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2021 CWS Coc Application Exhibit I Direct

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2021 CWS Coc Application Exhibit I Direct Exhibit I Cost of Capital Direct Testimony of Robert Kuta Vice President of Engineering and Chief Water Quality and Environmental Compliance Officer California Water Service Company May 2021 Table of Contents I. INTRODUCTION .................................................................................................. 1 II. QUALIFICATIONS ................................................................................................ 1 III. RISKS ASSOCIATED WITH GROUNDWATER EXTRACTION ..................................... 2 NEW REGULATORY ACTIONS ............................................................................................ 4 LEGAL LIABILITY ........................................................................................................... 18 OPERATIONAL COMPLEXITY AND RISK ASSOCIATED WITH TREATMENT ..................................... 23 IV. RISKS ASSOCIATED WITH WILDFIRE................................................................... 28 1 I. INTRODUCTION 2 Q. What is the purpose of this testimony? 3 A. The purpose of this testimony is to outline two categories of operational risk 4 which are more likely to affect California Water Service Company (“Cal Water”) than the 5 cost of capital peer group. The first relates to the multitude of risks associated with Cal 6 Water’s reliance on around 700 groundwater wells to produce roughly half of its water 7 supply1. The second, wildfire risk, is related to California’s legal framework and natural 8 environment. 9 10 II. QUALIFICATIONS 11 Q. What are your qualifications for this testimony? 12 A. I joined Cal Water in April 2015 and am Vice President of Engineering and Chief 13 Water Quality and Environmental Compliance Officer. In that role, I have responsibility 14 over asset management, the annual capital program, and all water quality and 15 environmental regulatory compliance. 16 17 Q. What is your educational background? 18 A. I obtained a Bachelor of Science degree in Biology from Central Michigan 19 University in 1986. During the 1990’s I completed approximately 40 hours of graduate 20 studies in engineering at Arizona State University. In 2001, I received a Master of 1 Of the 700 wells, approximately 400 are active. The non-active wells are either on “stand-by” with State Water Resource Control Board (“SWRCB”) imposed short term use restrictions or “in- active” pending short or long term solutions to be removed from this classification. 1 1 Business Administration from University of Phoenix. I am currently enrolled at MIT 2 Sloan School of Management in the Advanced Certificate for Executives program. 3 4 Q. Do you hold any professional certifications? 5 A. Since 2008, I have held a certificate of Designated Design-Build Professional from 6 the Design Build Institute of America. I also maintain four water and wastewater 7 operator certificates from the State of Arizona. 8 9 Q. Please summarize your business experience? 10 A. My 35-year professional career has spanned roles and responsibilities involving 11 many different aspects of the water industry. These include regulated utility 12 management, large capital program/project delivery, contract operations, and 13 divestiture and acquisition implementation. My employers range from local regulated 14 water utilities to global consulting firms. I have experience in utility ratemaking across 15 many states, including California. 16 17 III. RISKS ASSOCIATED WITH GROUNDWATER EXTRACTION 18 Q. What are the additional risks associated with Cal Water’s groundwater wells? 19 A. A reliance on groundwater well supply adds to Cal Water’s risk because there are 20 issues with groundwater that are either not generally experienced with surface water or 21 have different impacts to the company. Groundwater risk can be categorized into four 22 broad categories. First, and most recently evident, is the risk of new laws and regulatory 2 1 action for which timely cost recovery cannot be obtained. Second is the risk of serving 2 water to customers which does not meet health standards or otherwise injures the 3 customer. Third is the risk of liability to Cal Water for groundwater contamination 4 occurring incidentally through its operations. The fourth risk, is complexity of operation 5 and treatment declining groundwater levels, seawater intrusion, and likelihood of 6 failure due to aging infrastructure. 7 8 Q. Does Cal Water rely upon groundwater to serve its customers? 9 A. Yes. Cal Water obtains approximately half of its water supply from groundwater 10 wells. Statewide, Cal Water owns more than 700 wells. In certain districts, Cal Water 11 relies solely on wells, and in others Cal Water obtains water from a mix of groundwater 12 and other sources. Cal Water employs approximately 300 active treatment processes. 13 Some wells may require multiple treatment processes to remove contaminants. 14 15 Q. Is this situation different from the peer group selected by your financial 16 witness, Mr. Sheilendranath? 17 A. I am familiar with the operations of several of other peers, having worked in the 18 industry for many years and having been employed by several of the other peer group 19 water utilities. Yes, for a couple of reasons – California has been more active in 20 promoting new and stringent water quality regulations than the federal government 21 and most other states. Many of these contaminants occur in California groundwater 22 used for drinking water supplies. Examples of this are the State’s maximum 3 1 contaminant level (“MCL”) for perchlorate and its instituting notifications requirements 2 for more than 30 additional contaminants2 beyond those included in federal regulations, 3 some with additional associated response level requirements. The establishment of 4 California’s enhanced drinking water quality regulations, beyond those of many other 5 states, has resulted in greater challenges in avoiding violations of those regulations by 6 water utilities, and the increased prospect for exposure to adverse litigation actions. 7 With that said, Cal Water has, in California: 1) the greatest share of its customer count, 8 2) the largest and most dispersed service areas, as well as 3) largest number of 9 groundwater supply wells, numbering 700, when compared to the peer group 10 companies. Taken together, these conditions make Cal Water unique among the peer 11 group. 12 13 New Regulatory Actions 14 Q. What kinds of regulatory actions and legislation have affected Cal Water’s 15 groundwater supplies in recent years? 16 A. The Sustainable Groundwater Management Act (“SGMA”), new regulations for 17 Chromium-6 (“CR-6”), 1,2,3 Trichloropropane (“1,2,3-TCP”), and regulatory action on 18 perfluorooctanesulfonic acid (“PFOS”), perfluorooctanoic acid (“PFOA”) and 19 perfluorobutanesulfonic acid (“PFBS”) have each affected Cal Water’s groundwater 2 March 5, 2021, State Water Resources Control Board — Division of Drinking Water https://www.waterboards.ca.gov/drinking_water/certlic/drinkingwater/NotificationLevels.shtml 4 1 supplies in recent years. We have also had relatively new exposure to nitrate 2 contamination over the MCL. 3 4 Q. Can you provide examples of impacts from SGMA? 5 A. Yes. The Department of Water Resources (“DWR”) provides the following 6 summary. “SGMA requires governments and water agencies of high and medium 7 priority basins to halt overdraft and bring groundwater basins into balanced levels of 8 pumping and recharge. Under SGMA, these basins should reach sustainability within 20 9 years of implementing their sustainability plans. For critically over-drafted basins, that 10 will be 2040. For the remaining high and medium priority basins, 2042 is the deadline.” 11 While Groundwater Sustainable Plans (“GSP”s) for critically overdrafted basins 12 have been submitted to DWR, GSPs for high and medium priority basins are largely still 13 being developed. For this reason, there remains a high degree of uncertainty as to 14 projects and associated fees/costs that will be required by Groundwater Sustainable 15 Agencies (“GSA”s) to address the specific issues for each basin. 16 Cal Water draws groundwater in 14 basins that are designated by DWR as high- 17 priority basins and an additional 6 basins that are designated by DWR as medium- 18 priority. These 20 basins are included in 17 GSAs and these costs are unlikely to fully be 19 captured in General Rate Cases (“GRCs”). As discussed in the direct testimony by Mr. 20 Greg Milleman, while the modified cost balancing account (“MCBA”) has been in place 21 in the past to accurately capture these costs, it will no longer be in place after 2022. 22 5 1 Q. Please explain 1,2,3-TCP and its impact to Cal Water’s groundwater supplies? 2 A. 1,2,3-TCP is a synthetic chemical historically used as a cleaning, degreasing 3 solvent and paint remover. Some widely-used soil fumigants (i.e., pesticides) contained 4 1,2,3-TCP as a chemical ingredient. It is a volatile organic compound and is recognized 5 as a carcinogen in California. Historical and wide-spread use of pesticides containing 6 1,2,3-TCP has resulted in the local and regional contamination of groundwater and 7 aquifers, respectively. 1,2,3-TCP is very persistent in groundwater. The State Water 8 Resources Control Board (“SWRCB”) Division of Drinking Water (“DDW”) adopted an 9 MCL for 1,2,3-TCP of 5 parts per trillion (“ppt”) in July 2017 and the new 1,2,3-TCP MCL 10 went into effect on December 14, 2017. California Environmental Protection Agency's 11 Office of Environmental Health Hazard Assessment (“OEHHA”) has
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