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Kentucky-American Water Company, Inc. Case No. 2018

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Kentucky-American Water Company, Inc. Case No. 2018 KENTUCKY-AMERICAN WATER COMPANY, INC. CASE NO. 2018-00358 DIRECT TESTIMONY OF PATRICK L. BARYENBRUCH DIRECT TESTIMONY OF PATRICK L. BARYENBRUCH CASE NO. 2018-00358 1 BACKGROUND 2 Q. Please state your name and business address. 3 A. Patrick L. Baryenbruch, 2832 Claremont Road, Raleigh, North Carolina 27608. 4 Q. Please describe your educational and professional background. 5 A. I received a Bachelors degree in Accounting from the University of Wisconsin- 6 Oshkosh and a Masters in Business Administration degree from the University of 7 Michigan. 8 I am a Certified Public Accountant (CPA) with active licenses from the 9 state of Wisconsin (license number 5343-1) and North Carolina (reciprocal 10 license number 41832). I am a Certified Information Technology Professional 11 (CITP), an accreditation awarded by the American Institute of Certified Public 12 Accountants to CPA professionals who demonstrate expertise in Information 13 Technology management. I also hold a Global Information Assurance 14 Certification (GIAC) in cybersecurity from the SANS Institute. I am a member of 15 the American Institute of Certified Public Accountants and the North Carolina 16 Association of Certified Public Accountants. 17 I began my career with Arthur Andersen & Company where I performed 18 financial audits of utilities, banks and finance companies. After three years I left 19 to pursue an M.B.A. degree. Upon graduation from business school, I worked Baryenbruch - 1 1 with the consulting firms of Theodore Barry & Associates and Scott Consulting 2 Group (predecessor firm to Scott, Madden & Associates). 3 During my consulting career, I have performed consulting assignments for 4 approximately 50 utilities and 10 public service commissions. I have participated 5 as project manager, lead or staff consultant for 24 commission-ordered 6 management and prudence audits of public utilities. Of these, I have been 7 responsible for evaluating the area of affiliate charges and allocation of corporate 8 expenses in the Commission-ordered audits of Connecticut Light and Power, 9 Connecticut Natural Gas, General Water Corporation (Pennsylvania Operations), 10 Philadelphia Suburban Water Company (now Aqua America) and Pacific Gas & 11 Electric Company. 12 My firm has performed the commission-ordered audit of Southern 13 California Edison’s 2002, 2003, 2004 and 2005 transactions with its non- 14 regulated affiliate companies. 15 Q. What are your duties and responsibilities in your current position? 16 A. I am the President of my own consulting practice, Baryenbruch & Company, LLC, 17 which was established in 1985. In that capacity, I provide consulting services to 18 utilities and their regulators. 19 Q. Please describe the reason for your testimony in this case. 20 A. I am presenting the results of my study, which evaluated the services provided by 21 American Water Works Service Company, Inc. (Service Company) during the 12 22 months ended August 31, 2018 (review period) to Kentucky American Water Baryenbruch - 2 1 Company (KAWC). This study was undertaken in conjunction with KAWC’s rate 2 case and is accurate to the best of my knowledge and belief. The study is 3 attached as Exhibit PLB-1. 4 Q. What were the objectives of your study? 5 A. This study was undertaken to answer four questions concerning the services 6 provided by the Service Company to KAWC, each of which bears on the 7 reasonableness of those charges as incurred during the review period. First, 8 were the Service Company’s charges to KAWC during the review period 9 reasonable? Second, was KAWC charged the lower of cost or market value for 10 managerial and professional services provided by the Service Company during 11 the review period? Third, were review period costs of the Service Company’s 12 customer accounts services, including those of the National Call Centers, 13 comparable to those of other utilities? Fourth, are the services KAWC receives 14 from the Service Company necessary? 15 Q. What conclusions were you able to draw concerning question number 1, 16 whether the Service Company charges to KAWC were reasonable? 17 A. The Service Company’s review period cost per KAWC customer is reasonable 18 compared to cost per customer for electric and combination electric/gas service 19 companies. During the review period, KAWC was charged $67 per customer for 20 administrative and general (A&G)-related services provided by the Service 21 Company. This compares to a 2017 average of $107 per customer for service 22 companies reporting to the Federal Energy Regulatory Commission (FERC). Baryenbruch - 3 1 Seventeen of the 24 utility service companies that filed a FERC Form 60 for 2017 2 had a higher per-customer A&G cost than KAWC’s charges from the Service 3 Company. 4 Q. What conclusions were you able to draw concerning question number 2, 5 whether KAWC was charged the lower of cost or market services provided 6 by the Service Company? 7 A. I was able to draw the following conclusions: 8 (1) KAWC was charged the lower of cost or market for managerial and 9 professional services during the review period. 10 (2) On average, the hourly rates for outside service providers are 44% higher 11 than the Service Company’s hourly rates. 12 (3) The managerial and professional services provided by the Service 13 Company are vital and could not be procured externally by KAWC without 14 careful supervision on the part of KAWC. If these services were 15 contracted entirely to outside providers, KAWC would have to add at least 16 1 position to manage activities of outside firms. This position would be 17 necessary to ensure the quality and timeliness of services provided. 18 (4) If all the managerial and professional services now provided by the 19 Service Company had been outsourced during the 12 months ended 20 August 31, 2018, KAWC and its customers would have incurred almost $3 21 million in additional expenses. This amount includes the higher cost of 22 outside providers and the cost of 1 KAWC position needed to direct the 23 outsourced work. Baryenbruch - 4 1 (5) This study’s hourly rate comparison actually understates the cost 2 advantages that accrue to KAWC from its use of the Service Company. 3 Outside service providers generally bill for every hour worked. Service 4 Company exempt personnel, on the other hand, charge a maximum of 8 5 hours per day even when they work more hours. If all overtime hours of 6 Service Company personnel were factored into the hourly rate calculation, 7 the Service Company would have had an even greater annual dollar 8 advantage than the $3 million cited above. 9 (6) It would be difficult for KAWC to find local service providers with the same 10 specialized water and wastewater industry expertise as that possessed by 11 the Service Company staff. Service Company personnel spend 12 substantially all their time serving operating water and wastewater 13 companies. This specialization brings with it a unique knowledge of water 14 and wastewater utility operations and regulation that is most likely 15 unavailable from local service providers. 16 (7) Service Company fees do not include any profit markup. It assigns only 17 its actual expenses to the American Water subsidiaries it services, 18 including KAWC. 19 Q. What conclusions were you able to draw concerning question number 3, 20 whether the review period costs of the Service Company’s customer 21 account services, including those of the National Call Centers, were 22 reasonable? Baryenbruch - 5 1 A. The cost of the Service Company’s customer accounts services, including those 2 provided by the National Call Centers, is below the weighted average of the 3 neighboring electric utility comparison group. As will be explained further herein, 4 this group of companies provides a reasonable proxy group for comparison to a 5 regulated utility of the size and scope of the Service Company and KAWC. 6 During the 12 months ended August 31, 2018, the cost of customer accounts 7 services for KAWC customers was $27.26 compared to the 2017 average of 8 $28.37 for neighboring electric utilities. The highest comparison group per- 9 customer cost was $46.73 and the lowest $12.15. 10 Q. What conclusions were you able to draw concerning question number 4, 11 whether the services KAWC receives from the Service Company are 12 necessary? 13 A. I was able to draw the following conclusions: 14 (1) The services that the Service Company provides are necessary and would 15 be required even if KAWC were a stand-alone water utility. 16 (2) There is no redundancy or overlap in the services provided by the Service 17 Company to KAWC. 18 Q. Does this complete your testimony? 19 A. Yes. Baryenbruch - 6 VERIFICATION STATE OF NORTH CAROLINA SS: COUNTY OF WAKE The undersigned, Patrick L. Baryenbruch, being duly sworn, deposes and says he is the President of Baryenbruch & Company, LLC, that he has personal knowledge of the matters set forth in the foregoing testimony, and the answers contained therein are true and correct to the best of his information, knowledge, and belief. PATRICK L. BARYENBRU Subscribed and sworn to before me, a Notary Public in and before said County and State, this \ c_ day of November, 2018. C----1‘. -A-1:=2CO. (SEAL) Notary Public My Commission Expires: SHANDA OVERBAY Notary Public Wake Co., North Carolina My Commission Expires May 10, 2021 EXHIBIT PLB-1 Market to Cost Comparison of Service Company Charges to Kentucky American Water Company 12 Months Ended August 31, 2018 November 2018 Baryenbruch & Company, LLC Kentucky American Water
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