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Surrebuttal Testimony of Charles R. Hyneman

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Surrebuttal Testimony of Charles R. Hyneman Exhibit No.: _______________ Issue(s): Environmental Cost Adjustment Mechanism (ECAM)// Tank Painting// Accrual Accounting and Rate Case Matching Principle// Service Company Labor Expense Adjustment// Service Company “Reasonableness Test”// Short-Term Incentive Compensation (“AIP”)// Long-Term Incentive Compensation (“LTIP”)// Income Tax Expense/Normalization Violation// General Ratemaking Principles// Atrazine Settlement// Pension Trackers// Insurance Other Than Group Witness/Type of Exhibit : Hyneman/Surrebuttal Sponsoring Party : Public Counsel Case No .: WR-2015-0301 SURREBUTTAL TESTIMONY OF CHARLES R. HYNEMAN Submitted on Behalf of the Office of the Public Counsel MISSOURI-AMERICAN WATER COMPANY CASE NO. WR-2015-0301 March 4, 2016 TABLE OF CONTENTS Testimony Page Introduction 1 Environmental Cost Adjustment Mechanism (ECAM) 1 Tank Painting 17 Accrual Accounting and Rate Case Matching Principle 21 Service Company Labor Expense Adjustment 24 Service Company “Reasonableness Test” 25 Short-Term Incentive Compensation (“AIP”) 31 Long-Term Incentive Compensation (“LTIP”) 37 Income Tax Expense/Normalization Violation 42 General Ratemaking Principles 49 Atrazine Settlement 52 Rate Case Expense 53 Pension Trackers 55 Insurance Other Than Group 57 SURREBUTTAL TESTIMONY OF CHARLES HYNEMAN MISSOURI-AMERICAN WATER COMPANY CASE NO. WR-2015-0301 1 I. INTRODUCTION 2 Q. Please state your name, title and business address. 3 A. Charles R. Hyneman, Chief Public Utility Accountant, Office of the Public Counsel (“OPC” 4 or “Public Counsel”), P.O. Box 2230, Jefferson City, Missouri 65102 . 5 Q. Are you the same Charles Hyneman who filed direct and rebuttal testimonies in WR- 6 2015-0301? 7 A. I am. 8 Q. What is the purpose of your rebuttal testimony? 9 A. The purpose of this rebuttal testimony is to provide the OPC response to the February 11, 10 2016 revenue requirement rebuttal testimonies of Missouri Public Service Commission 11 (“Commission”) Staff and Missouri American Water Company (“MAWC”) witnesses 12 regarding certain issues. 13 II. ENVIRONMENTAL COST ADJUSTMENT MECHANISM (“ECAM”) 14 Q. Does OPC have concerns with Staff witness Mark Oligschlaeger’s rebuttal testimony on 15 MAWC’s proposal to include another single-issue ratemaking mechanism, an ECAM, 16 in this rate case? 17 A. Yes. Mr. Oligschlaeger filed Staff policy testimony concerning MAWC’s proposed ECAM 18 that only addressed the mechanics of an ECAM. He did not make any recommendation to 19 the Commission as to whether Staff supports or opposes the ECAM. He did not state the 20 Commission should approve the ECAM nor did he say the Commission should not approve 21 the ECAM. Surrebuttal Testimony of Charles Hyneman Case No. WR-2015-0301 1 OPC does have a concern with this approach by Staff of not making a recommendation to the 2 Commission on a major policy issue in a rate case. OPC’s concern is heightened given the 3 fact that Staff recently opposed mechanisms similar to the ECAM in Kansas City Power & 4 Light Company’s (“KCPL”) 2014 rate case. Staff has not explained the basis or rationale for 5 its change in position from general “opposition” to “non-opposition” to newly created single- 6 issue ratemaking mechanisms. 7 Q. Have you read Section 386.266.1 through 386.266.4, the state statute (“ECAM statute”) 8 that allows for the use of an ECAM? 9 A. Yes, I have. 10 Q. Have you also read Commission Rule 4 CSR240-50.050, Environmental Cost 11 Adjustment Mechanism (“ECAM Rule”) which provides in detail the Commission’s 12 standards for an ECAM? 13 A. Yes, I have. 14 Q. Do you have a concern that the ECAM Rule exceeds the scope of the ECAM Statute? 15 A. Yes, I do as it pertains to the types of costs covered in an ECAM in accordance with the 16 ECAM statute. I will discuss this concern later in this section of my surrebuttal testimony. 17 Q. Does Staff consider an ECAM to be a single-issue ratemaking mechanism? 18 A. Yes. Mr. Oligschlaeger states at page 3 line 8 that “(a)n ECAM is a single-issue ratemaking 19 mechanism.” 20 Q. Are single-issue ratemaking mechanisms illegal in the state of Missouri except when 21 specifically authorized by state law? 22 A. Yes, that is my understanding. 23 Q. Why are single-issue ratemaking mechanisms generally illegal in the state of Missouri? 24 A. As I explained in my rebuttal testimony, single-issue ratemaking mechanisms are generally 25 illegal in Missouri because they allow rate increases for a single expense without knowing 2 Surrebuttal Testimony of Charles Hyneman Case No. WR-2015-0301 1 whether other changes in expense and revenue negate the need for the increase. This results 2 in rates that are not just and reasonable and are detrimental to the interests of utility 3 ratepayers. Most if not all single-issue ratemaking mechanisms employed by Missouri 4 utilities contain little or no significant ratepayer protections and have the effect of protecting 5 only the interests of utility shareholders at the expense of utility ratepayers. 6 Q. Does OPC believe that the types of costs considered under an ECAM are normal and 7 recurring utility costs? 8 A. Yes. 9 Q. Does Staff believe that the types of costs considered under an ECAM normal and 10 recurring utility costs? 11 A. Yes. Mr. Oligschlaeger states at page 4 line 18: “As a practical matter, because utilities have 12 been operating under and incurring costs associated with environmental laws and regulations 13 for many years…” 14 Q. Does OPC believe that MAWC needs or deserves to be granted and ECAM? 15 A. No. OPC witnesses Lena Mantle provided evidence in her rebuttal testimony in this case that 16 MAWC does not need an ECAM in this rate case. Ms. Mantle provides additional evidence 17 in her surrebuttal testimony that it would be wrong for the Commission to approve and 18 ECAM in this rate case. 19 Q. Based on your understanding of Mr. Oligschlaeger’s rebuttal testimony, does it appear 20 Staff believes MAWC needs an ECAM in this rate case? 21 A. No. Mr. Oligschlaeger notes at page 5 of his rebuttal testimony: 22 Q. Is MAWC’s request to establish an ECAM in this proceeding 23 premised upon specific anticipated future environmental compliance costs? 24 25 A. No. The only costs cited by MAWC that it expects it may seek to 26 charge through future ECAM rate adjustments are expected costs to comply 27 with National Pollutant Discharge Elimination System permit renewals. Per 28 MAWC’s response to Staff Data Request No. 0313, incurrence of these costs 3 Surrebuttal Testimony of Charles Hyneman Case No. WR-2015-0301 1 is not expected for a number of years, and MAWC has not provided a 2 projection of the amount of such costs, if incurred. 3 4 Q. Do you consider it prudent on the part of MAWC management to include an ECAM in 5 this rate case when it has no costs to include in the ECAM and it does not expect to 6 incur costs eligible to be included in ECAM for “a number of years?” 7 A. No. I consider this to be imprudent on the part of MAWC management to add another 8 single-issue ratemaking mechanism that it admittedly does not need. 9 Q. What specific position does the Staff take towards an ECAM for MAWC in this case? 10 A. Staff witness Oligschlaeger states at page 2 line 18 of this rebuttal testimony that Staff does 11 not oppose the creation of a MAWC ECAM in this case. He also states this Staff “non- 12 opposition” at page 5 line 13 of his testimony. 13 Q. Doesn’t Mr. Oligschlaeger mention conditions at page 2 line 18 of his rebuttal 14 testimony? 15 A. Yes, but as he notes, these conditions do not apply to the Commission granting MAWC an 16 ECAM in this case but only apply to some future period when MAWC seeks recovery of 17 these costs under an ECAM. 18 Q. Mr. Oligschlaeger states at page 4 lines 13-21 of his rebuttal testimony that both the 19 ISRS statute and ISRS rule allow for MAWC, under an ECAM, to ignore offsetting 20 environmental cost decreases of the specific environmental costs that will be included in 21 its cost of service in this rate case. Do you agree with his conclusion? 22 A. No, for several reasons. The primary reason is that there is no Commission restriction in the 23 ECAM statute or ECAM Rule prohibiting the Commission from netting cost increases with 24 cost decreases. 25 Second, Section 386.266.2 RSMo states the adjustments MAWC seeks outside of a rate case 26 are to reflect “increases or decreases” in its prudently incurred environmental costs.” Here, 27 there is a clear requirement for MAWC to net increases and decreases. 4 Surrebuttal Testimony of Charles Hyneman Case No. WR-2015-0301 1 Finally, Section 386.266.4(4) RSMo calls for prudence reviews of the costs subject to an 2 ECAM at any time interval. Prudence reviews can be done weekly, monthly, semi-annually, 3 annually or every 18 months. Eighteen months is the maximum period allowed between 4 prudence reviews. I think it would meet anyone’s definition of imprudence if a company 5 ignored environmental cost decreases and only included environmental cost increases in an 6 ECAM. 7 Q. Mr. Oligschlaeger states at page 6 line 13 of his rebuttal testimony that “There is no 8 provision in the ECAM rule or statute that would appear to preclude recovery of labor 9 costs as part of the ECAM...” Is Mr. Oligschlaeger correct? 10 A. No. The ECAM statute only allows one type of cost (either capital or expense) to be included 11 in an ECAM.
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