are eight companies there?
A.Yes.
Q.Are all these companies based in the United
States?
A.No.
Q.Which one is not?
A.Veolia Environment.
Q.And do all these companies primarily operate in
the United States?
A.No.
Q.Which one does not?
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A.Veolia Environment.
Q.And do all of these companies operate in an
economy where the United States Federal Reserve sets the
interest rate?
A.At least partially, yes.
Q.So is it your testimony that Veolia Environment
S.A. operates in an economy in which the United States
Federal Reserve sets the interest rate?
A.Partially. They are the parent company of
Veolia Idaho, so yes, partially.
Q.And what percentage of Veolia Environment's
business comes from North America?
A.I don't remember off the top of my head. It's
in the double digits, but I don't think it's over 50
percent.
Q.We'll circle back to that, and Mr. Terry, the
numbers for Veolia Environment here are significantly
different from the other companies on the list; would you
agree?
A.Yes.
Q.So, for example, for the 2021 ROE, Veolia
Environment's ROE was 3.51 percent?
A.Yes.
Q.And the next lowest was 5.85 and they go up to
17 percent?
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A.Yes.
Q.Mr. Terry, before you determined to include
Veolia Environment in the comparable earnings analysis,
did you review any documents regard Veolia Environment's
operations?
A.Yes.
Q.And what documents were those?
A.I reviewed their financial documents that were
provided to their local stock exchange.
Q.So that would be documents that Veolia
Environment filed with, I guess, what entity?
A.It's the French Stock Exchange where they
operate.
Q.Okay, and what -- did you review the 2021
Universal Registration Document, Annual Financial Report?
A.I skimmed over it. I will admit that I did not
read every page of it. I went through the financial
sections.
Q.Okay, I have that here. It's 585 pages. I'm
going to try to ask questions so that we can avoid using
the entire thing as an exhibit. Do you know how many
employees Veolia Environment has?
A.Not off the top of my head, I do not remember.
Q.Would you have -- does 176,000 employees sound
about right?
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A.It's a believable number, but I would have to go
research it myself at this point. I don't remember.
MR. CARTER: Okay, I would like to introduce
what I have labeled as Cross-Examination No. 2. These
are excerpts from the Universal Registration Document
filed with the French Stock Exchange.
COMMISSIONER ANDERSON: Do you have copies to
circulate, please?
MR. CARTER: I do, and I have one copy of the
entire document and I can email another one upon request.
Maybe we can go through this and see if folks want to
have it.
(Mr. Carter distributing documents.)
COMMISSIONER ANDERSON: If the intervenors have
any comments on that after you've reviewed it, please
object. I'm hearing no objections. We will introduce --
what exhibit number would this be?
MR. CARTER: I have it labeled as
Cross-Examination Exhibit 2.
COMMISSIONER ANDERSON: Introduce
Cross-Examination Exhibit 2 to the record.
COMMISSIONER HAMMOND: If I think I know what's
coming, it's that the exhibits the Company have and all
the parties have are labeled in order and so to give it a
different designation, it kind of puts it out of order.
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It could make it confusing. I guess I'd prefer that this
exhibit take off from the last number of the Company's
exhibits, if that makes sense.
MR. CARTER: I have no problem with that, so I
believe this would be 21.
COMMISSIONER HAMMOND: Do you want to take a
moment, Mr. Chair, and --
COMMISSIONER ANDERSON: I'm going to wade
through it. Let's just find out what number we're at.
All I want is a number, so if we can't find a number, I
don't need too many moments to take.
MR. CARTER: I would choose 25 to be safe, I
suppose.
COMMISSIONER ANDERSON: We'll allow Exhibit
No. 25.
(Veolia Water Idaho, Inc., Exhibit No. 25 was
marked for identification and admitted into evidence.)
Q.BY MR. CARTER: Mr. Terry, you will see about
halfway down the page of this exhibit it says there are
176,488 employees; is that correct?
A.That is what it says, yes.
Q.And what percentage of those employees are based
in North America?
A.It states there is four percent.
Q.Okay. Now, Mr. Terry, Veolia Environment
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operates a number of business segments; isn't that
correct?
A.That is correct.
Q.And those segments include subsidiaries all
around the world; correct?
A.That's what it says here, yes.
Q.Do you know what percentage of revenue from
Veolia Environment comes from North America versus the
rest of the world?
A.I would imagine it is not that far different
from the number of employees.
Q.Okay, so Mr. Terry, including Veolia Environment
within your comparable earnings analysis significantly
impacts the return on equity from your comparable
earnings analysis; is that correct?
A.It does impact it. Significant I think is a
word I wouldn't use, but it does impact it, yes.
Q.Okay, so let's talk about the 2021 numbers from
the comparables earnings method. You've got that. It's
Exhibit 119, Schedule 1, so if we excluded Veolia
Environment from the proxy group, do you know how that
would impact the average and the median ROE's?
A.I would imagine it would increase the median and
the average somewhat.
Q.Do you know -- I guess I've got an exhibit that
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shows this. Does 10.67 percent as an average ROE sound
right if you were to exclude Veolia Environment?
A.Subject to check. It's not an inconceivable
number.
Q.All right, and then the median would go from 9.2
percent to 9.85 percent; does that sound roughly correct?
A.Subject to check.
Q.Okay, so Mr. Terry, why did you include Veolia
Environment in the comparable earnings analysis?
A.For the exact reason I included in as many of
them as was reasonable and it's the fact that Veolia
Water Idaho has only one investor. There is only one
investor that can invest equity into Veolia Water Idaho
and that is Veolia North America, and Veolia North
America only has one investor that can invest equity into
Veolia North America and that's Veolia Environment and so
I wanted to include them in there as to say this is how
shareholders might be viewing the only investor that
Veolia Water Idaho can have.
Q.So Mr. Terry, this Commission has jurisdiction
over Veolia Water Idaho, Inc.; correct?
A.Correct.
Q.And one of the standards that this Commission
uses to determine an appropriate ROE is the ROE necessary
to attract capital investment in Veolia Water Idaho,
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Inc.; correct?
A.Say that one more time. I think I got my head
crossed around there.
Q.Sure, so one of the standards used to establish
an appropriate return on equity is the capital attraction
standard; correct?
A.Right.
Q.And in considering the capital attraction
standard, this Commission must determine a return on
equity for Veolia Water Idaho, Inc., sufficient to
attract capital in Veolia Water Idaho, Inc.; correct?
A.Right.
Q.So the capital attraction standard, the question
before the Commission is not what return on equity needs
to be established for Veolia Water Idaho, Inc., to
attract investment in Veolia Environment, S.A. Rather,
the question for the Commission is what return on equity
needs to be set for Veolia Water Idaho, Inc., to attract
capital to Veolia Water Idaho, Inc.; correct?
A.Yes; however, to take that in a vacuum is also
denying all the benefits of being part of a larger
company as stated in my testimony. If you take Veolia
Water Idaho by itself, then that also means that in every
other way we should take Veolia Water Idaho by itself.
That includes all the costs passed down from the
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parent company, which, though, witness Culbertson
discussed that in detail of maybe some disagreements in
the number, we do not disagree that those costs should be
passed down, so to deny the benefits of a larger company
ownership doesn't seem fair if you're going to pass down
the costs of a larger parent company ownership.
Q.Mr. Terry, isn't it true that the benefits of
being part or being a subsidiary is efficiencies that
decrease costs that the Company would otherwise have to
his bear on its own?
A.Costs in every area, including cost of debt and
cost of equity, yes.
Q.So it is your testimony that an Idaho subsidiary
owned by a parent company should have a lower return on
equity than an Idaho company that does not have a parent
company?
A.If there are benefits of that sort, yes.
Q.So if Veolia Water Idaho were tomorrow to be
spun off from Veolia Environment S.A., in your opinion,
Veolia Water Idaho's return on equity might need to be
increased or altered?
A.That could be one option, but as a for instance,
it might be, but we would do a different analysis.
Q.Okay, so Mr. Terry, in including Veolia
Environment in your comparable earnings group, did you
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cite Commission precedent as authority for that?
A.No.
Q.Did you cite an academic source for that?
A.No.
Q.Did you cite any authority for that?
A.It seemed logical. I walked through the process
and said that if this is the one investor in Veolia Water
Idaho, Inc., then we should be at least including this
into the sample, even if at some points in other places I
remove it, because it got too far out of hand. It was
too far out from the center.
Q.So, and this is on your testimony on page 11, so
your reason for including Veolia Environment within the
proxy group was because it was -- in your testimony you
say that I feel it is always appropriate to include
Veolia Water Idaho's parent company should the data be
available and be somewhat comparable to the proxy group;
is that correct?
A.That is correct.
Q.Mr. Terry, the comparable earnings analysis
flows from a standard set by decisions of the United
States Supreme Court; correct?
A.Correct.
Q.And that standard is what?
A.That it needs to have comparable earnings to
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similar entities.
Q.Right, and that's known as the comparable
earnings standard?
A.Yes.
Q.It's not the somewhat comparable earnings
standard, is it?
A.Yes, that's correct.
COMMISSIONER HAMMOND: Mr. Chair, I'm going to
interject. I appreciate your asking questions about the
Supreme Court standard and what it says on paper. I'm a
little uncomfortable -- and his role in applying that.
I'm a little bit uncomfortable in having him answer
questions about interpreting a legal opinion or legal
issues when he's not an attorney, so if it's an issue you
want to brief, that's different. I just want to be
careful that yes, he needs to discuss those things, but
to get in and argue about what that authority means, I'm
a little uncomfortable, so with that --
MR. CARTER: Sure, understood.
COMMISSIONER ANDERSON: I'm going to interject,
also, I think that Commissioner Hammond's assessment is
correct; however, this is not a typical courtroom and I'm
going to allow a little bit of leniency to continue. I
think I see the direction it's going, so I'm going to
allow some leniency for you to continue in that vein.
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Just don't put too much pressure on the witness to answer
things that he may not have an answer to.
MR. CARTER: Understood. Thank you, Chairman.
Q.BY MR. CARTER: And let me be clear, I'm not
asking, Mr. Terry, for you to opine on the legal
standard. What I'm drawing out is there's one company on
that comparable earnings analysis chart that is
significantly different from the others; correct?
A.I would say if you were only looking at the 2021
ROE, there are two.
Q.Okay, so you included Veolia Environment in the
comparable earnings analysis because it was the parent
company of Veolia Water Idaho; correct?
A.Correct.
Q.And in your testimony, it was somewhat
comparable and the parent company and that's why it was
included?
A.Yes.
Q.Okay, I think I just have one more question --
well, two more questions, so one is I just want to be
clear about this point: The goal of the capital
attraction standard is to ensure that there's an adequate
ROE to attract private capital to Veolia Water Idaho,
Inc.
A.Yes.
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Q.And the second would be you are not aware of
any, apart from Arizona you are not aware of any,
authorized return on equity in the entire country that is
9.0 or lower?
A.That is correct.
MR. CARTER: No further questions.
COMMISSIONER ANDERSON: Thank you, Mr. Carter.
Micron?
MR. NELSON: Thank you. No questions.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: No questions.
COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions.
COMMISSIONER ANDERSON: Ms. Ullman?
MR. ULLMAN: One question.
COMMISSIONER ANDERSON: Okay.
CROSS-EXAMINATION
BY MS. ULLMAN:
Q.In regards to the issue of Veolia Water Idaho's
parent company, did they not just purchase Veolia Water
Idaho within the past year or so and, therefore, private
capital was attracted? I mean, the proof is in the
pudding; would you agree?
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A.I would agree.
MR. ULLMAN: Thank you.
COMMISSIONER ANDERSON: Do the Commissioners
have any questions? Yes, Commissioner Hammond.
EXAMINATION
BY COMMISSIONER HAMMOND:
Q.So going to this attracting capital, is it
different for a standard that counsel is referring to, is
it different for Veolia Water Idaho than it is for a
company that has multiple shareholders that's publicly
traded? In other words, this Company under your reading
has one shareholder or one owner. Maybe shareholder is
the wrong term. Is the standard different in attracting
capital for a Company like that versus a company that is
publicly traded?
A.One of the biggest difficulties in -- every
company is different in their own way, but these single,
you know, wholly-owned subsidiaries are definitely
different than one that has to go to the parent -- that
is the parent company themselves, because the parent
company has to go sell shareholders.
You know, if I am a publicly-traded company and
I want to issue equity stock, I have to go and issue
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stock or I have to withhold dividends to maintain
retained earnings to therefore invest into my company;
whereas, when you are a fully-owned subsidiary, every
dime you make goes to your parent company and every time
you need equity capital, you go to your parent company,
and in the case of Veolia Water Idaho, they do not even
issue their own debt. If they need debt equity, they go
to their parent company, which is something that a
publicly-traded company would not have the opportunity to
do.
Q.So there is no -- to your knowledge, is there
any debt outside of -- I mean, you're saying they go to
Veolia for their debt. Is there any debt outside of that
for Veolia Water Idaho, that goes outside of those
parameters?
A.No. As far as I know, Veolia Water Idaho has
never requested the authority to issue any debt and,
therefore, should have no debt on their books.
Q.And to be fair, does the rate of return and
return on equity for Veolia Water, Inc., Idaho, Inc.,
help its parent company attract capital that could be
used for them? I'm trying to see both sides of this, so
I just --
A.No, it absolutely does. I mean, if we take this
picture that we got and we could even use 2021 as an
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example for Veolia Water and Veolia Environment, if their
return on equity stays at 3.51 percent, they will likely
have struggle selling stock to people and collecting, and
four percent of that is, somewhere in that four percent
number is, the amount of their revenue that comes from
the United States, so if they used to get 4.3 percent and
now they get 4 percent of revenue because revenue has
dropped from all of their subsidiaries in the United
States, it can affect their ability to attract capital on
the larger market.
COMMISSIONER HAMMOND: Thank you. Nothing
further.
COMMISSIONER ANDERSON: Mr. Burdin, redirect?
MR. BURDIN: Yes, thank you.
REDIRECT EXAMINATION
BY MR. BURDIN:
Q.I'll touch on the two. Mr. Terry, is there
presently a utility in the U.S. that has the lowest ROE?
A.In the United States?
Q.Yes.
A.I want to say that I don't think Arizona has
refiled that.
Q.And so they're the current lowest?
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A.As far as I know.
Q.And are they operating or are they going out of
business?
A.They are operating.
Q.And then if they were to go out of business,
would there be a new company that has the lowest ROE in
the country?
A.I would assume so.
Q.Would they just also go out of business at that
point once they have the lowest?
A.That I could not assure. I don't think so.
Q.Right, and I guess my point is does having the
lowest ROE in the nation mean that ROE is not fairly
calculated or they're not receiving a fair rate of
return?
A.In the risk of going back to the Supreme Court,
in the end, there is also the end result doctrine from
the Supreme Court statements that says it doesn't matter
how the Commission gets to the number, but if they commit
to the number, then that is the right number, so by the
fact that it was awarded by the Commission, the
Commission felt it was fair, just, and reasonable.
Q.Thank you, and then as to the capital attraction
standard, we have talked a lot about investors investing
in Veolia Idaho, Inc., which they are not able to do and
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I'll just throw this out, Commissioner Hammond, you were
trying to get at this point, too, as a simple question,
what ROE that the Commission could give to Veolia Idaho,
Inc., would allow people to invest in Veolia Idaho, Inc.?
A.At this current point in time it doesn't matter
what ROE. You could go anywhere from one to 100 and it
would still be impossible.
Q.Right, so even with 10.8 as requested, I believe
it's 10.8, around there, that's requested by the Company,
Veolia Idaho, Inc., could still not attract its own
capital?
A.It would have to go to its parent company.
Q.Right, so even with a 20.0, no one would still
be able to invest in Veolia Idaho, Inc.?
A.That is correct.
Q.Great, so in that context, the capital
attraction standard, while it can be applied, would need
to be modified to the effect that it is the entity that
has the ability to attract capital that would be at
issue?
A.Yes.
Q.Are you aware of any recent ROE's ordered by the
Commission?
A.Yes.
Q.And which one would that be?
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A.Gem State Water just in Case 22, I believe it's,
-02. An Order was just issued that ordered them 9.5
return on equity.
MR. BURDIN: Thank you. I believe that's all I
have for you, Mr. Terry.
COMMISSIONER ANDERSON: Thank you, Mr. Burdin.
Without objection, you're excused, Mr. Terry. Thank you.
Excuse me? You're excused.
THE WITNESS: Thank you.
(The witness left the stand.)
COMMISSIONER ANDERSON: Mr. Burdin, you may call
your next witness.
MR. BURDIN: Staff calls Michael Eldred to the
stand.
MICHAEL ELDRED,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, was
examined and testified as follows:
DIRECT EXAMINATION
BY MR. BURDIN:
Q.Will you please state your name and spell your
last name for the record?
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A.Michael Eldred, last name spelled E-l-d-r-e-d.
Q.Are you the same Michael Eldred that filed
revised testimony in this case as well as exhibits?
A.Yes.
Q.Do you have any corrections or modifications to
your filed revised testimony?
A.Yes, I have two corrections to make. They're in
regard to some references I made, so the first correction
is on page 19 of my revised testimony. On line 5 I
state, "Schedule 2." The correct number should be
"Schedule 4" instead of "2."
The next correction is on page 28, line 11. I
currently have it as "Column 4." The correct number
should be "Column 3." In addition, I have "Exhibit
No. 130." That should be "Revised Exhibit No. 130."
Those are all of my corrections.
Q.With those modifications, if I were to ask you
the same questions today included in your revised
testimony, would your answers be the same?
A.Yes, they would.
MR. BURDIN: Mr. Chair, I now move to spread the
revised testimony on the record as if read with exhibits.
COMMISSIONER ANDERSON: Thank you. Without
objection, we will spread Mr. Eldred's testimony, direct
and rebuttal and revised, and the exhibits across the
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record.
(Staff Exhibit Nos. 122-128 were admitted into
evidence.)
(The following prefiled revised direct testimony
of Mr. Michael Eldred is spread upon the record.)
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Q.Please state your name and business address for
the record.
A.My name is Michael Eldred. My business address
is 11331 W. Chinden Blvd., Building 8, Suite 201-A,
Boise, Idaho 83720.
Q.By whom are you employed and in what capacity?
A.I am employed by the Idaho Public Utilities
Commission ("Commission") as a Utilities Analyst in the
Utilities Division.
Q.Please describe your work experience and
educational background?
A.Please see Exhibit No. 122 that provides a
summary of my work experience and education background.
Q.What is the purpose of your testimony in this
proceeding?
A.The purpose of my testimony is to address the
Company's Test Year Revenue at Present Rates and
normalized consumption adjustments used to determine (1)
the baseline for determining the increase (or decrease)
in revenue the Company will earn as result of this case,
and (2) the Company's Cost of Service Study ("COSS") used
to inform the spread of the Revenue Requirement across
the different
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classes.
I also provide an assessment of the Load Study
conducted in response to Commission Order No. 35030 that
was intended to validate whether the Company's customer
classes are appropriate to ensure customers are being
charged based on the costs that they cause based on their
demand and usage patterns.
For purposes of my testimony, the terms "usage" and
"consumption" can be used interchangeably and refer to
the amount of water purchased by customers from the
Company's system.
Test Year Revenue and Weather Normalized Consumption
Q.Please summarize your findings as a result of
your review of the Company's Test Year Revenue at Present
Rates and Weather Normalized Test Year Consumption.
A.I generally support the Company's methods for
determining the Test Year Revenue at Present Rates filed
in the Company's Application; however, Staff is proposing
to use a 2022 Test Year, January 1, 2022, through
December 31, 2022, without pro forma adjustments, instead
of the Company's proposed Test Year of July 1, 2021,
through June 30, 2022, with pro forma adjustments through
March 31,
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2023. The rationale for the Test Year change is
described in Staff witness English's testimony.
The change in the Test Year has the following
effects related to my testimony:
1.Test Year Revenue at Present Rates should be
increased $738,348 from $51,717,859 to
$52,456,207, which is reflected as adjustment
No. 4 in Revised Exhibit No. 130 of Staff
witness Culbertson's testimony;
2.Total water consumption for the Test Year
should be reduced from 857,424 one hundred
cubic feet ("CCF") as proposed by the Company
to 823,098 CCF; and
3.A downward adjustment of $8,905 should be
applied to power and chemical expense as a
result of the reduction in Test Year
consumption compared to the Company's
Application as reflected as adjustment No. 28
in Revised Exhibit No. 130 of Staff witness
Culbertson's testimony.
Q.Does this testimony replace your initial
pre-filed testimony?
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A.Yes, this updated testimony replaces my initial
pre-filed testimony that was filed on February 15, 2023.
Q.Why did your initial testimony need to be
updated?
A.My initial testimony provided estimates for the
Revenue at Present Rates. Staff did not receive a full
response from the Company to Staff Production Request
("PR") No. 163 before my pre-filed testimony was due on
February 15, 2023. The Company did provide an Interim
Response to PR No. 163 that provided enough information
to determine estimates for Staff's Revenue at Present
Rates in my initial testimony for Staff's 2022 Test Year.
On February 21, 2023, the Company provided the Updated
Response to PR No. 163 with all the information I needed
to perform a full analysis and to update my testimony and
exhibits associated with the Test Year Revenue and
Weather Normalized Consumption Section of my initial
testimony. This updated testimony replaces my initial
pre-filed testimony.
Q.What exhibit supports your testimony on Staff's
recommendation for Revenue at Present Rates?
A.I have included Revised Exhibit No. 123 with 4
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schedules to support my testimony. Schedule 1 is a
summary showing the overall total differences between
Staff's final recommended Total Test Year Revenue at
Present Rates and the Company's Total Test Year Revenue
at Present Rates included in its Application and in
Updated Response to PR No. 163. Schedule 2 is the
Company's Total Test Year Revenue at Present Rates
included in its Application using the Company's proposed
Test Year with pro forma adjustments. Schedule 3 is the
Total Test Year Revenue at Present Rates provided in
Updated Response to PR No. 163 using Staff's 2022 Test
Year without pro forma adjustments. Schedule 4 is
Staff's final recommended Total Test Year Revenue at
Present Rates using Staff's 2022 Test Year without pro
forma adjustments.
Q.Please describe how the Company developed its
final Test Year Revenue under Present Rates as contained
in the Application.
A.As discussed earlier, the Company's proposed
Total Test Year Revenue at Present Rates is summarized in
Company Exhibit 5, Schedule 1, in the Company's
Application, which I have included as Revised Exhibit No.
123, Schedule 2 of my testimony. It reflects a total
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revenue of $51,717,859 (Column 11), which is comprised of
$50,866,102 of Adjusted Historic Test Year Book Revenue
(column 4), and five adjustments increasing the Test Year
revenue by a total of $851,757 (Columns 6-10). To
determine the adjustments, the Company was required to
perform a Bill Analysis of the Test Year revenue, which
breaks down the amount of revenue earned through each
rate component on customer bills for each customer class.
The total of this breakdown (Column 5) is shown to
reconcile with the Adjusted Historic Test Year Book
Revenue (Column 4), validating the Bill Analysis. The
adjustments to the Bill Analysis Revenues Historic Test
Year Rates (Column 5) broken out in Columns 6 through 10
include the following:
1. Adjustment R1 - Annualization of Historic Test
Year Growth for $246,816 (Column 6);
2. Adjustment R2 - Customer Growth from
7/1/21-3/31/22 for $273,782 (Column 7);1
3. Adjustment R3 - Weather Usage Adjustment for
$(2,691,767) (Column 8);
4. Adjustment R4 Eagle Historic Test Year for
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________________
1 Staff verified the dates on this column are mis-labeled as 7/1/20
- 3/31/21 and should have contained date range 7/1/21 - 3/31/22.
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$661,051 (Column 9); and
5. Normalization of Phase I Rates for $2,343,875
(Column 10).
Q.Can you provide an overview of Staff's proposed
changes to the Company's Test Year Revenue at Present
Rates?
A.I have included a summary of Staff's final Test
Year Revenue at Present Rates, as shown in Revised
Exhibit No. 123, Schedule 4 using the same format used by
the Company. As mentioned earlier in my testimony,
Staff's proposal to the Test Year Revenue under Present
Rates is driven by changing to a 2022 Test Year.
Q.Did the Company provide a Test Year Revenue
under Present Rates reflecting Staff's 2022 Test Year?
A.Yes, the Company provided a Test Year Revenue
under Present Rates reflecting Staff's 2022 Test Year
through the Company's Updated Response to Staff PR No.
163. I have included the Company's written response to
PR No. 163 as Revised Exhibit No. 125 of my testimony.
The Test Year Revenue under Present Rates from the
Company's Updated Response to PR No. 163 is provided as
Revised Exhibit No. 123, Schedule 3. I used the
Company's Updated Response to
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PR No. 163 as the starting point for Staff's final Test
Year Revenue at Present Rates, as shown in Revised
Exhibit No. 123, Schedule 4.
Q.Please describe the Book Values (Columns 2-4)
in Staff's proposal as shown in Revised Exhibit No. 123,
Schedule 4 and how these values were determined.
A.The Booked Values in columns 2 through 4 show
actual booked values with removal of unbilled/surcharge
amounts for Staff's 2022 Test Year. These values were
obtained through the Company's Updated Response to Staff
PR No. 163 and match the values seen in Revised Exhibit
No. 123, Schedule 3 with the exception of the Meter
Reading Error Rebills line item.
Q.Please explain the Meter Reading Error Rebills
line item and why it is necessary.
A.The Meter Reading Error Rebills line item
represents rebilled revenue that was not included in the
2022 Test Year Booked Values. The value in this line
item is related to rebilling that occurred after the 2022
test year but is a result of inaccurate meter readings
that occurred from July 2022 through January 2023. The
$48,606 value in this line item represents rebills that
occur after
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the December 31, 2022, cut of date of Staff's Test Year.
This value was obtained from the Company's Updated
Response to PR No. 163. This line item is necessary
because this revenue would have been received during the
2022 test year had the meter reading issue not occurred.
Additional information on the meter reading issue is
provided in Staff Revised Exhibit No. 125.
Q.Please explain what the Bill Analysis Revenues
in Column 5 of Staff's proposal represent and how the
values were determined.
A.The Bill Analysis Revenues represent
consumption analysis and billing determinants at present
rates for Staff's Test Year. These values were obtained
through the Company's Updated Response to Staff PR No.
163 and match the values seen in Revised Exhibit No. 123,
Schedule 3 except for the Meter Reading Error Rebills
line item. The Rebills line item is necessary for the
same reasons as explained earlier and make the Bill
Analysis Revenue reconcile with the Adjusted Historic
Test Year Book Revenue shown in Column 4.
Q.Please explain what the Adjustment R1 -
Annualization of Historic Test Year Growth (Column 6)
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represents and how your values were determined.
A.The Company's R1 adjustment adjusts for growth
of the number of customers during the Test Year. The
values for my R1 adjustment were obtained through the
Company's Updated Response to Staff PR No. 163 and match
the values seen in Revised Exhibit No. 123, Schedule 3.
I reviewed the Company's R1 adjustment provided in the
Updated Response to PR No. 163 and agree with the final
adjustment values. I have included the billing
determinant calculations based on Staff's 2022 Test Year
for the R1 adjustment in Revised Exhibit No. 126. The
Exhibit follows the same format as Company Exhibit 5,
Schedule 4 VWID, and Schedule 4 Eagle Worksheets.
Q.Please explain what the Adjustment R2 -
Customer Growth from 7/1/22-3/31/23 (Column 7) represents
and how your values were determined.
A.The Company's R2 adjustment adjusts customer
growth for its pro forma period from July 1, 2022,
through March 31, 2023. However, under Staff's proposal,
the R2 adjustment is not required. Since Staff is using
a 2022 Test Year without a pro forma period, an
adjustment for pro forma period customer growth is not
needed. The amount of
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customer growth that occurred from July 1, 2022, through
December 31, 2022, the end of Staff's Test Year, is
incorporated in Staff's R1 adjustment, as described
above.
Q.Please explain what the Adjustment R3 - Weather
Usage Adjustment (Column 8) represents and how your
values were determined.
A.The R3 adjustment determines how much the 2022
Test Year Revenue needs to be adjusted so that the
Revenue at Present Rates represents the amount of Revenue
the Company would have earned if the Test Year
experienced a normal consumption and weather year. To
accomplish this, I ran statistical regression analyses
using 31 years of available historical consumption and
weather data provided by the Company to determine the
normalized Use per Customer ("UPC") for Residential and
Commercial customers for the 2022 Test Year. The
difference between the normalized UPCs for the 2022 Test
Year and actual UPCs for the 2022 Test Year were then
multiplied by the number of actual Residential and
Commercial customers at the end of the 2022 Test Year to
determine the total usage adjustment for the two classes.
Revised Exhibit No. 126. Using my recommended normalized
UPC adjustment of -7.51 CCF for
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Residential customers and -21.57 CCF for Commercial
customers, I estimated the total R3 Weather Usage
Adjustment to be $(1,664,176) using the allocation
factors from the Company's Bill Analysis provided in the
Company's Updated Response to Staff PR No. 163.
Q.Please explain how you developed the
recommended normalized UPCs for the 2022 Test Year.
A.To determine the normalized UPCs for the 2022
Test Year, I first compared the Company's normalization
regression method to my own regression methods for both
Residential and Commercial customers. I used historical
actual consumption data included in the Company's
Application as well as data provided through the
Company's Updated Response to Staff PR No. 163 so that I
had actual data throughout the 2022 Test Year. My method
summed the results of 12 monthly models to determine the
normalized annual UPCs instead of using a single annual
model used by the Company. I determined that the
Company's regression modeling method using the 2022 Test
Year resulted in normalized UPC amounts that were within
the standard error of the normalized UPCs that I
determined through my own models. Based on this finding,
I utilized the Company's
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modeling method with a couple of exceptions.
Q.Please explain your exceptions.
A.There were two things I did differently.
First, I used 31 years of data, from 1992 through 2022,
instead of 30 years used by the Company, since it was
available. The additional data provided an additional
degree of freedom which generally reduces the amount of
error in regression estimates.
Second, the Company's regression model in its
Application only included actual data through 2021.
Because the Company's test year went from July 1, 2021,
through June 30, 2022, the Company was effectively making
predictions 6 months past its actual data set. Using the
Company's method on Staff's test year would have resulted
in predicting 12 months past the actual data set. Most
introductory statistics texts warn against extrapolation,
that is, using regression to make predictions beyond the
range of the original data set.2 Given that the actual
data
________________
2 See, for example, 1. Pennsylvania State University's Department of
Statistics course notes for STAT 100: Statistical Concepts and
Reasoning. https://online.stat.psu.edu/stat100/lesson/5/5.5, 2.
University of West Georgia's Linear Regression Notes based on Chapter
5 of The Basic Practice of Statistics (6th ed.).
https://www.westga.edu/academics/research/vrc/assets/docs/.
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was available for the Company's proposed test year as
well as for Staff's 2022 Test Year, there is no reason
not to include the data in the regression model, thus
eliminating this as a source of error. However, I
included actual data from 1992 through the 2022 Test Year
in the regression model, preventing predictions outside
the actual data set eliminating this as a source of
error.
In the Company's Updated Response to PR No. 163,
they included actual data from 1993 through 2022 in their
regression model but predicted normal consumption for the
year 2023. This approach continues to extrapolate
outside the actual data set and uses a year that does not
match Staff's test year. For these reasons, I did not
use the Company's values from the Updated Response to PR
No. 163.
Q.What inputs and historic data did you and the
Company use in the regression models?
A.Both the Company and I performed our regression
analysis utilizing actual customer usage, calendar year,
and the Palmer Z index as inputs. Michaelson Direct at
6.
_____________________
linear_regression_notes.pdf. 3. "Making Predictions with Regression
Analysis", Statistics By Jim.
https://statisticsbyjim.com/regression/predictions-regression/.
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The Palmer-Z index from the National Oceanographic and
Atmospheric Administration ("NOAA") reflects weather
conditions that affect water consumption due to
irrigation. The index estimates the moisture content of
soil during a specified time period and geographic locale
relative to the long-term average for that same period
and locale. It incorporates the cumulative effects of
temperature, humidity, precipitation, evapotranspiration,
and soil conditions into a single number, serving as a
weather variable that drives water consumption. Positive
values indicate wetter-than-normal conditions; negative
values indicate drier-than-normal conditions. The
Company uses a 7-month Palmer Z index, which is a single
composite value for those months when the Company
determined that customer irrigation is most likely, from
April through October.
Q.Are there any improvements that you believe
should be incorporated in the Company's models in its
next general rate case?
A.There are two improvements. First, I advocate
either creating 12 monthly models similar to the models I
developed and used to compare against the Company's
annual model, or include monthly data and variables in a
single
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regression model. I believe the added resolution of
monthly data and variables is better to determine the
effects of weather to the amount of water consumption
because it more accurately matches the weather conditions
in each month to the amount of water consumed in each
month over the dataset timeframe. This is especially
important because weather conditions can vary widely
during the course of any given year.
Second, I suggest normalizing for economic
conditions such as wages, employment rate, and some
measure of buying power due to inflation. In any
regression model, it is important to identify the
statistically significant causal factors that contribute
to customer water consumption as the independent
variable. Doing so better isolates the effects of
weather from other causal factors and improves the
overall accuracy of the model.
I recommend that the Company, Staff, and other
interested parties meet prior to the next general rate
case to discuss the importance and methods of making
these changes in the Company's regression methodology.
Q.Please explain what the Adjustment R4 - Eagle
Historic Test Year (Column 9) represents and how your
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values were determined.
A.The Company's R4 adjustment makes an adjustment
to include revenue for Eagle Water legacy customers as if
the Company was providing service from July 1, 2021,
through December 31, 2021, even though the Company did
not provide service to Eagle Water customers until
January 1, 2022. This adjustment is required using the
Company's July 1, 2021, through June 30, 2022, test year
to ensure the correct revenue baseline. However, due to
Eagle Water customers being included in the Company's
system for all of Staff's 2022 Test Year, no R4
adjustment is required.
Q.Did you propose an adjustment to the Company's
proposed revenue requirement to reflect the reduced
consumption predicted by your consumption adjustments?
A.Yes. I proposed an adjustment to the Company's
power and chemicals expenses since these expenses vary in
proportion to water consumption. Because total
consumption changed using a 2022 Test Year as compared to
consumption in the Company's Application, Staff has
included an adjustment of $(8,905) in power and chemical
expense as reflected in Staff's adjustment No. 28 in
Revised Exhibit No. 130 of Staff witness Culbertson's
testimony. I used
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the same calculation method the Company used to make
their own adjustment after normalizing consumption for
their proposed Test Year as detailed in Company witness
Cary's Adjustment No. 29.
Q.Please explain what the Normalization of Phase
1 Rates (Column 10) represents and how your values were
determined.
A.The purpose of the Normalization of Phase I
Rates adjusts the Test Year revenue to account for two
things: (1) a rate change for Company and non-legacy
Eagle Water customers that occurred during the Test Year;
and (2) to adjust Test Year revenue for Eagle Water
legacy customer rates that went into effect on January 1,
2023. This adjustment is still needed for Staff's 2022
Test Year. The values for my Normalization of Phase 1
Rates were obtained through the Company's Updated
Response to Staff PR No. 163 and match the values seen in
Revised Exhibit No. 123, Schedule 3. I reviewed the
Company's Normalization of Phase 1 Rates adjustment
provided in the Updated Response to PR No. 163 and agree
with the final adjustment values.
Q.Please summarize your recommendations related
to the Test Year Revenue at Present Rates and Weather
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Normalized Test Year consumption.
A.First, I recommend the Commission approve my
proposed Test Year Revenue at Present Rates and
corresponding adjustments as shown in Revised Exhibit No.
123, Schedule 4. Second, I recommend an adjustment of
$(8,905) to power and chemical expense as a result of the
change in Test Year consumption compared to the Company's
Application. Finally, I recommend that the Company,
Staff, and other interested parties meet to discuss and
agree on improvements to the weather normalization
regression methodology before the next general rate case.
THE COMPANY'S COST-OF-SERVICE STUDY AND LOAD STUDY
Q.What is the purpose of a COSS?
A.A COSS allocates the Company's revenue
requirement to the Company's rate classes in accordance
with the principle of cost causation. The cost causation
principle states that costs should be borne by the class
that causes them to be incurred. Costs incurred in the
service of a single class, or its individual members,
should be directly assigned to that class; however,
because many of the Company's costs are incurred serving
multiple classes, a COSS is necessary to allocate costs
that are not
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directly assigned.
Q. Is the formation of customer classes based on
principles of cost causation widely used in utility
regulation?
A. Yes. It is a bedrock principle of utility
cost-of-service rate making. One example is described in
the Public Utility Regulatory Policy Act of 1978 under
Title I, Subtitle B, section 111(d)(1):

COST OF SERVICE.-In undertaking the consideration
and making the determination under section 111 with
respect to the standard concerning cost of service
established by section 111(d)(1), the costs of
providing electric service to each class of electric
consumers shall, to the maximum extent practicable,
be determined on the basis of methods prescribed by
the State regulatory authority (in the case of a
State regulated electric utility) or by the electric
utility (in the case of a nonregulated electric
utility). Such methods shall to the maximum extent
practicable-
(1) permit identification of differences in
cost-incurrence, for each such class of electric
consumers, attributable to daily and seasonal time
of use of service and
(2) permit identification of differences in
cost-incurrence attributable to differences in
customer demand, and energy components of cost. In
prescribing such methods, such State regulatory
authority or nonregulated electric utility shall
take into account the extent to which total costs
to an electric utility are likely to change if-
(A) additional capacity is added to meet peak
demand relative to base demand; and
(B) additional kilowatt-hours of electric
energy
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are delivered to electric consumers.
Q.Do the classes used in the Company's COSS
correspond to existing rate schedules?
A.No. The Company's COSS allocated costs to four
hypothetical rate classes: Residential, Commercial,
Public Authority, and Private Fire. None of these
classes corresponds to an existing rate schedule.
Customers in the study's Residential, Commercial,
and Public Authority classifications all take service
under Schedule 1, General Metered Service. The study's
Private Fire classification corresponds to two different
Schedules: (1) Schedule 3, Private Fire Sprinkling
Service, and (2) Schedule 4, Private Fire Hydrant
service, neither of which are subject to a volumetric
charge.
Q.What is a load study, and why is it a necessary
component of a COSS.
A.Because Company infrastructure and equipment
must be sized to meet the peak load that will be placed
on it, peak load is an important cost driver. A load
study should identify appropriate classes based on
differences of how each class uses the system during
peaking events. This information is then used to develop
allocators of cost used
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in the COSS.
Q.Did the load study performed by the Company
verify the hypothetical rate classes as the appropriate
classes based on cost causation principles?
A.No, the load study assumed the hypothetical
rate classes are the appropriate classes. The load study
did not perform a robust analysis to verify that the
hypothetical classes or any other potential classes are
the appropriate classes. The load study needed to
identify potential customer classes based on cost
causation principles before collecting data on these
potential classes to make meaningful comparisons between
the classes.
Q.Was the Company aware of these needs prior to
the load study being conducted?
A.Yes. The purpose of determining appropriate
classes was identified in the Stipulation authorized in
Case No. SUZ-W-20-02 through Commission Order No. 35030.
As a result of the Order, Staff and other parties met
with the Company about the load study prior to it being
conducted.3 During the meetings, Staff and other parties
emphasized the need to identify potential classes and how
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3 Meetings with the Company occurred on 5/16/22 and 6/6/22.
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to design a sampling plan so that the data could be
collected to identify what could be appropriate classes
based on the costs they cause on the Company's system.
Q.What is your position on the Company's load
study and its usefulness in the COSS?
A.I do not believe the load study was performed
in a manner that makes it used and useful to inform the
COSS. To make it useful, the load study should have
identified the appropriate classes based on data
collected during the load study. Because the load study
did not identify potential classes prior to data
collection, differences in demand and consumption
patterns of potential customer classes could not be
determined. As a result, the values used from the load
study and the results of the COSS are not useful.
Q.What factors should be considered when
determining the data that needs to be collected for the
load study?
A.Ordinarily, load studies are structured around
existing classes; however, as discussed earlier, the
Company's current rate schedules do not represent the
hypothetical customer classes used in the COSS. It was
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therefore necessary to design the load study so that it
can be used to inform the formation and/or validation of
classes.
The Company's current division of its consumptive
customers into Residential, Public Authority, and
Commercial classifications assumes that the customers in
each of these divisions have similar consumptive
patterns. However, this is unlikely true. For example,
Residential customers who live in single family dwellings
with yards and lawns will consume much more water in the
summer than apartment dwellers.
Rather than using the Company's Residential, Public
Authority, and Commercial classifications as the basis
for the load study, the study should have been conducted
using groupings based on meter size, whether customers
irrigate their property with Company water during the
summer months, single family and several different
versions of multi-family housing, lot sizes, types of
processes and equipment used by commercial and industrial
customers, etc. Many of these causal factors that can
influence different usage patterns are listed in the
Seventh Edition of "Principles of Water Rates, Fees, and
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Charges," published by the American Water Works
Association included as Exhibit No. 127.
If the load study collected the data based on
groupings determined by causal factors common within the
Company's service territory, differences in demand and
usage patterns between groups could be determined,
indicating the need for different customer classes.
The Company's AMI meters allow the collection of
useful data to help in the determination of customer
classes; however, the implementation of AMI meters across
the Company's service territory was incomplete. To
ensure sufficient sample size of each potential class
that is representative of the population of customers in
the Company's service territory, the Company's rollout of
AMI meters across their service territory could have been
altered to collect the necessary data. However, this
would have required the identification of potential
customer classes needing the additional meters to get a
representative sample.
Q.Briefly summarize the method used to determine
the allocation factors used in the Company's COSS.
A.The Company used a similar method and
allocation
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factors that were used in prior rate cases (UWI-W-11-02
and SUZ-W-20-02).
Q.Do you have other concerns with the Company's
COSS?
A.Yes, I have two concerns. First, rather than
directly assigning costs to customer classes, the Company
allocated nearly all costs using factors derived in the
2011 rate case, Case No. UWI-W-11-02.
The purpose of a COSS is to allocate the Company's
revenue requirement in accordance with the principles of
cost causation: that is, the class that caused a cost to
be incurred should pay for the cost. When the customer
groups who cause a cost can be clearly identified, then
those costs should be directly assigned to that
customer's class. For example, instead of directly
assigning the costs of meters and meter installations,
the Company allocated these costs based on 5/8" meter
equivalents.
The second concern relates to the Company's change
in fire demand in the COSS. In the COSS, the Company
changed an assumption for total fire demand from a single
long duration fire to three shorter duration fires
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without providing the proper justification for the
change. The result of this change shows fire protection
customers should receive a decrease in rates based of the
COSS. In the Application, the Company proposed private
fire receive no increase and all other customers receive
a uniform increase.
Staff requested justification for the fire demand
change in Staff PR No. 157. Exhibit No. 128. The
Company's response was not based on any credible evidence
to support the time and demand of the three-fire
assumption. Due to lack of justification for the
assumption change in fire demand and the other issues
with the COSS, I do not agree with the Company's proposal
of no increase for the private fire rates. I believe the
private fire class should receive a uniform increase like
all other classes.
Q.What are your recommendations to the Commission
regarding cost-of-service?
A.I have four recommendations based on my review.
First, I recommend that the Company use a uniform
percentage increase across all rate components and
customer classes. Without the establishment of
consumptive classes
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and a valid COSS study, it is impossible to fairly
allocate the increase based on traditional cost causation
principles.
Second, I recommend that the Commission disallow the
COSS and load study expense included in the rate case
because the load study and COSS was not performed in a
manner that makes it useful for the purpose of
determining rates in the rate case. This is a negative
adjustment of $40,817 to the Company's revenue
requirement reflected as adjustment No. 24, Column 3, in
Revised Exhibit No. 130 of Staff witness Culbertson's
testimony.
Third, I recommend the Commission order the Company
to conduct a new load study and COSS by the next rate
case. The load study and the COSS should be conducted to
determine the need for appropriate customer classes that
are based on traditional regulatory principles of cost
causation as outlined in my testimony. Specific to the
load study, it should be designed to collect demand and
usage pattern data that is representative of potential
consumptive customer classes.
Finally, I recommend that the Commission order the
Company to conduct a workshop with Staff and interested
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parties to determine how the study should be conducted
with the objective that the study meet principles of cost
causation as outlined in my testimony prior to the load
study being conducted.
Q.Does this conclude your testimony in this
proceeding?
A.Yes, it does.
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(The following proceedings were had in open hearing.)
MR. BURDIN: The witness is now available for
cross-examination.
COMMISSIONER ANDERSON: Thank you very much.
Mr. Carter?
MR. CARTER: I do have some questions. Thank
you.
CROSS-EXAMINATION
BY MR. CARTER:
Q.Mr. Eldred, you testified regarding Veolia Water
Idaho's cost of service study and load study; correct?
A.Yes.
Q.And Mr. Eldred, have you previously testified in
the Idaho PUC regarding cost of service studies?
A.No, I have not.
Q.Okay. Now, on page 20 of your testimony, you
quote the definition of cost of service from the Public
Utility Regulatory Policy Act of 1978, also known as
PURPA; is that correct?
A.Yes, that's correct.
Q.And PURPA deals with electrical utilities, not
water utilities; correct?
A.That's correct.
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Q.And the definition of cost of service that you
quote has several references specific to the electrical
sector; is that right? And I'll just run through them.
On line 13, it talks about the cost of providing electric
service. On line 16, it talks about electric utilities.
On page [sic] 19, it talks about class of electric
consumers, and there are several other references to
electric customers; is that correct?
A.Yes, these principles apply to all utilities.
Q.Mr. Eldred, is it fair to say that as a rule in
Idaho, as a generality in Idaho, electrical utilities
have a longer history of cost of service studies than
water utilities?
A.Yes, I would agree with that.
Q.Mr. Eldred, in your critique of the cost of
service study, are you carrying assumptions or practices
from the electrical sector into the water sector?
A.I'm carrying general principles, cost of service
principles. Largely, I think the water utility is
further behind largely due to technology that they are
currently starting to implement.
Q.And would you agree that it's not realistic in
the course of one rate case for a water utility that is
significantly behind the electrical sector to come all
the way up to the standard of electrical utilities?
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A.Yes, but I think they should start collecting
the data as they're implementing it so it could be
implemented more efficiently than waiting until it's
completely implemented.
Q.So you would agree -- by the way, I think we're
on the same page here. Are you familiar with the concept
of incremental progress?
A.Yes.
Q.But in this case, you recommend that the
Commission entirely disallow the cost of the load study;
correct?
A.That's what I'm requesting in this case, but
it's largely due because I don't think there was any
incremental improvement here.
Q.When was the last time Veolia Water Idaho or its
predecessor filed a cost of service study in a case, do
you know?
A.In 2020 there was one and then 2015 there was a
waiver. 2011 there was a cost of service study. I think
2009 and 2006 they were waived, the cost of service
study, and 2004, so there have been four in the last 20
years that I'm aware of.
Q.Okay, so I guess is it your testimony that this
cost of service study and load study, it doesn't reflect
any progress? It just needs to be thrown out because
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it's that bad?
A.No, I don't think it's overly useful, especially
with the Company's recommendations. It shows there
should be some movements, but the Company is stating
uniform across the board and it's been like that the last
three cases, so I'm not sure exactly why it's being done
if we're not using it, and I have an issue with the load
study. I don't think it was useful in supporting the
cost of service study the way it was designed.
Q.Okay, so on page 24 of your testimony, you
testified that the study should have been used
conducting -- excuse me, used with certain customer
groupings; is that correct? This is page 24, starting on
line 16.
A.Yes, I think the load study should have explored
potential. I'm not saying that these should be the
customer classes, but potential based on cost causation.
Q.Will you just identify what those customer
groupings are?
A.The paragraph right below that provides some
examples. Largely, I think this should have been a
collaborative. I think the Company has an idea of cost
causation principles that could have been used. We
discussed earlier some other potential ones with
irrigation, Micron, with industrial. Those are
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potential. We could have broken those out by
sub-classes. The other examples I have here,
multi-family, lot size. Those are all potential options.
Q.Okay, so let me, I guess, get back to your
testimony. It says, your testimony says, "the study
should have been conducted using groupings based on meter
size, whether customers irrigate their property with
Company water during the summer months, single family and
several different versions of multi-family housing, lot
sizes, types of processes and equipment used by
commercial and industrial customers." That's your
testimony to what the "study should have been conducted
using"?
A.Yes, and those aren't all they have to be. Just
those should have been explored.
MR. BURDIN: Commissioners, the quote ends with
"etc."
MR. CARTER: Fair, yeah, absolutely.
Q.BY MR. CARTER: You identify five potential
customer groupings that you say should have been
conducted using those five groups. Now, I just want to
be clear, you're not saying that the data shows, actually
shows, that these groupings have different costs of
service; correct?
A.I'm not aware because the analysis wasn't done.
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They may or may not, but I think they should be explored,
and the data if put together correctly could show one way
or the other.
Q.So you cite a source to support these five
different groupings and that source is Exhibit 127 to
your testimony; is that correct?
A.Yes, it is.
Q.And turning to Exhibit 127 of your testimony,
the top -- this is an excerpt from an AWWA Manual; is
that correct?
A.Yes, it is.
Q.It's a one-page excerpt?
A.Yes.
Q.And the top of it says, "Emerging Trends in
Water Ratemaking"; correct?
A.Yes.
Q.Mr. Eldred, the first sentence of this excerpt
says the emerging aspect to be addressed in this section
is prompted in part by better technology; is that
correct?
A.It is.
Q.And the second paragraph says utilities of the
future aren't limited to customer classes of the past;
correct?
A.Yes.
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Q.And there is in this excerpt what I would call
aspirational or forward-looking language, like it may be
desirable or the ability to better attract customers'
usage may reveal obvious clustering; non-traditional
classifications could be structured. Mr. Eldred, is it
fair to say that this document talks about possible
future changes and is not -- does not purport to describe
current best practices in utility ratemaking?
A.My reading of this is that current companies are
moving towards this so that in the future it should be
this. As we talked about earlier with electrical
companies, they are doing a lot of these practices, so
I'm just looking to incorporate some of those as it gets
implemented.
Q.But you would agree that this Exhibit 127
describes emerging trends in water ratemaking?
A.Yes, that's what it states.
Q.Okay, let's talk about data, so one of your
proposed groupings is whether customers irrigate their
property with Company water during the summer months, and
your testimony is the Company's load study should have
studied this potential grouping of customers; correct?
A.Yes.
Q.Does the Company have data regarding whether
customers irrigate their property with Company water
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during the summer months?
A.I think they have some, but I don't know that
they have all. I do not know the extent that they
actually researched. As we talked about earlier, it
looks like there's potential ways of getting it.
Q.So do you know, does the Company have the
authority to collect that information from its customers?
A.What are you specifically referring to?
Q.As to this potential customer grouping on
whether customers irrigate their property. Does the
Company have the legal authority to require their
customers to provide that information?
MR. BURDIN: Commissioners, I'm going to object.
He's asking for a legal opinion on his own Company
whether they have the authority to do something.
Mr. Eldred simply put an example of a type that could be
collected.
COMMISSIONER ANDERSON: Mr. Carter, do you want
to redirect? I tend to think that -- I understand your
question, but it would probably determine a legal -- I
don't think he has the answer to that particular
question.
MR. CARTER: Okay, I'll rephrase.
Q.BY MR. CARTER: So Mr. Eldred, you don't know
whether the Company has that data; correct?
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A.Yes.
Q.And you don't know whether the Company can get
that data; correct?
A.Yes. I've heard of some potential options, but
whether they're viable or not, I'm not exactly sure.
Q.And do you know whether the Company can verify
that data if it gets it?
A.I think it would depend on how they got the
information.
Q.So you are faulting the Company for not using
data they don't have and you're not aware as to whether
they have the ability to collect that data?
A.Largely faulting them on not pursuing to see if
it's available and accurate information that can be used.
Q.So sticking with customer irrigation, so certain
customers on the Company's system have access to other
alternate sources of water and some do not; is that
correct?
A.Yes, that's my understanding.
Q.And the Company cannot control even for a
customer that has the availability of irrigation water,
the Company cannot control whether the customer uses that
alternate source of irrigation; correct?
A.I agree with that to a larger extent. I guess
there are some rate design options that they could
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explore that may incentivize that, but not directly
telling them yes or no. They do not have control of it.
Q.So even if the Company were able to identify
which customers could use irrigation water, those
customers retain the ability to decide whether to use
irrigation water or Company water at their discretion?
A.Yes.
Q.Okay, how about -- I will ask similar questions
on the other classes, but we can probably abbreviate it.
Does the Company have information regarding what version
of multi-family housing its customers live in?
A.None that I'm aware of.
Q.And same on lot sizes, does the Company have
data regarding the lot sizes of its customers?
A.Not that I'm aware of, but it's like the other
issues.
Q.Right.
A.They may be able to obtain them.
Q.And last one on this particular thing, does the
Company have information regarding the types of processes
and equipment used by commercial and industrial
customers?
A.It sounds like people are self-reporting
potentially. I do not know the process on that, but the
Company has to know to put them into the classifications
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that were in the cost of service study, so they have some
amount of information. I do not know the details on what
they have there.
Q.Mr. Eldred, do customers have privacy concerns
regarding what sort of data they would like to give their
utility?
A.Yes.
Q.Okay, and would -- so I think that covers this,
other than to say your testimony is that the Company
should have considered these groupings, but you
acknowledge the Company doesn't have that data, there are
potential privacy concerns with providing that data --
MR. BURDIN: I'm going to object to that. He's
not acknowledging that the Company doesn't have that
data. He doesn't know. The Company hasn't provided that
data or any indication that they tried to get that data,
so he's not acknowledging that they don't have it, just
that he doesn't have it from the Company.
COMMISSIONER ANDERSON: Mr. Carter, can you
rephrase that question?
MR. CARTER: Sure.
Q.BY MR. CARTER: I think the thrust of it is,
Mr. Eldred, is criticizing, you are criticizing, the load
study because the Company failed to consider these five
groupings; yet you do not know whether the Company even
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has the data or could obtain the data to study those
groupings; correct?
A.No, I'm largely criticizing because the way it
was designed is not used and useful for the rate case
purposes.
Q.And is it your understanding that the data that
was used is the data that's currently available?
A.As far as AMI meter information. The other
information, like I stated, I do not know whether they
have access to that information.
Q.Okay. Now, Mr. Eldred, you do not know what it
would cost to collect the data to study these customer
groupings; is that correct?
A.I do not know the exact number.
Q.Do you have a guess of what that number might
be?
A.I do not, but if you -- the way you design it,
if you design the study where you collect sample size,
the number could be relatively lower on the number. If
we're looking at number of meters we have to install or
even find out the information, it largely depends how the
study would be set up to obtain the information needed.
Q.But you don't have any idea about what that
would cost sitting here today?
A.No. If we had discussions with the Company, we
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could look down that route, but --
Q.Those discussions were not held?
A.We asked for looking at potential customer
classes and they did not provide information on it.
Q.Okay, and Mr. Eldred, do you know how much time
it would take to collect information on the five customer
groupings you identify?
A.I am not aware of the total amount of time.
Q.And do you agree, Mr. Eldred, that in
considering what data to collect the Company ought to
consider the cost of collecting that data as well as how
much time it should take to collect it?
A.Yes, I think the Company should be efficient
with their uses of resources, but a lot of this new
technology customers are paying for, whether it's through
AMI meters or data management systems that can handle
this information. Customers are paying for that, so I
think the Company is obligated to efficiently use those
resources.
Q.So Mr. Eldred, the Company -- isn't it correct
that the Company used the existing AMI data that it had,
correct, in the load study?
A.Yes, they used it in the load study, but they
didn't look at these other potential customer classes,
which they may already have the data for, but since they
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didn't look at, it's not known.
Q.So is what you are saying the Company could have
used existing AMI data to study these five customer
groups?
A.If they had the information that broke out, for
example, the irrigation or the multi-family, if they had
that information, they may already have the sample size
needed to explore these classes.
Q.By you don't know whether they have the
information?
A.Yes, the information was not provided, wasn't
looked at in the study.
Q.Okay, I think there's a fundamental disconnect
here, so you say the Company should have studied whether
customers -- as a potential customer grouping; for
example, whether customers irrigate their property with
Company water during the summer months, and we agree or
you agree that the Company used existing AMI data, all
the existing AMI data, in its load study; correct?
A.Yes, all the existing AMI meters that they have.
Q.Right, so would data from the AMI meters tell
the Company whether customers irrigate their property
with Company water during the summer months?
A.There's potential to. I don't know that it's
overly accurate, but if they had the information on which
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ones of those customers irrigated, they could break them
out in a separate group and look at how their loads
compare to the ones without.
Q.Right, so we have one piece of that puzzle. We
know the data from the AMI meters, which talks about how
much and when it's used, but we don't have the second
piece of puzzle, which is which customers irrigate.
A.Yes, that was not provided in the load study.
Q.And you don't know whether the Company has it or
even can have it?
A.I know some potential ways they could.
Q.Okay. Now, on page 25, line 16, you testify the
Company's rollout of AMI meters across their service
territory could have been altered to collect necessary
data; is that correct?
A.Yes.
Q.And do you know how much it would cost to
alter that AMI, to implement the alteration of the
rollout of AMI meters?
A.As I stated earlier, if we knew the potential
customer classes we were looking at, they may already
have the information or if they did their random samples,
they may come up they need to install some additional
ones, but the sample size for many of these would not be
extremely large.
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Q.Okay, so the Company began its AMI meter rollout
in 2016; correct?
A.Yes, I believe so.
Q.And it agreed to complete this load study in
2021; correct?
A.I don't know if there was -- well, it was part
of the settlement and I think they said would meet with
intervenors within a year. I don't recall the exact
timeline on when it would be. I don't know if it was
prior to the next rate case. I'm not sure on the exact
details of that.
Q.Okay, but you agree that the settlement
agreement was approved in 2021?
A.Yes.
Q.So the rollout of AMI meters had been going on
for a significant period of time before the load study
was agreed upon in 2021?
A.Yes, that's correct.
Q.And you say -- but yet your testimony is the
Company could have altered the AMI rollout to collect
data for purposes of the load study; correct?
A.Yes. When they were setting it up, they could
have set up these potential classes, went in and
installed them, and even waited that year to get the
data, and then completed the load study then, setting up
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the load study.
Q.But you don't know how much that would cost?
A.Not without the information.
Q.Okay. I don't -- well, I guess one last
question. Mr. Eldred, would you agree that it's
reasonable to move -- to move Veolia Water Idaho, Inc.'s,
cost of service study methodology incrementally towards
the standard that electrical utilities use?
A.Yes, I do.
MR. CARTER: Okay, no further questions.
COMMISSIONER ANDERSON: Thank you, Mr. Carter.
Micron?
MR. NELSON: Yes, thank you. May I approach the
witness?
COMMISSIONER ANDERSON: You may.
MR. NELSON: I'm going to be providing the
witness with a copy of Micron's testimony, in particular
Exhibit 420.
COMMISSIONER ANDERSON: You may.
(Mr. Nelson approached the witness.)
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CROSS-EXAMINATION
BY MR. NELSON:
Q.Mr. Eldred, I'm going to ask some questions on a
similar topic to counsel prior relating to the load study
and your critique of the Company's load study. In your
testimony, and I'll call your attention to page 22, you
talk about your concern that the load study did not
perform a robust analysis to verify that the hypothetical
classes or any other potential classes are the
appropriate classes. Do you recall that, sir?
A.Yes, I do.
Q.And you said the load study needed to identify
potential customer classes based on cost causation
principles before collecting data on these potential
classes to make meaningful comparisons between the
classes; right?
A.Yes, that's correct.
Q.I guess I first want to start with I have a
little bit -- I'm troubled a little bit by the chicken
and the egg implication in that sentence. Your testimony
is that we need to identify the customer classes based on
cost causation before collecting data to make meaningful
comparisons and I don't understand how you can do the
former without having already done the latter. Can you
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help me understand that?
A.Yeah, I understand that argument, but the
Company already assumed that the hypothetical classes are
the correct ones. How did they know it was the correct
one? It's not -- that's basically doing the same thing
I'm suggesting, but I think theirs is too large a sample.
They're too large of groups, as you mentioned earlier,
like breaking off Micron and looking at those
different -- how they're using the system. I think
that's how they should be separated and I don't know that
the Company's classes that are currently there are
sufficient in breaking them out.
Q.Is the Company obligated to follow the tariffs
that it has on file with the Idaho Commission?
A.As far as charging rates, yes.
Q.Okay, I've put in front of you Exhibit 420,
which is an exhibit that accompanied Ms. York's
testimony. Did you have a chance to review Ms. York's
testimony prior to your taking the stand today?
A.Yes, I have.
Q.Exhibit 420 is Sheet No. 36 from the Suez Water
Idaho, Incorporated, tariffs. Do you recognize that,
sir?
A.Yes, I do.
Q.And this tariff sheet was approved by the
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Commission as it indicates on the bottom left corner in
IPUC Order No. 35030 effective May 1st, 2021; correct?
A.Yes.
Q.Okay. Do you know, sir, in the proceeding where
this tariff sheet was approved, did the Idaho Commission
Staff object to the language that was used on this sheet
describing the differences between residential,
commercial, industrial, and municipal customers?
A.Are you referring to the original creation of
this language or just in the last rate case?
Q.When this sheet was approved. In the Order,
it's indicated effective May 1st, 2021. In that case,
did the Idaho Commission Staff object to the language
shown here documenting the differences between
residential, commercial, industrial, and municipal
customers?
MR. BURDIN: I'm going to object to that. I
believe that was a settlement case. I don't know if that
actually applies, the approval.
COMMISSIONER ANDERSON: I think that was right.
MR. NELSON: And my question wasn't whether --
well, my question was whether the Staff objected in the
course of the case. Obviously, the case was resolved by
settlement, but I'm curious if the Staff even raised this
issue and had an objection to this language in the
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proceeding.
MR. BURDIN: I guess my objection is whether or
not that objection from Staff was in the settlement
conferences, which are confidential or are you simply
referring to --
Q.BY MR. NELSON: Let me ask it this way, then:
Staff agreed to the settlement in the last rate case;
right?
A.Yes.
Q.And as part of that settlement, Staff then
agreed to this tariff sheet that was approved in that
case essentially; right?
A.Yes, with the effect of a load study that would
evaluate the appropriate customer classes.
Q.Okay, but what tariff sheet has the Idaho
Commission approved that would tell Veolia what other
customer classes it ought to have studied in its load
study?
A.It only has one tariff sheet, which is these
ones, but I refer to these as hypothetical classes,
because if you look at the Schedule 1 where all of these
are under, that's how they're broken out. There's not
individual tariffs for these customer classes.
Q.But does this tariff indicate that it's only a
hypothetical tariff?
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A.No, they're just definitions of customer classes
that are not based on rates.
Q.So is it your position that the tariff approved
by the Commission with these designations doesn't have
any meaning?
A.It provides a definition for a customer.
Q.Okay. Now, when you go through in your
testimony and you raise questions, I want to call your
attention to page 24. Are you there, sir?
A.Yes.
Q.And I apologize, my line numbers are a little
askew. Somewhere it looks like on my printout at line
4 1/2, you have a paragraph that starts, "The Company's
current division," do you see that, sir?
A.We're on page 24; is that correct?
Q.Page 24, line 4, "The Company's current division
of its consumptive customers...".
A.Yes. I'm there, yes.
Q.Okay, and your testimony reads, "The Company's
current division of its consumptive customers into
residential, public authority, and commercial
classifications assumes that the customers in each of
these divisions have similar consumptive patterns." Do
you see that, sir?
A.Yes.
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Q.You then go on to provide an example. "For
example, residential customers who live in single family
dwellings with yards and lawns will consume much more
water in the summer than apartment dwellers." Do you see
that, sir?
A.Yes, I do.
Q.If we look at Exhibit 420, isn't it true that
apartment buildings are designated as commercial
customers, not residential customers?
A.If you're looking at apartment buildings, but if
you're looking at a duplex apartment, I do not know if it
fits into either of those definitions.
Q.Let's take a look. Paragraph 51 on Exhibit 420,
"Residential customers shall designate a building under
one roof, which is owned, leased or rented by one party
and occupied as a residence." Do you see that, sir?
A.Yes, I do.
Q.Okay, and conversely, a commercial customer is a
building containing two or more apartments or family
units, which are rented or leased to tenants; right?
A.Yes.
Q.So your testimony comparing residential
customers living in single family dwellings with
apartment dwellers, that distinction is already captured
in the classifications subject to the tariff; right?
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A.I'm not totally sure that it is totally
captured. If there was a duplex apartment and you lived
in one and rented out the other one, that's not two
apartments in one, but this example was a generic one
more leading to the multi-family distinction that could
be explored in the load study.
Q.My point is the multi-family apartments are not
included in the residential customer group for purposes
of the Company's load study; right?
A.I agree with you if there's two or more rented
out.
Q.What is the utility currently operating in Idaho
that from your perspective sets the gold standard on how
customer classes are disaggregated?
A.I'm assuming you're saying all utilities?
Q.Of the ones you're familiar with. I mean, I
tried to figure out, is there an example of the one that
you said that's the one that Veolia should aspire to?
A.They all have improvement. Largely because of
the new technologies that are coming into all the
utilities, trying to implement those effectively, I think
they all have improvements on.
Q.So if all the utilities have imperfect cost of
service studies, why isn't it the case that we simply
adopt across-the-board rate increases for all utilities
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all the time?
A.I agree with you, the imperfect. The cost of
service studies are more of an art than a science. It
would be nice if they were clean and dry, but there
should be when a general trend is moving towards
something and you have new technology, I think it should
be implemented into it to try to make it as accurate as
possible.
Q.Wouldn't you agree with me that this Commission
all the time uses perhaps imperfect cost of service
studies, but uses them for what they are and tries to
move customer rates towards cost of service recognizing
that those studies can continue to be improved?
A.Yes, I do.
MR. NELSON: Thank you. I have no further
questions.
COMMISSIONER ANDERSON: Thank you, Mr. Nelson.
City of Boise?
MS. GRANT: Thank you, Chair.
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CROSS-EXAMINATION
BY MS. GRANT:
Q.I'm going to first direct you to just recalling
a portion of your testimony, and this is on the bottom of
page 19, top of page 20, that the load study was needed
to identify potential customer classes based on causation
principles. Do you recall that?
A.Yes, I do.
Q.And you were asked a question previously about
that these hypothetical customer classes approved as part
of the settlement were sort of with the caveat for that
load study to review their utility.
A.Yes.
Q.In your opinion, did this load study meet the
purposes laid out in Order No. 35030 in that prior rate
case?
A.No.
Q.You spoke again or you also testified about the
"across-the-board methodology." Yes?
A.Yes, I have.
Q.And is it your opinion that irrigation demand or
increase in that demand would be a causation principle to
be evaluated in ratemaking?
A.Yes, I think so.
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Q.So I'll ask you the same questions that I asked
of a prior witness, is the lack of availability of that
data, those causation principles, is it a deficiency in
the load study that the data simply cannot be gathered or
is it a limitation in the across-the-board methodology
approach or all of the above? Maybe it's one or more.
A.I think it's largely due to how the load study
was designed. It didn't even attempt to look at that.
Q.In your opinion, with respect to these emerging
trends, is it reasonable to still assume that all
customers in each class have similar consumptive
patterns?
A.No, I do not.
Q.And so it's your belief maybe stated or asked
slightly differently that there are ways that that
distinction could be achieved?
A.Yes, I believe so.
Q.You were asked specifically with regards to some
ideas about how that data might be gathered, so I may
just ask a few examples of what might be applicable. One
was the AMI data; is that correct?
A.Yes, that could potentially be used.
Q.Would other information, public information,
gathered -- well, let me back up and ask it slightly
differently. As Mr. Carter was asking you, AMI is one
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piece of the data and then you gather other data to
inform how you utilize the AMI data; would that be
correct?
A.Yes.
Q.Okay, so for other public information available,
would something like irrigation assessment rolls be
useful in evaluating that?
A.I believe so, but I am not totally familiar with
those.
Q.Would something like the City of Boise's
municipal irrigation district assessment rolls, could
those be useful in determining who has access to
irrigation water?
A.Yes, I believe so.
Q.Would pre-treatment data that would be available
noting industrial processes and equipment and what usage
is required and documented, would that be useful
information?
A.Yes.
Q.What about planning and development applications
with respect to multi-family, residential, commercial,
and industrial?
A.Potentially.
Q.So each of these sources of public information
could provide a potentially representative sample to
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inform AMI interpretation to validate hypothetical
customer classes?
A.Yes, I think it would all be useful and it may
be even the incremental approach you look at it. It may
not be totally accurate and then you refine it.
Q.And would some of these recommendations -- well,
let me ask one other question before I ask that. It was
your testimony that there needs to be direction on rate
design to impact how this, like, incremental progress is
made; is that correct?
A.I think that's one of the tools you could use.
Q.And I also recall in your testimony you said
something about workshopping how to -- I'm sorry, I'm
spacing exactly the wording, but workshopping something
with interested parties, the Staff, the Commission,
Company, to inform a next load study or cost of service,
and I believe it was your recommendation that that
requirement for a load study and cost of service be
required in this particular Order.
A.Yes, that's correct.
Q.So I'm curious how you would, in your opinion,
bind the Company to recommendations that come from that
workshop.
A.Generally that would come from the Commission
ordering that.
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Q.So perhaps a review or approval of the outcome
of that workshop? I guess maybe asking it a different
way, it was your prior testimony that this load study did
not meet the purposes of the settlement agreement; that
was correct?
A.Yes.
Q.So how can we avoid that in this case of
ensuring that the outcome of a workshop meets the
purposes that Staff is recommending for a load study and
cost of service?
A.I just have a difficult time kind of with
guarantee, because Staff isn't looking to guarantee some
specific outcome like a new customer class. We just want
the information to be explored so we can make an informed
decision of whether there should be new customer classes
or looking at rate design or some other tool that could
potentially be used.
Q.And absent that workshop, could you opine on
certain ways to design the load study, maybe getting into
maybe a few more specifics, even one or two or three very
summarized of how an order could be crafted to hold the
Company to some incremental progress?
MR. BURDIN: I'm just going to jump in here. I
mean, the crafting of the order is obviously going to be
up to the Commissioners and I don't know if opining on
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the crafting of an order here is really --
COMMISSIONER ANDERSON: Yeah, thank you. Can
you direct your questions differently on that subject,
please?
MS. GRANT: Certainly.
Q.BY MS. GRANT: For an order to be adequately
effectuated, what would Staff desire to see in there with
specifically recommendations in design of a load study to
make it useful in a cost of service?
A.I think largely going back to some of my
suggestions in there of looking at specific customer
classes, and as I stated earlier, the ones I have in
there I'm not saying have to be in there. There are
things that should be explored by all interested parties,
like some of the information you're providing or some of
the other intervenors, they may have information that may
be useful.
I know the Company has lots of useful
information there with their experts. They could help
shape that, so my testimony lays out a generic, because I
don't want to be specific and direct an outcome. That's
not what Staff is looking for.
Q.So without specific recommendations but relying
on interested Staff and interested parties, maybe I'm
just being redundant at this point, but it would be your
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recommendation that the outcome of the workshop inform
and the load study would rely on information from that
workshop?
A.Yes.
Q.Okay. Maybe a question that's a little bit
aside, so I apologize for jumping around, but there are
ways to establish patterns in consumptive behavior
without requiring a separate meter on each individual
line?
A.Sorry, can you restate that, please?
Q.There was some prior testimony today of, you
know, well, how do we get this data if we don't
separately meter every single household, so I'm just
asking, in your opinion, there are ways to extrapolate
data and information and establish patterns for
consumptive behavior without the need for each individual
customer to have a separate meter?
A.Yes, I believe so.
MS. GRANT: I don't have anything further.
COMMISSIONER ANDERSON: Thank you. Ada County?
MS. WADDEL: No questions. Thank you.
COMMISSIONER ANDERSON: Thank you. Ms. Ullman?
MS. ULLMAN: I have a couple of questions.
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CROSS-EXAMINATION
BY MR. ULLMAN:
Q.Mr. Eldred, with regard to irrigation,
pressurized irrigation, using non-potable water, are you
aware that the City of Boise's Public Works Department
has a map of the entire area showing the names of the
irrigation districts and which households are covered or
which are households, commercial, which customers would
actually be within an irrigation district?
A.Yes, I've seen a map. I have not studied it as
far as the exact details in there.
Q.Okay, but do you believe it would be reasonably
easy and expedient to go to the irrigation districts and
compare Veolia Water Company's customer list with the
irrigation districts' lists and pretty easily come up
with a list of which customers actually do have some form
of additional irrigation not using potable Veolia water?
A.I think that's a potential avenue to explore in
a load study.
Q.Okay, and are you aware that the county assessor
has basically data on all of the parcels within Ada
County, including lot sizes?
A.Yes.
Q.And that the City of Boise started using lot
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size categories in the 1990s to install sewer in new
subdivisions?
A.I wasn't aware of that.
Q.Okay, so there's a lot -- would you agree
there's a lot of data out there that is not covered by
some kind of privacy issue, that people aren't going to
become very upset if somebody knows they have a half-acre
lot versus a two-acre lot? That's all a matter of public
record, is it not?
A.Yes.
Q.Okay, so I guess my question is if this data had
all been collected using the AMI data, would it be
possible to create a rate study where people who do not
have access to a non-potable irrigation water source for
watering their lawns in the summer, would it be possible
to set up a rate structure that differentiated for those
people if they were using water at night, you know,
between a set of hours in order to water their lawns,
their yards, and charge them a lower rate for their
nighttime water use compared to their daytime water use?
A.I think there is potential for it, but I would
have to have confidence in the load study and the
information that was accurate and it would get back to
that gradualism of moving that way.
MR. ULLMAN: Thank you.
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COMMISSIONER ANDERSON: Let us be careful that
we don't broaden the issues that are before us today with
the record that we have at hand, too.
Are any questions from the Commissioners?
Commissioner Hammond.
EXAMINATION
BY COMMISSIONER HAMMOND:
Q.I guess generally, generally all utilities, but
also with regard to Veolia, do you have an opinion on
whether, as a result of your work in this case whether,
the meters which are paid for by customers are getting
full usage of the data or the full range of data that
could be possible? I'm not asking you to give me an
opinion, but do you think these meters could be used for
a variety of uses that have not been proposed by the
Company in this case?
A.Yeah, I believe there are additional uses.
Depending on the accuracy, you may even need a smarter
meter than currently installed, so I think there are
limitations with the AMI meter that is installed, but
there are potential more uses.
Q.And this is probably an inartful question and I
apologize, but on the Veolia system, is there a
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difference, are you aware in the residential class the
difference in consumption in winter months or the months
where the summer rates or seasonal rates haven't risen,
is there different consumption in different times of the
year?
A.Yeah, there most definitely is. I do not know
the exact details on it.
Q.Is there a peak during any particular time of
year?
A.In the summer.
Q.And are you aware of any of the reasons for that
peak? Obviously, hot weather, people drink more water.
I mean, do you have any idea of what reasons there are
for that increase in consumption?
A.One of the major ones is irrigation and that's
one of the areas we would like to look into.
COMMISSIONER HAMMOND: All right, no further
questions.
COMMISSIONER ANDERSON: Any other questions from
the Commissioners? Thank you.
Mr. Burdin, would you like to redirect?
MR. BURDIN: Thank you.
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DIRECT EXAMINATION
BY MR. BURDIN:
Q.Mr. Eldred, I guess I'll go back a couple of
rate cases. There was a rate case for United Water in
2015; is that correct?
A.Yes, that's correct.
Q.And did the Company ask for individual customer
classes to be increased or did they ask for an across the
board?
A.Across the board.
Q.That was 13.2 percent; does that sound correct?
A.Yes.
Q.Was there a cost of service study in that one in
2015?
A.No, there was not.
Q.And then the next case would be the 2020 case;
is that correct?
A.Yes.
Q.And was there a cost of service study in the
2020 case?
A.Yes, there was.
Q.Did that show an equal cost of service increase
for all classes?
A.The cost of service showed a similar trend as
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this cost of service study with residential.
Q.If I might, residential increase of 24 percent,
commercial increase of 13.3 percent, public authority
increase of 29.1 percent, and private fire an increase of
74.3; does that sound correct?
A.Yes.
Q.Were those increased by that or what did the
Company ask for in that case?
A.The Company proposed a uniform increase.
Q.And did that case settle?
A.Yes, it did.
Q.And was there a stipulation and settlement that
was entered as well as a final Order in that case?
A.Yes, there was.
Q.And I believe you reference those.
Specifically, in the stipulation and settlement, as part
of that, the Company agreed to undertake a load study to
provide a calculated max day and max hour factor for the
total system as well as by appropriate customer classes;
is that correct?
A.Yes.
Q.The Order mirrors that and also indicates that
the Company will work with interested parties to take
input on load study components, including customer class
definitions, sampling methodologies from those classes,
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and data sources; is that correct?
A.Yes.
Q.And did the Commission or, sorry, did the
Commission Staff meet with the Company --
A.Yes, we did.
Q.And did the Commission Staff express roughly the
ideas that you have here about differentiating different
customer classes based on one, the uniform increase in
2015, traveling into the uniform increase in 2020?
A.Yes.
Q.And so the 2015 case, the Company indicated --
they started their AMI implementation in 2016, a year
after that case, so prior to the 2020 case, they had four
years to implement AMI meters; is that correct?
A.Yes.
Q.As part of the 2020 specifically future load
study, the Company was aware that customer class
definitions, sampling methodologies, and data sources, as
well as customer classes were things that needed to be
considered when going into the next cost of service study
that they were ordered to do?
A.Yes, that's correct.
Q.And then in this case, Ms. Bui, of course, put
up the numbers. It was very similar and yet, the Company
once again is asking for an increase in all customer
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classes except for fire?
A.Yes, that's correct. That's why I don't agree
with it.
Q.And so would you say that there has been
incremental movement from 2015 where they asked for an
across-the-board increase to 2020 where they asked for an
across-the-board increase and were ordered to conduct a
cost of service study and load study and speak with
Commission Staff regarding appropriate customer classes,
would you agree that there has been?
A.No, I would not agree that there has been.
MR. BURDIN: Thank you. That is all I have.
Thank you, Mr. Eldred.
COMMISSIONER ANDERSON: Thank you very much.
Without objection, you are excused. Thank you very much.
(The witness left the stand.)
MR. BURDIN: Commissioners, may we have a small
break between --
COMMISSIONER ANDERSON: I was just going to
announce that we are going to take a 10-minute break.
MR. NELSON: Before we take a break,
Mr. Chairman?
COMMISSIONER ANDERSON: Yes, sir.
MR. NELSON: I wanted to raise an issue. I
currently have two witnesses in the airport in Las Vegas.
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They're trying to figure out if they need to come to
Boise. As we discussed and for the benefit of the other
Commissioners, I learned earlier today that no one, as I
understand it, amongst the parties has any
cross-examination questions for Mr. Gorman or Ms. York
and I wanted to confirm if that was in fact still true,
and if so, I wanted to confirm if the Commissioners had
any questions, because if you don't, then I wondered if
we might after the break or whenever possible move the
admission of that testimony so that instead of flying to
Boise, they could go home from Las Vegas.
COMMISSIONER ANDERSON: I believe that the
Commissioners will briefly discuss that. We had some
discussion on this already, Mr. Nelson, and at the end of
the break, we will have that answer for you.
MR. NELSON: Excellent, thank you.
COMMISSIONER ANDERSON: Do you need to get back
to them before then?
MR. NELSON: I think they're just cooling their
heels for the moment in Law Vegas, but the sooner the
better.
COMMISSIONER ANDERSON: Mr. Burdin.
MR. BURDIN: Mr. Chair, we also have one
witness, Chris McEwan, who is not here today. He is the
one who was sponsoring the testimony of Jolene Bossard.
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It's sort of the same situation, if none of the
intervenors have any questions for Mr. McEwan, we would
also request to do sort of the same thing with him. We
also have Donn English who is one -- so we have one
witness and then one witness who is not here.
COMMISSIONER ANDERSON: If there is going to be
no objection, I don't believe this Commission is going to
try to continue this on, and this is a multi-day hearing,
but one is -- I mean, everybody really needs to be
present, so in a sense we are giving privilege by
allowing this testimony to be recorded. If there is no
cross, if we determine there's no objection, we're
probably not going to force them to attend, but their
testimony will be part of the record, so we will have
that discussion.
Any other before the break? We're going to go
ahead -- okay, we're going to 2:45 now for the end of the
break. Thank you.
(Recess.)
COMMISSIONER ANDERSON: We're back in order.
Mr. Burdin, would you like to call your next witness?
MR. BURDIN: Thank you, Mr. Chair. Staff calls
Donn English to the stand.
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DONN ENGLISH,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, was
examined and testified as follows:
DIRECT EXAMINATION
BY MR. BURDIN:
Q.Would you please state your name and spell your
last name for the record?
A.My name is Donn English. English is
E-n-g-l-i-s-h.
Q.Are you the same Donn English that filed
testimony in this case and exhibits?
A.Yes, I am.
Q.Do you have any corrections or modifications to
your testimony?
A.Yes, I do. On page 3 of my testimony, the
sentence beginning at the end of line 7 that starts with,
"This number excludes normalization adjustments," that
sentence can be stricken. Subsequent to the filing of
this testimony, we received additional information and
Staff witness Michael Eldred filed revised testimony, so
this sentence referring to an update is no longer
applicable.
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Additionally, on page 19, line 11, the word
"many" should be "any," so you can strike the "m,"
please.
Q.Are those all your corrections?
A.Yes, they are.
Q.With those modifications, if I were to ask you
the same questions today included in your filed
testimony, would your answers be the same?
A.Yes, they would.
MR. BURDIN: Mr. Chair, I now move to spread the
filed testimony of Donn English as if read with exhibits.
COMMISSIONER ANDERSON: Thank you. Without
objection, we will spread the testimony of Donn English
on the record, both direct and rebuttal and exhibits.
(Staff Exhibit Nos. 101-103 were admitted into
evidence.)
(The following prefiled direct testimony of
Mr. Donn English is spread upon the record.)
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Q.Please state your name and business address.
A.My name is Donn English. My business address
is 11331 W. Chinden Blvd., BLDG 8, STE 201-A, Boise,
Idaho 83714.
Q.By whom are you employed and in what capacity?
A.I am employed by the Idaho Public Utilities
Commission ("Commission") as a Program Manager overseeing
the Accounting and Finance Department in the Utilities
Division.
Q.Please describe your educational background and
professional experience.
A.I was hired by the Commission in 2003 and I
have provided testimony in numerous proceedings. My
educational background and professional experience are
provided in more detail in Exhibit No. 101.
Q.What is the purpose of your testimony in this
proceeding?
A.I am responsible for overseeing the Commission
Staff's ("Staff") audit of Veolia Water Idaho, Inc.
("Veolia" or "Company") and the development of a revenue
requirement. I will provide an overview of Staff's
recommendations in this case and introduce Staff
witnesses.
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I will also discuss Staff's position as it relates to the
test year and calculation of rate base, including the
treatment of working capital. My testimony is outlined
as follows:
-Summary of Staff Recommendations Pg. 2
-Introduction of Staff Witnesses Pg. 4
-Test Year Pg. 5
-Rate Base Pg. 7
-Depreciation Expense Pg. 12
-Working Capital Pg. 13
Q. What Exhibits are you sponsoring?
A. Exhibit No. 101 provides my education and
professional background, Exhibit No. 102 calculates the
Average of Monthly Averages ("AMA") rate base for 2022,
and Exhibit No. 103 illustrates the Company's annual
depreciation expense after removing depreciation expense
for plant placed in service after December 31, 2022.
Summary of Staff Recommendations
Q. Please summarize Staff's proposal in this case.
A.Staff proposes to establish a revenue
requirement for Veolia using rate base levels based on
the AMA from December 31, 2021, through December 31,
2022. Staff
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further proposes to update the Company's test year to the
12 months ending December 31, 2022, which coincides with
the close of the calendar year. Based on the 2022 test
year, Staff calculated a revenue requirement of $55.85
million, providing the Company with an additional $3.4
million in revenue for an increase of 6.48%.
(Stricken testimony)
Staff's revenue requirement is calculated using a
weighted average cost of capital of 6.77%, including 9.0%
Return on Equity ("ROE"), applied to the 2022 average net
rate base of $261,118,238. Staff's proposed revenue
increase is spread uniformly across all billing
components. Additionally, Staff does not support the
Company's proposal to implement a Distribution System
Improvement Charge ("DSIC") at this time.
Q.How does Staff's recommendation compare to the
Company's request in its Application?
A. The Company requested a revenue requirement of
$63.83 million, increasing its annual revenues by
approximately $12.1 million, or 23.4%. The Company's
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requested revenue increase was calculated using an
overall rate of return of 7.77%, including a 10.80% ROE,
applied to a March 31, 2023, year-end rate base. The
Company proposed that the revenue increase be distributed
uniformly across all billing components excluding the
Private Fire Protection users who would see no increase.
The Company also proposed to implement a DSIC mechanism
that would allow for bi-annual rate increases between
general rate case proceedings related to the replacement
of distribution system transmission and distribution
mains, services, hydrants, valves, meters, and other
infrastructure.
Introduction of Staff Witnesses
Q. Please identify the other witnesses who will
testify for Staff, and the topics their testimony will
cover.
A. Mr. Ty Johnson, Auditor 1, will testify
regarding specific adjustments made to the Company's
operating expenses that, in total, reduce the Company's
proposed revenue requirement.
Mr. Joseph Terry, Auditor 3, will provide
financial analysis that determines a reasonable range for
the Company's ROE, and his rationale for selecting a
point
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estimate of 9.0%. Additionally, Mr. Terry will testify
on the removal of short-term deferred debits from rate
base where the Company was not authorized to earn a
return.
Mr. Michael Eldred, Utilities Analyst, will
offer testimony regarding the Company's Class Cost of
Service and Load Study.
Mr. Travis Culbertson, Auditor 3, will sponsor
the Revenue Requirement Exhibits and additional
adjustments to the Company's operating expenses for
General Insurance Expense and Injuries and Damages
claims. He will also provide testimony regarding the
Company's allocation of Management & Service Fees and the
Company's proposed DSIC mechanism.
Lastly, Ms. Jolene Bossard, Utilities
Compliance Investigator will testify on customer-related
issues.
Test Year
Q. Please explain how Veolia presented its test
year.
A.The Company proposed a test year beginning July
1, 2021, and ending June 30, 2022, with pro forma
adjustments through March 31, 2023. The Company's case
includes expenses for capital additions reaching out a
full
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nine months after the close of its chosen test year.
Q.What is the test year that Staff used in its
determination of annual revenue requirement?
A.Staff initially began its audit using the
Company's proposed test year, with a cut-off date of
December 31, 2022, for pro forma adjustments. The
December 31, 2022, cut-off date provided Staff with the
opportunity to review actual 2022 operating expenses and
capital investments prior to developing positions and
filing testimony. It allowed Staff to effectively
evaluate and incorporate actual booked costs in its case
without having to speculate on what may or may not occur
in 2023. The December 31, 2022, cut-off date was
consistent with prior Commission orders. In Order No.
29838, UWI-W-04-04, the Commission recognized that, "It
simply is not possible to carefully review investment
cost figures and information that are provided close to
or at the time of hearing." Order No. 29838 at 6. In
that same Order, the Commission also stated:
To facilitate an adequate review, Company data
should be provided in time to incorporate the
information in the prefiled testimony of Staff and
other parties. This will facilitate the hearing and
decision processes by having similar time periods
and information for the
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Staff and intervenor prefiled testimony, the
Company's rebuttal, and at the hearing. 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 convenient and
administratively easier for all parties.
Id. at 7.
Given the Commission's stated preference for
having information available prior to the prefile
testimony date, a December 31, 2022, cut-off date for pro
forma adjustments is appropriate. However, as Staff was
updating the Company's pro forma adjustments to 2022
actual amounts, the information to adjust other accounts
was readily available. Therefore, Staff adjusted the
Company's test year of July 1, 2021, through June 30,
2022, to a calendar year test year ending December 31,
2022. A more recent test year provides a revenue
requirement that is more reflective of actual costs and
further mitigates regulatory lag. Therefore, Staff
calculated its proposed revenue requirement using actual
2022 expenses whenever possible. Overall, this increased
the Company's revenue requirement over what Staff would
have proposed using a historical test
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year ended June 30, 2022.
Q.Did Staff remove all pro forma 2023
adjustments?
A.Yes. Although the Company claimed many of the
adjustments to its test year were known and measurable,
the Company took a very liberal view of that term. In
every case, the Company made estimates and considered
those estimates to be known and measurable. The
Commission has traditionally held a stricter view of
known and measurable adjustments, only accepting specific
adjustments and rejected adjustments to historical data
based strictly on statistical analysis. See Order No.
25880. The Company's calculated estimates of its known
and measurable adjustments are based in rudimentary
statistical analysis.
Rate Base
Q.Please explain how you calculated the Company's
rate base on which it should earn a return.
A. I calculated the Company's rate base using the
AMA for the year-ended December 31, 2022, the same test
year Staff used for revenue and operating expenses.
Q.Why did you deviate from the Company's proposed
rate base methodology of using the terminal rate base
value based on March 31, 2023.
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A. The Company filed its case September 30, 2022,
with a proposed rate base that included 530 different
post-test year projects it claims will be completed by
March 31, 2023. Given the supply chain uncertainties in
today's economic environment, it is not reasonable to
assume that each of those projects will be completed on
time, or what the final cost will be. In the unlikely
event that all of those projects are completed on time,
Staff would not have the ability to fully evaluate the
decisional prudency of each project and perform an audit
to determine that the project was completed in a
least-cost manner without any imprudent charges.
Therefore, my calculation of average net rate base, only
includes plant that was placed in service on or before
December 31, 2022.
Q.Does Staff include the full value of capital
additions in 2022?
A.No. Generally, there are two ways to value a
Company's rate base: 1) using a terminal rate base which
is the value of plant, net of any offsets, at a single
point in time: the year end, or 2) calculating an average
value of plant, net of any offsets, throughout the year.
Including the 2022 capital plant additions that occurred
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throughout the year in rate base at their year-end value
creates an expense/revenue mismatch. It allows the
Company to earn a return on its rate base as if the plant
had been in service for the whole year without providing
customers the benefit of the revenues produced or expense
reductions that the new plant may enable. Without any
adjustments to increase revenues or reduce expenses as a
result of the new, more efficient plant placed into
service during the year, it is inappropriate to include
the value of the plant as if it was in service for the
entire year. I have calculated the 2022 AMA rate base as
shown in my Exhibit No. 102. The monthly beginning and
ending amounts in Exhibit No. 102 are net rate base
amounts (original plant in service offset by accumulated
depreciation, contributions in aid of construction,
customer advances, and accumulated deferred income
taxes.) The values were provided to Staff in the
Company's responses to Production Request Nos. 150 and
161.
Q.Can you briefly describe the effect of using an
average rate base methodology.
A.Average rate base methodologies calculate the
value of plant based on the month in which it was placed
in
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service. Plant that was placed in service in January
will essentially be included in rate base at its full
value, and plant placed in service in December will be
included in rate base at 1/12 of its value. This method
corrects the expense/revenue mismatch when benefits of
new plant are not annualized.
Q.Has the Commission ruled on use of an average
rate base vs. year-end rate base?
A.Yes. In every litigated general rate case
since 2003, the Commission either ordered or approved the
use of an average rate base. In Order No. 29505, Case
No. IPC-E-13-03, the Commission stated:
We generally believe that including
investment in the calculation of average rate
base as if it were in service the entire year
when it was not… creates a mismatch between
test year revenue and expenses.
Order No. 29505 at 6. Additionally, the Commission
stated:
The Commission expects all utilities to
attempt to identify expense saving and revenue
producing effects when proposing rate base
adjustments for major plant additions. It is
unfair to ratepayers to assume that the
investment in these plants will not increase
Company revenues or decrease Company expenses
in the future. Further, it is unreasonable to
expect the Commission to allow full recovery of
plant investment as if the plant has been in
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operation the full year without a corresponding
adjustment to revenues and expenses.
Id. at 7.
Q. Did the Company propose a corresponding
adjustment to its revenues and expenses for new plant
added during the test year?
A.No.
Q. Is it possible that the new plant added during
the test year does not produce revenue or decrease
expense?
A.No. New plant, whether installed for
reliability or to service growth, will require less
maintenance than older plant. It also may provide
opportunities not previously available that directly or
indirectly generate additional revenues. Additionally,
the Commission has previously noted that "in terms of
cash flow all depreciable investments are revenue
producing." Order No. 20592 at 12-13.
Q.Has the Commission ordered the Company to use
an average rate base in prior cases?
A.The Commission has not ordered Veolia Water
Idaho, Inc. to use an average rate base; however, the
Commission has ordered Veolia's predecessors to use
average rate base. Going as far back as 1993, the
Commission
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expressed disapproval that the Company had not included
an average rate base methodology, at least as an option,
for the Commission to consider. Order No. 25062 at 3.
In that case, the Commission was clear that it approved
the Company's year-end rate base calculation only because
no party objected, and no other option was presented.
Id.
In Order No. 29838, the Company's last
litigated general rate case, Case No. UWI-W-04-04, the
Commission affirmed that it, "has historically approved
use of an average rate base rather than year-end rate
base on which a utility can earn its authorized
investment return" and directed the Company, "to file
future rate cases using a 13-month average rate base
methodology." Order No. 29838 at 5 and 7. My
recommendation to use an average rate base in this case
is reasonable and follows prior Commission directives.
Every Commission Order from litigated rate cases since
1993 tends to support the use of the average rate base
methodology.
Q.Do you have any additional adjustments to the
Company's rate base?
A.Yes. When calculating the AMA rate base, I
removed the short-term deferred debits that the Company
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included. The deferred debits consist of the Company's
power cost deferrals, rate case expense deferrals, and
deferrals for the payment of convenience fees. Staff
witness Terry provides additional support for removing
these items from rate base. I also removed Working
Capital from rate base.
Depreciation Expense
Q.Will you please explain your Exhibit No. 103?
A.Exhibit No. 103 was prepared under my direction
and calculates the Company's annual depreciation expense
as of December 31, 2022, consistent with Staff's test
year and rate base cut-off date. The Company calculated
its annual depreciation expense for all plant forecasted
to be in service on March 31, 2023. Because I have
removed all 2023 plant additions from rate base, it is
necessary to remove the depreciation expense associated
with those capital projects, which reduces the Company's
proposed depreciation expense by $546,459. The values
used in this exhibit were provided by the Company in its
response to Staff Production Request No. 150.
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Working Capital
Q.What is working capital?
A. Working Capital is generally the money that is
needed for a company to meet its current obligation. It
can consist of Cash Working Capital ("CWC") or other
liquid assets that can readily be converted to cash. It
can be represented as current assets minus current
liabilities. In the utility industry, working capital
represents the money advanced by shareholders to pay the
current liabilities before that money is recovered from
customers.
Q.How did the Company calculate and treat working
capital in its case?
A.The Company used the 1/8 Method to calculate
its working capital. The 1/8 Method is a simple
estimation of working capital by multiplying Operations &
Maintenance expense by 12.5%. The Company then included
working capital in its rate base calculation to earn its
full rate of return.
Q.Do you agree with the Company's proposed method
to calculate working capital?
A. No. There are three generally accepted methods
to calculate working capital. The first method is a
lead-
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lag study which compares the time a company has to pay
its bills and the time a company receives payment from
customers. The lead time is the number of days between a
company's receipt and payment of invoices it receives,
and the lag time is the average number of days between
the company's billing of its customers and its receipt of
payment. A comprehensive study will analyze every
utility account and every payment received.
The second method to calculate working capital
is the Balance Sheet Method. The Balance Sheet Method
subtracts a company's current liabilities from its
current assets. This method does not always provide
accurate results for utility recovery because it can
fluctuate with the seasons. For example, a water
utility's current assets might be greater in September
because of cash and receivables from the peak season, and
lower in the winter as usage decreases.
The third method of calculating working capital
is the 1/8 Method used by the Company. The 1/8 Method
assumes that there is a 45-day lag between the time a
Company pays its bills and the time it receives payments
from customers. Dividing the 45-day lag period by 365
days
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in year results in approximately 1/8. Small utilities
without the expertise or the resources available to
perform a sophisticated lead-lag study generally use 1/8
Method. A utility the size of Veolia should not be
recovering its estimated working capital using such an
elementary calculation.
Q. Should Veolia be authorized to include any
working capital in rate base?
A. No. The premise of working capital is that
investors should be paid for the use of funds they
provide. However, investors should not earn a return on
money they did not provide, even though the utility may
denominate it as working capital. Without an explicit
showing that working capital was provided by shareholders
rather than customers, utilities should not include
working capital in rate base. In Boise Water Corp., 97
Idaho at 836, 555 P.2d at 167, the Idaho Supreme Court
stated:
To the extent that such amount [of expense]
exceeds the revenue collected, it is supplied
by the owners of the utility as a portion of
their investment and thus becomes part of the
rate base. Thus cash working capital is a
recognition of the sum which the utility needs
to supply from its own funds (rather than the
rate-payer's) to meet current obligations as
they arise due to the time lag between payment
of expenses and
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collection of revenues. Such allowances by the
Commission are not guaranteed as a matter of
course; the utility carries the burden of
showing by competent evidence that the need
therefore exists. [Emphasis added]
In Order No. 33757, Case No. INT-G-16-02, the
Commission accepted Staff's recommendation and disallowed
working capital from Intermountain Gas Company's
("Intermountain") rate base until Intermountain was able
to demonstrate that its working capital needs were
supplied by its investors.
Q.Are there any similarities between the
Intermountain Gas Company's working capital and the
Company's working capital in this case?
A. Yes. Both companies are subsidiaries of a much
larger parent company. In that regard, the Commission
noted:
The need for CWC is another area impacted by the
Company's relationship to its parent, MDU. Cash
pooling at the parent level, like consolidated tax
returns, benefits the entity as a whole. For
Intermountain to meet its burden of proving that it
needs to include CWC in rate base, we find the
Company must show: (a) a total of working capital
need beyond that included in rate base; (b) that
total work capital and its CWC component are
provided by shareholders; and (c) the need at the
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consolidated parent level is not offset by other
consolidated benefits, such as consolidated tax
benefits discussed above.
Order No. 33757 at 24.
Additionally, if a utility is profitable,
customers are providing working capital. Veolia is
currently collecting money from customers that is
embedded in its revenue requirement for federal and state
taxes, and regulatory assessment fees. That money is
collected throughout the year, prior to the time the
Company or its parent must make any payments. Customers
are not receiving a return on the working capital they
provide. For a utility to earn a return on working
capital provided by investors, it should pay a return on
working capital provided by customers. Incidentally, the
utilities recover federal taxes from customers at the
marginal corporate tax rate, but the taxes paid by the
utility, or its parent company, are often much less.
Q.If the Company were to demonstrate a working
capital balance that was supplied by shareholders, should
they be authorized to earn a return on that amount?
A.If the Commission determines that working
capital was, in fact, supplied by shareholders then a
return may be
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warranted. However, working capital should not be
included in rate base where it earns the Company's
overall rate of return. Working capital, by its very
definition, is money used to pay short-term obligations
before recovery from customers. Because it would
essentially be short-term investment, it should not earn
a long-term return. If the Commission determines that
working capital should earn a return, which I recommend
they do not, then the return should be at the customer
deposit rate and not the Company's overall rate of
return.
Q.Does this conclude your testimony in this
proceeding?
A. Yes, it does.
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(The following proceedings were had in
open hearing.)
MR. BURDIN: The witness is now available for
cross-examination.
COMMISSIONER ANDERSON: Thank you. Mr. Carter?
MR. CARTER: I do have some questions, thank
you.
CROSS-EXAMINATION
BY MR. CARTER:
Q.Okay, Mr. English, your testimony summarizes the
various recommendations of Commission Staff; correct?
A.It's a brief overview of Staff's case, yes.
Q.And the Staff's recommendation would result in a
rate increase of about 6.48 percent; is that correct?
It's on page 3.
A.And I believe a revised page was submitted and
it's 6.48. You're right, you've got the revised number,
I'm sorry. That is correct.
Q.I had to change it last night, and would you
agree with Mr. Terry that we are in an environment of
significant inflation?
A.I'm sorry, I had trouble hearing that question.
Q.Would you agree with Mr. Terry's testimony that
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we are in an environment of significant inflation?
A.Yes, I would agree with that.
Q.And without getting into too much detail, would
you agree that the rate of inflation since 2021 has been
in the neighborhood of 6 to 7 percent per year?
A.I could not verify, but I would say that's
probably a ball park figure.
Q.And the average time between utility rate cases
has been something like 3.7 years? That's from Joe
Terry's testimony.
A.Yes, that's correct, over the last -- since the
2015 case, I believe.
Q.So your recommended increase of 6.48 percent is
less than the rate of inflation between -- assuming that
we're on a rate case every four-year schedule; is that
correct?
A.Well, yes, but if you're using the CPI index to
calculate inflation, that includes a lot of stuff that is
not included in utility expenses. I'm not sure if it's
an apples to apples comparison, but generally speaking, I
will agree with your assertion.
Q.Okay, I want to talk about test year, so your
recommendation regarding the test year, is that the test
year ending December 31, 2022; is that correct?
A.That is correct.
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Q.And I refer to that just sort of mentally as a
cutoff and then second, you also recommend averaging the
value of the rate base over the test year; is that
correct?
A.Yes, that's standard practice.
Q.So there's two steps here. One is you cut off
the test year on December 31st, that's step one, and step
two is for rate base, you average the amount of the rate
base over the test year?
A.Yeah, both are standard practice.
Q.Okay, and so you reference in your testimony
prior Commission decisions regarding use of a December 31
in the prior year cutoff; correct?
A.Yes, I did.
Q.And those decisions, one of the reasons for a
December 31 cutoff is, and I'll quote from your
testimony, it's at page 6 to 7, "Not only will the data
be known and measurable by the time the other parties
prefile testimony and for the hearing, it will be more
convenient and administratively easier for all parties";
is that correct?
A.I think that's a direct quote from a Commission
Order, yes.
Q.So would you agree that the Commission's prior
decisions establishing a December 31 cutoff are motivated
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by the practical concern of being able to review
information before the rate case?
A.It is a practical concern, as well as Staff
cannot make any opinion on expenses and capital
investment that they have not been able to review, and so
yes, the Commission has supported cutoff dates in the
past and Staff works with those decisions, because we
need a cutoff date in order for us to review actual
expenses and actual capital investment.
Q.Would you agree that the Commission has the
discretion to determine a cutoff date?
A.Absolutely.
Q.And so the Commission has the discretion as to
whether to use your proposed December 31, 2022, cutoff
date or the Company's recommendation to use a March 31,
2023, cutoff date; correct?
A.If the Commission decided to include in rates
expenses that have not been reviewed or analyzed by the
parties, they could choose the March 31st, 2023, cutoff
date.
Q.And they could use a February 2023 cutoff date
as well?
A.Again, if the Commission decides to include in
rates expenses and capital investments that have not been
reviewed by all the parties, it's more than their
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prerogative to set any cutoff date that they could
choose.
Q.And Staff didn't question the prudency of any
capital investments in this case, did they?
A.Staff did not.
Q.So on page 7 of your testimony, you use the term
regulatory lag and I'll quote, "A more recent test year
provides a revenue requirement that is more reflective of
actual costs and further mitigates regulatory lag"; is
that correct?
A.That is correct.
Q.And so the closer the cutoff date to the date
the rates go into effect the smaller regulatory lag there
is; correct?
A.Which is why we had moved the Company's test
year from June 30th, 2022, to December 31st, 2022. Our
testimony was filed on February 15th, so by that time we
filed our testimony, no additional information beyond
December 31st would have been available to review.
Q.So would you agree that there are trade-offs in
determining the cutoff point and roughly speaking, the
trade-off would be the further -- the closer the cutoff
point to the date rates go into effect the less
regulatory lag; however, also, the less time Staff has to
review the investments?
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A.Yes.
Q.Turning to the averaging, so you proposed a
cutoff date of December 31, but you don't use for rate
base for the test year, you don't know use the amount as
of December 31, you average it over the prior year?
That's a repetitive question. I find it confusing, you
probably don't.
A.It's my life. I've been doing it for 20 years.
I can tell you everything you want to know.
Q.Okay, and you testified that "every litigated
general rate case since 2003" uses that average, the
monthly averages, methodology?
A.Yes, as directed by the Commission in prior
Orders.
Q.Okay, and how many litigated general rate cases
have there been since 2003?
A.Let's see, there was Idaho Power in 2003. There
was Avista 04-01 in 2004. There was United Water 04-04
in 2004. There was a litigated rate case for Idaho
Power, I believe, in '08. There was a partially settled
rate case for Idaho Power in 2011, and then there was a
fully litigated case for Intermountain Gas. It was a '16
case, but the litigation happened in 2017.
Q.Okay, so from a directional -- just from a
directional perspective and by that, I mean increasing or
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decreasing rates, both steps that you recommend of an
earlier cutoff date and the averaging have the effect of
lowering the Company's recovery; is that correct?
A.I don't believe so, but maybe you want to
rephrase your question, because the Company will still
recover its costs at a just, fair, and reasonable rate
using an average test year.
Q.Fair enough, but if you cut off -- if the cutoff
is December 31 versus March 31, the December 31 cutoff
would result in a lower recovery for the Company;
correct?
A.It will result in a lower revenue requirement
for the Company.
Q.And likewise, the averaging of the rate base --
the averaging of the rate base independently decreases
the amount of the recovery for the Company in this case;
correct?
A.In most normal environments. You could be in a
environment where retirements were greater than plant
additions, but generally speaking, in the environment we
operate in, that is correct.
Q.And those two decisions are distinct, right, so
the Commission could, for example, agree with the Company
on a March 31 cutoff date, but average or the Commission
could conversely agree on a December 31 cutoff date and
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not average?
A.If you're asking me what the Commission could or
could not do, the answer is always yes.
Q.There's no sort of conceptual disconnect between
those two positions; in other words, one decision doesn't
flow from the other?
A.Not entirely true. In regulatory practice, it's
standard to match your expenses with your test year, so
if you're going to, say, use a March 31st, 2023, test
year end date for expenses, but use an average test year
rate base with the date of December 31st, 2022, you have
a mismatch from the plant going into service to the
expenses that you're using to operate that plant, so
those two decisions could be distinct, but often they are
not for a good reason.
Q.But if there was a cutoff date of March 31, you
would average from March 31, 2023, to March 31, 2022;
correct?
A.If Staff decided to propose a March 31st test
year, then we would have done an average rate base for
the test year ending March 31st of 2023.
Q.But the Commission could order a March 31, 2023,
cutoff and average it back to March 31, 2022?
A.The Commission could do anything they want.
Q.Okay. I want to talk just briefly about cash
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working capital, so on page 15, you identify three
generally accepted methods to calculate working capital;
is that correct?
A.That is correct.
Q.And generally accepted, generally accepted by
whom?
A.Generally accepted by regulatory commissions.
Generally accepted by NARUC.
Q.Okay, but you don't recommend that the Company
apply any one of those methods to cash working capital.
You recommend the Commission disallow all cash working
capital; correct?
A.That is correct. I mean, one of the premises of
rate of return regulation is that the Company should only
earn a return on money that it actually pays out and
there has been no showing in this case that the Company
has spent any money on working capital, which is why you
have offsets to the rate base for, I don't know, customer
advances and contributions in aid of construction, and
the federal tax act, and so if it's money that the
Company did not pay, the Company should not earn a return
on it.
Q.But rejection of all cash working capital isn't
one of the generally accepted methods of calculating cash
working capital you identify; correct?
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A.Oh, it's been generally accepted by this
Commission. In the 16-02 Intermountain Gas case, the
Commission actually removed working capital from
Intermountain Gas's rate base, because there was no
showing that it was provided by shareholders and that
Order is referenced in my testimony.
Q.Right, so the three methods are generally
accepted by sort of the world, but removal, in your
opinion, is generally accepted by this Commission?
A.And the Supreme Court. I also provided a
Supreme Court case in my testimony that basically says
that working capital as a matter of fact is not included
into rate base unless there is a specific showing that
it's necessary and provided by shareholders, and I may
have paraphrased that Order, but it is properly reflected
in my testimony.
Q.Right, no, you cited that and that's an Idaho
case?
A.Yes.
Q.And it was upholding the Commission's decision
to exclude cash working capital?
A.That is correct.
Q.Okay. For water companies hasn't the Commission
consistently authorized recovery of cash working capital
using the 1/8th method?
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A.For small water companies, yes, and small water
companies are companies generally with less customers,
less revenues. They don't have the expertise or the
capital to pursue a more costly study.
Q.So would you say it's the Commission's practice
to consistently approve cash working capital using the
1/8th method for water companies, but only small water
companies?
A.I would say that is appropriate. It is more
likely to be shown that small water companies are using
the owner's investment in capital rather than the
customers and we see a lot of small water companies in
Idaho that struggle to make a profit.
Q.So your testimony is Veolia Water Idaho does not
fall within the Commission's practice of including cash
working capital for small water companies because Veolia
is big enough they should be treated differently?
A.They are the largest water provider in Idaho.
MR. CARTER: I don't have further questions.
Thank you.
COMMISSIONER ANDERSON: Thank you very much,
Mr. Carter. Micron?
MR. NELSON: Thank you, no questions.
COMMISSIONER ANDERSON: City of Boise?
MS. GRANT: No questions, Chair. Thank you.
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COMMISSIONER ANDERSON: Ada County?
MS. WADDEL: No questions, thank you.
COMMISSIONER ANDERSON: Ms. Ullman?
MS. ULLMAN: No questions, thank you.
COMMISSIONER ANDERSON: Do we have questions
from the Commission? Any redirect from Mr. Burdin?
MR. BURDIN: Just one.
REDIRECT EXAMINATION
BY MR. BURDIN:
Q.What is the rate of inflation going to be in
June of this year?
A.I don't think anybody could tell you that.
Q.What about June of next year?
A.Next year?
Q.Yeah.
A.Again, I don't think anybody could tell you
that.
MR. BURDIN: All right. That's all I have.
Thank you, Commissioners. Thank you, Mr. English.
COMMISSIONER ANDERSON: Thank you. Without
objection, you are excused, Mr. English. Thank you very
much for your testimony.
(The witness left the stand.)
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COMMISSIONER ANDERSON: And Mr. Burdin, you may
call your next witness.
MR. BURDIN: Commissioners, if I may, I need to
make a motion. My witness, Chris McEwan, is not
available. I have a new witness who will be sponsoring
the testimony of Jolene Bossard. That is Terri Carlock,
if I may, if there are no objections.
COMMISSIONER ANDERSON: If there are no
objections to that, Ms. Carlock can be your next
swear-in.
MR. BURDIN: Thank you. Staff calls Terri
Carlock to the stand.
COMMISSIONER ANDERSON: Thank you.
TERRI CARLOCK,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, was
examined and testified as follows:
DIRECT EXAMINATION
BY MR. BURDIN:
Q.Would you state your name and spell your last
name for the record, please?
A.Yes, my name is Terri Carlock, T-e-r-r-i
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C-a-r-l-o-c-k.
Q.Are you sponsoring the filed testimony of Jolene
Bossard in this case consisting of some testimony and
exhibits?
A.Yes, I will.
Q.Do you have any corrections or modifications to
that testimony?
A.Yes, I do. On page 2 -- I'm sorry, it's page 3,
the paragraph on line 11 to 16 should be reworded and
replaced with, "I recommend that the Company continue to
support the Veolia Cares program and to increase the
amount of the grant to reflect the increase in rates for
residential customers."
Then on page 6, I would note that the actual
number of customer accounts where the meters were misread
has increased. The last number I heard was 1,810. That
would be all of the changes.
Q.With those modifications, if I were to ask you
the same questions today included in Ms. Bossard's filed
testimony, would the answers be the same?
A.Yes, they would.
MR. BURDIN: Mr. Chair, I now move to spread the
filed testimony of Jolene Bossard on the record as if
read and as sponsored by Terri Carlock.
COMMISSIONER ANDERSON: Without objection, we
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will spread across the record Ms. Bossard's testimony,
both direct and rebuttal, and exhibits presented by Terri
Carlock.
(Staff Exhibit Nos. 136-141 were admitted into
evidence.)
(The following prefiled direct testimony
of Ms. Jolene Bossard sponsored by Ms. Terri Carlock is
spread upon the record.)
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Q.Please state your name and business address.
A.My name is Jolene Bossard. My business address
is 11331 W. Chinden Blvd., BLDG 8, STE 201-A, Boise,
Idaho 83714.
Q.By whom are you employed and in what capacity?
A.I am employed by the Idaho Public Utilities
Commission ("Commission") as a Utilities Compliance
Investigator in the Utilities Division.
Q.Please describe your educational background and
professional experience.
A.My educational background and professional
experiences are shown in Exhibit No. 136.
Q.What is the purpose of your testimony in this
proceeding?
A.The purpose of my testimony is to present the
Commission Staff's ("Staff") position on the following
consumer issues regarding Veolia Water Idaho, Inc.'s
("Veolia" or "Company") general rate case:
1.The Customer Notice and Press Release filed in
this case;
2.Reviewing the customer workshop;
3.Summarizing the customer comments received by
the
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Commission regarding this case;
4.Discussing the complaints received by the
Commission for the years 2020 through 2022;
5.Customer Service Center performance;
6.Discussing Consumer Assistance Staff's stance
on Veolia Cares (Low-income Assistance program);
7.Discussing Consumer Assistance Staff's stance
on the Cross Connection Control Program; and
8.Reviewing East first Bench Discolored Water &
Flushing Credits.
Q.Are you sponsoring any exhibits with your
testimony?
A.Yes. I am sponsoring Exhibit Nos. 136, 137,
138, 139, 140, and 141.
Q.Please summarize Staff's recommendations as
they relate to consumer issues.
A.I recommend that the Company submit the
customer notice and press release to the Commission for
review prior to submitting its Application in future
cases.
I reviewed the customer comments and found that
the number of comments received by the Commission in this
case has increased from the previous case. The customers
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appear in their comments to be even more frustrated and
angry at the prospect of paying more for water. Many
customers object to the cost of the Eagle Water purchase
being imposed on all customers.
I reviewed complaints/inquires submitted to the
Commission and recommend that in the future, the Company
communicate with the Commission when it recognizes a
possible issue that could generate complaints from a
significant number of customers.
I recommend that the Company continue to
support the Veolia Cares program and to increase the
amount of the grant to reflect the increase in rates for
residential customers.
I reviewed the status of the Company's Cross
Connection Control Program and recommend that it take
steps to improve tracking the annual certification
reports and follow-up with customers when they are not
submitted.
Customer Relations
Customer Notification and Customer Workshop
Q.Does the Company's Customer Notice and Press
Release meet the requirements of the Commission's Rules
of
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Procedure, (IDAPA 31.01.01), Rule 125?
A.No. The Company's Customer Notice and Press
Release were submitted on September 30, 2022, along with
the Application, and were reviewed by Staff at that time.
The customer notice failed to identify the case number,
although customers could locate the information if they
used the Commission's website. The Press Release failed
to inform Customers that they could file comments on the
case; however, all customers received the information
with the Customer Notice.
Q.How were the Company's customers informed of
the rate case?
A.Because the Company bills on a bimonthly
schedule, the first group of customers were sent notice
in the October 2022 billing statements, and the final
group of customers were sent a copy of the notice
enclosed in the November 2022 billing statements.
Customers who receive their billing statements
electronically have a link to the notice when they open
their billing statement. All customers should have
received notice of the Application by the end of November
giving them sufficient opportunity to submit written
comments and participate in the process.
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In addition to the customer notice and press
release, Staff hosted a virtual Customer Workshop on
January 31, 2023. Twenty-one (21) customers attended.
Customer Comments Regarding the Proposed Rate Increase
Q.Have you reviewed the written customer comments
that have been received by the Commission regarding this
case?
A.Yes. As of February 14, 2023, 134 customers
have submitted comments regarding the proposed increase
in rates. The comments are primarily from residential
customers who oppose any increase in rates.
Q.What are some of the concerns mentioned by
customers?
A.Commenters raise the same issues as have been
raised in prior rate cases. Many customers are
low-income or fixed-income customers who see basic living
costs rising due to increased inflation but their wages
and/or social security income benefits are not keeping
pace.
Q.Are there other concerns mentioned by
customers?
A.Many comments (66 of 134) bring up the cost of
the Company's acquisition of Eagle Water and the costs
associated with the purchase being passed on to all
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customers.
Customer Complaints and Inquiries
Q.Please describe how many and what type of
complaints and inquiries the Commission has received
regarding the Company between 2020 and 2022.
A.Exhibit No. 137 shows the number of informal
complaints and inquiries received over the past three
years.
Q.Recently, have there been any specific
complaints that were different than a typical complaint
the Commission receives.
A.Yes. According to the Company, 1,810
customers' accounts were affected when their meters were
misread (underread) over several months. This equated to
a little over 1% of the Customer base. The Company has
been rebilling these customers in a manner so that the
adjustment of the usage on the accounts will not affect
their sewer billing. As of 1/24/2023, the last of the
customers meters that were previously misread, now have
verified good meter readings. In the future, I recommend
that the Company notify Staff as soon as they recognize a
potential large-scale issue that will affect customers.
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Call Center Telephone Answering Standards (often referred
to as "service levels")
Q.What is Veolia's performance objectives for
handling incoming calls?
A.Veolia's goal is to answer 80% of customer
calls within 60 seconds or less.
Q.Has Veolia met their standards of Average Speed
of Answer ("ASA")?
A.Yes, until recently. Since January 2020 Veolia
met their standards of Average Speed except for August,
September, and October 2022. Exhibit No. 138.
Q.What were Veolia's total number of incoming
calls and emails during each of the past 3 years?
A.The yearly totals were 83,994 in 2020, 86,191
in 2021, and 96,617 in 2022. Exhibit No. 139.
Veolia Cares
Q.Does Staff have any recommendations for the
Company in light of the customer concerns regarding
higher rates and income restraints?
A.A review of the Veolia Cares program over the
past three years indicates that the program was valuable
to low-income customers during the recent COVID pandemic.
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While the number of disconnections for customers who had
received assistance increased during the pandemic, the
recovery in 2022 reduced both the amount of assistance
provided and the number of customers who were
disconnected, even after assistance was received.
Exhibit No. 140.
Recently inflation has increased costs and has
subsequently increased the level of benefits available to
low-income customers who receive benefits. Staff
recommends that the Company increase the amount of
assistance an individual customer can receive in the 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. The
program qualifies customers through El-Ada Community
Action Partnership, which also handles other low-income
programs such as Energy Assistance and Crisis Funds, both
of which are part of the federally sponsored LIHEAP
program, meaning that the agency has the means and the
ability to assess the
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household income and determine whether it qualifies.
Raising the income level would allow more households with
marginal income to receive benefits.
Cross Connection Control Program
Q.What is the Company's Cross Connection Control
Program.
A.The Company's authority for the program falls
under the Idaho Rules for Public Drinking Water (IDAPA
58.01.08) administered by the Idaho Department of
Environmental Quality, Idaho's Uniform Plumbing Codes,
and the Commission's Rules and Regulations. The Company
is required to locate cross connections and determine
suitable protection to ensure that non-potable water
cannot flow back into the Company system. The Company
must approve the installation and requires annual
inspection. To that end, the customer with such a device
is required to have the device tested and the inspection
results forwarded to the Company. Should a customer fail
to install and maintain the proper device, including the
annual inspection, the Company has the authority to take
steps to disconnect the customer. See Order No. 33436.
In 2019, the Company revised its Cross Connection Control
Program.
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Q.What is the current status of the program?
A.Although the number of customers has increased
over the past three years, the number of annual
inspection reports received by the Company has decreased
from 1,759 in 2020, to 1,228 in 2021, to 1,015 in 2022
(as of November). The Company does not track the total
number of customers with a Cross Connection Control
Device (CCD) electronically, maintaining only a paper
data base. It does not track how many customers have
been disconnected and does not follow up on customers who
have previously submitted a certificate. In addition,
the Company call center personnel do not have access to
the information should a customer call to make an
inquiry.
Q.How does the Company notify customers that they
need to submit an annual inspection certificate.
A.The Company includes a reminder to all
customers in its Annual Summary of Rules through billing
inserts and through its website because it doesn't have
the ability to target customers who have previously
submitted a certificate.
Q. Does the Staff have any recommendations for
the Company in light of the lack of recordkeeping?
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A.Staff recommends that the Company create an
electronic database for all customers who have previously
submitted a certificate and all other customers, both new
construction and current customers, who are required to
maintain a CCD but may not have a device installed. The
Company could then use the database to track certificates
and notify customers who have not submitted the required
certificate. The program has a notification process to
enforce the requirement or if necessary to disconnect the
customer. Staff recommends that it increase efforts to
ensure compliance and prevent cross-contamination of its
system.
Boise East First Bench Discolored Water
Q.Please provide information on the discolored
water on the East First Bench ("EFB") for January 2020
through October 2022.
A.There was a total of 66 discolored water
reports with a flushing credit applied. The total amount
of flushing credits was $99.00. Exhibit No. 141. The
number of calls has gone down every year, with the
exception of a spike in November of 2021, which was
correlated to when the Company was performing Ice Pigging
on the lines.
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Company Documents
Q.Have Veolia's forms required by the Utility
Customer Relations Rules (UCRR) (IDAPA 31.21.01) been
reviewed for compliance?
A.Yes. Veolia's forms were reviewed and
determined to meet the requirements of the UCRR.
Q.Does Staff support the Company's proposed
updates to the language included in the tariffs?
A.Yes. Staff has reviewed the Company's proposed
changes and supports updating the language. The actual
rates to be included in the tariffs will be determined by
the Commission.
Q.Does this conclude your testimony in this
proceeding?
A.Yes, it does.
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(The following proceedings were had in
open hearing.)
MR. BURDIN: The witness is now available for
cross-examination.
COMMISSIONER ANDERSON: Thank you. Mr. Carter.
MR. CARTER: I don't have any questions.
COMMISSIONER ANDERSON: Micron?
MR. NELSON: No questions, thank you.
COMMISSIONER ANDERSON: City of Boise.
MS. GRANT: Yes, just a couple. Thank you.
CROSS-EXAMINATION
BY MS. GRANT:
Q.Ms. Carlock --
A.Just one moment. Adam, could you move back and
could you move to your mic? Thank you, Mary.
Q.Thank you, I've been doing that all day. In any
case, you recall the testimony with respect to the
customer workshop in the written direct?
A.Yes.
Q.And are you also familiar with the Order in the
prior rate case with respect to the requirement for a
public workshop?
A.I am familiar with the settlement, the
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stipulation, and the Order. You would just have to refer
me to a specific cite location.
Q.If I may read into the record what it says and
you can then say if that reflects accurately your
recollection.
A.Please.
Q.Okay, that the Company agreed to host annual
workshops for all interested parties with the
participation of Commission Staff, the Idaho Department
of Environmental Quality, the Idaho Department of Water
Resources on a range of topics related to water
conservation and resource planning. Is that your
recollection that was included in the Order?
A.Yes.
Q.Okay, and is the customer workshop that's
referenced in the direct testimony one and the same with
that particular public workshop?
A.No, this is the customer workshop associated
with this rate increase.
Q.And is it the Staff's opinion that that public
workshop from the prior rate case has been conducted or
that that stipulation has been met?
A.I'm not aware of any workshops, meetings that
would have included all of those parties on an annual
basis.
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Q.Does Staff have a recommendation or would it be
the recommendation of Staff to carry that requirement
forward in any subsequent Order?
A.I believe it is a worthwhile endeavor. I don't
know that I have a recommendation on that section, but I
would not be opposed to it.
Q.Then maybe just asking it a slightly different
way, you're unaware or do not have any information that
that took place as between when the prior Order was
entered and as of today?
A.That is correct, I'm not aware of a meeting with
all of those parties.
MS. GRANT: I have no further questions.
COMMISSIONER ANDERSON: Thank you. Ada County?
MS. WADDEL: No questions, thank you.
COMMISSIONER ANDERSON: Thank you. Ms. Ullman?
MS. ULLMAN: No questions, thank you.
COMMISSIONER ANDERSON: Thank you very much.
Are there questions from the Commissioners? Hearing
none, any redirect from Mr. Burdin?
MR. BURDIN: No, Commissioner, thank you.
COMMISSIONER ANDERSON: Thank you. Without
objection, Ms. Carlock, you are excused. Thank you.
(The witness left the stand.)
MR. BURDIN: Staff has no further witness,
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Chair.
COMMISSIONER ANDERSON: Thank you, Mr. Burdin.
Micron, I believe you have some witnesses?
MR. NELSON: Yes. Mr. Chairman, with the
discussion of the parties and the Commission, we
understand that no one has any questions of either
Mr. Gorman or Ms. York, and so at this time we would
simply ask the Commission's permission to move the
admission of Mr. Gorman's testimony and exhibits and have
those appear as if they -- spread upon the record as if
read, as well as we would move the admission of
Ms. York's exhibits and testimony and ask that those also
be spread upon the record as if read.
COMMISSIONER ANDERSON: There are no corrections
to any --
MR. NELSON: There are no corrections and just
to be clear, I apologize if I misstated this, Ms. York
has both direct and rebuttal. Mr. Gorman has just
direct.
COMMISSIONER ANDERSON: Thank you. I'm going to
make two motions here, then, if we could. Without
objection, I would move that Mr. Gorman's testimony be
spread across the record, both direct and rebuttal --
MR. NELSON: Just direct for Mr. Gorman.
COMMISSIONER ANDERSON: Just direct, thank you
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very much, and exhibits also included with that?
MR. NELSON: Correct.
COMMISSIONER ANDERSON: Thank you. Without
objection, that will be done.
(Micron Technology, Inc., Exhibit Nos. 401-418
were admitted into evidence.)
(The following prefiled direct testimony
of Mr. Michael P. Gorman is spread upon the record.)
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Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A Michael P. Gorman. My business address is
16690 Swingley Ridge Road, Suite 140, Chesterfield, MO
63017.
Q WHAT IS YOUR OCCUPATION?
A I am a consultant in the field of public
utility regulation and a Managing Principal with the firm
of Brubaker & Associates, Inc. ("BAI"), energy, economic
and regulatory consultants.
Q PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND
EXPERIENCE.
A This information is included in Appendix A to
my testimony.
Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS
PROCEEDING?
A I am appearing on behalf of Micron Technology, Inc.,
a large customer of Veolia Water Idaho Inc. ("Veolia,"
"VWID," or "the Company").
Q WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS
PROCEEDING?
A My testimony will address adjustments to VWID's
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proposed revenue requirement, the overall rate of return
including return on equity, embedded debt cost of VWID,
and analysis of VWID's testimony on these subjects.
/
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/
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Q DOES THE FACT THAT YOU DID NOT ADDRESS EVERY
ISSUE RAISED IN VWID'S TESTIMONY MEAN THAT YOU AGREE WITH
VWID'S TESTIMONY ON THOSE ISSUES?
A No. It merely reflects that I did not choose
to address all those issues. It should not be read as an
endorsement of, or agreement with, VWID's position on
such issues.

I. SUMMARY
Q WILL YOU SUMMARIZE YOUR ADJUSTMENTS TO VWID'S
REVENUE REQUIREMENT AS PRESENTED IN YOUR TESTIMONY?
A I recommend several adjustments to VWID's
claimed revenue deficiency. As outlined in Table 1
below, I believe the Company's claimed revenue deficiency
of $12.1 million is overstated by approximately $5.7
million.
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(Table in hard copy of transcript)
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Q PLEASE SUMMARIZE YOUR RECOMMENDATIONS AND
CONCLUSIONS ON RATE OF RETURN.
A I recommend the Idaho Public Utilities
Commission ("the Commission") approve a reasonable return
on equity that reflects VWID's investment risk, and
charges customers rates that are as low and competitive
as possible while also fairly compensating VWID, and
maintains its access to capital, financial integrity and
credit standing. Specifically, I recommend the
Commission award a return on common equity within my
recommended range of 9.00% to 9.70%, with a midpoint of
9.35%. My proposed return on equity and the Company's
capital structure will result in an overall rate of
return of 6.97%, as shown on my Exhibit No. 401.
My recommended return on equity will fairly
compensate the Company for its current market cost of
common equity, and preserve its credit rating, its access
to capital on reasonable terms and its financial
integrity. My recommended return on equity will also
mitigate the Company's claimed revenue deficiency in this
proceeding while providing a return that fairly balances
the interests of customers and shareholders.
Finally, I respond to VWID witness Mr. Harold
Walker's return on equity recommendation. Mr. Walker
recommended an equity return in the range of 9.60% to
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11.60% and a return on equity point estimate of 10.80%.1
Mr. Walker's recommended return on equity for VWID
substantially exceeds a fair return on equity for the
Company's investment risk. Mr. Walker's return on equity
is simply excessive and would result in unjust and
unreasonable rates for VWID's retail customers.
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__________________
1Walker Direct Testimony at pp. 4-5.
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Q PLEASE SUMMARIZE YOUR PROPOSED ADJUSTMENT TO
VWID'S FORECASTED TEST YEAR SALES.
A VWID's forecasted sales for residential
customers in the test year ending March 31, 2023,
reflects a pessimistic projected decline in the
residential customer water usage. The Company projects a
significant decrease in use per residential customer in
the test year ending March 31, 2023, relative to actual
annual use over the past three to five years.
Specifically, VWID's projected use per customer for the
test year is 96.88 thousand gallons per customer compared
to the most recent actual use of 105.48 thousand gallons
per customer. As a result, VWID's test year sales
forecast applies an 8.59 thousand gallons usage
adjustment which lowers projected revenues by $2.4
million. I recommend a more conservative estimate of use
per customer in the test year, based on actual normalized
historical usage trends, which generally align with
declining use the Company has experienced over the past
15 years. This adjustment results in a more reasonable
projection of sales and revenue at current rates in the
projected test year. This adjustment increases
residential sales in the forecasted test year and
increases revenue at proposed rates and reduces the
Company's projected revenue deficiency by approximately
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$1.9 million.
Q PLEASE SUMMARIZE YOUR PROPOSED ADJUSTMENT TO
VWID'S LABOR EXPENSES.
A I adjusted VWID's test year labor expense to
remove the cost of budgeted but vacant full time
equivalent ("FTE") employee positions. The Company has
not justified the additional employees or explained why
they are required and instead relies on a headcount
comparison to other utilities. It is not known if VWID
will incur the cost of unfilled/vacant FTE positions in
the projected test year, and,
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therefore, the cost of unfilled FTE positions is not a
known and measurable cost that should be included in the
test year cost of service. Removing the hypothetical
cost of these vacant positions from VWID's test year
budget lowers the test year cost of service by
approximately $800,000.
II. SALES FORECAST
Q PLEASE PROVIDE AN OVERVIEW OF THE COMPANY'S
FORECAST OF TEST YEAR REVENUES AT PRESENT AND PROPOSED
RATES.
A VWID witness Timothy Michaelson discusses the
Company's proof of revenue under present and proposed
rates and the development of test year revenues in his
direct testimony. As shown on his Exhibit No. 5,
Schedule No. 1, Mr. Michaelson forecasts $51.7 million of
revenues in the test year ending March 31, 2023, at
present rates and $63.8 million at proposed rates, an
increase of $12.1 million.
As part of his analysis, Mr. Michaelson makes four
adjustments to his calculation of revenues at present and
proposed rates. First, he adjusts revenues by
annualizing for gain or loss of customers during the
historic test year. Second, he adjusts revenues for a
projected increase in the average number of customers.
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Third, he adjusts revenues for a projected decline in
customer usage. Finally, he normalizes the number of
bills and volumes for existing Eagle Water Company2
customers in the historic test year.
Mr. Michaelson projects approximately 92,800
residential customers and approximately 105,800 customers
total. This includes a gain of 511 customers by March
31, 2023, compared to the historical test year.
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__________________
2Eagle Water Company customers became part of VWID in December 2021.
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Q DO YOU HAVE ANY CONCERNS WITH VWID'S SALES
FORECAST?
A Yes. I believe the Company's residential sales
forecast underestimates normalized sales and results in
an understated and unreasonable projection of residential
sales in the test year.
Q PLEASE EXPLAIN HOW MR. MICHAELSON PROJECTED
RESIDENTIAL SALES REVENUE IN THE FORECASTED TEST YEAR?
A Mr. Michaelson's residential and commercial use
per customer adjustments take the difference between
actual residential or commercial usage in the historical
test year and a predicted usage based on his 30-year
regression analysis. As a result of his analysis, he
applies an 8.59 thousand gallons per residential customer
declining usage adjustment. As shown on his Exhibit No.
5, Schedule No. 1, Mr. Michaelson's 8.59 thousand gallons
adjustment (or 11.49 CCF adjustment) lowers revenues at
proposed rates by $2.4 million. Applying his adjustment
to the 92,800 residential customers lowers water
consumption in the test year ending March 31, 2023, by
1.066 million CCF.
Q HOW HAS MR. MICHAELSON UNDERSTATED RESIDENTIAL
SALES REVENUE IN THE FORECASTED TEST YEAR?
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A Mr. Michaelson provides a graphical comparison
of residential and commercial actual usage versus his
predicted usage on Exhibit No. 5, Schedule No. 6 and
Schedule No. 8. I replicated the residential comparison
in Figure 1, below.
As shown on the figure, VWID's residential sales
forecast projects the Company's test year residential use
per customer to be 96.88 thousand gallons per year. This
residential sales projection is well below actual
residential usage
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over the last 30 years but more importantly well below
actual usage over the most recent three- to five-year
period. It is also significant that Mr. Michaelson's
annual predicted use per customer during the period 2019
to 2022 was below actual use in every one of those years.
In contrast, the Company's projected use per customer
prior to 2019 reflected a better fit and more reliable
estimate of sales because those projections varied
between being above and below actual use. If projected
usage is consistently and materially less than actual
usage, the test period residential sales revenues will be
unreasonably understated in a forecasted test year.
In contrast, the commercial comparison Mr.
Michaelson provided as Exhibit No. 5, Schedule No. 8
shows the predicted usage produced by his analysis is
comparable to actual usage for the past several years.
Mr. Michaelson also projects declining usage for
commercial customers in the test year in his Exhibit No.
5, Schedule No. 1 and a revenue reduction of $920,000 to
this rate class in the test year. But the sales
projections to this rate class have not consistently
understated actual sales and reflect a reasonable trend
of annual usage for the commercial customers.
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(Chart in hard copy of transcript)
VWID's projected declining use adjustment for
residential customers is unreasonable and should be
adjusted. Mr. Michaelson's test year adjustment of 8.59
thousand gallons represents a 10% decrease in use per
residential customer for the test year compared to actual
use per customer over the past five years, which includes
the two lowest residential sales years in the 30-year
time period. While it is reasonable to assume that use
per customer will decline over time as customers install
more water efficient appliances and become more aware of
conservation efforts, it is also reasonable to expect
that this declining use per customer trend will moderate
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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. Mr. Michaelson's use of a declining use trend
based over a 30 year historical period does not allow for
this rational expectation
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of changing declining use trends over time. Again, as
residential customers as a group modernize their water
appliances and consumption patterns, the forward
declining use trend will start to slow relative to the
long-term past trend - an expectation borne out by recent
actual data.
Q WHAT DO YOU RECOMMEND?
A I recommend a residential declining use
adjustment that is more in line with actual usage
patterns. Table 2, below, shows the most recent 15 years
of residential use per customer. As shown in the table,
annual usage declined by approximately 1.7% per year over
the past 15 years. Applying my proposed 1.7% residential
declining use adjustment results in a usage adjustment of
1.79 thousand gallons compared to the Company's 8.59
thousand gallons adjustment, or a difference of 6.80
thousand gallons.
My proposed normalized residential sales in the test
year for use per residential customer is 103.686 thousand
gallons compared to the Company's 96.88 thousand gallons.
My projection is based on a 1.7% declining use trend
adjustment (or 1.79 thousand gallons per customer) based
on a 15-year trend and is more reasonable than the
Company's declining use adjustment of 8.1% (or 8.59
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thousand gallons per customer) based on a 30-year trend.
As shown in Table 2 below, my estimate reflects a
decrease in annual usage compared to the last five years,
but the decline in use is more moderate than the
projection proposed by the Company.
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(Table in hard copy of transcript)
A moderate declining use relative to the last five years
is also reasonable in recognition of weather impacts on
sales over this five-year period. Mr. Michaelson's
regression analysis relies on the Palmer Z index which is
a measure of short-term drought. The Palmer Z index for
2008 to 2022 is -0.27, which is comparable to the 30-year
average of -0.23.3 Hence, the 15-year average trend
period contains both a variety of rainfall and other
weather conditions which impact year-over-year usage by
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the residential class, as well as more recent
conservation impacted consumption behavior.
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3Michaelson Direct Testimony, Exhibit No. 5, Schedule No. 4E.
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Q HOW DOES YOUR RESIDENTIAL SALES ADJUSTMENT
IMPACT THE COMPANY'S CLAIMED TEST YEAR REVENUE
DEFICIENCY?
A This increases revenues and lowers the
Company's claimed revenue deficiency by approximately
$1.9 million, as shown below. My impact was calculated
by updating Mr. Michaelson's Exhibit No. 5, Schedule No.
4E with my revised usage of 103.686 thousand gallons.
Mr. Michaelson's 8.59 thousand gallons per customer
adjustment translates to 1.066 million CCF across the
92,800 residential customers while my adjustment
translates to approximately 222,000 CCF across the same
number of customers. This adjustment is shown in detail
in Table 3 below.
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(Table in hard copy of transcript)
III. EMPLOYEE ADJUSTMENT
Q DOES VWID'S TEST YEAR COST OF SERVICE INCLUDE
LABOR EXPENSES ASSOCIATED WITH A BUDGETED LEVEL OF
EMPLOYEES?
A Yes. VWID witness Jarmila M. Cary proposes
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several operation and maintenance ("O&M") expense
adjustments including an adjustment to labor expenses to
account for an increase of 15 positions due to the
filling of vacant
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FTE positions. VWID proposes to increase its total
employee headcount from 122 filled full-time employee
positions as of June 30, 2022 to 137 full-time employees
(or filled plus vacancies). Ms. Cary lists the 15
positions in her direct testimony but does not describe
why the positions are needed. As shown on her Exhibit
No. 10, Schedule 1, page 1, the payroll associated with
137 positions is $10.4 million, of which 66.17% is
charged to expense.
Q IS VWID'S BUDGETED TEST YEAR LABOR EXPENSE
REASONABLE?
A No. VWID's budgeted test year labor expense
includes labor costs associated with vacant or unfilled
positions and new hires. Unfilled employee positions are
not known and measurable costs and should not be included
in the development of the test year labor expense. The
Company will not incur costs associated with the
additional positions unless and until those positions are
actually filled.
Q IS IT REASONABLE TO CONCLUDE THAT THE COMPANY
CAN FILL ALL OF ITS BUDGETED EMPLOYEE POSITIONS IN THE
FORECASTED TEST YEAR?
A Filling the new budgeted positions will be
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challenging because it requires finding qualified
employees to fill the new positions while at the same
time the Company will need to fill existing positions as
employees leave the Company via retirement or other
reasons during the year. Employee attrition can offset
increases in the Company's employee count as a result of
hiring employees for new positions, leaving the number of
vacant positions unchanged. The employee headcount
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chart on pdf page 94 of VWID witness Marshall Thompson's
direct testimony shows that VWID's headcount can decrease
year-over-year as well as increase.
Q DID VWID PRESENT A PLAN TO FILL ALL BUDGETED
POSITIONS IN THE FORECASTED TEST YEAR?
A No. Therefore, its ability to fill all
budgeted positions is uncertain and the additional cost
is not known and measurable.
Q DID VWID PROVIDE EVIDENCE THAT IT NEEDS TO
INCREASE ITS NUMBER OF EMPLOYEES IN ORDER TO PROVIDE HIGH
QUALITY AND RELIABLE SERVICE?
A No. VWID only relies on comparisons to other
utilities to justify its proposed increase in labor
expenses. Specifically, VWID's support for this
adjustment is limited to the following:
According to the American Water Works
Association's 2021 Utility Benchmarking Study,
the historic average for Customers per Employee
from that study' [sic] 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.
* * *
Veolia's 2022 metric of 782 leaves considerable
room for employee headcount growth before the
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company approaches the AWWA median of its
industry peers.5
VWID's comparison to other utilities alone does not
justify the Company's proposal to include in cost of
service the cost of unfilled/vacant positions. The
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__________________
4This page was incorrectly numbered as p. 2 in Mr. Thompson's
testimony
5Thompson Direct Testimony at pdf pp. 9-10, which were incorrectly
numbered as pp. 2-3 in Mr. Thompson's testimony.
Company has not adequately demonstrated that it actually
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needs more employees. And, as described above, it is not
known whether VWID will incur its full budgeted labor
expense in the rate-effective period.
Q ARE YOU PROPOSING AN ADJUSTMENT TO VWID'S TEST
YEAR LABOR EXPENSE?
A Yes. I recommend the Commission remove from
cost of service the budgeted expense associated with the
15 vacant positions. The Company has not proven that it
needs to increase its number of employees in order to
provide high quality and reliable service. VWID's
increase in payroll expense is largely not known and
measurable and should be rejected. In addition, VWID is
forecasting an increase in overtime expense despite
assuming it will have more employees in the
rate-effective period who could take work from employees
currently working overtime. For these reasons, I
recommend the costs associated with the vacant positions
be removed from cost of service. This lowers VWID's
claimed revenue deficiency by approximately $0.8
million.6
IV. RATE OF RETURN MARKET EVIDENCE
Q PLEASE DESCRIBE THIS SECTION OF YOUR TESTIMONY.
A In this section, I will provide observable
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market evidence, credit metrics to assess the
reasonableness of rate of return positions, and a
detailed analysis to demonstrate that my recommended rate
of return will support VWID's financial integrity and
access to capital. I also comment on market-based models
to
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6$10,382,008 regular payroll for 137 positions divided by 137
positions times the 15 vacant positions times the 66.17% applicable
to O&M expense.
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estimate the current market-required rate of return
investors demand to assume the risk of an investment
similar to VWID's.
IV.A.Utility Industry Authorized Returns on Equity,
Access to Capital, and Credit Strength
Q PLEASE DESCRIBE THE OBSERVABLE EVIDENCE ON
TRENDS IN AUTHORIZED RETURNS ON EQUITY FOR REGULATED
UTILITIES.
A Authorized returns on equity are an important
part of how utilities produce revenues and cash flows
adequate to support their credit standing and maintain
their financial integrity, which supports their access to
capital under reasonable terms and prices. Observable
data, including on industry authorized returns on equity,
trends and outlooks on credit standing, and the ability
of utilities to attract capital to fund large
investments, provides clear evidence that industry
authorized returns on equity have been judged by market
participants to be fair and reasonable. With this as
background, it is significant to observe that industry
authorized returns on equity for electric and gas
utilities have ranged from 9.29% to 9.78% for the period
from 2014 through the end of 2022 and, since 2020,
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authorized returns on equity have averaged below 9.50%.
These returns are summarized in Figure 2 below.
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(Chart in hard copy of transcript)
Q HAVE UTILITIES BEEN ABLE TO ACCESS EXTERNAL
CAPITAL TO SUPPORT CAPITAL EXPENDITURE PROGRAMS?
A Yes. In Regulatory Research Associates'
("RRA") October 28, 2022 Utility Capital Expenditures
Update report, RRA Financial Focus, a division of S&P
Global Market Intelligence, made several relevant
comments about utility investments generally:
·2022 capital expenditures by the Regulatory
Research Associates-tracked energy utilities
may eclipse their total investments in 2021
by more than 20%, with anticipated capex
rising to more than $158.6 billion, compared
with actual spending in 2021 of $131.8
billion.
·2023 is anticipated to be another record year
of increased investment, with the aggregated
forecast for energy utility capex exceeding
$169 billion.
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·The nation's electric, gas and water
utilities are investing in infrastructure at
record levels to upgrade aging transmission
and distribution systems; build new gas,
solar and wind generation; and implement new
technologies, including those
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related to smart meter deployment, smart grid
systems, cybersecurity measures, electric
vehicles and battery storage. The
considerable spending levels are expected to
serve as the basis for solid profit expansion
in the utility industry for the foreseeable
future.
·Several catalysts are anticipated to impel
elevated spending over the next several
years, including replacement of aging
infrastructure, state renewable portfolio
standards, and federal infrastructure
investment plans and tax credits
incentivizing conversion of the nation's
power generation network to zero-carbon
sources. The recently passed federal
Inflation Reduction Act of 2022 is expected
to play a substantial role over the next
decade.7
As shown in Figure 3 below, capital expenditures for the
regulated utilities have increased considerably over the
period 2021 into 2022, and the forecasted capital
expenditures remain elevated through the end of 2023,
with projected spend in 2024 tapering off slightly from
2022 levels.
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(Chart in hard copy of transcript)
As outlined in Figure 3 above, and in the comments
made by RRA S&P Global Market Intelligence, capital
investments for the utility industry continue to
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7S&P Global Market Intelligence, RRA Financial Focus: "2023 energy,
water utility capex plans on track to break prior spending records,"
October 28, 2022, (footnotes omitted).
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stay at elevated levels, and these capital expenditures
are expected to fuel utilities' profit growth into the
foreseeable future. This is clear evidence that the
capital investments are enhancing shareholder value and
are attracting both equity and debt capital to the
utility industry in a manner that allows for funding
these elevated capital investments. While capital
markets embrace these profit-driven capital investments,
regulatory commissions also must be careful to maintain
reasonable prices and tariff terms and conditions to
protect customers' need for reliable utility service at
reasonable rates.
Q HAVE WATER UTILITIES ALSO ENJOYED ACCESS TO
EXTERNAL CAPITAL TO FUND SALES GROWTH?
A Yes. In its latest RRA Water Advisory report,
Standard & Poor's ("S&P") outlined the robust capital
expenditure programs undertaken by the water utilities:
The water utility sector has been accelerating
its capital spending budgets for decades. The
group continues to outpace electric and
multi-utilities when comparing capex to
depreciation and amortization, and its spending
rate is similar to the gas utility level, which
began to accelerate in the last decade.
* * *
Total capex for the IOUs, tracked by RRA, are
expected to increase 7.3% in 2022, continuing a
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long-term trend of accelerating investments.
Total capex for RRA-monitored water utilities
have grown at a 10-year compound annual growth
rate of 11.1% and are expected to increase 7.3%
in 2022 versus 2021 levels, to over $3.9
billion. In 2021, capex growth averaged just
4.8%.
RRA expects these water utilities to continue
to invest at accelerated rates. Investment in
existing service territories has been augmented
by acquisitions and subsequent investment in
those often under-invested systems. Increased
regulation by the EPA could drive further
expansion of water utility capital spending
programs, and continued expansion of water
utilities' operational
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footprints and capex programs are likely to
support further earnings growth.8
Q IS THERE EVIDENCE OF ROBUST VALUATIONS OF
REGULATED UTILITY EQUITY SECURITIES?
A Yes. Robust valuations are an indication that
utilities can sell securities at high prices, which is a
strong indication that they can access equity capital
under reasonable terms and conditions, and at relatively
low cost. As shown on my Exhibit No. 402, utility
valuation metrics show robust valuation of utility
securities more recently compared to the historical
period stretching back to 2002. Specifically, The Value
Line Investment Survey ("Value Line") tracks and projects
various valuation metrics related to regulated utility
securities, as well as non-regulated companies followed
by Value Line. These valuation metrics are considered by
market participants in assessing the investment risk
characteristics of individual company stocks and
industries and are used by market participants to derive
their required rates of return for making investments.
All of these valuation metrics for utility stocks
indicate robust valuations of utility stocks, which in
turn support my finding that utilities' cost of capital
is low by historical comparison and utilities are
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producing competitive returns.
For example, my Exhibit No. 402 shows a Value Line
electric utility industry price-to-earnings ratio of
18.66x, compared to a 21-year average price-to-earnings
ratio of around 17.17x (Page 1). The current
price-to-earnings ratio for gas utilities is 17.28x,
which is still higher than the price-to-earnings ratio
relative to historical levels (Page 11). This strong
price-to-earnings performance
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8S&P Global Market Intelligence RRA Water Advisory: "Intro to Water
Utilities - Current Trends and Growth Driver," July 18, 2022, page 5.
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indicates stock prices relative to earnings have been
robust. Robust stock prices, or higher stock prices,
indicate lower cost of capital.
The market price-to-cash flow for electric utilities
is currently 8.97x, compared to the 21 year average of
7.53x (Page 2). The market price-to-cash flow for gas
utilities is currently 9.87x, compared to the 17-year
average of 9.61x (Page 11). Again, high stock prices in
relationship to utility cash flows indicate investors are
willing to accept lower rates of return to invest in
utility stocks.
Finally, the current market-to-book ratio for the
electric utility industry is 1.98x, compared to the
18-year average of 1.73x (Page 3). The current
market-to-book ratio for the gas utility industry is
1.78x, which is comparable to the 17-year average of
1.82x (Page 11). Again, the market-to-book ratio
indicates robust stock prices and low cost of capital to
utilities. The utility industry exhibits strong
valuations in the marketplace, which is a clear
indication that utilities have access to external capital
markets under favorable conditions and at low costs.
Q PLEASE DESCRIBE THE MARKET VALUATION OF WATER
UTILITIES STOCKS.
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A Similar to electric and gas utilities, the
water utilities market performance has been quite robust
and supportive of access to capital markets.
Specifically, S&P states the following:
Despite the pullback, water utilities continue
to trade at a historical premium to the
electric, natural gas and multi-utility
sectors. Water utilities currently trade at a
27.9x price-to-earnings, or P/E, multiple based
on 2023 earnings estimates. As of Dec. 31,
2021, that multiple had been 35.3x. In
contrast, electric utilities trade at a 2023
P/E multiple of 17.9x, natural gas utilities at
18.0x and multi-utility companies at 19.1x.9
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9Id. at 8.
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Similarly, Value Line notes:
The demand to own shares by the large
institutional investors clearly outstrips the
supply. This is one of the prime reasons for
these stocks trading at such seemingly inflated
P/E ratios. Of the six water stocks covered by
Value Line, the P/E's range from a low of 24.8,
to a high of 38.8, with the average being 32.4.
Essential Utilities is the only equity with a
P/E below 30, mostly because of its gas utility
operations.10
Q PLEASE DESCRIBE UTILITY STOCK PRICE PERFORMANCE
OVER THE LAST SEVERAL YEARS.
A Figure 4 below, shows the utility stock price
performance compared to overall market.

(Chart in hard copy of transcript)
Utility stocks have not exhibited the higher volatility
as the S&P 500 and have maintained strong valuation
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relative to overall market performance. In fact, they
had a slightly higher stock price return than the S&P 500
(7.81% vs 7.08%, respectively) in the last quarter of
2022.
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__________________
10Value Line Investment Survey, Water Utility Industry, January 6,
2023.
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Q HOW SHOULD THE COMMISSION USE THIS MARKET
INFORMATION IN ASSESSING A FAIR RETURN FOR VWID?
A Observable market evidence is quite clear that
capital market costs are near historically low levels.
Even as authorized returns on equity have fallen into the
mid-9% range, utilities continue to have access to large
amounts of external capital while still funding large
capital programs. Furthermore, utilities'
investment-grade credit ratings are stable and have
improved due, in part, to supportive regulatory
treatment. The Commission should carefully weigh all
this important observable market evidence in assessing a
fair return on equity for VWID.
IV.B. Federal Reserve's Impact on Cost of Capital
Q ARE THE MONETARY POLICY DECISIONS AND ACTIONS
OF THE FEDERAL RESERVE, AND OF THE FEDERAL RESERVE
SYSTEM'S ("FRS") FEDERAL OPEN MARKET COMMITTEE ("FOMC"),
KNOWN TO MARKET PARTICIPANTS, AND IS IT REASONABLE TO
BELIEVE THOSE DECISIONS AND ACTIONS ARE REFLECTED IN THE
MARKET'S VALUATION OF BOTH DEBT AND EQUITY SECURITIES?
A Yes. The Federal Reserve has been transparent
on its efforts to support the economy to achieve maximum
employment, and to manage long-term inflation to around a
2% level. The Federal Reserve, in a February 1, 2023
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press release, noted that recent indicators point to
modest growth in spending and production, while job gains
have been robust and the unemployment rate has remained
low. Meanwhile inflation has moderated but remains
elevated. The Federal Reserve also noted that Russia's
war against Ukraine is causing tremendous human and
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economic hardship and is contributing to elevated global
uncertainty. The Federal Reserve noted that it is highly
attentive to inflation risk.11
With this as a backdrop, the Federal Reserve
announced it raised the target range of the Federal Funds
Rate ("FFR") to 4.75%, and that it anticipates ongoing
increases to the FFR to achieve the target 2.0% inflation
rate. The Federal Reserve also stated that it will
continue to reduce its holding of Treasury securities,
agency debt securities and agency mortgage-backed
securities, as outlined in the Size of The Federal
Reserve Balance Sheet statement issued in May 2022. In
that statement, the Federal Reserve outlined its
intention to reduce the Federal Reserve's securities
holdings over time in a predictable manner primarily by
gradually adjusting the amounts reinvested of principal
payments received from securities holdings without
disrupting markets.12 On February 1, 2023, the Federal
Reserve reiterated its strong commitment to returning
inflation to the 2% rate objective.13
The trend in the Federal Reserve's monetary
actions on the Federal Funds Rate is shown below in
Figure 5.
__________________
11Federal Reserve Press Release, February 1, 2023.
12Federal Reserve Balance Sheet Developments, May 2022.
13Federal Reserve Press Release, February 1, 2023.
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(Chart in hard copy of transcript)
As shown in Figure 5, the Federal Reserve's recent
increase to the Federal Funds Rate, currently at a 4.50%
to 4.75% range, resulted in a higher Federal Funds Rate
than the rate prior to the economic effects of the
worldwide pandemic starting around March/April of 2020.
Q DO INDEPENDENT ECONOMISTS' OUTLOOKS FOR FUTURE
INTEREST RATES ALIGN WITH THE FEDERAL RESERVE'S MONETARY
POLICY?
A Yes. In its most recent report, Blue Chip
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Financial Forecasts ("BCFF") outlines consensus
economists' projections that reflect a rising risk of
inflation, and likely continued monetary tightening by
the Federal Reserve to fight inflation. BCFF indicated
the likelihood that the Federal Reserve would increase
the Federal
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Funds Rate in December but at a slower rate.
Importantly, the BCFF expects the FFR to reach its peak
in the second quarter of 2023 and gradually decline after
that."14 In fact, the increase of the FFR in December was
25 basis points lower than the last four increases of 75
basis points. As noted above, this trend was also
reflected in the most recent increase in February, an FFR
hike of only 25 basis points. The BCFF also noted that
there is a high probability of the economy slowing down,
possibly entering a recession, as illustrated by the
inverted yield curve. These outlooks and projections of
short-term Federal Funds Rate levels, long-term Treasury
bond 30-year maturities, and of the U.S. economic outlook
more generally suggest inflation will impact interest
rates over the intermediate term but is expected to
moderate over the long term. All of this is illustrated
in a comparison of interest rate and Gross Domestic
Product ("GDP") projections over time as developed in
Table 4 below.
__________________
14Blue Chip Financial Forecasts, January 1, 2023 at 2.
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(Table in hard copy of transcript)
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Further, the outlook for long-term interest rates in the
intermediate to longer term is also impacted by the
current Federal Reserve actions and the expectation that
eventually the Federal Reserve's monetary actions will
return to more normal levels. Long-term interest rate
projections are illustrated in Table 5 below.
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(Table in hard copy of transcript)
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As outlined in Table 5 above, the outlook for
increases in interest rates has jumped more recently
relative to 2020 but is still relatively modest. Indeed,
today's relatively low capital market costs are expected
to prevail at least in the short-term, i.e., over the
next five to ten years. While there may be some upward
movement in the cost of capital, that upward movement is
not expected to be significant. Importantly, the U.S.
economy has largely recovered from the severe effects of
the COVID-19 pandemic experienced in 2020. Capital
markets continue to perform in a rational and
economically logical manner at lower capital costs for
safe investment sectors such as the utility industry.
Moreover, while economists are projecting a modest
increase in interest rates relative to those published in
the past, these projections of increases in interest
rates are, at best, uncertain. But more importantly, the
projected increases are relatively modest compared to
prior projections and demonstrate that VWID's proposal to
increase its authorized return on equity in this case is
simply not reflective of current or short-term forecast
market capital costs.
IV.C. Market Sentiments and Utility Industry Outlook
Q PLEASE DESCRIBE THE CREDIT RATING OUTLOOK FOR
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REGULATED UTILITIES.
A The global economy has faced the extraordinary
challenges of COVID-19, which led to nearly a complete
shutdown of the global economy for a period of time.
This unprecedented event impacted all sectors and capital
markets. However, regulated utilities have generally
performed well during the COVID-19 pandemic with
consistent access to capital markets. More recently, the
regulated utilities
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have faced higher inflation, natural gas prices and
increasing recessionary pressure.
S&P currently has a negative outlook for the
regulated utility industry, because utility companies are
operating with minimum financial cushion from their
downgrade thresholds and their exposure to environmental,
social and governance risk. Specifically, in a recent
report, S&P states the following:
The industry outlook remains negative and has
been negative since early 2020. Over this
timeframe downgrades have outpaced upgrades by
more than 3:1 (see chart 8). While the
industry's percentage of negative outlooks has
decreased to about 15% from 35% at year-end
2020, prolonged inflationary risks or a
deeper-than-expected recession could harm the
industry's credit quality in 2023.
* * *
MAIN ASSUMPTIONS ABOUT 2023 AND BEYOND
1. Minimal financial cushion
More than 40% of the industry is strategically
managing their financial performance with only
minimal financial cushion, reflecting funds
from operations (FFO) to debt that is less than
100 basis points above the downgrade threshold.
Because utility cash flows are typically more
stable than those of many other industries,
this strategy of limiting excess credit
capacity works well under ordinary conditions.
However, when unexpected risks occur or base
case assumptions deviate from expectations, the
utility's credit quality can weaken, as we've
seen over the past three years.
2. Consistent access to the capital markets
Because of the industry's high capital spending
and consistent dividends, negative
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discretionary cashflow is regularly more than
$100 billion annually. To fund this large
deficit, the industry requires consistent
access to the capital markets. Rising interest
rates, decreasing equity prices, and inflation
could hamper consistent access to the capital
markets, potentially pressuring credit quality.
Typically, most of the funding of negative
discretionary cashflow is from new debt
issuance with the balance from common equity,
hybrid securities, and asset sales. For 2023,
we expect the industry will rely on a lower
percentage of common
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equity compared to prior years and instead rely
on a higher percentage of asset sales.
3. Energy transition
Over the past decade, the utility industry
reduced its reliance on coal-fired generation
by more than 50% and more than doubled its
generation from renewable energy. We expect
that by the end of the decade it will reduce
coal-fired generation by about another 50% and
will fully phase out coal by about 2040.
KEY RISKS OR OPPORTUNITIES AROUND THE BASELINE
1. Inflation reduction act (IRA)
While this legislation will benefit much of the
industry, there are aspects of the law that
will be detrimental to a few companies. The
key benefits are the expansion of tax credits
and the transferability of these credits. The
legislation provides long-term tax credits for
renewables, batteries, nuclear power, and
hydrogen. We expect the use of these credits
will significantly increase because of the
relatively easy transferability of these tax
credits. Conversely, the IRA also establishes
an alternative minimal tax, which we expect
will increase taxes for large transmission and
distribution holding companies, pressuring
their financial measures.
2. Recession
S&P Global's economists forecast the likelihood
of a 2023 recession at greater than 50%.
Should the recession be more severe than
expected, unemployment could rise faster than
expected, increasing the industry's
uncollectibles and pressuring its financial
measures.
3. Affordability of customer bill
Customer bills may become less affordable
because of rising commodity prices, interest
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rates, inflation, and capital spending. During
2022, Henry Hub natural gas prices, the U.S.
benchmark, peaked at about $9 per mmBTU.
Although prices have since retreated to about
$4/mmBTU and the forward curve reflects
$3.50-$4.50/mmBTU, they remain substantially
higher than preinflation levels, pressuring the
customer bill. While we estimate the
industry's average electric bill represents
only about 2.5% of after-tax household income,
sharp increases and bill volatility often
results in increasing customer dissatisfaction
that
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can ultimately heighten regulatory scrutiny and
constrain the industry's ability to effectively
manage regulatory risk.15
More recently, Moody's Investors Service ("Moody's")
changed the industry outlook to "Negative."
Specifically, Moody's states:
>> We have revised our outlook on the US
regulated utilities sector to negative from
stable. We changed the outlook because of
increasingly challenging business and
financial conditions stemming from higher
natural gas prices, inflation and rising
interest rates. These developments raise
residential customer affordability issues,
increasing the level of uncertainty with
regard to the timely recovery of costs for
fuel and purchased power, as well as for
rate cases more broadly.
* * *
>> What could change our outlook: The outlook
could return to stable if the sector's
regulatory support remains intact, natural
gas prices settle at a level where most
utilities are able to fully recover fuel
and purchased power costs without a delay
beyond 12 months, overall inflation
moderates, interest rates stabilize and/or
the sector's aggregate (FFO)-to-debt ratio
remains between 14% to 15%. We could
change our outlook to positive if utility
regulation turns broadly more credit
supportive resulting in timelier cash flow
recovery or we expect the sector's
aggregate (FFO)-to-debt ratio to rise above
17% on a sustained basis.16
Fitch Ratings ("Fitch") states the following:
The sector outlook for North American
Utilities, Power and Gas in 2022 is neutral,
according to Fitch Ratings.
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Approximately 81% of rated entities in the
sector have Stable Rating Outlooks based on an
expectation that retail electricity sales will
continue to strengthen and the regulatory
environment will remain supportive.
Key rating concerns include high natural gas
prices, which will increase the fuel and
purchased power costs for utilities and will be
directly passed through to customers. Elevated
capex, recovery of storm restoration costs and
recovery of deferred coronavirus expenses will
compound the pressure on customer
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15S&P Global Ratings: "Industry Top Trends: North America Regulated
Utilities," January 23, 2023, at 4. (emphasis added).
16Moody's Investors Service Outlook: "Regulated Electric and Gas
Utilities - US; 2023 Outlook - Negative on higher natural gas prices,
inflation and rising interest rates," November 10, 2022 at 1
(emphasis added).
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bills. Declining O&M costs due to cost control
initiatives and the ongoing energy transition
to lower cost renewables should provide some
offset.17
As outlined above, S&P, Moody's and Fitch all are
concerned about utilities' ability to maintain rates
which their customers can afford to pay and note that
cost recovery is increasingly becoming a concern to
credit rating agencies. As such, the Commission should
carefully weigh the evidence in determining an
appropriate and fair overall rate of return for VWID in
this case particularly, in order to ensure that VWID's
rates are managed in a manner to minimize cost increases
and maintain the most competitive rate structure possible
for this utility. Maintaining competitive rates will
support the economic strength of VWID's service
territory, and make its rates more affordable for its
customers, which in turn will support stronger credit
standing and financial integrity for VWID.
Q HOW DID YOU USE THIS OBSERVABLE MARKET DATA IN
FORMING YOUR RECOMMENDED RETURN ON EQUITY AND OVERALL
RATE OF RETURN FOR VWID?
A Generally, authorized returns on equity, credit
standing, and access to capital have been quite robust
for utilities over the last several years. The COVID-19
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pandemic has created challenges for the U.S. economy as a
whole, including utility companies. However, the U.S.
economy has largely recovered and utilities have mostly
weathered the economic downturn caused by the pandemic.
More recently, regulated utilities are faced with higher
inflation and increased interest rates. Even so, the
Federal Reserve has expressed its commitment, and taken
measures, to restore inflation to its target of 2.0%. In
the meantime, it is critical
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__________________
17Fitch Ratings: "Neutral Outlook for North American Utilities, Power
& Gas in 2022," December 9, 2021 at 1-2. (emphasis added).
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that the Commission ensure that rates are increased no
more than necessary to provide fair compensation and
maintain financial integrity and be especially concerned
about rate impacts on the service area economies that are
severely constrained due to current economic conditions.
IV.D. VWID'S Investment Risk
Q PLEASE DESCRIBE THE MARKET'S ASSESSMENT OF THE
INVESTMENT RISK OF VWID.
A VWID does not raise capital on its own and does
not have its own credit rating. Rather, 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. VUR is currently not rated by Moody's. However,
its current corporate bond rating from S&P is A.18 The
Company's credit outlook from S&P is "Stable."
Specifically, S&P states:
Rating Action Overview
·Veolia Environment S.A. (Veolia) acquired Suez
S.A., fully integrating its North American
operations, including Veolia Utility Resources LLC
(VUR) (formerly Suez Water Resources LLC) and its
immediate holding company, Veolia Utility Parent,
Inc (formerly Suez Utility Holdings Inc).
·As part of this acquisition, Suez S.A. did not
exercise any drag-along rights to bring minority
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shareholder PGGM into the sales process for Veolia
Utility Parent, Inc. (VUPI). Furthermore, PGGM,
the 20% minority shareholder of Veolia Utility
Parent, Inc., has maintained its ownership
interest. We anticipate no changes to the
insulating measures currently in place for the
foreseeable future.
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__________________
18Walker Direct Testimony at 28.
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·As such, we affirmed the ratings, including the
'A' issuer credit rating on Veolia Utility
Resources LLC. The outlook is stable.
·The stable outlook on VUR reflects our stable
outlook on Veolia as well as our view of VUR's
low-risk, rate-regulated water and wastewater
utility operations. Furthermore, the outlook
reflects our expectation that the insulating
measures will remain in place for the foreseeable
future and remain adequate for us to rate VUR
higher than Veolia. We also expect that VUR will
continue to reach constructive regulatory outcomes
and avoid any substantial rise in business risk.
Our base case forecast has VUR and VUPI
maintaining adjusted funds from operations (FFO)
to debt of about 13%-15% over the next few
years.19
IV.E. VWID's Proposed Capital Structure
Q WHAT IS THE COMPANY'S PROPOSED CAPITAL
STRUCTURE?
A VWID witness Mr. Walker also sponsors the
Company's proposed capital structure, which is shown
below in Table 6.
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(Table in hard copy of transcript)

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__________________
19Standard & Poor's RatingsDirect®: "Veolia Utility Resources LLC
Ratings Affirmed After Acquisition By Veolia Environnement; Outlook
Stable," May 5, 2022, at 1, emphasis added.
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IV.F. Embedded Cost of Debt
Q WHAT IS VWID'S EMBEDDED COST OF LONG-TERM DEBT?
A VWID is proposing an embedded cost of long-term
debt of 3.99% as developed on the Company's Exhibit No.
6. I have used VWID's proposed embedded cost of
long-term debt in my calculation of an overall weighted
cost of capital.
V. RETURN ON EQUITY
Q PLEASE DESCRIBE WHAT IS MEANT BY A "UTILITY'S
COST OF COMMON EQUITY."
A A utility's cost of common equity is the
expected return that investors require on an investment
in the utility. Investors expect to earn their required
return from receiving dividends and through stock price
appreciation.
Q PLEASE DESCRIBE THE FRAMEWORK FOR DETERMINING A
REGULATED UTILITY'S COST OF COMMON EQUITY.
A In general, determining a fair cost of common
equity for a regulated utility has been framed by two
hallmark decisions of the U.S. Supreme Court: Bluefield
Water Works & Improvement Co. v. Pub. Serv. Comm'n of W.
Va., 262 U.S. 679 (1923) and Fed. Power Comm'n v. Hope
Natural Gas Co., 320 U.S. 591 (1944). In these
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decisions, the Supreme Court found that just compensation
depends on many circumstances and must be determined by
fair and enlightened judgments based on relevant facts.
The Court found that a utility is entitled to have the
opportunity to earn a return on its property devoted to
the convenience of the public that is generally
consistent with the same returns available in other
investments of corresponding risk. The Court continued
that the utility has no
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constitutional rights to profits such as those realized
or anticipated in highly profitable enterprises or
speculative ventures, and defined the ratepayer/investor
balance as follows:
The return should be reasonably sufficient to
assure confidence in the financial soundness of
the utility and should be adequate, under
efficient and economical management, to
maintain and support its credit and enable it
to raise the money necessary for the proper
discharge of its public duties.20
As such, a fair rate of return is based on the
expectation that the utility's costs reflect efficient
and economical management, and the return will support
its credit standing and access to capital, without being
in excess of this level. From these standards, rates to
customers will be just and reasonable, and under economic
management, compensation to the utility will be fair and
support financial integrity and credit standing.
V.A. Risk Proxy Group
Q PLEASE DESCRIBE HOW YOU IDENTIFIED PROXY
UTILITY GROUPS THAT COULD BE USED TO ESTIMATE VWID'S
CURRENT MARKET COST OF EQUITY.
A I relied on the same water utility proxy group
developed by VWID witness Mr. Walker with the exception
of York Water Company, which is no longer covered by
Value Line.
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In addition, I also developed a gas utility proxy
group comparable to VWID. My gas utility proxy group was
developed by starting with the gas companies followed by
Value Line. In developing my gas utility proxy group, I
excluded South Jersey Industries ("SJI") because, in
February 2022, SJI agreed to be acquired by an
Infrastructure Investment Fund (JPMorgan Chase), which
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20Bluefield, 262 U.S. 679, 693 (1923), emphasis added.
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significantly increased its stock price. I also excluded
Chesapeake Utilities Corporation because it is not rated
by S&P or Moody's.
Q WHY DID YOU RELY ON GAS UTILITIES AS A PROXY
GROUP IN ESTIMATING VWID'S COST OF EQUITY?
A I relied on a gas utility proxy group along
with the water utility proxy group to better measure
VWID's cost of equity. This was necessary for several
reasons. First, gas utilities' securities are more
widely followed than are water utility stocks, and
therefore the estimated cost of equity from a gas utility
proxy group provides a more robust estimate of VWID's
current market cost of equity. Second, the asset
capitalization and operations of water and gas utilities
are very similar. Both utility groups' operations are
dependent on large main investment and operations,
infrastructure replacement and upgrades, and reliability
and safety compliance with state, local and federal
regulations. The two groups together produce a better
investment risk proxy than only a water utility proxy
group.
For these reasons, I believe these two proxy groups
are reasonable to estimate the investment risk of VWID.
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Q WHY IS IT APPROPRIATE TO EXCLUDE COMPANIES
WHICH ARE INVOLVED IN MERGER AND ACQUISITION ("M&A")
ACTIVITY FROM THE PROXY GROUPS?
A Companies that are involved in M&A or
divestitures activities have market valuations that may
not accurately reflect the stand-alone valuation of the
company, but rather may anticipate enhanced valuation
from the proposed M&A transaction. Therefore, removing
them from the proxy group is necessary
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because the resulting market-based return analyses on
these specific companies can be distorted and/or would
simply be unreliable.
Q WHY IS IT APPROPRIATE TO EXCLUDE COMPANIES THAT
DO NOT HAVE A BOND RATING FROM S&P OR MOODY'S?
A Credit rating agencies undertake a detailed
assessment of a company's business and financial risk in
awarding a bond rating. This bond rating is available to
public capital market participants and is considered an
independent assessment of the investment risk of the
subject company. While a bond rating generally assesses
the credit strength of the company, it is useful in
determining the predictability and strength of the
company's cash flows to meet its financial obligations
including cash needed to meet common equity shareholders'
investment return outlooks. For these reasons, credit
ratings from S&P and Moody's are information that is
available to the investment community to assess the
overall investment risk of the underlying company.
Because Chesapeake Utilities does not have a bond
rating from S&P or Moody's, it is not possible to rely on
independent market participants' assessment of its
investment risk in comparison to VWID, or VUR.
Therefore, I excluded this company from the proxy group.
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Q PLEASE DESCRIBE WHY YOU BELIEVE YOUR WATER
PROXY GROUP IS REASONABLY COMPARABLE IN INVESTMENT RISK
TO VWID.
A My water proxy group is shown in Exhibit No.
403. The water proxy group has an average credit rating
from S&P of A, which is identical to VUR's S&P rating.21
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21Walker Direct Testimony at 28.
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The water proxy group has an average Moody's credit
rating of Baa1. However, VUR does not have a credit
rating from Moody's.
The water proxy group has an average common equity
ratio of 54.8% from S&P (including short-term debt) and a
48.4% equity ratio from Value Line (excluding short-term
debt). VWID's proposed equity ratio of 55.6% is
significantly higher than that of the water proxy group
average of 48.4%.
Q PLEASE DESCRIBE WHY YOU BELIEVE YOUR GAS PROXY
GROUP IS REASONABLY COMPARABLE IN INVESTMENT RISK TO
VWID.
A My gas proxy group is also shown in Exhibit No.
403. The gas proxy group has an average credit rating
from S&P of A-, which is a notch lower than VUR's S&P
rating of A. The gas proxy has an average Moody's credit
rating of A3.
My gas proxy group has an average common equity
ratio of 38.0% from S&P (including short-term debt) and a
44.3% equity ratio from Value Line (excluding short-term
debt). VWID's equity ratio of 55.6% is again
significantly higher than that of the gas proxy group
average of 44.3%.
Therefore, my proxy groups produce return on
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equity estimates that are very conservative.
V.B. DCF Model
Q PLEASE DESCRIBE THE DCF MODEL.
A The DCF model posits that a stock price is
valued by summing the present value of expected future
cash flows discounted at the investor's required rate of
return or cost of capital. This model is expressed
mathematically as follows:
(Equation 1 in hard copy of transcript)
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P0 = Current stock price
D = Dividends in periods 1 - infinity
K = Investor's required return
This model can be rearranged in order to estimate
the discount rate or investor-required return, known as
"K." If it is reasonable to assume that earnings and
dividends will grow at a constant rate, then Equation 1
can be rearranged as follows:
K = D1/P0 + G (Equation 2)
K = Investor's required return
D1 = Dividend in first year
P0 = Current stock price
G = Expected constant dividend growth rate
Equation 2 is referred to as the annual "constant
growth" DCF model.
Q PLEASE DESCRIBE THE INPUTS TO YOUR CONSTANT
GROWTH DCF MODEL.
A As shown in Equation 2 above, the DCF model
requires a current stock price, expected dividend, and
expected growth rate in dividends.
Q WHAT STOCK PRICE DID YOU USE IN YOUR CONSTANT
GROWTH DCF MODEL?
A I relied on the average of the weekly high and
low stock prices of the utilities in the proxy group over
a 13-week period ending on January 20, 2023. An average
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stock price is less susceptible to market price
variations than a price at a single point in time.
Therefore, an average stock price is less susceptible to
aberrant market price movements, which may not reflect
the stock's long term value.
A 13-week average stock price reflects a period that
is still short enough to contain data that reasonably
reflects current market expectations, but the
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period is not so short as to be susceptible to market
price variations that may not reflect the stock's long
term value. In my judgment, a 13 week average stock
price is a reasonable balance between the need to reflect
current market expectations and the need to capture
sufficient data to smooth out aberrant market movements.
Q WHAT DIVIDEND DID YOU USE IN YOUR CONSTANT
GROWTH DCF MODEL?
A I used the most recently paid quarterly
dividend as reported in Value Line.22 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).
Q WHAT DIVIDEND GROWTH RATES DID YOU USE IN YOUR
CONSTANT GROWTH DCF MODEL?
A There are several methods that can be used to
estimate the expected growth in dividends. However,
regardless of the method, to determine the
market-required return on common equity, one must attempt
to estimate investors' consensus about what the dividend,
or earnings growth rate, will be and not what an
individual investor or analyst may use to make individual
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investment decisions.
As predictors of future returns, securities
analysts' growth estimates have been shown to be more
accurate than growth rates derived from historical
data.23 That is, assuming the market generally makes
rational investment decisions, analysts' growth
projections are more likely to influence investors'
decisions,
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22The Value Line Investment Survey, November 25, 2022 and January 25,
2023.
23See, e.g., David Gordon, Myron Gordon & Lawrence Gould, "Choice
Among Methods of Estimating Share Yield," The Journal of Portfolio
Management, Spring 1989.
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which are captured in observable stock prices, than
growth rates derived only from historical data.
For my constant growth DCF analysis, I have relied
on a consensus, or mean, of professional securities
analysts' earnings growth estimates as a proxy for
investor consensus dividend growth rate expectations. I
used the average of analysts' growth rate estimates from
three sources: Zacks, MI, and Yahoo! Finance. All such
projections were available on January 20, 2023, and all
were reported online.
Each consensus growth rate projection is based on a
survey of securities analysts. There is no clear
evidence whether a particular analyst is most influential
on general market investors. Therefore, a single
analyst's projection does not as reliably predict
consensus investor outlooks as does a consensus of market
analysts' projections. The consensus estimate is a
simple arithmetic average, or mean, of surveyed analysts'
earnings growth forecasts. A simple average of the
growth forecasts gives equal weight to all surveyed
analysts' projections. Therefore, a simple average, or
arithmetic mean, of analyst forecasts is a good proxy for
market consensus expectations.
Q WHAT ARE THE GROWTH RATES YOU USED IN YOUR
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CONSTANT GROWTH DCF MODEL?
A The growth rates I used in my DCF analysis are
shown in Exhibit No. 404. The average growth rate for my
water proxy group is 6.69%. The average growth rate for
my gas proxy group is 5.73%.
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Q WHAT ARE THE RESULTS OF YOUR CONSTANT GROWTH
DCF MODEL?
A As shown in Exhibit No. 405, the average and
median constant growth DCF returns for my water proxy
group for the 13-week analysis are 8.62% and 9.49%,
respectively. The average and median constant growth DCF
returns for my gas proxy group for the 13-week analysis
are 9.41% and 9.00%, respectively.
Q DO YOU HAVE ANY COMMENTS ON THE RESULTS OF YOUR
CONSTANT GROWTH DCF ANALYSIS?
A Yes. The constant growth DCF analysis for my
water and gas proxy groups is based on an average long
term sustainable growth rates of 6.69% and 5.73%,
respectively. The three- to five-year growth rate is
higher than my estimate of a maximum long-term
sustainable growth rate of 4.00%.
Q HOW DID YOU ESTIMATE A MAXIMUM LONG-TERM
SUSTAINABLE GROWTH RATE?
A The long-term sustainable growth rate for a
utility stock cannot exceed the growth rate of the
economy in which it sells its goods and services. The
long-term maximum sustainable growth rate for a utility
investment is, accordingly, best proxied by the projected
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long-term GDP growth rate as that reflects the projected
long-term growth rate of the economy as a whole. While
growth rates on shorter periods can exceed the GDP growth
rate, those short-term growth periods are likely followed
by other periods where the growth rate is below the GDP.
On average over long periods of time, the growth rate is
most accurately approximated by the long term growth rate
outlooks of the U.S. GDP.
Blue Chip Financial Forecasts projects that over the
next 5 and 10 years, the U.S. nominal GDP will grow at an
annual rate of approximately 4.0%. These
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GDP growth projections reflect a real growth outlook of
around 1.9% and an inflation outlook of around 2.1% going
forward. As such, the average nominal growth rate over
the next 5 to 10 years is around 4.0%, which I believe is
a reasonable proxy of long-term sustainable growth.24
Q IS THERE INDEPENDENT AUTHORITATIVE SUPPORT FOR
USING LONG-TERM GDP GROWTH AS A MAXIMUM SUSTAINABLE
GROWTH RATE?
A Yes. In my multi-stage growth DCF analysis, I
discuss academic and investment practitioner support for
using the projected long-term GDP growth outlook as a
maximum sustainable growth rate projection. Using the
long-term GDP growth rate, however, as a conservative
projection for the maximum sustainable growth rate is
logical, and is generally consistent with academic and
economic practitioner accepted practices.
V.C. Sustainable Growth DCF
Q PLEASE DESCRIBE HOW YOU ESTIMATED A SUSTAINABLE
LONG TERM GROWTH RATE FOR YOUR SUSTAINABLE GROWTH DCF
MODEL.
A A sustainable growth rate is based on the
percentage of the utility's earnings that is retained and
reinvested in utility plant and equipment. These
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reinvested earnings increase the earnings base (rate
base). Earnings grow when plant funded by reinvested
earnings is put into service, and the utility is allowed
to earn its authorized return on such additional rate
base investment.
The internal growth methodology is tied to the
percentage of earnings retained by the utility and not
paid out as dividends. The earnings retention ratio
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24Blue Chip Financial Forecasts, December 2, 2022, at 14.
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is 1 minus the dividend payout ratio. As the payout
ratio declines, the earnings retention ratio increases.
An increased earnings retention ratio will fuel stronger
growth because the business funds more investments with
retained earnings.
The payout ratios of the proxy group are shown in my
Exhibit No. 406. These dividend payout ratios and
earnings retention ratios then can be used to develop a
sustainable long-term earnings retention growth rate. A
sustainable long term earnings retention ratio will help
gauge whether analysts' current three- to five-year
growth rate projections can be sustained over an
indefinite period of time.
The data used to estimate the long-term sustainable
growth rate is based on VWID's current market-to-book
ratio and on Value Line's three- to five-year projections
of earnings, dividends, earned returns on book equity,
and stock issuances.
As shown in Exhibit No. 407, the average sustainable
growth rate using this internal growth rate model is
5.55% for my water proxy group and 5.41% for my gas proxy
group.
Q WHAT IS THE DCF ESTIMATE USING THESE
SUSTAINABLE LONG-TERM GROWTH RATES?
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A A DCF estimate based on these sustainable
growth rates is developed in Exhibit No. 408. As shown
there, the sustainable growth DCF analysis produces water
proxy group average and median DCF results for the
13-week period of 7.45% and 7.50%, respectively. The
average and median DCF results for my gas proxy group are
9.08% and 9.30%, respectively.
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V.D. Multi-Stage Growth DCF Model
Q HAVE YOU CONDUCTED ANY OTHER DCF STUDIES?
A Yes. My first constant growth DCF is based on
consensus analysts' growth rate projections so it is a
reasonable reflection of rational investment expectations
over the next three to five years. The limitation on
this constant growth DCF model is that it cannot reflect
a rational expectation that a period of high or low
short-term growth can be followed by a change in growth
to a rate that better reflects long term sustainable
growth. Therefore, I performed a multi-stage growth DCF
analysis to reflect this outlook of changing growth
expectations.
Q WHY DO YOU BELIEVE GROWTH RATES CAN CHANGE OVER
TIME?
A Analyst-projected growth rates over the next
three to five years will change as utility earnings
growth outlooks change. Utility companies go through
cycles in making investments in their systems. When
utility companies are making large investments, their
rate base grows rapidly, which in turn accelerates
earnings growth. Once a major construction cycle is
completed or levels off, growth in the utility rate base
slows and its earnings growth slows from an abnormally
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high three- to five-year rate to a lower sustainable
growth rate.
As major construction cycles extend over longer
periods of time, even with an accelerated construction
program, the growth rate of the utility will slow simply
because the pace of rate base growth will slow and
because the utility has limited human and capital
resources available to expand its construction program.
Therefore, the three- to five year growth rate projection
should only be used as a long-term sustainable growth
rate in concert with a reasonable, informed judgment as
to whether it considers the current market environment,
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the industry, and whether the three- to five-year growth
outlook is actually sustainable.
Q PLEASE DESCRIBE YOUR MULTI-STAGE GROWTH DCF
MODEL.
A The multi-stage growth DCF model reflects the
possibility of non-constant growth for a company over
time. The multi-stage growth DCF model reflects three
growth periods: (1) a short-term growth period consisting
of the first five years; (2) a transition period,
consisting of the next five years (6 through 10); and (3)
a long term growth period starting in year 11 through
perpetuity.
For the short-term growth period, I relied on the
consensus analysts' growth projections I used above in my
constant growth DCF model. For the transition period,
the growth rates were reduced or increased by an equal
factor reflecting the difference between the analysts'
growth rates and the long-term sustainable growth rate.
For 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.
Q WHY IS THE GDP GROWTH PROJECTION A REASONABLE
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PROXY FOR THE MAXIMUM SUSTAINABLE LONG-TERM GROWTH RATE?
A Utilities cannot indefinitely sustain a growth
rate that exceeds the growth rate of the economy in which
they sell services. Utilities' earnings/dividend growth
are created by increased utility investment or rate base.
Such investment, in turn, is driven by service area
economic growth and demand for utility service. In other
words, utilities invest in plant to meet sales demand
growth. Sales growth, in turn, is tied to economic
growth in their service areas.
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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 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.
Q IS THERE RESEARCH THAT SUPPORTS YOUR POSITION
THAT, OVER THE LONG TERM, A COMPANY'S EARNINGS AND
DIVIDENDS CANNOT GROW AT A RATE GREATER THAN THE GROWTH
OF THE U.S. GDP?
A Yes. This concept is supported in published
analyst literature and academic work. Specifically, in
"Fundamentals of Financial Management," a textbook
published by Eugene Brigham and Joel F. Houston, the
authors state:
The constant growth model is most appropriate
for mature companies with a stable history of
growth and stable future expectations.
Expected growth rates vary somewhat among
companies, but dividends for mature firms are
often expected to grow in the future at about
the same rate as nominal gross domestic product
(real GDP plus inflation).25
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The use of the economic growth rate is also
supported by investment practitioners as outlined as
follows:
Estimating Growth Rates
One of the advantages of a three-stage
discounted cash flow model is that it fits with
life cycle theories in regards to company
growth. In these theories, companies are
assumed to have a life cycle with varying
growth characteristics. Typically, the
potential for extraordinary growth in the near
term eases over time and eventually growth
slows to a more stable level.
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25"Fundamentals of Financial Management," Eugene F. Brigham & Joel F.
Houston, Eleventh Edition 2007, Thomson South-Western, a Division of
Thomson Corporation at 298, emphasis added.
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* * *
Another approach to estimating long-term growth
rates is to focus on estimating the overall
economic growth rate. Again, this is the
approach used in the Ibbotson Cost of Capital
Yearbook. To obtain the economic growth rate,
a forecast is made of the growth rate's
component parts. Expected growth can be broken
into two main parts: expected inflation and
expected real growth. By analyzing these
components separately, it is easier to see the
factors that drive growth.26
Q ARE THERE ACTUAL INVESTMENT RESULTS THAT
SUPPORT THE THEORY THAT THE GROWTH ON STOCK INVESTMENTS
WILL NOT EXCEED THE NOMINAL GROWTH OF THE U.S. GDP?
A Yes. This is evident by a comparison of the
compound annual growth of the U.S. GDP to the geometric
growth of the U.S. stock market. Kroll measures the
historical geometric growth of the U.S. stock market over
the period 1926-2021 to be approximately 6.4%.27 During
this same time period, the U.S. nominal compound annual
growth of the U.S. GDP was approximately 6.0%.28
As such, over the past 95 years, the geometric
average annual growth of the U.S. nominal GDP has been
slightly lower than, but comparable to, the average
annual growth of the U.S. stock market capital
appreciation. This historical relationship indicates
that the U.S. GDP growth outlook is a reasonable estimate
of the long-term sustainable growth of U.S. stock
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investments.
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__________________
26Morningstar, Inc., Ibbotson SBBI 2013 Valuation Yearbook at 51 and
52.
27Kroll, 2022 SBBI Yearbook at 145.
28U.S. Bureau of Economic Analysis, Table 1.1.5 Gross Domestic
Product, Revised May 26, 2022.
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Q WHAT IS THE GEOMETRIC AVERAGE AND WHY IS IT
APPROPRIATE TO USE THIS MEASURE TO COMPARE GDP GROWTH TO
CAPITAL APPRECIATION IN THE STOCK MARKET?
A The terms geometric average growth rate and
compound annual growth rate are used interchangeably.
The geometric annual growth rate is the calculated growth
rate, or return, that measures the magnitude of growth
from start to finish. The geometric average is best, and
most often, used as a measurement of performance or
growth over a long period of time.29 Because I am
comparing achieved growth in the stock market to achieved
growth in U.S. GDP over a long period of time, the
geometric average growth rate is most appropriate.
Q HOW DID YOU DETERMINE A LONG-TERM GROWTH RATE
THAT REFLECTS THE CURRENT CONSENSUS MARKET PARTICIPANT
OUTLOOK?
A I relied on the economic consensus of long-term
GDP growth projections. Blue Chip Financial Forecasts
publishes the consensus for GDP growth projections twice
a year. These consensus GDP growth outlooks are the best
available measure of the market's assessment of long-term
GDP growth because the analysts' projections reflect all
current outlooks for GDP. They are therefore likely the
most influential on investors' expectations of future
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growth outlooks. The consensus projections published GDP
growth rate outlook is 4.0% over the next 5 to 10
years.30
I propose to use the consensus for projected five
year average GDP growth rates of 4.0%, as published by
Blue Chip Financial Forecasts, as an
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29New Regulatory Finance, Roger Morin, PhD, at 133-134.
30Blue Chip Financial Forecasts, December 2, 2022, at p. 14.
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estimate of long term sustainable growth. Blue Chip
Financial Forecasts projections provide real GDP growth
projections of 1.9% and inflation of approximately 2.1%
over the next 5 to 10-year (2024-2033) period, resulting
in an average projected nominal annual GDP growth
projection of 4.0%.31 These GDP growth forecasts
represent the most likely views of market participants
because they are based on published economic consensus
projections.
Q DO YOU CONSIDER OTHER SOURCES OF PROJECTED
LONG-TERM GDP GROWTH?
A Yes, and these alternative sources corroborate
the consensus analysts' projections I relied on.
Various, commonly relied upon analysts' projections are
shown in Table 7 below.
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31Id.
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(Table in hard copy of transcript)
As shown in the table above, the real GDP and
inflation fall in the range of 1.6% to 2.2% and 2.1% to
2.4%, respectively. This results in a nominal GDP in the
range of 3.7% to 4.5%.
Therefore, the nominal GDP growth projections made
by these independent sources support my use of 4.0% as a
reasonable estimate of market participants' expectations
for long term GDP growth.
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Q WHAT STOCK PRICE, DIVIDEND, AND GROWTH RATES
DID YOU USE IN YOUR MULTI-STAGE GROWTH DCF ANALYSIS?
A I relied on the same 13-week average stock
prices and the most recent quarterly dividend payment
data discussed above. For stage one growth, I used the
consensus analysts' growth rate projections discussed
above in my constant growth DCF model. The first stage
covers the first five years, consistent with the time
horizon of the securities analysts' growth rate
projections. The second stage, or transition stage,
begins in year 6 and extends through year 10. The second
stage growth transitions the growth rate from the first
stage to the third stage using a straight linear trend.
For the third stage, or long term sustainable growth
stage, starting in year 11, I used a 4.00% long-term
sustainable growth rate based on the consensus
economists' long-term projected nominal GDP growth rate.
Q WHAT ARE THE RESULTS OF YOUR MULTI-STAGE GROWTH
DCF MODEL?
A As shown in Exhibit No. 410, the average and
median DCF returns on equity for my water proxy group
using the 13-week average stock price are 6.23% and
6.31%, respectively. The average and median DCF returns
on equity for my gas proxy group are 8.03% and 8.08%,
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respectively.
V.E. DCF Summary Results
Q PLEASE SUMMARIZE THE RESULTS FROM YOUR DCF
ANALYSES.
A The results from my DCF analyses are summarized
in Table 8 below:
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(Table in hard copy of transcript)
Based on the current market conditions, my DCF
studies indicate a fair return on equity for VWID in the
range of 8.60% to 9.50%, with an approximate midpoint of
9.00%.
V.F. Risk Premium Model
Q PLEASE DESCRIBE YOUR BOND YIELD PLUS RISK
PREMIUM MODEL.
A This model is based on the principle that
investors require a higher return to assume greater risk.
Common equity investments have greater risk than bonds
because bonds have more security of payment in bankruptcy
proceedings than common equity and the coupon payments on
bonds represent contractual obligations. In contrast,
companies are not required to pay dividends or guarantee
returns on common equity investments. Therefore, common
equity securities are considered to be riskier than bond
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securities.
This risk premium model is based on two estimates of
an equity risk premium. First, I quantify the difference
between regulatory commission-authorized returns on
common equity and contemporary U.S. Treasury bonds. The
difference between the authorized return on common equity
and the Treasury bond yield is the risk premium. I
estimated the risk premium on an annual basis for each
year from 1986 through September 2022. The authorized
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returns on equity were based on regulatory commission-
authorized returns for utility companies. Authorized
returns are typically based on expert witnesses'
estimates of the investor-required return at the time of
the proceeding.
The second equity risk premium estimate is based on
the difference between regulatory commission-authorized
returns on common equity and contemporary "A" rated
utility bond yields by Moody's. I selected the period
1986 through September 2022 because public utility stocks
consistently traded at a premium to book value during
that period. This is illustrated in Exhibit No. 411,
which shows the market to book ratio since 1986 for the
utility industry was consistently above a multiple of
1.0x. Over this period, an analyst can infer that
authorized returns on equity were sufficient to support
market prices that at least exceeded book value. This is
an indication that commission authorized returns on
common equity supported a utility's ability to issue
additional common stock without diluting existing shares.
It further demonstrates utilities were able to access
equity markets without a detrimental impact on current
shareholders.
Based on this analysis, as shown in Exhibit No. 412,
the average indicated gas equity risk premium over U.S.
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Treasury bond yields has been 5.64%. Since the risk
premium can vary depending upon market conditions and
changing investor risk perceptions, I believe using an
estimated range of risk premiums provides the best method
to measure the current return on common equity for a risk
premium methodology.
I incorporated five-year and ten-year rolling
average risk premiums over the study period to gauge the
variability over time of risk premiums. These rolling
average risk premiums mitigate the impact of anomalous
market conditions and skewed risk premiums over an entire
business cycle. As shown on my Exhibit No. 412, the
five-year rolling average gas risk premium over Treasury
bonds
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ranged from 4.17% to 7.17%, with an average of 5.61%.
The ten-year rolling average gas risk premium ranged from
4.30% to 6.92%, with an average of 5.60%.
As shown on my Exhibit No. 413, the average
indicated gas equity risk premium over contemporary "A"
rated Moody's utility bond yields was 4.28%. The
five-year rolling average gas risk premiums ranged from
2.80% to 5.97%, with an average of 4.26%. The ten year
rolling average gas risk premiums ranged from 3.11% to
5.75%, with an average of 4.23%.
Q DO YOU BELIEVE THAT THE TIME PERIOD USED TO
DERIVE THESE EQUITY RISK PREMIUM ESTIMATES IS APPROPRIATE
TO FORM ACCURATE CONCLUSIONS ABOUT CONTEMPORARY MARKET
CONDITIONS?
A Yes. Contemporary market conditions can change
during the period that rates determined in this
proceeding will be in effect. A relatively long period
of time where stock valuations reflect premiums to book
value indicates that the authorized returns on equity and
the corresponding equity risk premiums were supportive of
investors' return expectations and provided utilities
access to the equity markets under reasonable terms and
conditions. Further, this time period is long enough to
smooth abnormal market movement that might distort equity
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risk premiums. While market conditions and risk premiums
do vary over time, this historical time period is a
reasonable period to estimate contemporary risk premiums.
Alternatively, some studies, such as Duff & Phelps,
have recommended that the use of "actual achieved
investment return data" in a risk premium study should be
based on long historical time periods. The studies find
that achieved
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returns over short time periods may not reflect
investors' expected returns due to unexpected and
abnormal stock price performance. Short-term, abnormal
actual returns would be smoothed over time and the
achieved actual investment returns over long time periods
would approximate investors' expected returns.
Therefore, it is reasonable to assume that averages of
annual achieved returns over long time periods will
generally converge on the investors' expected returns.
My risk premium study is based on data that
inherently relied on investor expectations, not actual
investment returns, and, thus, need not encompass a very
long historical time period.
Q WHAT DOES CURRENT OBSERVABLE MARKET DATA
SUGGEST ABOUT INVESTOR PERCEPTIONS OF UTILITY
INVESTMENTS?
A The equity risk premium should reflect the
relative market perception of risk today in the utility
industry. I have gauged investor perceptions in utility
risk today in Exhibit No. 414, where I show the yield
spread between utility bonds and Treasury bonds over the
last 43 years. As shown in this attachment, the average
utility bond yield spreads over Treasury bonds for "A"
and "Baa" rated utility bonds for this historical period
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are 1.49% and 1.91%, respectively. The utility bond
yield spreads over Treasury bonds for "A" and "Baa" rated
utilities in 2022 were 1.60% and 1.91%, respectively.
The current 13-week average "A" rated utility bond
yield of 5.47% when compared to the current Treasury bond
yield of 3.81%, as shown in Exhibit No. 415, implies a
yield spread of 1.66%. This current utility bond yield
spread is higher than the 43-year average spread for "A"
rated utility bonds of 1.49%. The current spread for the
"Baa" rated utility bond yield of 1.95% is slightly
higher but comparable to the 43 year average spread of
1.91%.
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Q IS THERE OBSERVABLE MARKET EVIDENCE TO HELP
GAUGE MARKET RISK PREMIUMS?
A Yes. Market data illustrates how the market is
pricing investment risk and gauging the current demands
for returns based on securities of varying levels of
investment risk. This market evidence includes bond
yield spreads for different bond return ratings as
implied by the yield spreads for Treasury, corporate and
utility bonds. These spreads provide an indication of
the market's return requirement for securities of
different levels of investment risk and required risk
premiums.
Table 9 below summarizes the utility and corporate
bond spreads relative to Treasury bond yields.

(Table in hard copy of transcript)
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As outlined above, the observable market evidence
indicates that risk premiums are reasonably aligned with
long-term historical averages. As such, in comparison to
recent utility bond yields and Treasury bond yields, I
believe the most reasonable estimate of the current
market cost of equity should reflect an average
historical yield spread.
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In terms of utility stock yields over utility bond
yields, the risk premium appears to be returning to more
normal levels. As outlined on my Exhibit No. 402, page
4, stock yield spreads over A-rated utility bond yields
have expanded to around 1.0% from negative to very thin
spreads extending back to 2016. The same is true for
utility stock yield spreads over Baa-rated utility bonds.
Observable stock yield spreads over utility bond yields
indicate that risk premiums in the marketplace today more
reasonably align with normal risk premiums that have been
experienced over long historical periods.
Q WHAT IS YOUR RECOMMENDED RETURN FOR VWID BASED
ON YOUR RISK PREMIUM STUDY?
A I am recommending more weight be given to the
high-end risk premium estimates than the low-end. As
outlined above, I believe the current market is
reflecting high premiums for investing in securities of
greater levels of investment risk. Based on this
observation, I propose to be conservative in applying a
risk premium analysis. For these reasons, I will
recommend my high-end equity risk premium in forming a
return on equity in this proceeding.
For Treasury bond yields, I relied on the five-year
rolling average historical risk premium of 5.61% in
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combination with the forecasted Treasury bond yield.
Using a Treasury bond risk premium of 5.61% and a
projected 30-year Treasury bond yield of 3.80%32 produces
an indicated equity risk premium of 9.41% (5.61% +
3.80%).
A risk premium based on utility bond yields reflects
current observable bond yields. Current observable bond
yields may increase over time based on economists'
projections of changes in interest rates. However,
history indicates
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32Blue Chip Financial Forecasts, January 1, 2023 at 2.
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that economists typically overestimate increases in
interest rates. Therefore, current observable rates
should also be considered. With current observable
rates, I recommend using the five-year rolling average
risk premium estimate of 4.26%, which as shown on Exhibit
No. 413 with an A utility yield of 5.47% as shown on my
Exhibit No. 415, page 1, produces a risk premium return
on equity of 9.73% (4.26% + 5.47%).
Based on this methodology, my Treasury bond risk
premium and my utility bond risk premium indicate a
return in the range of 9.41% to 9.73%, with an
approximate midpoint of 9.60%.
V.G. Capital Asset Pricing Model ("CAPM")
Q PLEASE DESCRIBE THE CAPM.
A The CAPM method of analysis is based upon the
theory that the market-required rate of return for a
security is equal to the risk-free rate, plus a risk
premium associated with the specific security. This
relationship between risk and return can be expressed
mathematically as follows:
Ri = Rf + Bi x (Rm - Rf) where:
Ri = Required return for stock i
Rf =Risk-free rate
Rm = Expected return for the market
portfolio
Bi = Beta - Measure of the risk for stock
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The stock-specific risk term in the above equation
is beta. Beta represents the investment risk that cannot
be diversified away when the security is held in a
diversified portfolio. When stocks are held in a
diversified portfolio, stock-specific risks can be
eliminated by balancing the portfolio with securities
that react in the opposite direction to firm-specific
risk factors (e.g., business cycle, competition, product
mix, and production limitations).
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Risks that cannot be eliminated when held in a
diversified portfolio are non diversifiable risks.
Non-diversifiable risks are related to the market and
referred to as systematic risks. Risks that can be
eliminated by diversification are non systematic risks.
In a broad sense, systematic risks are market risks and
non systematic risks are business risks. The CAPM theory
suggests the market will not compensate investors for
assuming risks that can be diversified away. Therefore,
the only risk investors will be compensated for are
systematic, or non diversifiable, risks. The beta is a
measure of the systematic, or non diversifiable risks.
Q PLEASE DESCRIBE THE INPUTS TO YOUR CAPM.
A The CAPM requires an estimate of the market
risk-free rate, VWID's beta, and the market risk premium.
Q WHAT DID YOU USE AS AN ESTIMATE OF THE MARKET
RISK-FREE RATE?
A As previously noted, Blue Chip Financial
Forecasts' projected 30-year Treasury bond yield is
3.80%.33 The current 30-year Treasury bond yield is 3.81%
as shown in Exhibit No. 415.
Q WHY DID YOU USE LONG-TERM TREASURY BOND YIELDS
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AS AN ESTIMATE OF THE RISK-FREE RATE?
A Treasury securities are backed by the full
faith and credit of the United States government.
Therefore, long-term Treasury bonds are considered to
have negligible credit risk. Also, long-term Treasury
bonds have an investment
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33Id.
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horizon similar to that of common stock. As a result,
investor-anticipated long-run inflation expectations are
reflected in both common stock required returns and
long-term bond yields. Therefore, the nominal risk-free
rate (or expected inflation rate and real risk-free rate)
included in a long-term bond yield is a reasonable
estimate of the nominal risk-free rate included in common
stock returns.
Treasury bond yields, however, do include risk
premiums related to unanticipated future inflation and
interest rates. In this regard, a Treasury bond yield is
not a risk free rate. Risk premiums related to
unanticipated inflation and interest rates reflect
systematic market risks. Consequently, for companies
with betas less than 1.0, using the Treasury bond yield
as a proxy for the risk-free rate in the CAPM analysis
can produce an overstated estimate of the CAPM return.
Q WHAT BETA DID YOU USE IN YOUR ANALYSIS?
A As shown on my Exhibit No. 416, page 1, the
average beta of my water and gas proxy groups are 0.78
and 0.88, respectively.
I also reviewed the long-term trend of Value Line
betas reported for the proxy group companies, and the
Value Line water and gas industries. As shown on Exhibit
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No. 416, page 2, the proxy group betas have generally
ranged between 0.65 and 0.75 prior to the elevated betas
published after the COVID-19 pandemic commenced. The
historical variability in the proxy group Value Line
betas is similar to the historical variability in the
water and gas regulated utility industry betas followed
by Value Line. This is shown on Exhibit No. 416, page 3.
On this schedule, similar to the proxy group companies, I
show the Value Line water and gas industry historical
beta estimates, which also indicate that the
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current beta is abnormally high, and the long-term
historical average beta of the proxy groups reasonably
aligns with that of the entire industry.
The average normalized historical beta estimates are
0.72 and 0.77 for my water and gas proxy groups,
respectively. Thus, the current beta estimates of 0.78
(water) and 0.88 (gas) are well above the normalized
historical beta.
Q HAVE YOU PERFORMED ANY STUDIES TO PROVE THAT
PUBLISHED VALUE LINE BETAS ARE ABNORMALLY HIGH AND DO NOT
ACCURATELY REFLECT INVESTMENT RISK OF VWID?
A Yes. Above I discuss beta variability based on
published Value Line information. However, using the S&P
500 utility index, relative to the New York Stock
Exchange, shows that beta estimates like those in Value
Line are skewed due to two extraordinary months within
the 60-month time period used to measure beta. The two
months that skew the betas are March and April of 2020,
the time period that coincides with the start of the
worldwide COVID-19 pandemic. Removing these two months
to derive a more normal level of beta has the effect of
reducing utility beta estimates from the very high levels
right now of around 0.90, down to more normalized betas
in the range of 0.65 to 0.75. This beta regression study
is summarized in Table 10 below.
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(Table in hard copy of transcript)
Based on this analysis, I reject placing significant
weight on Value Line published betas and instead rely on
more normalized historical betas to produce a fair
risk-adjusted return in this proceeding.
Q WHY IS IT NOT REASONABLE TO ESTIMATE A CAPM
RETURN ON A REGULATED UTILITY BASED ON BETA ESTIMATES
THAT ARE CLEARLY OUTLIERS FOR HISTORICAL AVERAGE BETAS?
A Utility company betas have increased from
around 0.65 to 0.75 up to a current level around 0.90
over the last two years. This increase in betas suggests
that utility companies' investment risks are increasing
relative to the overall general marketplace. However,
the outlook of increasing utility investment risk is
simply not supported by a review of other risk measures
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for utilities including: (a) current robust valuation
metrics of utilities as described above; (b) risk spreads
of utility stock yields relative to bond yields; (c)
sustained investment grade bond ratings for utility
companies, and (d) access to significant amount of
capital. Again, as shown on Exhibit No. 402, the
historically strong valuation metrics of regulated
utilities are particularly robust, indicating the market
is paying a premium for utility
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stocks. The fact that utility stocks are trading at a
premium is inconsistent with the notion that the market
perceives the utility industry's investment risk to be
increasing. It also shows that the market is not
demanding a higher rate of return to invest in these
securities. My conclusion is that the elevated betas for
utility stocks were skewed by the temporary effects of
the market events during the onset of the pandemic but
the beta impacts have returned to more normal levels as
the market recovered.
For these reasons, in performing my CAPM I used a
more normalized beta of 0.75 and market risk premium
factors in order to derive a CAPM return estimate in this
proceeding.
Q HOW DID YOU DERIVE YOUR MARKET RISK PREMIUM
ESTIMATE?
A I derived two market risk premium estimates: a
forward-looking estimate and one based on a long-term
historical average.
The forward-looking estimate was derived by
estimating the expected return on the market (as
represented by the S&P 500) and subtracting the risk-free
rate from this estimate. I estimated the expected return
on the S&P 500 by adding an expected inflation rate to
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the long-term historical arithmetic average real return
on the market. The real return on the market represents
the achieved return above the rate of inflation.
Kroll's 2022 SBBI Yearbook estimates the historical
arithmetic average real market return over the period
1926 to 2021 to be 9.2%.34 A current consensus for
projected inflation, as measured by the Consumer Price
Index, is 2.3%.35 Using these estimates, the expected
market return is 11.71%.36 The
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34Kroll, 2022 SBBI Yearbook at 146.
35Blue Chip Financial Forecasts, January 1, 2023 at 2.
36{(1 + 0.092)(1 + 0.023) - 1}*100.
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market risk premium then is the difference between the
11.71% expected market return and my 3.80% risk-free rate
estimate, or 7.91%, which I referred to as a normalized
market risk premium.
I also developed a current market risk premium based
on the difference between the expected return on the
market of 11.71% as described above and the current
30-year Treasury yield of 3.81% as shown on my Exhibit
No. 415, which produced a current market risk premium of
approximately 7.90%.
A historical estimate of the market risk premium was
also calculated by using data provided by Kroll in its
2022 SBBI Yearbook. Over the period 1926 through 2021,
the Kroll study estimated that the arithmetic average of
the achieved total return on the S&P 500 was 12.3%37 and
the total return on long term Treasury bonds was 6.0%.38
The indicated market risk premium is 6.3% (12.3% - 6.0% =
6.3%).
The long-term government bond yield of 6.0% occurred
during a period of inflation of approximately 3.0%, thus
implying a real return on long-term government bonds of
3.0%.
Q HOW DOES YOUR ESTIMATED MARKET RISK PREMIUM
RANGE COMPARE TO THAT ESTIMATED BY KROLL?
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A Kroll makes several estimates of a
forward-looking market risk premium based on actual
achieved data from the historical period of 1926 through
2021 as well as normalized data. Using this data, Kroll
estimates a market risk premium derived from the total
return on the securities that comprise the S&P 500, less
the income return on Treasury bonds. The total return
includes capital
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37Kroll, 2022 SBBI Yearbook at 145.
38Id.
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appreciation, dividend or coupon reinvestment returns,
and annual yields received from coupons and/or dividend
payments. The income return, in contrast, only reflects
the income return received from dividend payments or
coupon yields.
Kroll's range is based on several methodologies.
First, Kroll estimates a market risk premium of 7.46%
based on the difference between the total market return
on common stocks (S&P 500) less the income return on
20-year Treasury bond investments over the 1926-2021
period.39
Second, Kroll used the Ibbotson & Chen supply-side
model which produced a market risk premium estimate of
6.22%.40 Kroll explains that the historical market risk
premium based on the S&P 500 was influenced by an
abnormal expansion of P/E ratios relative to earnings and
dividend growth during the period, primarily over the
last 30 years. Kroll believes this abnormal P/E
expansion is not sustainable. In order to control for
the volatility of extraordinary events and their impacts
on P/E ratios, Kroll takes into consideration the
three-year average P/E ratio as well as the current P/E
ratio.41
Finally, Kroll develops its own recommended equity,
or market risk premium, by employing an analysis that
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takes into consideration a wide range of economic
information, multiple risk premium estimation
methodologies, and the current state of the economy by
observing measures such as the level of stock indices and
corporate spreads as indicators of perceived risk. Based
on this methodology, and utilizing the higher of a
"normalized" risk-free rate of 3.5%, Kroll concludes the
current expected, or forward-looking, market risk premium
is 5.5%, implying an expected return on the market of
9.0%. However, when the
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39Id. at 199
40Id. at 207-208.
41Id.
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current market risk-free rate exceeds the normalized
risk-free rate, Kroll recommends applying the current
20-year Treasury yield of approximately 3.8% as of
January 20, 2023. Currently, the 20-year Treasury yield
is above the normalized risk-free rate. Hence, based on
Kroll's methodology, the risk premium is 9.3%.42
Importantly, Kroll's market risk premiums are
measured over a 20-year Treasury bond. Because I am
relying on a projected 30-year Treasury bond yield, the
results of my CAPM analysis should be considered
conservative estimates for the cost of equity.
Q WHAT ARE THE RESULTS OF YOUR CAPM ANALYSIS?
A The current observable beta estimate for both
my water and gas proxy groups is approximately 0.83.
However, recognizing beta estimates are currently skewed,
the normalized beta estimate for both my water and gas
proxy groups is reasonably estimated using the average
historical beta estimate of approximately 0.75.
As shown on my Exhibit No. 417, using a current
market risk-free rate of 3.81% and a projected market
return of 11.71% produces a market risk premium of 7.90%.
When combined with the current beta of 0.83, this
indicates a CAPM return estimate of 10.36%.
Using a market return of 11.71%, with a projected
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risk-free rate of 3.80%, produces a market risk premium
of 7.91%. This market risk premium and risk-free rate
with a normalized utility beta of 0.75, indicates a CAPM
return of 9.71%.
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42Kroll, "Kroll Increases U.S. Normalized Risk-Free Rate from 3.0% to
3.5%, but Spot 20-Year U.S. Treasury Yield Preferred When Higher,"
June 16, 2022.
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As discussed above, the current elevated betas do
not reflect the low industry risk for VWID or the utility
industry as a whole. Therefore, I find a more reasonable
result using a CAPM study in this case would be to use a
normalized utility beta, which produces a return on
equity of approximately 9.70%.
V.H. Return on Equity Summary
Q BASED ON THE RESULTS OF YOUR RETURN ON COMMON
EQUITY ANALYSES DESCRIBED ABOVE, WHAT RETURN ON COMMON
EQUITY DO YOU RECOMMEND FOR VWID?
A Based on my analyses, I recommend VWID's
current market cost of equity be in the range of 9.00% to
9.70%, with a point estimate of 9.35%.
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(Table in hard copy of transcript)
My recommended return on common equity of 9.35%
falls within my range of 9.00% to 9.70%. The low-end of
my range is based on my DCF analyses, and the high-end is
based on my CAPM studies. My risk premium analysis falls
in this range.
My return on equity estimates reflect observable
market evidence, the impact of Federal Reserve policies
on current and expected long-term capital market costs,
an assessment of the current risk premium built into
current market securities, and a general assessment of
the current investment risk characteristics of the
regulated utility industry and the market's demand for
utility securities.
V.I. Financial Integrity
Q WILL YOUR RECOMMENDED OVERALL RATE OF RETURN
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SUPPORT AN INVESTMENT GRADE BOND RATING FOR VWID?
A Yes. I have reached this conclusion by
comparing the key credit rating financial ratios for VWID
at my proposed return on equity and VWID's recommended
capital structure to S&P's benchmark financial ratios
using S&P's new credit metric ranges.
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Q PLEASE DESCRIBE THE MOST RECENT S&P FINANCIAL
RATIO CREDIT METRIC METHODOLOGY.
A S&P publishes a matrix of financial ratios
corresponding to its assessment of the business risk of
utility companies and related bond ratings. On May 27,
2009, S&P expanded its matrix criteria by including
additional business and financial risk categories.43
Based on S&P's most recent credit matrix, the
business risk profile categories are "Excellent,"
"Strong," "Satisfactory," "Fair," "Weak," and
"Vulnerable." Most utilities have a business risk
profile of "Excellent" or "Strong."
The financial risk profile categories are "Minimal,"
"Modest," "Intermediate," "Significant," "Aggressive,"
and "Highly Leveraged." Most of the utilities have a
financial risk profile of "Aggressive." Based on the
most recent S&P report, VWID has an "Excellent" business
risk profile and an "Intermediate" financial risk profile
and falls in the "Low Volatility" benchmark tables.
Q PLEASE DESCRIBE S&P'S USE OF THE FINANCIAL
BENCHMARK RATIOS IN ITS CREDIT RATING REVIEW.
A S&P evaluates a utility's credit rating based
on an assessment of its financial and business risks. A
combination of financial and business risks equates to
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the overall assessment of VWID's total credit risk
exposure. On November 19, 2013, S&P updated its
methodology. In its update, S&P published a matrix of
financial ratios that defines the level of financial risk
as a function of the level of business risk.
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43S&P updated its 2008 credit metric guidelines in 2009, and
incorporated utility metric benchmarks with the general corporate
rating metrics. Standard & Poor's RatingsDirect: "Criteria
Methodology: Business Risk/Financial Risk Matrix Expanded," May 27,
2009.
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S&P publishes ranges for primary financial ratios
that it uses as guidance in its credit review for utility
companies. The two core financial ratio benchmarks it
relies on in its credit rating process include: (1) Debt
to Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA"); and (2) Funds From Operations
("FFO") to Total Debt.44
Q HOW DID YOU APPLY S&P'S FINANCIAL RATIOS TO
TEST THE REASONABLENESS OF YOUR RATE OF RETURN
RECOMMENDATIONS?
A I calculated each of S&P's financial ratios
based on VWID's cost of service for its regulated utility
operations in its Idaho service territory. While S&P
would normally look at total consolidated VWID financial
ratios in its credit review process, my investigation in
this proceeding is not the same as S&P's. I am
attempting to judge the reasonableness of my proposed
cost of capital for rate-setting in VWID's Idaho
regulated utility operations. Hence, I am attempting to
determine whether my proposed rate of return will in turn
support cash flow metrics, balance sheet strength, and
earnings that will support an investment grade bond
rating and VWID's financial integrity.
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Q DID YOU INCLUDE ANY OFF-BALANCE SHEET ("OBS")
DEBT EQUIVALENTS?
A No. In response to Micron 2nd Data Request No.
39, VWID stated that it does not have any off-balance
sheet debt equivalents. Therefore, I did not include any
in the development of my credit metrics.
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44Standard & Poor's RatingsDirect: "Criteria: Corporate Methodology,"
November 19, 2013.
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Q PLEASE DESCRIBE THE RESULTS OF THIS CREDIT
METRIC ANALYSIS AS IT RELATES TO VWID.
A The S&P financial metric calculations for VWID
at a 9.35% return are developed on Exhibit No. 418, page
1. The credit metrics produced below, with VWID's
financial risk profile from S&P of "Intermediate" and
business risk profile of "Excellent," will be used to
assess the strength of the credit metrics based on VWID's
retail operations in the state of Idaho.
The adjusted debt ratio for credit metric purposes
at the Company's proposed capital structure is 44.4%,
which is significantly lower than the adjusted industry
median debt ratio for A rated utilities in the range of
48.5% to 52.7%, as shown on page 3 of Exhibit No. 418. A
lower debt ratio indicates, all else equal, less
financial risk. VWID's financial risk is significantly
lower than the industry average.
Based on an equity return of 9.35% and the Company's
proposed common equity ratio of 55.6%, VWID will be
provided an opportunity to produce a Debt to Earnings
Before Interest, Taxes, Depreciation and Amortization
("EBITDA") ratio of 3.5x. This is within S&P's
"Intermediate" guideline range of 3.0x to 4.0x.45
VWID's retail utility operations FFO to total debt
coverage at a 9.35% equity return and 55.6% equity ratio
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is 20%, which is within S&P's "Intermediate" metric
guideline range of 13% to 23%. This ratio is again
within the FFO/total debt range that will support VWID's
credit rating.
I conclude that VWID's core credit metrics ratios
based on the Company's proposed capital structure and my
return on equity will support its investment grade credit
rating of A.
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45Standard & Poor's RatingsDirect: "Criteria: Corporate Methodology,"
November 19, 2013.
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Q DOES THIS FINANCIAL INTEGRITY ASSESSMENT
SUPPORT YOUR RECOMMENDED OVERALL RATE OF RETURN FOR VWID?
A Yes. As noted above, I believe my return on
equity and the Company's proposed capital structure
represent fair compensation in today's very low capital
market costs, and as outlined above, my overall rate of
return will provide VWID an opportunity to earn credit
metrics that will support its bond rating.
VI. RESPONSE TO VWID WITNESS MR. HAROLD WALKER
Q WHAT RETURN ON COMMON EQUITY IS VWID PROPOSING
FOR THIS PROCEEDING?
A VWID's proposed 10.80% return on equity is
supported by its witness Mr. Walker.46 His recommended
return on equity is based on several market-based models
such as DCF, CAPM and risk premium ("RP") applied to a
group of publicly traded water utilities. Mr. Walker's
results fall in in the range of 9.60% to 11.60% and are
summarized in Table 12 below.
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46Walker Direct Testimony at pp. 4-5.
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(Table in hard copy of transcript)
As illustrated above in Table 12 under Column 2, Mr.
Walker's market-based models without his adjustments
would support my proposed return on equity of 9.35%. For
reasons set forth below, Mr. Walker's proposed
adjustments to his DCF, CAPM and RP results are unjust
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and unreasonable and should be rejected. Without these
risk adjustments and correcting some of the inputs used
in his studies, Mr. Walker's DCF, CAPM and RP results
indicate a return on equity for VWID that supports my
proposed return on equity of 9.35%.
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VI.A. Leverage Risk Adjustment
Q HOW DID MR. WALKER DEVELOP HIS RISK ADJUSTMENT?
A Mr. Walker's risk adjustment is actually a
market-to-book ratio or a leverage adjustment that he
applied to all of his return on equity model results. To
develop his adjustment, on his Exhibit No. 1, Schedule
16, Mr. Walker employs the Hamada beta adjustment to
modify the water group's original Value Line beta of 0.77
up to a relevered beta of 1.10, producing a risk
adjustment factor of 1.82x.47 He produces his return on
equity adjustments from the difference in the equity
ratio for the proxy group using the market value
capitalization equity ratio of 74.4%, compared to the
book value equity ratio of 48.1%. His claim is that this
market-to-book ratio leverage difference requires a
financial risk adder to the model result when applied to
a book value equity rate base.
Then, he averages the spread between the AAA and A
rated bonds of approximately 0.45% with his Hamada risk
adjustment of 1.8% (his actual estimate is 1.82% but Mr.
Walker used 1.8%) to produce an adjustment of 1.10% to be
applied to all of his return estimates.48
Q IS MR. WALKER'S LEVERAGE ADJUSTMENT REASONABLE?
A No. Again, investors do not distinguish the
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financial risk of an enterprise based on the difference
between its market value common equity ratio and its book
value common equity ratio. Rather, investors perceive
the earnings strength of the company based on its book
value, and value the stock based on this same stock value
placed by the market on the company's earnings and
dividends outlook.
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47Walker Direct Testimony, Exhibit No. 1, Schedule 16.
48Walker Direct Testimony at pdf pp. 49-50, which were incorrectly
numbered as pp. 24-25 in Mr. Walker's testimony.
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The stability and predictability of earnings and
dividends are based on book value financial risk
characteristics, which are then valued by the market to
produce market prices and dividend yields.
Because Value Line beta estimates are estimated
originally based on differences in returns on market
value securities, the leverage risk reflected in the
Value Line beta reflects the market risk of the stocks,
which is not distinct and separate from the financial
risk based on the Company's book value. More
specifically, the Company only has one measure of
financial risk and it is the same regardless of its
market-to-book ratio. The Company does not have two
different measures of financial risk - one on market
value and a second on book value.
Further, Mr. Walker's leverage adjustment as
developed on his Exhibit No. 1, Schedule 16, is really
nothing more than a market-to-book ratio adjustment,
which produces a premium to the CAPM return estimate. A
market-to-book ratio adjustment to either a DCF, CAPM or
RP is severely flawed because it provides the utility an
ability to earn an above market rate of return on
incremental plant investments, which is in excess of the
returns the utility can earn in other enterprises of
comparable risk, including buying back its own stock.
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For these reasons, the beta leverage adjustment proposed
by Mr. Walker is flawed and produces a return on equity
that is not balanced, reasonable or an accurate
measurement of a fair rate of return for VWID.
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Q DOES MR. WALKER'S PROPOSED LEVERAGE ADJUSTMENT
PRODUCE A RATE OF RETURN THAT IS FAIR TO BOTH CUSTOMERS
AND INVESTORS?
A No. Under the Hope and Bluefield standard, the
return on equity should produce just and reasonable
prices and provide investors an opportunity to earn the
same rate of return in utility plant investment as they
can by investing in another enterprise of comparable
risk. This standard illustrates the imbalanced nature of
Mr. Walker's market-to-book ratio.
Specifically, if Mr. Walker's market-to-book ("M/B")
ratio adjustment were adopted, then VWID would be able to
earn a much higher rate of return by making incremental
utility plant investments than it could by repurchasing
its own stock-these are comparable risk investments. For
example, using Mr. Walker's DCF results, VWID would be
allowed to earn a return on equity of 9.60% (a market
return of 8.50% plus a M/B ratio return on equity adder
of 1.10%) for incremental plant investments. However, if
it invested in its own stock, it would expect to earn a
market return of 8.50%, because the market return would
not be subject to the M/B return on equity adder.
As such, Mr. Walker's market-to-book ratio
adjustment would provide VWID an opportunity for a well
above market return on incremental plant investments,
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compared to alternative investments of comparable risk.
Therefore, the market-to-book ratio adjustment fails to
meet the fair compensation standard of Hope and
Bluefield, and should be rejected.
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Q DID MR. WALKER OFFER AN EXAMPLE OF WHY HE
BELIEVES HIS MARKET-TO-BOOK RATIO ADJUSTMENT IS
REASONABLE?
A Yes. On Mr. Walker's Exhibit No. 1, Schedule
15, he shows three different situations where a DCF
return of 10% is applied to book value when the
market-to-book ratio of the Company ranges from 50% to
100% to 200%. In each scenario, applying a 10% return to
the book value of $50 will produce an equity return on
book value of around $5. With that $5 return, Mr.
Walker's illustration is that the actual return to the
shareholder will depend on the market-to-book ratio of
the Company. With a $5 return on a book value of $50,
where the market-to-book ratio is 50%, Mr. Walker
estimates that the $5 earnings relative to a market value
of $25 would produce a return on market value of around
20%. With a market-to-book ratio of 1, the $5 return on
book value would also produce a 10% return on market
value. However, when the market-to-book ratio exceeds 1,
in this case up to 2, then a $5 return on book value
would only produce a 5% return on market value. Using
Mr. Walker's market-to-book ratio adjustment, the return
on book value would be set equal to the return necessary
to achieve the 10% of market value in each instance.
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Q DOES MR. WALKER'S EXHIBIT NO. 1, SCHEDULE 15
SUPPORT HIS MARKET-TO-BOOK RATIO ADJUSTMENT IN THIS CASE?
A No. What Mr. Walker fails to recognize is that
customers are obligated to pay a fair rate of return on
utility plant investment based on the company's cost of
making that investment. Customers are not obligated to
pay a rate of return to maintain a targeted market price
of stock. Rather, customers are obligated to pay a fair
rate of return that ensures that the utility has an
economic incentive to continue to reinvest in utility
plant and equipment. This is accomplished by
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providing the utility the same rate of return for
incremental plant investments that the utility could earn
by buying back its own stock or reinvesting in another
enterprise of comparable investment risk. In this
instance, the fair rate of return should be set at the
return on the market, regardless of what the
market-to-book ratio is, and Mr. Walker's market-to-book
ratio return on equity adder should be rejected.
VI.B. DCF
Q PLEASE DESCRIBE MR. WALKER'S DCF ANALYSIS.
A As shown on his Exhibit No. 1, Schedule 12, Mr.
Walker's constant growth DCF return is based on an
average growth rate of 6.6% from First Call, S&P, Zacks,
and Value Line, added to his water group's adjusted
dividend yield of 1.9% as of July 2022 to produce a
return on equity of 8.5%. Next, Mr. Walker increases his
traditional DCF return estimate by 110 basis points to
account for the difference in market price and book value
of his proxy group. His adjusted DCF estimates produce a
return on equity of 9.6%.49
Q IS MR. WALKER'S DCF RETURN ESTIMATE OF 9.6% A
REASONABLE ESTIMATE OF VWID'S DCF COST OF EQUITY?
A No. Mr. Walker's DCF return estimate is
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overstated for two main reasons. First, the 6.6% growth
rate used in his constant growth DCF model is excessive
and overstates the constant growth DCF return. Second,
for the reasons I previously discussed, his proposed
market-to-book adjustment is flawed and unreasonable, and
significantly inflates the return on equity estimate for
VWID.
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49Walker Direct Testimony at pdf p. 50, which was incorrectly
numbered as p. 25 in Mr. Walker's testimony.
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Q PLEASE EXPLAIN WHY MR. WALKER'S DCF GROWTH RATE
OF 6.6% IS EXCESSIVE.
A Mr. Walker's projected growth rate of 6.6% is
based on the average growth rate from consensus analysts'
estimates from First Call, S&P, and Zacks and single
analysts' projections from Value Line. While a 6.6%
growth rate may be appropriate for the water utility
companies over the next three to five years, it is not an
appropriate estimate of a long-term sustainable growth
rate for these companies over an indefinite period of
time.
As discussed in regard to my own DCF studies, it is
not rational to expect a utility company to have a growth
rate higher than the growth of the economy in which it
sells its goods and services. Therefore, the long-term
maximum sustainable growth rate for a utility investment
is best proxied by the projected long-term GDP growth of
4.0%.
Q CAN MR. WALKER'S DCF MODEL BE MODIFIED TO
PRODUCE A REASONABLE RETURN ON EQUITY FOR VWID?
A Yes. Disregarding his risk adjustment of
1.10%, Mr. Walker's constant growth DCF model produces a
return of 8.5% as shown on his Exhibit No. 1, Schedule
12. Even though this DCF return is based on an excessive
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growth rate estimate, to limit the issues in this
regulatory proceeding, I consider Mr. Walker's DCF return
of 8.5% as a reasonable high end return estimate.
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VI.C. CAPM
Q PLEASE DESCRIBE MR. WALKER'S CAPM ANALYSIS.
A Mr. Walker conducts a traditional CAPM analysis
using a risk-free rate of 3.2%, a beta estimate of 0.77,
a historical risk premium of 7.5% and a prospective
market risk premium of 13.7%, which indicate a
traditional CAPM return in the range of 9.00%
(historical) to 13.75% (projected).50 Then, Mr. Walker
adds a small company risk premium of 1.5 percentage
points, which produces an adjusted CAPM return estimate
in the range of 10.5% to 15.2%. These CAPM return
estimates are developed on Mr. Walker's Exhibit No. 1,
Schedule 17. To arrive at his final CAPM return
estimate, Mr. Walker relies only on his historical CAPM
result of 10.5%. He applies his M/B or leverage
adjustment of 110 basis points to his historical CAPM
return of 10.5% to produce a CAPM return of 11.6%.51
Q IS MR. WALKER'S CAPM RETURN ESTIMATE
REASONABLE?
A No. There are many aspects of his CAPM
analysis with which I disagree, however, my primary issue
with his CAPM study is his adders to his return estimate
for VWID. Specifically, his leverage and his small size
adjustments should be rejected. The deficiencies in Mr.
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Walker's leverage adjustment were already discussed in
detail above. Mr. Walker has failed to show that either
of these adjustments is necessary to produce a fair and
reasonable return for VWID.
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503.2% + 0.77 x 7.5% = 9.0% and 3.2% + 0.77 x 13.7% = 13.75%
51Walker Direct testimony at pdf p. 54, which was incorrectly
numbered as p. 29 in Mr. Walker's testimony.
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Q PLEASE DESCRIBE WHY MR. WALKER'S SMALL COMPANY
RISK PREMIUM ADJUSTMENT OF 1.50% IS UNREASONABLE.
A Mr. Walker derives his size premium estimate
based on Kroll's 2022 SBBI development of a size
differentiated adjustment to the CAPM return estimate.
Kroll reviews the beta risk of companies based on
different market capitalizations. This adjustment, as
shown on page 4 of Mr. Walker's Exhibit No. 1, Schedule
17, relied on a beta estimate for Mid-Cap companies of
1.13. This beta estimate is significantly higher than
the average beta estimate of 0.77 for the water utility
companies included in his analysis. Importantly, the
Value Line beta used by Mr. Walker and me has already
been adjusted for the tendency of the beta estimate to
move toward the market beta of 1.0.52 However, the beta
estimates used by Kroll are raw betas that have not been
adjusted. Therefore, Mr. Walker's methodology suffers
from the use of inconsistent betas that distort the
measurement of risk and CAPM return and renders his CAPM
return unreliable.
For example, adjusting the Value Line beta to be
consistent with the Kroll beta would require reversing
the Value Line beta adjustment. This would revise the
average proxy group Value Line beta of 0.77, down to an
unadjusted beta of 0.63.53 This unadjusted beta would
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produce a lower CAPM to coincide with Mr. Walker's small
capitalization adder.
Further, the unadjusted Value Line beta of 0.63 is
much lower than Kroll's Mid-Cap Index beta of 1.13. His
size adjustment is based on companies that have
significantly more systematic risks that are not
reflective of the utility industry or VWID. The size
adjustments relied on by Mr. Walker reflect
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52Meir Statman, Betas Compared: Merrill Lynch vs. Value Line, The
Journal of Portfolio Management Winter 1981, pages 41-44.
53Raw Beta = (VL Beta - 0.35) / 0.67, Raw Beta = (0.77 - 0.35) / 0.67
= 0.63.
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companies that have unadjusted beta estimates well in
excess of 1.00. As shown on his schedule, every decile
measured by Kroll has a much higher beta than Mr.
Walker's water group. The typical company in each decile
is much riskier than the typical utility company. This
significant difference in the two betas distorts the
measurement of market risk and renders Mr. Walker's CAPM
return unreliable. Mr. Walker has not provided evidence
that Kroll's Mid-Cap Index presents risk comparable to
regulated water companies generally or VWID specifically
and should be rejected.
Q HOW WOULD MR. WALKER'S CAPM RETURN ESTIMATE
CHANGE IF THESE INAPPROPRIATE RETURN ADD-ONS ARE
ELIMINATED?
A Eliminating his leverage and small company
adjustments and relying on Mr. Walker's risk premium of
7.5%, his beta estimate of 0.77, and an updated risk free
rate of 3.8% as described in my own CAPM analysis would
reduce his CAPM return from 11.6% to 9.6%.54
VI.D. Risk Premium
Q PLEASE DESCRIBE MR. WALKER'S RISK PREMIUM
STUDY.
A As developed on his Exhibit No. 1, Schedule 18,
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Mr. Walker's risk premium ("RP") study is based on an
estimated equity risk premium of 5.5% added to his
projected utility bond yield of 4.7%. This produced a
risk premium estimate of 10.2%. Mr. Walker developed the
equity risk premium of 5.5% based on the public utility
stock returns, less "A" rated public utility bond yields.
He then
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543.8% + 0.77 x 7.5% = 9.58%, rounded to 9.6%.
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inflates the traditional risk premium estimate of 10.2%
up to 11.3% to account for his leverage adjustment
applied to all of his market-based models.55
Q DO YOU HAVE ANY ISSUES WITH MR. WALKER'S RP
ANALYSIS?
A Yes. I have two major issues with Mr. Walker's
RP analysis. First, his index selection is not risk
comparable to his water utility proxy group. Second, his
leverage adjustment to his RP return estimate should be
rejected as discussed above.
Q WHY IS MR. WALKER'S RISK PREMIUM ESTIMATE NOT
APPROPRIATE FOR VWID?
A Mr. Walker has not shown that the Public
Utility Index is an appropriate risk proxy for VWID. The
Public Utility Index includes electric utility companies
that are much higher risk than low-risk water utility
companies. Specifically, electric utilities have
commodity cost recovery risk for coal, purchased power
energy charges and natural gas expense. Given the
volatile nature of commodity pricing and procurement
constraints, an electric utility has much greater
operating risk than that of a water utility.
Therefore, because the Public Utility Index includes
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integrated utility companies, it is not an appropriate
risk proxy for VWID. Hence, the equity risk premium
estimated by Mr. Walker is not an appropriate estimate
for VWID.
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55Walker Direct Testimony at pdf p. 60. This page is incorrectly
numbered as p. 35 in Mr. Walker's testimony.
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Q WHAT WOULD BE A REASONABLE RISK PREMIUM RETURN
FOR VWID?
A Disregarding Mr. Walker's leverage adjustment
and reflecting his "A" rated utility bond yield of 4.7%,
along with my market risk premium of approximately 4.3%
as described above in regard to my own RP analysis, would
indicate a current return on equity for VWID of 9.0%.
Using a more updated 13-week average A-rated utility
yield of approximately 5.5% as discussed above will
result in a risk premium return of 9.8%.
VI.E. Additional Business Risks
Q DID MR. WALKER CONSIDER ADDITIONAL BUSINESS
RISKS TO JUSTIFY HIS RETURN ON EQUITY OF 10.8%?
A Yes. Mr. Walker believes that VWID is exposed
to several additional risks that should be accounted for
such as: (1) the Company's small size; and (2) VWID's
planned capital expenditure.56 Mr. Walker believes that
these additional risks should be considered in
determining the return on equity for VWID.
Q WHY DO YOU BELIEVE THAT VWID FACES RISKS THAT
ARE COMPARABLE TO THE RISKS FACED BY MR. WALKER'S AND
YOUR PROXY GROUP COMPANIES?
A The major business risks identified by Mr.
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Walker are considered in the assigning of a credit rating
by the various credit rating agencies.
As shown on page 14 of Mr. Walker's testimony, the
average S&P credit rating for his and my water proxy
group is A, which is identical to VUR's credit rating
from S&P. The relative risks discussed in Mr. Walker's
testimony are
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56Walker Direct Testimony at pdf pp. 20-32, which were incorrectly
numbered as pp. 20-7 in Mr. Walker's testimony.
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already incorporated in the credit ratings of the proxy
group companies. S&P and other credit rating agencies go
through great detail in assessing a utility's business
risk and financial risk in order to evaluate their
assessment of its total investment risk. This 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.
Q HOW DOES S&P ASSIGN CORPORATE CREDIT RATINGS
FOR REGULATED UTILITIES?
A In assigning corporate credit ratings, the
credit rating agency considers both business and
financial risks. Business risks, among others, include a
company's 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.
Specifically, S&P states:
To determine the assessment for a corporate
issuer's business risk profile, the criteria
combine our assessments of industry risk,
country risk, and competitive position. Cash
flow/leverage analysis determines a company's
financial risk profile assessment. The
analysis then combines the corporate issuer's
business risk profile assessment and its
financial risk profile assessment to determine
its anchor. In general, the analysis weighs
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the business risk profile more heavily for
investment-grade anchors, while the financial
risk profile carries more weight for
speculative-grade anchors.57
Q DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
A Yes, it does.
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57Standard & Poor's RatingsDirect: "Criteria/Corporates/General:
Corporate Methodology," November 19, 2013.
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Appendix A - Qualifications of Michael P. Gorman
Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A Michael P. Gorman. My business address is
16690 Swingley Ridge Road, Suite 140, Chesterfield, MO
63017.
Q PLEASE STATE YOUR OCCUPATION.
A I am a consultant in the field of public
utility regulation and a Managing Principal with the firm
of Brubaker & Associates, Inc. ("BAI"), energy, economic
and regulatory consultants.
Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND
AND WORK EXPERIENCE.
A In 1983 I received a Bachelor of Science Degree
in Electrical Engineering from Southern Illinois
University, and in 1986, I received a Master's Degree in
Business Administration with a concentration in Finance
from the University of Illinois at Springfield. I have
also completed several graduate level economics courses.
In August of 1983, I accepted an analyst position
with the Illinois Commerce Commission ("ICC"). In this
position, I performed a variety of analyses for both
formal and informal investigations before the ICC,
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including: marginal cost of energy, central dispatch,
avoided cost of energy, annual system production costs,
and working capital. In October of 1986, I was promoted
to the position of Senior Analyst. In this position, I
assumed the additional responsibilities of technical
leader on projects, and my areas of responsibility were
expanded to include utility financial modeling and
financial analyses.
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In 1987, I was promoted to Director of the Financial
Analysis Department. In this position, I was responsible
for all financial analyses conducted by the Staff. Among
other things, I conducted analyses and sponsored
testimony before the ICC on rate of return, financial
integrity, financial modeling and related issues. I also
supervised the development of all Staff analyses and
testimony on these same issues. In addition, I
supervised the Staff's review and recommendations to the
Commission concerning utility plans to issue debt and
equity securities.
In August of 1989, I accepted a position with
Merrill-Lynch as a financial consultant. After receiving
all required securities licenses, I worked with
individual investors and small businesses in evaluating
and selecting investments suitable to their requirements.
In September of 1990, I accepted a position with
Drazen-Brubaker & Associates, Inc. ("DBA"). In April
1995, the firm of Brubaker & Associates, Inc. was formed.
It includes most of the former DBA principals and Staff.
Since 1990, I have performed various analyses and
sponsored testimony on cost of capital, cost/benefits of
utility mergers and acquisitions, utility
reorganizations, level of operating expenses and rate
base, cost of service studies, and analyses relating to
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industrial jobs and economic development. I also
participated in a study used to revise the financial
policy for the municipal utility in Kansas City, Kansas.
At BAI, I also have extensive experience working
with large energy users to distribute and critically
evaluate responses to requests for proposals ("RFPs") for
electric, steam, and gas energy supply from competitive
energy suppliers. These analyses include the evaluation
of gas supply and delivery charges, cogeneration and/or
combined cycle unit feasibility studies, and the
evaluation of third-party asset/supply management
agreements. I have participated in rate cases on rate
design and class cost of service for electric, natural
gas, water and wastewater
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utilities. I have also analyzed commodity pricing
indices and forward pricing methods for third party
supply agreements, and have also conducted regional
electric market price forecasts.
In addition to our main office in St. Louis, the
firm also has branch offices in Corpus Christi, Texas;
Detroit, Michigan; Louisville, Kentucky and Phoenix,
Arizona.
Q HAVE YOU EVER TESTIFIED BEFORE A REGULATORY
BODY?
A Yes. I have sponsored testimony on cost of
capital, revenue requirements, cost of service and other
issues before the Federal Energy Regulatory Commission
and numerous state regulatory commissions including:
Alaska, Arkansas, Arizona, California, Colorado,
Delaware, the District of Columbia, Florida, Georgia,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nevada, New Hampshire,
New Jersey, New Mexico, New York, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, South Carolina, South
Dakota, Tennessee, Texas, Utah, Vermont, Virginia,
Washington, West Virginia, Wisconsin, Wyoming, and before
the provincial regulatory boards in Alberta, Nova Scotia,
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and Quebec, Canada. I have also sponsored testimony
before the Board of Public Utilities in Kansas City,
Kansas; presented rate setting position reports to the
regulatory board of the municipal utility in Austin,
Texas, and Salt River Project, Arizona, on behalf of
industrial customers; and negotiated rate disputes for
industrial customers of the Municipal Electric Authority
of Georgia in the LaGrange, Georgia district.
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Q PLEASE DESCRIBE ANY PROFESSIONAL REGISTRATIONS
OR ORGANIZATIONS TO WHICH YOU BELONG.
A I earned the designation of Chartered Financial
Analyst ("CFA") from the CFA Institute. The CFA charter
was awarded after successfully completing three
examinations which covered the subject areas of financial
accounting, economics, fixed income and equity valuation
and professional and ethical conduct. I am a member of
the CFA Institute's Financial Analyst Society.
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(The following proceedings were had in
open hearing.)
COMMISSIONER ANDERSON: And I will also, without
objection, move that Ms. York's testimony shall be spread
across the record, both direct and rebuttal, and
exhibits, also.
MR. NELSON: Correct, sir.
COMMISSIONER ANDERSON: Thank you, that is done.
(Micron Technology, Inc., Exhibit Nos. 419-420
were admitted into evidence.)
(The following prefiled direct and rebuttal
testimony of Ms. Jessica A. York is spread upon the
record.)
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Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A Jessica A. York. My business address is 16690
Swingley Ridge Road, Suite 140, Chesterfield, MO 63017.
Q WHAT IS YOUR OCCUPATION?
A I am a consultant in the field of public
utility regulation and an Associate at Brubaker &
Associates, Inc., energy, economic and regulatory
consultants.
Q PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND
EXPERIENCE.
A This information is included in Appendix A to
my testimony.
Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS
PROCEEDING?
A I am appearing on behalf of Micron Technology,
Inc., a large customer of Veolia Water Idaho Inc.
("Veolia," "VWID," or "the Company").
Q WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A The purpose of my testimony is to address the
Company's class cost of service study ("COSS"), proposed
revenue apportionment, base rate design, and proposed
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Distribution System Improvement Charge ("DSIC"). My
silence with respect to any issues addressed by any other
party's testimony in this proceeding should not be taken
as tacit approval or agreement regarding those issues.
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I. SUMMARY
Q PLEASE SUMMARIZE YOUR CONCLUSIONS AND
RECOMMENDATIONS.
A My conclusions and recommendations are as
follows:
·The Company's COSS follows the generally accepted
Base-Extra Capacity cost allocation method, which
is a reasonable approach. However, the Company's
COSS needs to be modified to improve the accuracy
of the measurement of its cost of providing
service to each customer class.
o Specifically, the Company's COSS does not
recognize the fact that some large customers
are connected directly to transmission mains,
and do not utilize the smaller distribution
mains. An adjustment should be made to the
allocation factors used for distribution main
cost allocation for each class to reflect
this distinction in the infrastructure used
to provide service.
·The Company's proposed revenue apportionment
should be rejected, as it does not make a
meaningful movement toward cost of service for
each customer class, and continues the interclass
subsidies that have existed for years.
o I recommend an alternative revenue
apportionment where all classes are brought
to cost of service in this case, subject to
the limitation that no class receives an
increase greater than 1.25x the system
average increase. Any remaining revenue
deficiency can be spread to classes that
would receive a rate change below the system
average, in proportion to each of the
non-capped class's total cost of service.
·The Company has not adequately supported the
continuation of its existing inclining block
volumetric rate structure. I recommend the
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Commission direct the Company to develop and
present a declining block volumetric rate
structure in the next rate case.
·I recommend that the Company's tariffs be modified
to provide an economic development rate, and/or to
allow for service to be provided under a special
contract for certain qualifying customers.
·I recommend the Commission reject the Company's
proposed DSIC mechanism. But, if the Commission
adopts the Company's proposed DSIC mechanism, I
recommend that the proposed DSIC be modified to
track changes in total net-plant investment
related to the replacement and/or rehabilitation
of distribution system transmission and
distribution mains, services, hydrants, valves,
meters and other infrastructure, and should not
track only incremental plant investments. Also,
if the DSIC is adopted, it should account for not
only incremental rate base changes resulting from
investments made under the rider, but should also
account for the change in legacy net-plant or rate
base value during post-test year periods.
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II. CLASS COST OF SERVICE STUDY
Q HAVE YOU REVIEWED THE COMPANY'S CLASS COST OF
SERVICE STUDY?
A Yes. The Company's COSS is sponsored by Ms.
Ann Bui. Her COSS is based on the test year ended March
31, 2023, and uses the widely accepted Base-Extra
Capacity method for functionalizing, classifying and
allocating costs to VWID's various customer classes.
Investment in water utility plant and operating costs are
first functionalized according to the role they play in
providing water service: water supply, pumping,
treatment, transmission, distribution, metering, and
billing. Next, these costs are classified into cost
categories that reflect the causation of these costs:
Base, or average day rates of flow; Extra
Capacity-Maximum Day and Extra Capacity-Maximum Hour
rates of flow; and Customer-related costs, such as
metering and billing.
Q IS THE COMPANY'S COSS REASONABLE?
A In general, the Base-Extra Capacity cost
allocation method is a reasonable approach to cost
allocation. However, the Company's COSS does not
accurately measure the cost of providing service to each
customer class. Therefore, it should not be relied upon
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as the basis for revenue apportionment in this
proceeding.
Q WHY DO YOU BELIEVE THAT THE COMPANY'S COSS DOES
NOT ACCURATELY MEASURE ITS COST OF PROVIDING SERVICE TO
EACH CUSTOMER CLASS?
A There are two reasons. First, the Company
initially made an error when allocating depreciation
expense and rate base investment associated with
Transmission and
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Distribution ("T&D") Mains and Accessories. This error
overstates VWID's cost to serve the Commercial class and
understates the cost to serve Residential customers. As
discussed below, the Company acknowledged this error in
discovery and an adjustment has been made to reflect the
correction.
Second, certain large customers are connected
directly to VWID's large transmission mains, and
therefore do not use and should not be allocated the
costs associated with the smaller distribution mains.
However, there is no distinction in the allocation of
distribution mains costs to reflect this reality. As a
result, the Company's COSS over-allocates distribution
costs to customers that do not use smaller distribution
mains.
I discuss each of these reasons in further detail
below.
II.A. VWID's Error in the Allocation of T&D Mains and
Accessories
Q PLEASE DISCUSS THE COMPANY'S ALLOCATION OF
COSTS ASSOCIATED WITH TRANSMISSION AND DISTRIBUTION MAINS
AND ACCESSORIES.
A In the COSS included as Exhibit 14-2 to Ms.
Bui's direct testimony, transmission and distribution
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costs were not separated by main size, and instead were
lumped together in one category. As shown on Bui Exhibit
14-2, page 5 of 40, O&M expenses associated with T&D
mains are allocated using Factor 6, which is appropriate
for these expenses because it reflects a base, maximum
day, maximum hour, and fire protection component. While
the Company had correctly allocated the O&M expenses
associated with T&D mains on Factor 6, it did not
correctly allocate the corresponding plant investment in
T&D mains, or the associated depreciation expense.
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Q PLEASE DISCUSS THE COMPANY'S ALLOCATION OF
DEPRECIATION EXPENSE AND PLANT INVESTMENT ASSOCIATED WITH
T&D MAINS.
A The Company allocated the depreciation expense
associated with T&D Mains and Accessories using Factor
3.1 Similarly, the Company allocated the T&D Mains and
Accessories rate base using Factor 3.2
Factor 3 includes a base, maximum day demand, and
fire protection component. However, unlike Factor 6, it
does not reflect a maximum hour extra capacity demand
component, and therefore does not accurately allocate the
distribution main-related expenses and rate base that are
included in these line items of the COSS.
Q DID YOU SUBMIT A DISCOVERY REQUEST TO THE
COMPANY REGARDING THIS ISSUE?
A Yes. Micron's Discovery Request No. 47 to
VWID raised questions about these allocations.3 In
response to this request, the Company acknowledged that
its original proposed allocations were in error.4 In
addition, the Company provided a corrected version of its
COSS model and exhibits with that discovery response.
The Company has now correctly separated T&D plant
investment and expenses in its COSS, and allocated
transmission costs using Factor 3, and distribution costs
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using Factor 6.
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1Exhibit 14-2, Page 8 of 40.
2Id.at 10.
3Attached as Exhibit No. 419, pp. 1-29.
4Id.
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Q WHAT WAS THE IMPACT OF THIS CORRECTION ON THE
COMPANY'S COSS RESULTS?
A A comparison of VWID's original COSS results to
its corrected COSS results is presented below in Table 1.

(Table in hard copy of transcript)
As can be seen from the Table 1, this error was
overstating VWID's cost to serve the Commercial class by
$545,452,5 and understating the cost to serve Residential
customers by about $469,031.6
While VWID acknowledged and corrected this error,
the issue of the distinction in main size used to serve
some large customers must be resolved in order to produce
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a more accurate measure of the cost of providing service
to each customer class.
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5$2,726,433 - $3,271,885 = $545,452.
6$10,146,076 - $9,677,046 = $469,031.
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II.B. Certain Large Customers Do Not Use the
Distribution System
Q HOW DOES THE COMPANY DISTINGUISH TRANSMISSION
MAINS FROM DISTRIBUTION MAINS INSTALLED IN ITS SYSTEM?
A The Company defines transmission mains as those
that have diameters of 12-inches and larger.7 VWID
defines distribution mains as those with diameters of
less than 12 inches.8
Q HAS THE COMPANY ACKNOWLEDGED THAT SOME LARGE
CUSTOMERS DO NOT TAKE SERVICE FROM SMALL DISTRIBUTION
MAINS, BECAUSE THEY ARE CONNECTED DIRECTLY TO
TRANSMISSION MAINS?
A Yes. The Company has acknowledged that there
are at least two 8-inch meters that are served from
transmission mains.9 One meter is associated with a
24-inch diameter main, and the other is associated with a
12-inch diameter service line.10 It is my understanding
that Micron takes service directly from transmission
mains as well.
Q DOES THE COMPANY'S ALLOCATION OF COSTS
ASSOCIATED WITH DISTRIBUTION MAINS REFLECT THE FACT THAT
SOME CUSTOMERS DO NOT TAKE SERVICE FROM DISTRIBUTION
MAINS?
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A No. As a result, the Company's COSS allocates
distribution costs to customers that are connected
directly to the transmission system, and that do not take
service from the smaller distribution mains. This does
not accurately reflect cost causation
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7VWID's Response to Micron's Discovery Request No. 17, attached as
Exhibit No. 419, p. 30.
8VWID's Response to Micron's Discovery Request No. 18, attached as
Exhibit No. 419, p. 31.
9VWID's Response to Micron's Discovery Request No. 7, attached as
Exhibit No. 419, p. 32.
10Id.
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and is inequitable to large customers that are connected
directly to the transmission mains.
Q DO WATER UTILITIES IN OTHER JURISDICTIONS
RECOGNIZE THE DISTINCTION IN MAIN SIZE USED TO PROVIDE
SERVICE IN THEIR COSS MODELS?
A Yes. Several subsidiaries of American Water
Works Company reflect such a distinction in their COSS
models, including Virginia-American Water Company
(Virginia State Corporation Commission ("VSCC") Docket
No. PUR-2021-00255), Illinois-American Water Company
(Illinois Commerce Commission ("ICC") Docket No.
22-0210), Indiana-American Water Company (Indiana Utility
Regulatory Commission ("IURC") Cause No. 45142), and
Missouri-American Water Company (Missouri Public Service
Commission ("MPSC") Case No. WR-2022-0303). The
distinction in main size is appropriate based on cost
causation principles and has been agreed to by parties,
or approved for use by these various state Commissions.
Q HOW SHOULD THE DISTINCTION IN MAIN SIZE USED TO
SERVE CUSTOMERS BE REFLECTED IN THE COSS MODEL?
A The best approach is to establish a separate
class in the COSS and for rate design purposes for large
customers that take service directly from transmission
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mains and do not use the smaller distribution mains. The
Commission should direct the Company to create this
separate class in the COSS for the next rate case.
In the meantime, an alternative approach would be to
make an adjustment to the allocation factors used to
allocate distribution main costs to reflect the fact that
some customers do not use the distribution mains.
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As an example, Missouri-American Water Company
recognizes that there are some customers in the
commercial, industrial, and public authority classes that
are connected directly to the transmission system, and do
not use the small distribution mains. Therefore, it has
historically reduced the amount of water consumption used
to develop its distribution cost allocation factors for
these classes.
For its Industrial class, Missouri-American Water
Company has historically relied on an analysis of the
length of small distribution mains serving Industrial
customers as a fraction of the total distribution main
installed on the system and concluded that the Industrial
units of service should be reduced by 90% in the
development of its distribution cost allocation factors
for that class.11
In other jurisdictions, utilities are estimating the
portion of water consumption in the non-residential
classes served directly from the transmission system, and
removing that portion of usage from an allocation of
distribution costs.12 While I do not agree with
developing customer class distribution multipliers
strictly based on water usage, this approach could be
used to improve the accuracy in the measurement of VWID's
COSS in the instant case, while the Company conducts a
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more detailed review of this issue prior to the next rate
case.
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11MPSC Case Nos. WR-2008-0311, WR-2017-0285, WR-2020-0344. MPSC
Staff proposed to continue the same distribution multiplier in
WR-2022-0303.
12VSCC Docket No. PUR-2021-00255, Direct Testimony of Charles Rea at
48. ICC Docket No. 22-0210, Direct Testimony of Charles Rea at 47.
IURC Cause No. 45142, Direct Testimony of Constance Heppenstall at
10-11.
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Q ARE YOU RECOMMENDING A MODIFICATION TO THE
COMPANY'S COSS TO RECOGNIZE THE DISTINCTION IN SIZE OF
MAINS USED TO SERVE VARIOUS CUSTOMERS?
A Yes. I recommend the Commission direct VWID to
recognize the fact that some large customers take service
directly from the transmission system, and therefore
should not be allocated costs associated with the smaller
distribution mains that are not used to provide service
to them. I recommend that for the next rate case, the
Commission direct VWID to create a separate class in the
COSS model and for rate design for customers that are
served directly from the transmission mains.
However, for purposes of this case, VWID should
recognize this distinction in the infrastructure used to
provide service by developing a distribution multiplier
to remove the units of service that are not served by the
distribution system from the development of distribution
main cost allocation factors by class. At this time,
VWID has not provided the data necessary for Micron to
make a specific proposal as to what distribution
multipliers would be appropriate for each class.
However, at a minimum, allocation factors should be
adjusted such that the test year units of service for the
two 8-inch meters identified by VWID in response to
Micron's Discovery Request No. 7 are removed from an
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allocation of distribution costs.
III. REVENUE APPORTIONMENT
Q PLEASE DISCUSS THE COMPANY'S PROPOSED REVENUE
APPORTIONMENT.
A The Company's proposed revenue apportionment
does not reflect its actual cost to serve each customer
class, as demonstrated by its COSS. A comparison of the
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Company's proposed revenue apportionment to its COSS
results is presented in Table 2.

(Table in hard copy of transcript)
As shown above in the Table 2, the Company proposes no
rate change for the Private Fire class, despite the fact
that the COSS shows a rate decrease is warranted. The
Company proposes to spread the remaining revenue
deficiency on an equal percentage basis across the
Residential, Commercial, and Public Authority classes,
even though the COSS results do not support an equal
percentage increase.
Q IS THE COMPANY'S PROPOSED REVENUE APPORTIONMENT
REASONABLE?
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A No. The Company's proposed revenue allocation
does not make meaningful movement toward cost of service
for all customer classes. Indeed, the Company's proposed
revenue allocation maintains rates that are below cost of
service for the
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Residential class, and significantly above cost of
service for all other classes perpetuating existing
cross-subsidies among rate classes. Further, the
Company's proposed revenue apportionment is based on a
COSS model that does not accurately reflect its cost of
providing service to its customers, as further discussed
above. Finally, an across-the-board increase has been
applied in the last several VWID rate cases, which
suggests that there has been essentially no movement
toward cost of service for years. As a result, I
recommend that the Company's proposed revenue allocation
be rejected.
Q HOW LONG HAVE INTERCLASS SUBSIDIES EXISTED FOR
VWID'S CUSTOMERS?
A The subsidies have existed since at least the
2006 rate case, when VWID was still United Water.
Despite the COSS results presented in each rate case, the
Commission approved settlement agreements that resulted
in an equal percent increase for all customer classes in
the 2006, 2009, 2015, and 2020 rate cases.13 In the 2011
rate case, a slightly different approach was taken where
the parties agreed to a two-step phase-in of the rate
increase.14
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Q HAS THE COMMISSION PREVIOUSLY RECOGNIZED THE
IMPORTANCE OF MOVING CUSTOMER CLASS RATES CLOSER TO COST
OF SERVICE?
A Yes. In a previous Idaho Power Company rate
case, the Commission noted the following:
"Nonetheless, the passage of time since the
Commission's last examination of IPCo's rates
has allowed several classes to drift further
away from cost of service rates. Recognizing
that cost-of-
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13See Settlement Agreement and Orders in Dockets UWI-W-06-02,
UWI-W-09-01, UWI W 15 011, and SUZ-W-20-02.
14See Settlement Agreement and Order in Docket UWI-W-11-2.
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service studies are not precise, we think it is
important that cross subsidies among customer
classes should be minimized. Accordingly, as
outlined below, we take significant steps to
move each class closer to its indicated cost of
service."15
Q ARE YOU RECOMMENDING AN ALTERNATIVE REVENUE
APPORTIONMENT?
A Yes. I recommend bringing each class to cost
of service in this case, based on my recommended
corrections to the Company's COSS model discussed above,
with the limitation that no class receive an increase
greater than 1.25x the system average increase. Any
remaining revenue deficiency could be spread to classes
that would receive a rate change that is less than the
system average percentage increase, in proportion to each
non-capped class's allocated cost of service.
An example of this proposed revenue allocation is
shown in Table 3 below. For illustrative purposes, Table
3 assumes that my recommended correction to the
allocation of distribution main costs would show that the
Residential class requires a 1.26x system average
increase to reach cost of service. However, the actual
impact will need to be determined by VWID, and may not
create a need for any class to be capped.16
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15Idaho Public Utilities Commission Case No. IPC-E-94-5; Order No.
25880 at 20.
16The Company's COSS shows that the Residential class needs a 1.23x
system average increase to reach cost of service. If my recommended
correction to the COSS does not increase this index above 1.25x, then
no cap would be needed.
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(Table in hard copy of transcript)
Table 4, below, shows the results of the revenue
apportionment presented in Table 3 based on Mr. Gorman's
recommended revenue increase of $6.4 million, or 12.4%.
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(Table in hard copy of transcript)
My recommendations will move away from inequitable
across-the-board rate increases and take meaningful steps
toward aligning customer rates.
IV. RATE DESIGN
IV.A. Existing Volumetric Block Rate Structure
Q PLEASE DISCUSS VWID'S CURRENT RATE STRUCTURE.
A Currently, VWID has a rate structure that
consists of a fixed meter charge by size, and volumetric
charges that vary by season. For the winter period from
October through May, a single flat volumetric rate per
hundred cubic feet ("CCF") applies. The summer period
consists of two volumetric rate blocks where the first
block is priced at the same rate as the winter period and
captures the first 3 CCF of usage. The second summer
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rate block captures all additional CCF and is more
expensive than the first block.
This rate structure applies to all customer classes.
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Q HAS VWID PROPOSED ANY CHANGES TO ITS EXISTING
RATE STRUCTURE?
A No. VWID proposes to maintain the existing
rate structure, with all rate components increased by an
equal percentage to recover the Company's requested
revenue requirement.
Q HAS THE COMPANY EXPLAINED WHY IT BELIEVES IT IS
REASONABLE TO MAINTAIN ITS INCLINING BLOCK RATE
STRUCTURE?
A No. The Company's testimony does not
specifically address this issue.
Q DO YOU HAVE ANY CONCERNS WITH THE COMPANY'S
INCLINING BLOCK VOLUMETRIC RATE STRUCTURE?
A Yes. First, if the purpose of this rate
structure is to promote water conservation, it is not
clear that the existing rate structure accomplishes this
objective. The first summer rate block captures the
first 3 CCF, or about 2,200 gallons, of usage. For the
Residential class, only about 6% of summer usage falls
into the first block with the remaining 94% in the
second, more expensive block.17 For the Commercial class,
the first summer block captures about 2% of the summer
water usage, and 98% falls into the second block.18 Thus,
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since the second block is essentially unavoidable, this
rate structure does little or nothing to encourage
customers to use less water during the higher priced
summer period.
Second, under the Company's existing volumetric rate
structure, customers with seasonal water use may not be
making a great enough contribution to the Company's
recovery of fixed costs during the non-summer months. As
a
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17VWID's workpaper WP 14.6, Proof of Revenue.
18Id.
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result, large water customers with relatively steady
water use year-round may be subsidizing customer classes
with seasonal peak water demands.
In addition, an inclining block rate structure could
inhibit economic development by deterring potential new
large water users from locating in the Company's service
territory or deter existing large water users from
expanding operations.
A declining block volumetric rate structure that
primarily targets fixed cost recovery in the more
expensive first blocks, and volumetric cost recovery in
the tail block would be more appropriate. In the event
that the Commission determines it is appropriate to
maintain a single rate structure for all customer
classes, then a declining block rate design could be used
to more closely align rates with the cost of providing
service to each class and support economic development.
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.
IV.B. Large Customer Rate Options
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Q ARE THERE ANY OTHER RATE DESIGN ISSUES THAT YOU
WOULD LIKE TO RAISE?
A Yes. 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. As noted by Ms.
Bui, the Company's current tariff includes an Industrial
classification, but no active customers are in this
class.19 Further, in response to a discovery request from
Staff, the Company
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19Bui, Appendix B at 8.
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claimed that based on the Company's existing definition
of Industrial customers, no customers currently meet this
definition.20
Q WHAT IS THE COMPANY'S CURRENT DEFINITION OF AN
INDUSTRIAL CUSTOMER?
A The Company's tariff defines an industrial
customer as follows:
"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."21
Q DOES MICRON FIT WITHIN THE DEFINITION OF AN
INDUSTRIAL CUSTOMER?
A According to the Company, Micron does not
currently fit the definition of an Industrial customer.
VWID indicates that currently Micron's water use is
primarily for office space and private fire protection,
and therefore it fits the definition of a Commercial
customer.22
Q SHOULD THE DEFINITION OF AN INDUSTRIAL CUSTOMER
BE TIED TO THE PURPOSE FOR WHICH WATER IS USED?
A No. The definition of customer classes should
take into consideration load characteristics and the
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infrastructure used to provide service. The purpose for
which water is used is not relevant.
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20VWID's Response to Staff's Discovery Request No. 154, attached as
Exhibit No. 419, p. 34.
21Sheet No. 36 of the Company's Current Tariff, attached as Exhibit
No. 420.
22VWID's Response to Micron's Discovery Request No. 42, part c (ii),
attached as Exhibit No. 419, pp. 35-37.
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Q IS MICRON EXPECTED TO FIT WITHIN VWID'S
DEFINITION OF AN INDUSTRIAL CUSTOMER IN THE FUTURE?
A Yes. It is public knowledge that Micron is
doing a major expansion in Boise, Idaho. Indeed, Micron
has announced plans to invest about $15 billion through
the end of the decade in advanced memory manufacturing in
Boise.23 Construction is expected to begin in 2023 with
production beginning in 2025.24 Micron's expansion will
include a water treatment facility to ensure incoming
water meets high-purity specifications for
manufacturing.25 Water sources will include on-site
groundwater and service from Veolia.26 Water will be a
crucial element to Micron's manufacturing process, and
its water consumption is expected to increase
significantly when operations commence. Thus, Micron
will require industrial use water from VWID.
In addition, Micron's expansion is expected to
create over 17,000 Idaho jobs, including 2,000 direct
Micron jobs.27 Micron also intends to increase investment
in K-12 STEM education programs, build on partnerships
with community colleges and universities, and identify
new ways to provide education and training to
underrepresented and rural populations.28
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23Micron Breaks Ground on Leading-Edge Manufacturing Fab in Boise,
Idaho. September 12, 2022.
https://investors.micron.com/news-releases/news-release-details/micro
n-breaks-ground-leading-edge-manufacturing-fab-boise-idaho
24Id.
25Micron Boise Expansion Plans Coming into View, October 28, 2022.
https://www.ktvb.com/article/news/local/growing-idaho/boise-micron-ex
pansion-planning-zoning-new-fab-semiconductor/277-35909baa-0305-430a-
8dda-9492a1a6a105
26Id.
27Micron Breaks Ground on Leading-Edge Manufacturing Fab in Boise,
Idaho. September 12, 2022.
28Id.
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Q WHEN MICRON'S EXPANDED MANUFACTURING OPERATIONS
COMMENCE, WILL IT BE APPROPRIATE FOR MICRON TO BE
INCLUDED IN THE COMMERCIAL CLASS?
A No. Micron's consumption will increase
significantly and will be used for purposes that fit the
current Industrial class definition. In addition, it is
my understanding that Micron takes service directly from
VWID's transmission mains, and therefore it should not be
paying for the costs associated with small distribution
mains through its rates.
It is clear that at least one of VWID's largest
customers will qualify as an Industrial customer in the
next couple of years. If the utility cannot or will not
negotiate a special contract, or offer an economic
development rate as discussed below, then at the very
least, I recommend that the Commission direct VWID 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.
IV.C. Potential Special Contract
Q WOULD IT BE REASONABLE FOR MICRON TO BE
ELIGIBLE FOR A SPECIAL CONTRACT OR ECONOMIC DEVELOPMENT
RATE WITH VWID?
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A Yes. Micron is already one of VWID's largest
customers in terms of annual water consumption, and its
water usage is expected to grow.29 As explained above,
given Micron's significant investment in Boise and the
associated benefits to the state and local community, it
would be reasonable for VWID to provide service to
Micron's facilities under a special contract or economic
development rate that more
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29VWID's Response to Micron's Discovery Request No. 44, attached as
Exhibit No. 419, p. 38.
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accurately reflects VWID's cost of providing service to
Micron. In addition, Micron's expansion plan includes
groundwater as a source of supply, as well as the
development of its own water treatment facility. A
special contract or economic development rate that more
accurately reflects VWID's cost of providing service to
Micron could improve the competitiveness of VWID's rates
relative to the cost of Micron's own water treatment
process.
Q DOES VWID'S CURRENT TARIFF PROVIDE FOR THE
ESTABLISHMENT OF A SPECIAL CONTRACT, OR AN ECONOMIC
DEVELOPMENT RATE?
A It does not appear that VWID's current tariff
identifies either of these approaches as an option for
new customers or existing customers with increasing
consumption.
Q WHAT IS YOUR RECOMMENDATION WITH RESPECT TO A
SPECIAL CONTRACT OR ECONOMIC DEVELOPMENT RATE?
A I recommend that the Commission direct VWID to
analyze the potential for offering special contracts, or
an economic development rate to certain customers, and
present its analysis and recommendations in the next rate
case.
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IV.D. DSIC
Q PLEASE DISCUSS THE COMPANY'S PROPOSAL WITH
RESPECT TO THE DSIC MECHANISM.
A The Company proposes to establish a DSIC
mechanism related to the replacement and/or
rehabilitation of distribution system transmission and
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distribution mains, services, hydrants, valves, meters,
and other infrastructure.30 This mechanism would allow
the utility to increase rates between general rate case
proceedings, which specifically relate to non-revenue
producing investments to replace aging utility
infrastructure.31
Q DO YOU HAVE ANY CONCERNS WITH THE COMPANY'S
PROPOSAL TO IMPLEMENT A DSIC?
A Yes. First, this request is an example of
single issue ratemaking, as it proposes to focus on a
single component of the utility's cost of providing
service and address it separately from a general rate
case. The Commission has previously rejected
single-issue, or piecemeal, ratemaking as it considers a
single cost item without considering other potentially
offsetting revenues, and can lead to an improper matching
of costs and revenues and potentially unjust and
unreasonable rates.32
Second, the Company's proposed method of calculating
the DSIC incremental revenue requirement ignores
offsetting reductions in the value of plant investment
included in base rates.
In light of these concerns, the Commission
should reject the DSIC.
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30Direct Testimony of James Cagle at 3. Note that the page numbering
may be mislabeled, and the correct page number may be 2 (i.e., the
second page of questions and answers in the testimony).
31Id. at 4.
32See Intermountain Gas Company Case No. INT-G-17-07, Order No. 34090
at 6-7, where the Commission rejected Intermountain Gas Company's
proposed Infrastructure Integrity Management Mechanism.
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Q IN THE EVENT THE COMMISSION APPROVES THE
COMPANY'S DSIC PROPOSAL, DO YOU HAVE ANY SUGGESTED
CHANGES?
A Yes. The Company's capital investment costs
from the replacement of DSIC eligible investments should
be synchronized with the investment costs included in
base rates. Currently, base rates include the return
"of" and "on" investments related to distribution system
transmission and distribution mains, services, hydrants,
valves, meters, and other infrastructure.
Specifically, the Commission should ensure that
VWID's investment included in base rates is synchronized
with the incremental eligible investment that would be
subject to the DSIC. Synchronizing a utility's total
investments is fair to both the utility and its customers
and will ensure that a utility does not recover excessive
charges from its customers.
Q WHAT IS YOUR SPECIFIC RECOMMENDATION?
A The level of depreciation expense included in
base rates associated with the same type of
infrastructure that is proposed to be eligible for the
DSIC should be used to offset the DSIC eligible
investment prior to the rate of return calculation for
the DSIC surcharge. This will ensure that the utility
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properly recovers the incremental revenue requirement
associated with eligible infrastructure replacement and
that the utility is not allowed to charge excessive
surcharges through the DSIC.
Once rates are set in a rate case, the utility
recovers depreciation expense in post-test year periods,
which increases accumulated depreciation and reduces net
plant balances, ultimately reducing test year rate base
in the post-test year periods. Post-test year plant
investments offset this decline in rate base because
plant added to rate base offsets the increase in
accumulated depreciation. If rate base investments are
recovered in base rates, the utility can time rate cases
to
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adjust rates only if a rate adjustment is justified.
However, recovering post-test year plant additions in a
separate rate mechanism, like the DSIC, has the real
potential to harm ratepayers, via excess charges, for
total net-plant investments being used to provide
service.
The proposed DSIC surcharge does not appear as
though it would reflect the decline in rate base that has
occurred since base rates were last set. Thus, in the
years between rate cases, customers would be charged both
depreciation expense for plant already depreciated and
new depreciation expense for new investments through the
incremental DSIC charge. As such, the DSIC charge as
proposed by VWID would result in excessive charges to
customers and would harm customers. It is a fundamental
tenant of cost of service ratemaking that if new
investments cause rate base to grow at the level of
depreciation, all other things held constant, it is
unnecessary to change customer rates for the utility to
fully recover the costs of the new investments.
My proposal will synchronize the net-plant balance
for transmission and distribution mains, services,
hydrants, valves, meters, and other infrastructure that
would not be subject to DSIC replacement with the
increased net plant investment levels associated with the
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DSIC eligible investment. In this way, total charges to
customers, including base tariff rates and the DSIC, will
track net-plant investment being used to provide service
during post-test year periods.
Q WHY SHOULD DEPRECIATION EXPENSE IN BASE RATES
BE REQUIRED AS AN OFFSET TO RATE BASE WHEN DETERMINING
THE APPROPRIATE LEVEL OF SURCHARGE REVENUE?
A Depreciation expense that is included in a
utility's base rates increases the utility's internal
cash flow, which is used as a funding source for new
plant investments
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including the plant investments necessary to replace a
utility's aging or obsolete infrastructure. In terms of
rate base, recovering this depreciation expense in a
utility's existing base rates reduces test year rate base
via increases to accumulated depreciation, and is used as
an internal cash source to fund new infrastructure
capital investments that are included in post-test year
utility rate base.
This can be illustrated with an example. Assume
that a certain utility has annual rate case proceedings
and has $10 million in annual depreciation expense and
$10 million in annual new capital investment. If
post-test year capital investment is at the same amount
as post-test year depreciation expense recovery, the
utility's net plant and rate base will not grow in the
post-test year period. In which case, the base tariff
rate revenue recovered by the utility will provide it
sufficient revenue to fully recover its cost of service
in the post-test year period. A separate charge, like
the DSIC, above the base tariff rates for the incremental
plant investments in this example would result in
excessive rates that are not just and reasonable, and
customers would be harmed.
Now assume the utility implements a rider surcharge,
without recognizing the declining value to existing rate
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base (depreciation offsets), instead of annual base rate
proceedings. In the case of the utility recovering the
incremental revenue requirement for new investment
through a rider surcharge, customer rates would go up to
account for the $10 million spent by the utility on
eligible infrastructure, but the surcharge would not
reflect the reduction for the $10 million of depreciated
rate base. Customers would pay higher bills, via the
combination of existing base tariff rates and the
incremental DSIC, despite the utility's net-plant
investment amount remaining the same.
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Q PLEASE SUMMARIZE YOUR RECOMMENDATION WITH
RESPECT TO THE DSIC.
A The DSIC mechanism, as proposed by the Company,
should be rejected. If the Commission adopts the DSIC, I
recommend modifying the DSIC revenue requirement
calculation to reflect depreciation expense for similar
plant included in base rates as an offset to the
incremental DSIC plant investment for the purpose of
calculating a return on DSIC investment.
Q DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
A Yes, it does.
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Qualifications of Jessica A. York
Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A Jessica York. My business address is 16690
Swingley Ridge Road, Suite 140, Chesterfield, MO 63017.
Q PLEASE STATE YOUR OCCUPATION.
A I am a consultant in the field of public
utility regulation and an Associate with the firm of
Brubaker & Associates, Inc. ("BAI"), energy, economic and
regulatory consultants.
Q PLEASE IDENTIFY THE JURISDICTIONS IN WHICH YOU
HAVE PREVIOUSLY SPONSORED TESTIMONY.
A I have sponsored expert testimony in front of
the Illinois Commerce Commission, the Indiana Utility
Regulatory Commission, the Michigan Public Service
Commission, the Minnesota Public Utilities Commission,
the Missouri Public Service Commission, the Public
Utilities Commission of Nevada, and the Oklahoma
Corporation Commission.
Q PLEASE STATE YOUR EDUCATIONAL BACKGROUND AND
PROFESSIONAL EMPLOYMENT EXPERIENCE.
A I graduated from Truman State University in
2008 where I received my Bachelor of Science Degree in
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Mathematics with minors in Statistics and Actuarial
Science. I earned my Master of Business Administration
Degree with a concentration in Finance from the
University of Missouri-St. Louis in 2014.
I joined BAI in 2011 as an analyst. Then, in March
2015, I joined the consulting team of BAI.
I have worked in various electric, natural gas and
water and wastewater regulatory proceedings addressing
cost of capital, sales revenue forecasts, revenue
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requirement assessments, class cost of service studies,
rate design, and various policy issues. I have also
conducted competitive power and natural gas solicitations
on behalf of large electric and natural gas users, have
assisted those large power and natural gas users in
developing procurement plans and strategies, assisted in
competitive contract negotiations, and power and natural
gas contract supply administration. In the regulated
arena, I have evaluated cost of service studies and rate
designs proffered by other parties in cases for various
utilities, including in Wisconsin, Illinois, Indiana,
Kansas, and others. I have conducted bill audits, rate
forecasts and tariff rate optimization studies.
I have also provided support to clients with
facilities in deregulated markets, including drafting
supply requests for proposals, evaluating supply bids,
and auditing competitive supply bills. I have also
prepared and presented to clients reports that monitor
the electric market and recommend strategic hedging
transactions.
BAI was formed in April 1995. BAI and its
predecessor firm have participated in more than 700
regulatory proceedings in forty states and Canada.
BAI provides consulting services in the economic,
technical, accounting, and financial aspects of public
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utility rates and in the acquisition of utility and
energy services through RFPs and negotiations, in both
regulated and unregulated markets. Our clients include
large industrial and institutional customers, some
utilities and, on occasion, state regulatory agencies.
We also prepare special studies and reports, forecasts,
surveys and siting studies, and present seminars on
utility-related issues.
In general, we are engaged in energy and regulatory
consulting, economic analysis and contract negotiation.
In addition to our main office in St. Louis, the
firm also has branch offices in Corpus Christi, Texas;
Detroit, Michigan; Louisville, Kentucky and Phoenix,
Arizona.
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Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A Jessica A. York. My business address is 16690
Swingley Ridge Road, Suite 140, Chesterfield, MO 63017.
Q WHAT IS YOUR OCCUPATION?
A I am a consultant in the field of public
utility regulation and an Associate at Brubaker &
Associates, Inc., energy, economic and regulatory
consultants.
Q ARE YOU THE SAME JESSICA A. YORK WHO FILED
DIRECT TESTIMONY IN THIS PROCEEDING ON FEBRUARY 15, 2023?
A Yes, I am.
Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS
PROCEEDING?
A I am appearing on behalf of Micron Technology,
Inc., a large customer of Veolia Water Idaho Inc.
("Veolia," "VWID," or "the Company").
Q WHAT IS THE PURPOSE OF YOUR REBUTTAL TESTIMONY?
A The purpose of my rebuttal testimony is to
respond to certain positions taken by the Idaho Public
Utilities Commission Staff ("Staff"). Specifically, I
will address Staff's recommendation to disregard the
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Company's class cost of service study ("COSS") and apply
an across-the-board increase to all customer classes. I
disagree with Staff's recommendation and, as discussed in
my Direct Testimony, believe that the COSS model provides
adequate data on which to base a revenue allocation that
moves customer classes closer to cost of service rather
than perpetuating the class subsidies that currently
exist with an across-the-board rate increase.
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My silence on any other issues addressed by Staff's
testimony should not be taken as tacit approval or
agreement regarding those issues.
Q PLEASE SUMMARIZE STAFF'S PROPOSAL WITH RESPECT
TO THE COMPANY'S LOAD STUDY AND CLASS COST OF SERVICE
STUDY.
A Staff witness Michael Eldred addresses the
Company's load study and COSS. Mr. Eldred recommends
that the Commission disregard the Company's COSS and
apply a uniform percent increase across all rate
components.1 Mr. Eldred's recommendation is based on the
following key points:
1) Mr. Eldred's conclusion is based, in large part,
on his opinion that the customer classes used in
the COSS are hypothetical classes, because they
do not correspond to an existing rate schedule,2
and
2) Mr. Eldred's recommendation stems from his
perspective that the Company's load study is not
used and useful to the COSS because it was not
used to verify that the existing classes are
appropriate, or to identify new classes based on
cost-causation principles.3
Q DO YOU AGREE WITH MR. ELDRED'S CONCLUSIONS
ABOUT THE COSS AND LOAD STUDY?
A No. I do not agree with Mr. Eldred's
characterization of the existing customer classes as
hypothetical, nor do I agree with Mr. Eldred's conclusion
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that the COSS and load study should be disregarded
altogether.
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1 Revised Direct Testimony of Mr. Eldred at 27-28.
2 Id. at 21-22.
3 Id. at 23.
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Q WHY DO YOU TAKE ISSUE WITH THE CHARACTERIZATION
OF THE CUSTOMER CLASSES USED IN VWID'S COSS AS
"HYPOTHETICAL" CLASSES?
A The customer classes reflected in the COSS
include Residential, Commercial, Public Authority, and
Private Fire. First, it is my understanding that these
customer classes reflect the definitions in VWID's
IPUC-approved tariff. Presumably, these customer classes
were determined to be reasonable for the purpose of a
COSS at some point in this utility's past. Thus, I do
not agree that these customer classes are "hypothetical"
as claimed by Mr. Eldred.
Mr. Eldred also tries to justify his
characterization of the existing customer classes as
"hypothetical" because VWID applies a single rate
structure to all of them. This practice is not uncommon
in the water industry, as other water utilities apply a
single rate structure to all customer classes. For
example, in its Central Water Division, Illinois-American
Water Company ("IAWC") recognizes different classes in
its COSS model, but applies a single rate structure to
the majority of those classes.4 Specifically, IAWC's
Metered General Water Service tariff for the Central
Water Division reflects monthly meter charges that vary
by size, along with a declining block volumetric rate
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structure.5 Meter charges and the declining block
volumetric rates are periodically adjusted in rate cases,
such that the proper amount of revenues are recovered
from each class, based on the COSS results.
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4 See IAWC's Current Tariff for the Central Water Division, effective
January 1, 2023, and Illinois Commerce Commission ("ICC") Docket No.
22-0210, IAWC's Exhibit 7.0 and Exhibit 7.05.
5 ICC Docket No. 22-0210, IAWC Exhibit 7.0
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Q DID MR. ELDRED RAISE OTHER CONCERNS ABOUT THE
EXISTING CUSTOMER CLASS GROUPINGS IN THE COSS?
A Yes. Mr. Eldred states that the Company's
current division of its consumptive customers into
Residential, Commercial, and Public Authority
classifications assumes that the customers in each of
these divisions have similar consumptive patterns, and
that this is unlikely to be true.6 Mr. Eldred proceeds
to argue that Residential customers who live in single
family dwellings with yards and lawns will consume much
more water in the summer than apartment dwellers.7
Q IS MR. ELDRED'S CONCERN ABOUT THE RESIDENTIAL
CLASS, AS EXPLAINED IN HIS EXAMPLE, VALID?
A No. Mr. Eldred is correct that water usage
patterns between single family residences and apartment
dwellers are likely different. However, Mr. Eldred's
example fails to recognize that based on VWID's customer
class definitions, single family residences reside in the
Residential class, while apartment dwellers are included
in the Commercial class.8 Therefore, these customers are
already in different classes in the Company's COSS.
Q DO YOU AGREE WITH STAFF THAT THE LOAD STUDY
COULD BE USED TO IDENTIFY POTENTIAL NEW CUSTOMER CLASSES?
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A Yes. I agree that the load study could be used
for the purpose of identifying new or different classes
of customers in VWID's service territory, such as a class
of higher load factor customers. In the event that a
class of higher load factor customers was
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6 Revised Direct Testimony of Mr. Eldred at 24.
7 Id.
8 VWID's Tariff Sheet No. 36, attached to Jessica A. York's Direct
Testimony as Micron Exhibit No. 420.
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identified, this would provide further support for the
recommendations I made in my direct testimony with
respect to establishing a separate class for these
customers in the COSS, or support a declining block
volumetric rate structure that more accurately reflects
the fixed and variable costs incurred to provide service
to each class.
Q DID THE SETTLEMENT AGREEMENT IN THE PRIOR RATE
CASE (CASE NO. SUZ-W-20-02) REQUIRE THE COMPANY TO USE
THE LOAD STUDY TO IDENTIFY NEW CLASSES OR MODIFY ITS
EXISTING RATE STRUCTURE?
A No. With respect to the load study, the
settlement agreement stated the following:
"The Company agrees to undertake a load study to
provide calculated max-day and max-hour factors for
the total system as well as by appropriate customer
class. The Company will convene a discussion
process with interested parties to take input on
load study components including but not limited to
customer class definitions, sampling methodologies
for those classes, and data sources (i.e., AMI,
SCADA, meters). Such discussions will be commenced
by the Company soon after a decision in this rate
case and will be completed within twelve months of
that start date. After taking input from interested
parties, the Company will make the final
determination on how the load study shall be
performed."9
"The Company shall present the results of such load
study to the Commission in the first general rate
case filing after the study's conclusion. The above
does not represent a commitment to any change in
rate structure nor a commitment to delay any future
rate case filing as a result of the above-described
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discussion process."10
As shown above, the Company agreed to use the load study
to identify maximum day and maximum hour demand ratios by
appropriate customer class, but the Company was not
obligated to use the study to identify new classes, or to
change its existing rate structure.
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9 Case No. SUZ-W-20-02, Stipulation and Settlement at 6.
10 Id.
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Q DO YOU AGREE WITH STAFF'S RECOMMENDATION THAT
THE COSS AND LOAD STUDY SHOULD BE DISREGARDED, AND THAT A
UNIFORM PERCENTAGE INCREASE SHOULD BE APPLIED TO ALL
CUSTOMER CLASSES?
A No. I do not agree with Staff's recommendation
to apply a uniform percent increase to all customer
classes on the basis that the load study and COSS are not
used and useful in this case, and thus should be
disregarded. First, I have shown that there has been
effectively no movement toward cost of service for any
class since at least 2006, as uniform percent increases
across customer classes have been applied in nearly every
rate case since that time.11
Second, the load study was used to develop maximum
day and maximum hour demand ratios for each of the
existing, IPUC-approved, customer classes in the COSS
model. Thus, the load study is useful for the Company's
COSS model.
Third, I agree that the Company's COSS and rate
design could be improved, particularly with respect to
recognizing the differences in infrastructure and load
characteristics used to provide service to certain
customers who currently reside in the Commercial class.
In my Direct Testimony, I recommended an approach to
addressing this issue in the current case, while the
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Company fine tunes its COSS for the next rate case.12
For these reasons, the Company's COSS model should
not be completely disregarded as recommended by Staff.
The COSS model provides adequate data on which to base a
revenue allocation that moves customer classes closer to
cost of service rather than perpetuating the class
subsidies that currently exist with an across the-board
rate increase. Such movement toward cost of service is
consistent
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11 Direct Testimony of Jessica A. York at 12.
12 Id. at 10.
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with Commission precedent acknowledging that rates should
strive to match cost of service.13 The COSS model should
be used, with my recommended improvements, for revenue
apportionment across customer classes.
Q DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY?
A Yes, it does.
_________________
13 Idaho Public Utilities Commission Case No. IPC-E-94-5; Order
No. 25880 at 20.
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(The following proceedings were had in open
hearing.)
MR. NELSON: With that, Micron has nothing
further.
COMMISSIONER ANDERSON: Thank you, and I believe
there are no other witnesses on the list, no other
intervenors have witnesses, and if you'll give me a
second now to find out where I'm at. This does exhaust
the witness list.
Are there any further issues or items that need
to come before the Commission today from any of the
parties?
MR. CARTER: Not from Veolia Water Idaho.
COMMISSIONER ANDERSON: Thank you.
MR. BURDIN: Nothing from Commission Staff.
Thank you.
MR. NELSON: Nothing further from Micron. Thank
you.
MS. GRANT: Nothing from the City. Thank you,
Chair.
COMMISSIONER ANDERSON: Thank you.
MS. WADDEL: Nothing from Ada County. Thank
you.
MR. ULLMAN: No, Mr. Chairman.
COMMISSIONER ANDERSON: Thank you very much. Do
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we have any posthearing briefs or closing statements?
MR. CARTER: Not unless the Commission would
like one.
COMMISSIONER ANDERSON: That would be your
prerogative. I think that we have a pretty well
developed record at this point.
MR. BURDIN: Nothing from Commission Staff.
Thank you.
COMMISSIONER ANDERSON: Thank you very much. If
I have over looked any admission to any additional
exhibits previously identified in this matter, they are
now hereby admitted Pursuant to Rule 267, any exhibits
presented during the hearing without objection are deemed
admitted.
Intervenor Funding Rule 164 allows 14 days to
apply for intervenor funding. Do you anticipate you
would need 14 days? I don't know that we have any
objections to 14 days. Hearing none.
I do appreciate everybody's attendance today and
I also want to acknowledge the courtesy that you've all
shown to the Chair and to the Commission and to one
another and the ability to work some of the issues out
cooperatively. I do appreciate that. It shows great
intent here.
Pursuant to Idaho Rule 47, representatives of
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the parties and parties appearing in a proceeding must
conduct themselves properly and ethically and courteous
in this manner and we have succeeded that today, so thank
you again.
The Commission will consider this record fully
developed. We will deliberate privately and render a
decision as expeditiously as is possible and with that,
then, and there's no further business here, we are
adjourned.
(The Hearing adjourned at 3:12 p.m.)
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A U T H E N T I C A T I O N
This is to certify that the foregoing
proceedings held 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, commencing at 9:00 a.m., on Tuesday, April 4,
2023, at the Commission Hearing Room, 11331 West Chinden
Blvd., Building 8, Suite 201-A, Boise, Idaho, is a true
and correct transcript of said proceedings and the
original thereof for the file of the Commission.
Accuracy of all prefiled testimony as
originally submitted to the Reporter and incorporated
herein at the direction of the Commission is the sole
responsibility of the submitting parties.
CONSTANCE S. BUCY
Certified Shorthand Reporter #187

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